In re Wapshare

• Decision Date: 15 May 2013
• Docket Number: No. 13–35075 (cgm).,13–35075 (cgm).
• Citation: 492 B.R. 211
• Parties: In re James N. WAPSHARE, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

492 B.R. 211

In re James N. WAPSHARE, Debtor.

No. 13–35075 (cgm).

United States Bankruptcy Court,

S.D. New York.

May 15, 2013.

Edward J. Quilice, Esq., Simon Haysom LLC, Goshen, NY, for Debtor.

Kevin F. Preston, Esq., MacVean, Lewis, Sherwin & McDermott, P.C., Middletown, NY, for Orange County Trust Company.

MEMORANDUM DECISION ON MOTION TO AVOID SECOND MORTGAGE AND RECLASSIFY CLAIM

CECELIA G. MORRIS, Chief Judge.

Introduction

James N. Wapshare (“Debtor”) seeks to avoid and reclassify a second mortgage that encumbers his principal residence. The holder of the second mortgage, Orange County Trust Company (the “Bank”), objects to the Debtor's requested relief. The Bank argues that the mortgage lien cannot be avoided until the Debtor has proposed a confirmable plan in this “chapter 20” case. For the reasons discussed below, the Bank's objection is overruled.

Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(A) and (b)(2)(B) (allowance of claims against the estate).

Background

Prior to filing this case, on July 20, 2012, the Debtor filed a chapter 7 petition. In re Wapshare, Case No. 12–36849(cgm) (Bankr.S.D.N.Y. July 20, 2012), ECF No. 1. Shortly thereafter, on October 17, 2012, the Debtor received a discharge and the case was closed on the same day. Order of Discharge, Case No. 12–36849 (cgm), ECF No. 13. On January 14, 2012, approximately three months after a discharge was granted and the chapter 7 case was closed, the Debtor filed a chapter 13 petition initiating this case. In re Wapshare, Ch. 13 Case No. 12–36849 (cgm) (Bankr. S.D.N.Y. July 20, 2012).

The Debtor in this case seeks to modify the Bank's rights as holder of a wholly underwater second mortgage pursuant to § 1322(b)(2). Dr's Mem. of Law at 2, ECF No. 15.

The Bank in this case did not contest the Debtor's use of § 1322(b)(2), and did not contest the Debtor's appraisal, which indicated that the second mortgage is wholly unsecured. The Bank focused on the Debtor's purported inability to confirm the proposed chapter 13 plan. The Bank argues that the plan will not generate sufficient funds to treat the arrears of the first mortgage holder, that the Debtor has already failed to make post-petition payments to the first mortgage holder, and that the plan will not pay priority unsecured creditors in full. Obj. ¶ 3, ECF No. 18.

Discussion

I. Lien avoidance in a “chapter 20” case

In Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir.2001), the Second Circuit held that a chapter 13 debtor could avoid a wholly unsecured second mortgage that encumbered a principal residence. 252 F.3d at 127. To arrive at this conclusion, the Second Circuit analyzed the interaction between §§ 506(a) and 1322(b)(2). Id. at 124–25. Noting that § 1322(b)(2) allows a debtor to modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, the court focused on whether the mortgage holder held a secured claim.¹Id.;11 U.S.C. 1322(b)(2). Looking to the Supreme Court decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) for guidance, and agreeing with a majority of Courts of Appeals who had spoken on the issue, the Second Circuit adopted the view that “the antimodification exception is triggered only where there is sufficient value in the underlying collateral to cover a portion of a creditor's claim.” Id. at 125–26;In re Wong, 488 B.R. 537, 540 (Bankr.E.D.N.Y.2013) (determining that Pond stands for the proposition that where there is no value in the collateral to cover the claim, the antimodification provision does not apply); see also McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 612 (3d Cir.2000); Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 295 (5th Cir.2000); Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663, 668 (6th Cir.2002); Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1227 (9th Cir.2002); Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357, 1360 (11th Cir.2000); Domestic Bank v. Mann (In re Mann), 249 B.R. 831, 840 (1st Cir. BAP 2000); Fisette v. Keller (In re Fisette), 455 B.R. 177, 182 (8th Cir. BAP 2011), appeal dismissed,695 F.3d 803 (8th Cir.2012); Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 170 (10th Cir. BAP 2005).

