Matter of Garner

• Decision Date: 28 August 1981
• Docket Number: 81-Adv-6093.,Bankruptcy No. 81-B-20336
• Citation: 13 BR 799
• Parties: In the Matter of Leonard K. GARNER and Sallie G. Garner, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

13 B.R. 799 (1981)

In the Matter of Leonard K. GARNER and Sallie G. Garner, Debtors.

Bankruptcy Nos. 81-B-20336, 81-Adv-6093.

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

August 28, 1981.

Spodek & Schklair, New York City, for debtors; David B. Gilbert, of counsel.

Walter L. and Robert M. Post, Hicksville, N.Y., for Dale Funding Corp.

DECISION ON COMPLAINT OF DALE FUNDING CORPORATION FOR RELIEF FROM THE AUTOMATIC STAY.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

This Chapter 13 case illustrates how a secured claim against the debtors' principal residence, which could not be modified under Code § 1322(b)(2), may nevertheless be subject to a cram-down to the value of the collateral. The mortgagee foreclosed upon the property and obtained a judgment of foreclosure prior to the filing of the petition for relief under Chapter 13 of the Bankruptcy Reform Act of 1978; 11 U.S.C. 1301 et seq. The change in the plaintiff's status from mortgagee to judgment lienor is a crucial factor in the application of the so-called cram-down concept.

FINDINGS OF FACT

1. The debtors, Leonard K. Garner and his wife, Sallie G. Garner, filed their joint petition for relief under Chapter 13 of the Bankruptcy Code on May 27, 1981.

2. The plaintiff, Dale Funding Corporation, was the mortgagee on the debtors' principal place of residence in the Town of West Haverstraw, Rockland County, New York.

3. Dale Funding commenced an adversary proceeding for relief from the automatic stay, as authorized under Code § 362(d). A valuation hearing under Code § 506 was held in conjunction with the complaint for relief from the stay.

4. On August 26, 1976, the debtors executed and delivered to Dale Funding a mortgage and bond in the amount of $37,200.00 which was recorded in the Office of the Clerk of the County of Westchester. The mortgage was guaranteed by the Veterans' Administration. The debtors entered into possession of the mortgaged premises and made the required mortgage payments to May 1, 1979. Thereafter, due to Mrs. Garner's illness and Mr. Garner's loss of employment they failed to make further payments. Dale Funding then commenced a foreclosure action which resulted in a judgment of foreclosure in the sum of $48,073.37, which was entered on April 7, 1981.

5. A foreclosure sale occurred on May 29, 1981, two days after the debtors filed their Chapter 13 petition. Dale Funding did not have notice of the filing of the Chapter 13 petition when the deed of sale was issued to the Veterans' Administration, the guarantor of the mortgage.

6. The sale to the Veterans' Administration after the filing of the debtors' Chapter 13 petition, and in the face of the automatic stay under Code § 362, does not have any significance to the determination in this matter, since such sale is void.

7. The uncontroverted evidence offered by Dale Funding as to the value of the debtors' residence established a present market value of $40,000.

8. The debtors testified that they are now in a position to pay the face amount of Dale Funding's claim during the period of their proposed Chapter 13 plan because they are now both employed, as are their two children who will also contribute to funding the plan. Their main objective in this Chapter 13 case is to save their home.

DISCUSSION

Modification of Secured Claims

Dale Funding correctly observes that Code § 1322(b)(2) expressly forbids a modification of the rights of a holder of a claim secured only by a security interest in real property that is the debtors' principal residence. Thus, Dale Funding's claim under its mortgage, which amounted to approximately $48,000, could not be crammed down against it. Moreover, the debtors can no longer propose to make up their default under the mortgage and reinstate its maturity for continued payments in accordance with its terms because their rights under the mortgage were terminated pursuant to state law when Dale Funding obtained a judgment of foreclosure prior to the filing of the Chapter 13 petition. In such case a Chapter 13 case can not cure or achieve a deceleration of a pre-petition mortgage that was reduced to judgment. In re Butchman, 4 B.R. 379, 6 B.C.D. 403 (Bkrtcy.S.D.N.Y. 1980); In re Pearson, 10 B.R. 189, 7 B.C.D. 567 (Bkrtcy.E.D.N.Y.1981); In re La Paglia, 8 B.R. 937, 7 B.C.D. 333 (Bkrtcy.E.D.N.Y. 1981).

