Monroe v. Seaway Bank & Trust Co. (In re Monroe)

• Decision Date: 25 April 2014
• Docket Number: Bankruptcy No. 13–24570–GMH.,Adversary No. 13–02747.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin
• Parties: In re Mark and Sharon MONROE, Debtors. Mark and Sharon Monroe, Plaintiffs, v. Seaway Bank & Trust Company, and U.S. Department of Housing and Urban Development, Defendants.

509 B.R. 613

In re Mark and Sharon MONROE, Debtors.Mark and Sharon Monroe, Plaintiffs,

v.Seaway Bank & Trust Company, and U.S. Department of Housing and Urban Development, Defendants.

Bankruptcy No. 13–24570–GMH.

Adversary No. 13–02747.

United States Bankruptcy Court, E.D. Wisconsin.

Signed April 25, 2014.

Paul A. Strouse, Strouse Law Offices, Milwaukee, WI, for Plaintiffs.

Seaway Bank & Trust Company, pro se.

Christian R. Larsen, Office of the U.S. Attorney, Milwaukee, WI, for Defendants.

DECISION

G. MICHAEL HALFENGER, Bankruptcy Judge.

The United States Department of Housing and Urban Development and Seaway Bank & Trust Company hold claims that are secured by junior mortgages encumbering the principal residence of chapter 13 debtors Mark and Sharon Monroe. The Monroes allege—and no one contests—that they owe more to Wells Fargo Bank, N.A., which holds the senior mortgage encumbering their residence, than their residence is worth. The Monroes seek a judgment declaring that (i) HUD's and Seaway's claims are “unsecured,” as that term is defined in 11 U.S.C. § 506(a), and (ii) the junior mortgages either are void under 11 U.S.C. § 506(d) or can be extinguished through the Monroes' chapter 13 debt adjustment plan pursuant to 11 U.S.C. § 1322(b)(2).

Only HUD answered the complaint. HUD acknowledges that its mortgage on the Monroes' principal residence is junior to the mortgages of both Wells Fargo and Seaway, and that the amount the Monroes owe to Wells Fargo exceeds the property's value. Because Wells Fargo's claim is undersecured, neither Seaway's nor HUD's lien attaches to any value in the property. This makes Seaway's claim irrelevant to resolving the Monroes' dispute with HUD, and, for ease of explication, this decision treats HUD as the only defendant. The Monroes are entitled to relief against Seaway if and only if they prevail on the legal defenses that HUD raises against the Monroes' attempt to eliminate its lien.

HUD contends that the Monroes cannot eliminate its junior-mortgage lien because (i) § 506(d) doesn't authorize a court to invalidate a lien solely on the grounds that the lien is “underwater,” i.e., on the grounds that the property is worth less than the amount owed to senior lienholders, and (ii) the Monroes are ineligible for a discharge pursuant to 11 U.S.C. § 1328(f) as a result of the chapter 7 discharge they received three years before commencing this case, see 11 U.S.C. § 1328(f) (“[T]he court shall not grant a discharge of all debts provided for in the plan ... if the debtor has received a discharge ... in a case filed under chapter 7 ... of this title during the 4–year period preceding the date” that the debtor filed his chapter 13 petition.).

Controlling authority dooms the Monroes' contention that § 506(d) invalidates HUD's lien. But there is no controlling precedent and this district's judges have disagreed on whether the Code allows chapter 13 debtors who are not eligible for a discharge under § 1328(f)(1) to “strip”—i.e., eliminate—through their chapter 13 plan an underwater junior lien. Compare Lindskog v. M & I Bank, 480 B.R. 916 (E.D.Wis.2012) (Clevert, C.J.) (debtor who is ineligible for a chapter 13 discharge under § 1328(f)(1) may not strip a creditor's state-law lien rights through her chapter 13 plan), with In re Fair, 450 B.R. 853 (E.D.Wis.2011) (Randa, J.) (contra). Bankruptcy court decisions in this district have consistently rejected discharge-ineligible chapter 13 debtors' efforts to strip liens. See Lindskog v. M & I Bank (In re Lindskog), 451 B.R. 863 (Bankr.E.D.Wis.2011), aff'd,480 B.R. 916 (E.D.Wis.2012); MacDonald v. HSBC Mortg. Servs., Inc. (In re MacDonald), Case No. 09–31552, Adv. No. 10–02287 (Bankr.E.D.Wis. Oct. 25, 2010), http:// www. wieb. uscourts. gov/ opinions/ files/ pdfs/ Mac Donald,_ et_ al._ v._ HSBC_ Mortgage_ Services,_ Inc.,_ 10- 2287. pdf; Blosser v. KLC Fin., Inc. (In re Blosser), Case No. 07–28223, Adv. No. 08–02353, 2009 WL 1064455 (Bankr.E.D.Wis. April 15, 2009).

