In re Sadala, 02-07006-OJ3.

• Decision Date: 02 June 2003
• Docket Number: No. 02-07006-OJ3.,02-07006-OJ3.
• Citation: 294 B.R. 180
• Parties: In re SADALA, Thomas F., Sadala, Barbara, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of Florida

294 B.R. 180

In re SADALA, Thomas F., Sadala, Barbara, Debtors.

No. 02-07006-OJ3.

United States Bankruptcy Court, M.D. Florida, Orlando Division.

June 2, 2003.

Catherine B. Palumbo, Melbourne, FL, for debtor.

Laurie K. Weatherford, Winter Park, FL, trustee.

MEMORANDUM OPINION DENYING SUNTRUST BANK'S MOTION FOR RELIEF FROM STAY AND GRANTING DEBTORS' MOTION FOR CLARIFICATION

KAREN S. JENNEMANN, Bankruptcy Judge.

This case came on for hearing, on March 11, 2003, on the Motion for Clarification (Doc. No. 39) filed by Thomas and Barbara Sadala, the Chapter 13 debtors in this case. The debtors seek clarification on whether they can value and strip off a second unsecured mortgage encumbering their homestead by motion, or, instead, whether an adversary proceeding is required. The dispute over whether the debtors are required to file an adversary proceeding to value and to strip off a second unsecured mortgage arose at a preliminary hearing held on November 19, 2002, on SunTrust's Motion for Relief from the Automatic Stay (Doc. No. 26) and the debtors' Response (Doc. No. 34). SunTrust sought relief from the automatic stay because the debtors' Chapter 13 plan (Doc. No. 6) valued SunTrust's secured claim at zero, included no payments to SunTrust as a secured creditor under the plan, and proposed to avoid SunTrust's second mortgage. Because SunTrust was not being treated as a secured creditor, they asked this Court to modify the automatic stay to allow the bank to pursue their state court rights against the debtors' home.

The debtors value their home at $81,000. SunTrust holds both the first and second mortgages encumbering the debtors' home. The first mortgage has a balance of $83,321.62; the second mortgage has a balance of $16,610.60. In addition, Household Finance holds a third mortgage encumbering the debtors' home in the amount of $26,503.36. Because the value of the home, as asserted by the debtors, was less than the balance due on SunTrust's first mortgage, the debtors intend to value SunTrust's second mortgage and Household Finance's third mortgage at zero and extinguish, or strip off, the respective liens pursuant to In re Tanner, 217 F.3d 1357 (11th Cir.2000). Consistent with this intention, the debtors filed an Objection to SunTrust's Proof of Claim (Doc. No. 16) and an Amended Motion for Valuation of Homestead Property and Strip Off of SunTrust's Lien (Doc. No. 25).

In response, SunTrust filed an Objection (Doc. No. 22) to the Motion for Valuation and Strip Off, an Objection to the debtors' Objection to Proof of Claim (Doc. No. 23), and a Motion for Relief from Stay (Doc. No. 26). In all of these pleadings, SunTrust argued that both its first and second mortgages were secured, at least in part, because the debtors' valuation of the home was inaccurate. SunTrust asserts the actual value of the home is $127,640, an amount in excess of the combined balance due under all three mortgages encumbering the property. Therefore, SunTrust argues that the debtors cannot strip off the second or third mortgage because the mortgages are fully secured and that SunTrust is entitled to payment under the debtors' Chapter 13 plan, or in the alternative to enforce its rights under the second mortgage. A separate evidentiary hearing is needed to resolve these disputed valuation issues.¹

However, at the preliminary hearing on the Motion for Relief from Stay, SunTrust also objected to the debtors' valuation motion on procedural grounds. SunTrust argued that the debtors could not strip off its second mortgage by motion. Rather, Bankruptcy Rule 7001(2) required the debtors to institute an adversary proceeding. The debtors then filed their Motion for Clarification, arguing that a motion to value was procedurally sufficient. This opinion only addresses this one issue: can a debtor value a claim arising from an unsecured mortgage encumbering a homestead by motion or is an adversary proceeding required?

Section 506 of the Bankruptcy Code² allows a debtor to value a claim to determine if the claim is secured or unsecured and to declare void a lien for a totally unsecured claim. Section 506(a) provides that collateral, which secures an allowed claim, may be valued 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, Section 506(d) provides that the lien is void.

