In re Rich Bankruptcy Number 10-21536 (District of Utah), Nice discussion about abandonment. Creditor obtained unopposed staylift order to foreclose on debtors residence. Debtor then filed motion to abandon so he could do a short sale, with no money to debtor. Trustee opposed abandonment but did not assert any equity in the property:
The Debtor’s stated purpose for seeking abandonment of the Real Property is to effectuate a short sale of the Real Property prior to a scheduled foreclosure sale. The Court finds that a party in interest’s motivation for seeking abandonment is irrelevant. The only question the Court should properly address under § 554(b) is whether the property is burdensome or of inconsequential value to the estate.
When faced with a § 554(b) motion a Trustee has two options: He may concede that the property is burdensome or of inconsequential value and abandon the property or he may demonstrate to the court that his administration of the property will result in a benefit to the estate and he should be allowed to administer the property. Failure to administer property that is of value and benefit to the estate is not an acceptable option and failure to abandon property that is burdensome is not an acceptable option.
The Trustee has had since November of 2011 to administer the Real Property which is an asset of this estate. There is no evidence in the docket that the Trustee has attempted to market the Real Property by employing the services of a real estate professional or appraiser, nor does the Trustee allege in his objection that he is attempting to sell, or intends to sell the Real Property sometime in the future.6 Importantly, the Trustee does not allege that there is equity or even the possibility of equity in the Real Property. Accordingly, the Court finds that the Real Property is burdensome to the estate and is of inconsequential value to the estate and the Debtor’s motion to abandon the Real Property shall be granted.
HICKS v. E. T. LEGG & ASSOCIATES (05/25/01 – No. D034398) Civil Code 2924c(e), and 2924g(d) do not prohibit the postponement of a foreclosure sale for successive periods of five of fewer business days during the period a sale is on hold because of an injunction or bankruptcy stay.
Bankruptcy of Wytch, USBAP 9th, Nos. 97-1089 and 79-1145, 7/1/98: 11 U.S.C. Section 349(b) does reinstate a debtor’s prepetition property rights by invalidating specified bankruptcy court orders, Section 349(b) does not vacate orders for relief from the automatic stay under 11 U.S.C. Section 362(d). real property sold 2 hours after BK filed (chapter 7) property purchased by TP with no knowledge of BK, LR brought action to annul stay, no objection , relief granted. Case inadvertently dismissed, then reinstated, DR’s argued that set aside earlier Order lifting stay – BK Court and BAP did not agree – Order lifting stay stands.
In re SNTL Corp., 571 F.3d 826, Bankr. L. Rep. ¶ 81,515 (9th Cir., June 23, 2009), pages 154, 183 (case no. 08-60001) The Ninth Circuit Court of Appeals, in a unanimous panel decision, affirmed, and adopted as its own, In re SNTL Corp., 380 B.R. 204 (9th Cir. B.A.P. 2007), holding that an unsecured creditor may include, as part of its claim, attorney’s fees incurred postpetition but based on a prepetition contract. The opinion reasoned that (1) Code § 506(b), permitting an oversecured creditor to recover postpetition attorney’s fees, speaks only to the secured status of a claim, and not to its allowability; (2) the claim for attorney’s fees exists on the petition date, although it is contingent and unliquidated, as the “right to payment” exists on the petition date; thus, the claim is not disallowed under Code § 502(b)(1), requiring a bankruptcy court to “determine the amount of such claim … as of the date of the filing of the petition”; and (3) neither United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988) (holding that an undersecured creditor could not receive postpetition interest on the unsecured portion of its debt) nor public policy mandated disallowance of such a claim.
The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
In re Foster sides with the HOA basically stating that the assessments are a liability that runs with the land. I do not know where that leaves Congress’ leaving out 1328(a) as one of the exceptions to 523(a)(16), – basically it makes no difference even though Congress specifically excluded 1328(a). (L. Karandreas briefed 9/11)
HOA Notes: Post BAPCPA: Even though the pre-petition obligations are discharged in the chapter 7, the HOA most likely (check the CC&Rs) has a statutory lien for unpaid dues. Therefore the lien is not extinguished in a Chapter 7 even if the personal liability is discharged. But, there is a 3 year statute of limitations on the lien itself. ARS 33-1807(F) establishes a 3 year statute of limitations on each particular assessment, during which time the HOA must foreclose on that particular assessment, or the assessment is removed from the lien. So to the extent there is pre-petition unpaid HOA assessments that are older than 3 years old, then they are not a lien anymore. You will only need to take care of those that are less than 3 years old. But see Section 108 (c) (tolling during chapter 7) (c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
1) Statutory – Under Arizona planned community and condominium law (Title 33), an HOA has a statutory lien for unpaid assessments on the property which is subject to the CC&R’s. The statutory lien is subordinate only to property taxes and the first mortgage or deed of trust. Arizona law specifically gives an HOA the right to foreclose its statutory lien.