To determine whether value existed to secure the claim, the Second Circuit then looked to § 506(a) and United States v. Ron Pair Enters., Inc., 489 U.S. 235, 239, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), which explained that “[s]ubsection (a) of § 506 provides that a claim is secured only to the extent of the value of the property on which the lien is fixed....” Pond, 252 F.3d at 126;see also Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997) (“The first sentence [of § 506(a)], in its entirety, tells us that ... the secured portion of [a] claim [is] limited to the value of the collateral.”); In re Miller, 462 B.R. 421, 428 (Bankr.E.D.N.Y.2011) (noting that the Second Circuit permits courts to value a residential mortgage lien under § 506(a) to determine whether it is secured or unsecured, and if unsecured, the plan may modify the rights of the holder of the unsecured junior mortgage with § 1322(b)(2)).

There is an ongoing debate over whether a chapter 20 ² debtor can modify an underwater junior mortgage lien that is secured by the debtor's principal residence. See Miller, 462 B.R. at 428–29 (listing cases); In re Waterman, 469 B.R. 334, 338–39 (D.Colo.2012) (listing cases); Frazier v. Real Time Resolutions, Inc., 469 B.R. 889, 895, n. 6–8 (E.D.Cal.2012) (noting three separate approaches courts take and listing cases falling into each approach). The split between courts results from the interplay of a number of statutory provisions. Frazier, 469 B.R. at 896 (“The determination of whether Appellees' Chapter 13 plan may remove Appellant's junior lien necessitates analysis of the interplay between §§ 506(a)(1), 1322(b)(2) and 1328(f)(1) of the Bankruptcy Code”); Miller, 462 B.R. at 429 (“[T]he issue of strip offs in chapter 20 cases requires an examination of §§ 506(a), 506(d), 1322(b)(2), 1325 and 1328....”).

The Court finds that the plain language of the Bankruptcy Code, even as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, 119 Stat. 37 (2005) (“BAPCPA”), does not categorically prohibit the filing of a chapter 13 petition even though the debtor is ineligible for discharge. In re Rogers, 489 B.R. 327, 333 (D.Conn.2013); accord Johnson v. Home State Bank, 501 U.S. 78, 84–85, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). The Court finds that the plain language of the Bankruptcy Code does not prohibit the use of § 1322(b)(2) in a chapter 20 case, and the Court is bound to follow the Second Circuit's decision in Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir.2001). E.g., Rogers, 489 B.R. at 333 (“[T]here is nothing in the plain language of the applicable Bankruptcy Code sections,even where amended by BAPCPA, that presumptively prohibits application of section 1322(b)(2) in a no-discharge Chapter 13 case.”); In re Scantling, 465 B.R. 671, 678 (Bankr.M.D.Fla.2012) (“[A] debtor can modify the rights of a wholly unsecured junior mortgage in a chapter 13 case[,] [a]nd the same ought to be true in a chapter 20 case absent some prohibition to the contrary.”); In re Gloster, 459 B.R. 200, 205 (Bankr.D.N.J.2011) (discussing how Congress is presumed to have known that six Circuit Courts of Appeals sanctioned strip-off of wholly unsecured mortgage obligations with §§ 506(a) and 1322(b)(2) in chapter 13, and nonetheless did not make any changes to these provisions in the BAPCPA amendments).

Section 1325(a)(5) does not change the result. That section states that the court shall confirm a plan if, in relevant part:

(5) with respect to each allowed secured claim provided for by the plan—

(A) the holder of such claim has accepted the plan;

(B)

(i) the plan provides that—

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

The Bank's junior mortgage lien is wholly underwater. It does not give rise to an “allowed secured claim” such that § 1325(a)(5) is implicated. See11 U.S.C. § 506(a); See also Transcript of Confirmation Hearing and Motion to Avoid Lien at 4, In re Maria Sands, Case No. 12–23241(rdd) (Bankr.S.D.N.Y. Sept. 12, 2012), ECF No. 22 (“under the Second Circuit law—because, obviously, we're all governed by the Pond case—1325(a)(5) doesn't kick in.... and the Pond rationale is consistent with not having it kick in.”). The provision in the statute requiring payment of the underlying debt or discharge before a lien can be avoided is not implicated in this case.

The Court finds the reasoning in the recent Fourth Circuit case Branigan v. Davis (In re Davis), 716 F.3d 331, 337–38, 2013 WL 1926407, at *7 (4th Cir.2013) to be persuasive. In Davis, the court found that wholly unsecured junior mortgages are “worthless” and are therefore unsecured claims under § 506(a). Id. BAPCPA did not amend §§ 506 or 1322(b)(2), leaving that premise intact in chapter 20. Id. Section 1325(a)(5) could not change this result; that section applies to “allowed secured claims.” Id. Valuation under § 506(a) would be required, and that would lead to a wholly unsecured claim. Id. This result did...