However, Dale Funding's claim is not based only upon a security interest in the debtors' principal residence. The claim was reduced to judgment and constitutes a judicial nonconsensual lien against the debtors' home. Code § 101(27) defines a "judicial lien" as a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." Manifestly, the holder of a judicial lien against real estate does not occupy the same status as "a claim secured only by a security interest in real property" as expressed under Code § 1322(b)(2). Prior to the foreclosure judgment Dale Funding held a security interest, which is defined under Code § 101(37) to mean a "lien created by an agreement." Reference must also be made to Code § 101(36) which defines a "security agreement" to mean an "agreement that creates or provides for a security interest." When Dale Funding obtained its rights under the foreclosure judgment it could no longer assert that its rights in the real estate were "secured only by a security interest" under an existing consensual mortgage and therefore not subject to modification under Code § 1322(b)(2). In re Jordan, 5 B.R. 59, 2 C.B.C.2d 635 (B.C.N.J.1980). Hence, Code § 1322(b)(2) permits the debtors to "modify the rights of holders of secured claims", not otherwise only secured by a security interest in the debtors' principal residence.

In order to achieve confirmation of their plan the debtors must satisfy Code § 1325(a)(5), which requires that

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

. . .

(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim . . . ".

As of this date, Dale Funding has established that the value of its interest in the estate's interest in the property in question as expressed in Code § 506(a), amounts to $40,000. In accordance with Code § 506(a), the balance of Dale Funding's claim against the debtors is unsecured. If this value remains the same at the time of confirmation the debtors would then be required to pay Dale Funding's $40,000 secured claim during the period of their plan an amount, allowing for current interest, that would have a present value of $40,000. The unsecured balance would be paid in the same fashion as their other unsecured creditors.

Request For Relief From the Stay

Under Code § 362(d) relief from the automatic stay is authorized under either of two alternative provisions. Under subsection (1) a creditor may obtain relief "for cause", which includes the lack of adequate protection of the creditor's interest in the property in question. The second alternative is expressed in subsection (2) and requires proof (A) that the debtor does not have equity in the property and (B) that the property "is not necessary to an effective reorganization." Emphasis added It is this alternative provision in Code § 362(d)(2) which has caused considerable divergence of opinions by the courts when dealing with Chapter 13 cases.

Some courts have said that Code § 362(d)(2) does not apply in a Chapter 13 case because unlike Chapter 11, which is entitled "Reorganization" and pertains mainly to business reorganizations, Chapter 13 involves only individuals with regular income and is not available to either partnerships or corporations. In re Feimster, 3 B.R. 11, 6 B.C.D. 131 (Bkrtcy.N.D.Ga.1979); In re Sulzer, 2 B.R. 630, 5 B.C.D. 1314 (Bkrtcy.S.D.N.Y.1980); In re Breuer, 4 B.R. 499, 6 B.C.D. 136 (Bkrtcy.S.D.N.Y.1980). Therefore such individuals with regular income, by definition do not seek any reorganization under Chapter 13 which requires a solicitation of consents from the creditor body, as in Chapter 11, but only an opportunity to pay their creditors over a period of time provided for in the plan, whether or not their creditors consent to the plan. Although Chapter 13 may be availed of by an individual in business, described in Code § 109(e), whose unsecured and secured debts are less than $100,000 and $350,000 respectively, most Chapter 13 debtors are not self-employed individuals. In any event, whether self-employed or not, the debtor does not effect a reorganization under Chapter 13; merely an individual economic rehabilitation.

It has also been held that only subsection (A) applies under Code § 362(d)(2) and that the only issue to be determined is whether or not the debtor has any equity in the property since proof as to the debtors' need for the property for an effective reorganization is inappropriate with respect to Chapter 13 individuals with regular income. In re Youngs, 7 B.R. 69 (Bkrtcy.D.Me.1980).

A third body of judicial authorities has held that both subsections (A) and (B) apply under Code § 362(d)(2) because Code § 103(a) expressly mandates that Chapters 1, 3, and 5 apply in a case under Chapter 7, 11 or 13. Hence, Code § 362(d)(2), which is in Chapter 3, must be applied to its full extent in a Chapter 13 case. In re Buschardt, 9 B.R. 400, 7 B.C.D. 454 (Bkrtcy. 1981); In re Ruark, 7 B.R. 46 (D.C.1980); In re Zellmer, 6 B.R. 497 (Bkrtcy.N.D.Ill.1980). There is no question that Code § 103(a) expressly makes Chapter 3 applicable in a Chapter 13 case. However, it does not follow that every section and subsection in Chapter 3 must apply with equal vigor in Chapter 13, notwithstanding that such application produces an unintended or illogical result.

The split of opinions involving the application of Code § 362(d)(2) in Chapter 13 cases does...