2) Judicial – Any judgment lien that an HOA obtains through a lawsuit would be subject to the same requirements and restrictions that any other judicial lien has, and is potentially voidable in a bankruptcy case.
Limitation Based on Length and Amount of Delinquency
The HOA/COA cannot foreclose unless:
• the owner has been delinquent in paying the amounts secured by the lien (excluding collection fees, attorney fees, charges for late payments, and costs incurred with respect to the assessments) for a period of one year, or
• the delinquent amount is $1,200 or more, whichever occurs first (Ariz. Rev. Stat. § 33-1807(A), § 33-1256(A)).
No Foreclosure for Penalties and Fees Only
Fines, in contrast to assessments, are the penalties that an HOA or COA imposes if you violate the CC&R’s or other governing documents. For example, letting your lawn become overgrown, leaving trash cans outside, and parking in forbidden areas can result in fines and associated fees. The HOA or COA can get a lien for penalties, fines, and related fees after the entry of a judgment in a civil suit, but it cannot foreclose that lien (Ariz. Rev. Stat. § 33-1807(A), §33-1256(A)). Basically, Arizona law makes a distinction between assessments and fines, and allows foreclosure actions only based on liens for unpaid assessments and related charges, but not for fines.
In re: Gebhart In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.
A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien. The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00. In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12. Also see, ARS 33-1103 (A)(4). Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101. See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)
Note: The recorded judgment lien survives the bankruptcy. The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead. 522 addresses an “interest” in debtor’s property in support of a lien avoidance. Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522? The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.
It appears that the judgment lien and the right to enforce that lien survive a Chapter 7. If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity. Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.
(not bankruptcy case)
U.S. DISTRICT COURT DISMISSES NON-JUDICIAL FORECLOSURE: MERS NOT AUTHORIZED TO FORECLOSE MAY 15 2011
Hooker v. Northwest Trustee Services, Bank of America, MERS District Court District of Oregon case no. 10-3111-PA
“Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act by failing to record all assignments of the trust deed.
“While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure.
” … MERS, and its registered bank users, created much of the confusion involved in the foreclosure process. By listing a nominal beneficiary that is clearly described in the trust deed as anything but the actual beneficiary, the MERS system creates confusion as to who has to do what with the trust deed.
“The MERS system raises serious concerns regarding the appropriateness and validity of foreclosure by advertisement and sale outside of any judicial proceeding. “MERS makes it much more difficult for all parties to discover who “owns” the loan. When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification, or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur.”
Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?
§ 506(a) provides: “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” The various approaches all prefer their approach as meeting this standard.
For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.]
For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),
Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].
In re Veal, (9th Cir BAP) 6/10/11 Bk. No. 09-14808 Failure to properly document transfer of interest in note or other formalities results in lack of standing to foreclose: motion for relief from say denied
In this Chapter 13 case the ostensible agent for Wells Fargo Bank could not establish that Wells Fargo had possession of the note or had other right to payment. This lengthy opinion is a thorough stand-alone discourse on the key elements required for standing to foreclose (and hence assert a claim in bankruptcy), and draws an important distinction between assignment of the mortgage and assignment of the note.
Wrote the court: “We hold that a party has standing to seek relief from the automatic stay if it has a property interest in, or is entitled to enforce or pursue remedies related to, the secured obligation that forms the basis of its motion.”
“Thus, unlike the assignment from GSF to Option One, the purported assignment from Option One to Wells Fargo does not contain language effecting an assignment of the Note. While the Note is referred to, that reference serves only to identify the Mortgage. Moreover, unlike the first assignment, the record is devoid of any endorsement of the Note from Option One to Wells Fargo. As a consequence, even had the second assignment been considered as evidence, it would not have provided any proof of the transfer of the Note to Wells Fargo. At most, it would have been proof that only the Mortgage, and all associated rights arising from it, had been assigned.”
