In re Ricci-Breen
| Decision Date | 31 August 2015 |
| Docket Number | Case No. 14-22798 (RDD) |
| Parties | In re: John Ricci-Breen and Margaret Ricci-Breen, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
POST-TRIAL MEMORANDUM OF DECISION ON DEBTORS' MOTION FOR AN ORDER VOIDING SECOND MORTGAGE LIEN OF PNC BANK, NATIONAL ASSOCIATION UNDER 11 U.S.C. § 1322
Appearances: BRONSON LAW OFFICES, P.C., by H. Bruce Bronson, Esq., for the Debtors
TUCKER ARENSBERG, P.C., by Jordan S. Blask, Esq., for PNC Bank, National Association
By motion, dated October 27, 2014 (the "Motion"), the debtors herein (the "Debtors") sought an order voiding the second mortgage lien of PNC Bank, National Association ("PNC") on their principal residence, located at 81 Poplar Rd., Briarcliff Manor, NY 10510 (the "Property"), pursuant to 11 U.S.C. §§ 506(a) and 1322(b) as applied by Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir. 2001).
The right to such relief depends on the Court finding that "there is not even one dollar of value in the Property to support the lien which the Debtor[s] seek to avoid." In re Lepage, 2011 Bankr. LEXIS 1842, at *11-12 (internal quotations and citations omitted). This is because, as held by the Second Circuit, the Bankruptcy Code's exception in 11 U.S.C. § 1322(b)(2) to a chapter 13 plan's ability to modify the rights of the holder of a claim secured only by a security interest in real property that is the debtor's principal residence "protects a creditor's rights in a mortgage lien only where the debtor's residence retains enough value -- after accounting for other encumbrances that have priority over the lien -- so that the lien is at least partially secured under [11 U.S.C. § 506(a)]." In re Pond, 252 F.2d at 126. If there is no such value, the chapter 13 plan may modify the creditor's rightsunder 11 U.S.C. § 1322(b), id.,1 and treat the (in fact) wholly unsecured claim like other unsecured claims over the creditor's objection under 11 U.S.C. § 1325(b) (provided, of course, that the debtor (i) complies with the confirmation requirements of 11 U.S.C. § 1325(a)(1)-(4) and (6)-(9) (), and (ii) performs the confirmed plan that has modified the claim and therefore is binding on the creditor.2
Here, PNC objected to the Debtors' assertion, supported by an appraisal, that there was no collateral value in the Property to secure PNC's junior mortgage debt and submitted its own appraisal showing that there is at least some value in the Property in excess of the senior mortgage debt. The Court therefore held an evidentiary hearing on April 14, 2015 (the "Hearing") on the value of the Property. This Memorandum of Decision sets forth the Court's reasons for concluding, upon the record of the Hearing and after considering post-hearing submissions and weighing the evidence, that the Motion should be granted and PNC's junior mortgage lien treated as void under the Debtors' chapter 13 plan, subject to PNC's rights under 11 U.S.C. § 363(k) and the lien's reinstatement if this case is dismissed or converted to a case under chapter 7 of the Bankruptcy Code before the Debtors completetheir chapter 13 plan. There is no collateral value supporting PNC's junior lien; accordingly, its wholly unsecured claim can be modified under 11 U.S.C. § 1322(b)
The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157(a)-(b) and 1334(b), which it can decide by final order as a core proceeding under 28 U.S.C. § 157(b)(2)(B), (K) and (L).
The parties agree that the Property is encumbered by a first mortgage securing Bank of America N.A.'s claim of $429,736.93. The Debtors do not identify any other encumbrances on the Property senior to PNC's second mortgage, and thus PNC contends that it need show only that the Property has a value in excess of $429,736.93 to satisfy the test of In re Pond, 252 F.3d at 126. To do so, it submits its own $440,000 appraisal and argues that the Debtors' $400,000 valuation is too low. In re Casas, 2014 Bankr. LEXIS 4515, at *20-21 (Bankr. N.D. Cal. Sept. 28, 2014) ( ) (internal citations omitted); In re Lepage, 2011 Bankr. LEXIS 1842, at *12 (); In re Karakas, 2007 Bankr. LEXIS 1578, at *19-20 (same).3
The Debtors contend, however, that in addition to subtracting the senior mortgage debt from the value of the Property, they are entitled to subtract the Property's reasonably projected selling costs, at least a customary broker's fee, before the Court determines whether there is any remaining value to support PNC's secured claim. The outcome of this legal dispute would be dispositive here, because it is clear, based on the $440,000 value ascribed to the Property by PNC's appraiser, that even if a broker charged only a 2.5 percent commission there would be no remaining collateral value to provide PNC with any recovery, and, in the Court's experience based on the frequent review of residential broker retention agreements under 11 U.S.C. §§ 327(a) and 328(a), the average broker commission for the Property would be higher than 2.5 percent, ranging from 4 to 6 percent.4
Id. To drive the point home, the court continued, "The value of the lien could differ from the value of the collateral underlying that lien for a variety of reasons, such as the state-law rights that attach to the lien but not to the collateral, or the costs associated with collecting on the lien." Id. n. 5 (emphasis added). Thus it would appear that, under In re Pond, one should not deduct the lender's hypothetical collection or sales costs, such as a broker's commission.
This conclusion is supported by Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), cited by the Pond court, which held that when valuing collateral under 11 U.S.C. § 506(a) for purposes of cramming down a secured creditor under 11 U.S.C. § 1325(a)(5), the first sentence of § 506(a), which refers to a claim being secured "to the extent of the value of such creditor's interest in the estate's interest in such property" (which the lower court had construed as requiring a valuation from the creditor's perspective, including the deduction of hypothetical selling costs), should not control. Id. at 960-61. Instead, the analysis should be directed by the second sentence of § 506(a), which requires such value be determined "in light of the purpose of the valuation and of the proposed disposition or use of such property." Id. at 961-62. Therefore, where, as is the case here, the court is valuing collateral in a context where the debtor is proposing to keep the collateral, the focus should be on the value of the property in the debtor's possession, that is, the replacement value to the debtor of property of the same type and condition. Id. at 962-63.5 When the debtor is retaining the collateral under the plan, therefore, selling costs, unlike a senior mortgage, remain only hypothetical and should not be deducted. Id.
This clearly provides a windfall to the junior lienholder over what it would recover if the debtor abandoned the collateral or it were liquidated in foreclosure; indeed, Rash not only reversed the Fifth Circuit's award of the going concern surplus to the debtor but also declined to adopt the approach of the Second and Seventh Circuits, which split the savings between the creditor and the debtor resulting from not liquidating the collateral. Id. at 959, 964-65.6
Apparently no post-Rash decision has deducted selling costs in addition to senior lien debt in the lien-stripping context; to the contrary, courts addressing the issue after Rash have consistently held that, because the debtor is retaining the house, liquidation or selling costs should not be deducted. See e.g., In re Strever, 468 B.R. 776, 780-81 (Bankr. D. S.C. 2012); In re Yildiz, 2011 Bankr. LEXIS 4996, at *4 (Bankr. E.D. Va. Dec. 19, 2011); In re Serda, 395 B.R. 450, 456 (Bankr. E.D. Cal. 2008); In re Smith, 262 B.R. 594, 599-600 (Bankr. E.D.N.Y. 2001); see also In re Relyea 2003 Bankr. LEXIS 2254, at *7-8 (Bankr. N.D.N.Y. Apr. 26, 2003) (...
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