Bankruptcy Rule 3012 specifically permits 506(a) collateral valuations to be requested on motion provided notice and an opportunity for hearing is given to the affected party. Fed. R. Bankr.P. 3012. Although the rule does not specifically address whether an adversary proceeding is needed to extinguish an unsecured lien under 506(d), the Official 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 a claim in a plan.]

11 U.S.C. § 506 advisory committee's notes. Interpreting this comment, it appears that an adversary proceeding is only needed when the basis of the lien itself is in dispute and that no adversary proceeding is needed simply to value and to declare void a totally unsecured claim. Developing case law supports this conclusion.

The bankruptcy rules create two different types of proceedings for resolving disputes — contested matters and adversary proceedings — presumably because the drafters of the rules deemed certain matters of sufficient consequence to the affected party that the party deserved something more than a motion and an accelerated hearing. In reality, the differences often are blurred.

In a contested matter, the creditor receives a motion. Typically, no filing fee is required. Because many contested motions are not opposed, the responding party is given an opportunity to file a response or objection within a certain period of time. If a response is filed, the court will set a hearing. Often, the creditor will not dispute the relief requested in the motion, files no response, and the motion is granted upon notice but without the need for any hearing after the response period passes. The process provides due process in a streamlined and efficient manner.

In contrast, in an adversary proceeding, the debtor must file and formally serve a complaint upon the creditor, which identifies the party that is the object of the debtor's action, the specific relief sought, and the basis for such relief. Fed. R. Bankr.P. 7003 and 7008. Filing fees associated with adversary proceedings are substantial. Additionally, the debtor must serve a summons accompanied with the complaint directed to the named defendant which states, among other things, that if the party does not appear and defend, a judgment for the relief sought will be entered against it. Fed. R. Bankr.P. 7004. Clearly, an adversary proceeding is more formal, takes longer, and is more costly.

With this structure in mind, all courts permit collateral valuation by motion as permitted by Bankruptcy Rule 3012. The majority of courts that have analyzed whether a motion or adversary proceeding is necessary to strip off an unsecured mortgage also have held that the appropriate procedure for collateral valuation is by motion. However, there is a split among courts as to whether an adversary proceeding is required under Bankruptcy Rule 7001(2) to declare a lien void if the collateral is valued at zero. The minority of courts have held that an adversary proceeding is required because, in order to declare a lien void, the court necessarily must determine the validity, priority, or extent of the lien.

The majority of courts 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. No further proceeding is required. In re Hoskins, 262 B.R. 693 (Bankr.E.D.Mich.2001); In re Fuller, Jr., 255 B.R. 300 (Bankr.W.D.Mich.2000); In re Jones, 152 B.R. 155 (Bankr.E.D.Mich.1993); Lee Servicing Co. v. Wolf (In re Wolf), 162 B.R. 98 (Bankr.D.N.J.1993). Once the value of the secured claim is determined, the attendant lien is stripped off automatically under Section 506(d).

For instance, in In re Hoskins, the bankruptcy court held that a Chapter 13 debtor was not required to bring an adversary proceeding in connection with stripping off a second unsecured mortgage because merely extinguishing the lien did not involve a determination of the validity, priority, or extent of the mortgage.³ The bankruptcy court defined the terms "validity," "priority" and "extent" to demonstrate that these matters were not implicated when all the debtor was asking the court to do was to value the secured creditor's collateral. Hoskins, at 697 (citing In re Hudson, 260 B.R. 421, 433 (Bankr.W.D.Mich.2001)). In defining the terms, the court opined that "validity" referred to whether the lien was enforceable. Id."Priority" referred to the rank held by the mortgage in relation to other claims attached to the same property. Id."Extent" referred to the identification of the scope of specific property that is the subject of the lien. Id. The court found that these matters were not in dispute, only the value of collateral. Therefore, the debtor could both value and strip off the unsecured lien by motion. No adversary proceeding was needed.

Similarly, in In re Jones, the bankruptcy court held that a Chapter 13 debtor was not required to bring an adversary proceeding to strip off a second unsecured mortgage because the validity, priority, or extent of the mortgage was not at issue. In re Jones, 152 B.R. 155 (Bankr.E.D.Mich.1993). Rather, the appropriate procedure to...