In re Robert, 03-18304.

• Decision Date: 30 August 2004
• Docket Number: No. 03-18304.,03-18304.
• Parties: In re Leo Stephen ROBERT and Nancy Jean Robert, Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Northern District of New York

313 B.R. 545

In re Leo Stephen ROBERT and Nancy Jean Robert, Debtors.

No. 03-18304.

United States Bankruptcy Court, N.D. New York.

August 30, 2004.

Barbara Whipple, Orlando & Barbaruolo, PLLC, Albany, NY, for Debtors.

Brian B. Kumiega, Steven J. Baum, P.C., Amherst, NY, for Secured Creditor.

Mark W. Swimelar, Syracuse, NY, Chapter 13 Standing Trustee.

Memorandum-Decision and Order

ROBERT E. LITTLEFIELD, JR., Bankruptcy Judge.

Upon motion by Leo and Nancy Robert (the "Debtors"), the court is asked to decide whether, under Section 1322(b)(2) of the United States Bankruptcy Code (11 U.S.C. §§ 101 — 1330) ("Code"), a Chapter 13 debtor can strip off a wholly unsecured lien on his residential property without instituting an adversary proceeding. For the reasons stated below, the court concludes that a Pond¹ determination may be sought through regular motion practice rather than through an adversary proceeding.

Jurisdiction

The court has jurisdiction over this case. 28 U.S.C. §§ 157(a), (b)(1), and 1334. This matter is a core proceeding. 28 U.S.C. §§ 157(b)(2)(K) and (L).

Factual and Procedural Background

On December 18, 2003, the Debtors filed a voluntary joint petition, together with the requisite schedules and statements, seeking relief under Chapter 13 of the Code ("Petition"). They simultaneously filed a proposed Chapter 13 plan ("Plan").

On Schedule A (Real Property), the Debtors list their residence located at 449 Fourth Street in Troy, New York (the "Property"). They indicate that the Property has a current fair market value of $85,900 and that it is subject to two mortgages which secure obligations totaling $124,854.30. On Schedule D (Creditors Holding Secured Claims), the Debtors list ABN AMRO Mortgage Group, Inc. ("ABN") as the holder of a first mortgage with a claim in the amount of $87,854.83. Additionally, the Debtors list Homecomings Financial ("Homecomings") as the holder of a second mortgage with a claim in the amount of $37,000. In relation to Homecomings' claim, the Debtors note on Schedule D that the entire portion is unsecured "based upon the existence of [s]uperior [l]iens." Accordingly, the Plan specifically provides that "[t]he second mortgage owed to Homecoming Financial shall be stripped and paid pro rata with the remaining unsecured creditors pursuant to the Pond decision."

Homecomings was included on the Debtors' mailing matrix and the following address was provided:

                  Homecomings Financial
                  P.O. Box 78426
                  Phoenix, AZ 85062-8426
                

All creditors, including Homecomings, were served with the Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, and Deadlines, issued by the clerk's office on December 19, 2003 (the "Notice"). (Dkt. No. 3.) The Notice alerted creditors that the meeting of creditors would be held on January 28, 2004, the deadline to file a proof of claim was April 27, 2004, and that the confirmation hearing would be held on February 12, 2004. It further indicated that any objection to confirmation must be filed and properly served no later than 5 business days prior to the confirmation hearing date and that any party objecting must appear at the confirmation hearing.

On March 31, 2004, counsel for Homecomings, Brian B. Kumiega, filed a Notice of Appearance on behalf of "HOMECOMINGS-FIDELITY, Secured Creditor." (Dkt. No. 13.) Homecomings has not filed an objection to confirmation or a proof of claim in this case.

The Trustee filed an objection to confirmation on February 5, 2004.² The objection states in relevant part:

Debtor(s) seek to avoid the lien of the following Creditor without an Order pursuant to § 506/522(f) obtained by consent or by an adversary proceeding under Bankruptcy Rule 7001:

HOMECOMING FINANCIAL[.]

(Trustee's Objection to Confirmation of Chapter 13 Plan.)

Following the Trustee's objection, on May 28, 2004, the Debtors filed the instant motion seeking an order automatically stripping off Homecomings' lien upon the entry of their discharge and immediately compelling Homecomings to provide the Trustee with a satisfaction of lien to be held in escrow pending their successful completion of the Plan. The Debtors did not affirmatively challenge the validity, priority, and/or extent of Homecomings' lien, but instead alleged that there was insufficient equity to reach beyond the first mortgage. In support of their motion, the Debtors submitted a Pricing Recommendation prepared by Diane Dobrowolski, a realtor with Coldwell Banker Prime Properties, Inc. (Exhibit B attached to the Application in Supp.) Ms. Dobrowolski, using the comparable sales approach, arrived at a "recommended list price" of $85,900 and an "average sale price" of $74,972. Id.