“Here, the Veals allege that neither Wells Fargo nor AHMSI have shown they have any interest in the Note or any right to be paid by the Veals. They seek to invoke prudential standing principles which generally provide that a party without the legal right, under applicable substantive law, to enforce an obligation or seek a remedy with respect to it is not a real party in interest.”
” .. while the failure to obtain the endorsement of the payee or other holder does not prevent a person in possession of the note from being the “person entitled to enforce” the note, it does raise the stakes. Without holder status and the attendant presumption of a right to enforce, the possessor of the note must demonstrate both the fact of the delivery and the purpose of the delivery of the note to the transferee in order to qualify as the “person entitled to enforce.”
“As to Wells Fargo, it had to show it had a colorable claim to receive payment pursuant to the Note, which it could accomplish either by showing it was a “person entitled to enforce” the Note under Article 3, or by showing that it had some ownership or other property interest in the Note.”
“In particular, because it did not show that it or its agent had actual possession of the Note, Wells Fargo could not establish that it was a holder of the Note, or a “person entitled to enforce” the Note. “In addition, even if admissible, the final purported assignment of the Mortgage was insufficient under Article 9 to support a conclusion that Wells Fargo holds any interest, ownership or otherwise, in the Note. Put another way, without any evidence tending to show it was a “person entitled to enforce” the Note, or that it has an interest in the Note, Wells Fargo has shown no right to enforce the Mortgage securing the Note. Without these rights, Wells Fargo cannot make the threshold showing of a colorable claim to the Property that would give it prudential standing to seek stay relief or to qualify as a real party in interest.”
“In the context of a claim objection, both the injury-in-fact requirement of constitutional standing and the real party in interest requirement of prudential standing hinge on who holds the right to payment under the Note and hence the right to enforce the Note. “With respect to Wells Fargo’s request for relief from the automatic stay, we hold that a party has standing to seek relief from the automatic stay if it has a property interest in, or is entitled to enforce or pursue remedies related to, the secured obligation that forms the basis of its motion.”
” … the purported assignment from Option One to Wells Fargo does not contain language effecting an assignment of the Note. While the Note is referred to, that reference serves only to identify the Mortgage. Moreover, unlike the first assignment, the record is devoid of any endorsement of the Note from Option One to Wells Fargo.”
“As a consequence, even had the second assignment been considered as evidence, it would not have provided any proof of the transfer of the Note to Wells Fargo. At most, it would have been proof that only the Mortgage, and all associated rights arising from it, had been assigned.
The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
Some Arizona bankruptcy courts are reluctant to enter an order avoiding a judicial lien on an Arizona homestead citing Arizona law that specifically protects homesteads from a judicial lien attaching to the property (ARS §33-964 B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.) The challenge is that many title companies will require the debtor to pay the judgment despite the entry of discharge. In re CASEY D. O’SULLIVAN, Case No. 15-30173- a Missouri court addresses this issue:
CRP thus did not have a judgment lien against the Debtor under Missouri law when the Debtor filed his chapter 7 bankruptcy case. But that does not, however, end the inquiry. As the Eighth Circuit points out, the Bankruptcy Code in§ 101(36) defines a judicial lien as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
Likewise, the Bankruptcy Code defines what a “lien” is: “[t]he term ‘lien’ means charge against or interest in property to secure payment of a debt or performance of an obligation.” And with the filtering lens of these definitions, the court then looks to applicable state law to see if a particular judgment constitutes a “judgment lien” within the meaning of the Bankruptcy Code. There is no question that a judgment, even against entirely exempt TBE property, may constitute a “cloud” against title. The question is whether a “cloud” may constitute an “interest in property” under Missouri law such that the “cloud” may be considered a “lien” and thus avoided as a “judicial lien” for purposes of overriding bankruptcy law.
Although other states may treat “clouds” differently, under Missouri law, a judgment against TBE property is a cloud that gives rise to an “interest in property” such that it may be avoided under § 522(f)(1).