At the initial pretrial conference, the parties agreed to submit briefs addressing whether the Code allows the Monroes to eliminate HUD's lien and identifying any disputed facts. After the parties submitted their briefs and supplemental authority, I heard oral argument. Based on the parties' briefs, HUD's supplemental filings, and the arguments presented by counsel, I conclude that the parties do not dispute any material fact and whether the Monroes can eliminate HUD's lien can be adjudicated as a matter of law. My conclusions of law based on the undisputed facts are described below.¹

I

HUD's claim arose after Wells Fargo and Seaway (or their predecessors in interest, a detail I ignore) recorded their mortgages on the Monroes' principal residence. Wells Fargo recorded its first-priority mortgage in November 2002, and Seaway recorded its second-priority mortgage in July 2008. In March 2009, the Monroes executed a note in HUD's favor and a mortgage on their principal residence to secure that note. HUD recorded its third-priority mortgage in April 2009.

In February 2010, the Monroes filed a petition under chapter 7. A few months later the bankruptcy court entered a chapter 7 discharge, which discharged—among other debts—their personal obligations to repay HUD.²

The Monroes commenced this chapter 13 case on April 12, 2013. HUD filed a proof of claim asserting its right to payment of the Monroes' debt secured by its lien, which was not affected by the Monroes' discharge because the lien passed through their chapter 7 bankruptcy unaltered. See Dewsnup v. Timm, 502 U.S. 410, 418–20, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Long v. Bullard, 117 U.S. 617, 620–21, 6 S.Ct. 917, 29 L.Ed. 1004 (1886). HUD's claim in this case is nonrecourse; it consists solely of the right to collect the debt owed on the note executed in 2009 by foreclosing on the collateral securing that note—the Monroes' principal residence. See Johnson v. Home State Bank, 501 U.S. 78, 83–86, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991).

But, as already explained, when the Monroes filed this case their residence was worth less than the amount owed to lenders holding liens senior to HUD's. HUD concedes this point, stating: “HUD's third position lien does not currently attach to any equity in the Debtors' residence, even if Seaway's second position lien is stripped by its default.” No. 13–02747, CM–ECF No. 14, at 4. Outside of bankruptcy or foreclosure by a senior lienholder, HUD could have awaited an increase in the property's value sufficient to satisfy through a foreclosure sale both the amount that the Monroes owe to the senior lienholders and some or all of the amount that the Monroes owe to HUD. The central question presented here is whether the Monroes can eliminate through their chapter13 case HUD's right to await such an increase in the property's value.

Again, the Monroes offer two bases for eliminating HUD's lien. First, they argue that the lien is void under § 506(d) because it “secures a claim ... that is not an allowed secured claim”. 11 U.S.C. § 506(d). Second, they contend that § 1322(b)(2) allows them to eliminate HUD's lien by modifying HUD's rights through their chapter 13 plan. The Monroes have proposed a chapter 13 plan that provides:

Debtors [intend] to strip off the wholly unsecured second and third mortgages [on the debtors' primary residence held by] Seaway Bank and Trust Company and the United States Department of Housing & Urban Development ... pursuant to Section 1322(b)(2).... Upon successful completion of the Debtors' Chapter 13 plan, the junior mortgages held by Seaway Bank and Trust Company and [the U.S.] Department of Housing and Urban Development shall be deemed to be fully paid and their liens shall have no legal effect[.]

No. 13–24570, CM–ECF No. 73, at 2.

HUD objects to the Monroes' proposed chapter 13 plan “based on its position, to be litigated in [this] adversary proceeding, that HUD's lien, even if not supported by equity in the debtor[s'] home, may only be stripped in the event of a chapter 13 discharge.” Id., CM–ECF No. 75, at 3; see also id., CM–ECF No. 84 (renewing objection). This decision, therefore, resolves both HUD's defense to the entry of judgment in this adversary proceeding and its objection to confirmation of the Monroes' proposed chapter 13 plan.

II

The Monroes cannot avoid HUD's lien under § 506(d). Section 506(d) provides that a lien is void “[t]o the extent that [it] secures a claim against the debtor that is not an allowed secured claim” (unless either of two exceptions—both of which are inapplicable here—apply). § 506(d). The Monroes correctly contend that under § 506(a) a claim can only be “secured” to the extent that a debtor's bankruptcy estate has an interest in the property. 11 U.S.C. § 506(a). Subsection (a)(1) provides, “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.” Id. Thus, a creditor has a secured claim under § 506(a) only to the extent that its lien attaches to value in the property that its lien encumbers. And a creditor holding a junior lien has a secured claim for § 506(a) purposes only to the extent that the value of the debtor's property that the junior lien encumbers is greater than the amount the debtor owes to creditors holding senior liens on that property.

HUD concedes that its claim is “unsecured” under § 506(a), because, again, the amount owed on the claims secured by the liens senior to HUD's lien exceeds the value of the Monroes' residence. Id. The Monroes argue that because HUD's lien “does not attach to any value,” HUD's claim is not a “secured claim” for purposes of the Code, and therefore “void according to § 506(d)”. No....