The Debtors submitted affidavits of service attesting to service of the motion upon Homecomings' President at the following physical locations:

                  Homecomings Financial
                  9275 Sky Park Court, 3rd Floor
                  San Diego, CA 92123
                  ATTN: President
                  Homecomings Financial
                  2711 North Haskell Ave., Suite 900
                  Dallas, TX 75204
                  ATTN: President
                

(Dkt. No. 14.) The Debtors also served the motion upon Mr. Kumiega. (Dkt. No. 17.) The motion was returnable on the court's regular motion calendar on June 23, 2004. Homecomings did not respond to the motion or appear at the hearing. Nonetheless, the court took the matter under advisement to address the Trustee's objection and to evaluate the procedure utilized by the Debtors in this case.

Discussion

I. Overview

Preliminarily, it is important to note that the Second Circuit has held that a Chapter 13 debtor may modify the rights of a wholly unsecured mortgagee under Code § 1322(b)(2). See In re Pond, 252 F.3d at 126 (holding that a wholly unsecured mortgage lien may be stripped off in a Chapter 13 proceeding notwithstanding the antimodification exception of § 1322(b)(2)).³ Therefore, neither Homecomings nor the Trustee contest the Debtors' substantive right to avoid Homecomings' lien, assuming the same is in fact wholly unsecured.

Instead the Trustee asserts, on very narrow procedural grounds, that Homecomings' lien cannot be avoided apart from the protections afforded by an adversary proceeding. Prior to the Debtors' motion, an adversary proceeding was the sole method utilized by debtors and practitioners appearing before this court to extinguish a junior lienholder's wholly unsecured mortgage lien. The Debtors' motion however squarely places before the court the question of whether an adversary proceeding is necessary to effect a strip off.

II. Motion Versus Adversary Proceeding

The issue before the court brings into question the relationship between the Code and the Rules; is strip off part and parcel of the secured claim determination and valuation process under Code § 506(a), which may be addressed by motion under Rule 3012, or does it constitute "a proceeding to determine the validity, priority, or extent of a lien," FED. R. BANR. P. 7001(2), required to be made in compliance with the Rules governing adversary proceedings?

Code § 506 provides in relevant part:

(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

....

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void....

11 U.S.C. § 506. Under Code § 506(a), the court may determine the value of collateral, which secures an allowed claim, to ascertain what portion of the claim is secured and what portion is unsecured. To the extent the lien exceeds the amount of the allowed secured claim, subsection (d) provides that the lien is void.

Rule 3012 specifically permits Code § 506(a) collateral valuations to be requested on motion provided notice and opportunity for hearing is given to the affected party. Fed. R. Bankr. P. 3012.⁴ Although the Rule does not specifically address whether strip off may be accomplished by motion practice alone, the Advisory Committee Notes provide some guidance:

An adversary proceeding is commenced when the validity, priority, or extent of a lien is at issue as prescribed by Rule 7001. That proceeding is relevant to the basis of the lien itself while valuation under Rule 3012 would be for the purposes indicated above [e.g., to determine the issue of adequate protection, impairment, or treatment of the claim in a plan.]

Fed. R. Bankr. P. 3012 Advisory Committee Notes (emphasis added). Thus, it appears that no adversary proceeding is needed simply to value and declare void a totally unsecured claim. The majority of courts therefore hold that "the appropriate procedure for lien avoidance under Section 506 is by motion because lien avoidance is the inevitable byproduct of valuing a claim, which is accomplished by motion pursuant to Bankruptcy Rule 3012." In re Sadala, 294 B.R. 180, at 183 (Bankr.M.D.Fla.2003) (collecting cases); see also, In re Millspaugh, 302 B.R. 90 (Bankr.Idaho 2003); In re Fisher, 289 B.R. 544 (Bankr.W.D.N.Y.2003) (court allows Pond proceedings to be prosecuted by motion in the absence of a specific objection by the mortgage holder that the proceeding be converted to an adversary proceeding); but see, e.g., In re Kressler, 252 B.R. 632 (Bankr.E.D.Pa.2000) (espousing the minority view that an adversary proceeding is required); In re McMillan, 251 B.R. 484 (Bankr.E.D.Mich.2000) (same). "Once the value of the secured claim is determined, the attendant lien is stripped off automatically under Section 506(d)." In re Sadala, 294 B.R. at 183.

In contrast, an adversary proceeding is required under Rule 7001(2) when the dispute between the parties raises an issue as to the validity, priority, or extent of the underlying lien. Pursuant to Part VII of the Rules, adversary proceedings are...