In re Watt, Case No. 14-31295-tmb13, (D. Or 10/15/14) Bankruptcy judge decided there were no prohibitions to allowing the Debtors to both surrender the Property and vest it in BONY Mellon. Nor is there any indication that Debtors plan was filed in bad faith. Accordingly, Court confirmed the Second Amended Plan over the objection of BONY Mellon. However, the Order Confirming Plan should amend the plan by interlineation to make clear that the Debtors are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property.
See also In re Rose, 512 B.R. 790 (Bankr. W.D. N.C.July 8, 2014) (case no. 4:12-bk-40743)Chapter 13—Treatment of secured claims— Transfer of collateral to creditor: No provision of the Bankruptcy Code permits a Chapter 13 debtor to force a secured creditor to accept a conveyance of the property serving as collateral for the debt. Nor does Florida law permit a debtor to compel a secured creditor to foreclose on the property or take title to the property. However, the court would permit the Chapter 13 debtors to tender a deed to the property to the first-priority lienholder for its consideration, and if the creditor did not accept or reject the deed within 60 days, the debtors would be permitted to record the quitclaim deed in the applicable Florida registry and thereby transfer the property to the creditor.
Corvello v. Wells Fargo Bank, No. 11-16234 (9th Cir, August 8, 2013) Dismissals of actions challenging defendant-bank’s decision not to offer permanent mortgage modification to plaintiff-borrowers is reversed and remanded, where: 1) under the Home Affordable Modification Program the bank was contractually required to offer the plaintiffs a permanent mortgage modification after they complied with the requirements of a trial period plan (TPP); and 2) the district court should not have dismissed the plaintiffs’ complaints when the record before it showed that the bank had accepted and retained the payments demanded by the TPP, but neither offered a permanent modification, nor notified plaintiffs they were not entitled to one, as required by the terms of the TPP.
In re Sagendorph, 14-bk-41675 (C.D. MA) using chapter 13 plan to vest property in secured lender’s name. Wells Fargo objected, court approved plan.
In re Burboa (Bankr. D. Ariz. September 29, 2014) Judge Ballinger. Debtor could not strip off valueless lien on home in “chapter 20” case. BAP overturned similar decision: In re Boukatch, 2:14-bk-04721-EPB, BAP AZ-14-1483 (July 9, 2015) We conclude that § 1328(f)(1) does not prevent Debtors’ ability to strip off MidFirst’s wholly unsecured junior lien in heir chapter 13 plan, because nothing in the Bankruptcy Code prevents chapter 20 debtors from stripping such liens off their principal residence under §§ 506(a)(1) and 1322(b)(2). We further conclude that plan completion is the appropriate end to Debtors’ chapter 20 case. Unlike a typical chapter 13 case, the lien avoidance will become permanent not upon a discharge, but rather upon completion of all payments as required under the plan. In re Davis, 716 F.3d at 338; In re Frazier, 469 B.R. at 900; In re Blendheim, 2011 WL 6779709, at *6; In re Okosisi, 451 B.R. at 99-100; In re Frazier, 448 B.R. at 810; In re Tran, 431 B.R. at 235.
We conclude that the bankruptcy court erred when it denied the Lien Strip Motion on the basis that Debtors were not eligible for a chapter 13 discharge.
For the foregoing reasons, we REVERSE the decision of the bankruptcy court and REMAND for further proceedings consistent with this opinion.
Boukatch v. Midfirst (In re Boukatch) The Boukatch panel “join[ed] the growing consensus of courts” that follow the third approach. The panel held that nothing in the Bankruptcy Code prevented the debtors from stripping off a wholly underwater lien against their principal residence, notwithstanding that the debtors were not eligible for a discharge. The panel made a distinction between discharge—which would have enjoined the creditor from enforcing the debt against the debtor personally, but would not have released the lien from the debtor’s property—from avoiding the lien. The panel concluded that the Bankruptcy Code does not prevent individual debtors from stripping off a wholly underwater lien in their chapter 13 plan. The only way the lien would not be avoided would be if the debtors failed to complete all of the payments required under their chapter 13 plan and the case was subsequently converted or dismissed. Accordingly, the panel reversed the bankruptcy court’s decision to deny the lien stripping motion.
Branigan v. Davis, No. 12-1184 (4th Cir. 05/10/2013) Confirmation orders entered by the bankruptcy court stripping off junior liens against debtors’ residences in so-called “Chapter 20 cases”, is affirmed, where: 1) the Bankruptcy Abuse Prevention and Consumer Protection Act does not bar the orders entered by the bankruptcy court; and 2) the stripping off of valueless liens is otherwise consistent with the Bankruptcy Code. There is a dissent. Read more…
In re Hill, 440 BR 176 (2010, S.D.Cal) debtors’ ability to use plan in order to “strip off” wholly unsecured junior mortgage lien was not conditioned on their eligibility for discharge, but solely upon their obtaining confirmation of, and performing under, Chapter 13 plan that complied with requirements of the Code. 11 U.S.C.A. §§ 506, 1322, 1325, 1328(f).
§ 1322(b)(2) In re Rones, 2015 Bankr. LEXIS 1936 (Bankr. D.N.J. June 11, 2015) (Gravelle, B.J.). Unsecured balance of condominium association lien could be stripped off.
Bank of America, NA v. Caulkett, 135 S. Ct. 674 – 2014 – Supreme Court (5/2014) A debtor in a chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code. http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf
In Re: Lorraine McNeal, D. C. Docket Nos. 1:10-cv-01612-TCB; 09-BKC-78173-PWB (11th Cir US Ct App 5/11/12) – very limited decision, lien stripping in chapter 7. “But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured — just as GMAC’s claim is here — was voidable under the plain language of section 506(d).3 862 F.2d at 1538-39.” “Because Dewsnup disallowed only a “strip down” of a partially secured mortgage lien and did not address a “strip off” of a wholly unsecured lien, it is not “clearly on point” with the facts in Folendore or with the facts at issue in this appeal.”
In re Caliguri, (Bkrtcy.E.D.N.Y.) July 20, 2010: Avoidance – Chapter 7 debtor cannot avoid lien of wholly undersecured, consensual mortgage lien holder. A Chapter 7 debtor may not avoid or “strip off” the lien of a wholly undersecured, consensual mortgage lien holder, a New York bankruptcy court has held. In so ruling, the court adopted the analysis of the court in In re Pomilio, 425 B.R. 11 (Bankr.E.D.N.Y. 2010), which, in turn, relied on 506(a) and (d) of the Bankruptcy Code and the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). The bankruptcy court distinguished In re Lavelle, 2009 WL 4043089 (Bankr.E.D.N.Y. 2009.
In re Winitzky 1-80-bk-19337 Motion to strip fully unsecured lien on residence (Central District of CA, June 9, 2009) at issue in this case is whether the Bankruptcy Code allows Chapter 13 debtors who previously received chapter 7 discharges within the last 4 years could strip a completely unsecured consensual lien off their primary residence. This Court concluded that the Code does not allow this because a discharge is required to lien strip in a Chapter 13 case.
In Re: Mansaray-Ruffin, No. 05-4790 (U.S. 3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure. Read more…
CHAPTER 20: In re Trevor M. Jarvis, Debtor. No. 07-72281 2008 WL 2682514— B.R. —-, 2008 WL 2682514 (Bankr.C.D.Ill.) United States Bankruptcy Court, C.D. Illinois. July 9, 2008.
Holdings: The Bankruptcy Court, Mary P. Gorman, J., held that: (1) debtor who, due to his receipt of discharge in prior Chapter 7 case, was ineligible to receive Chapter 13 discharge even if he successfully completed his payments under plan could not use his successive Chapter 13 filing to “strip off” a wholly unsecured junior mortgage lien; and (2) even assuming that debtor’s earlier Chapter 7 discharge, shortly prior to commencement of his current Chapter 13 case, had not rendered him ineligible for discharge in Chapter 13, plan proposed by debtor could not be confirmed. Cases such as King which helped to develop the theory of lien stripping of fully unsecured claims involved debtors who had previously received a Chapter 7 discharge and did not need the Chapter 13 discharge to extinguish personal liability. Rather, those cases hold that the use of Chapter 13 to modify rights not discharged in the prior case requires a second discharge to be fully effective. Courts have consistently held that, because a portion–the in rem portion–of a creditor’s claim against a debtor remains after the Chapter 7 discharge, the permanent modification of that claim can only be effected by completing the terms of the Chapter 13 and receiving a discharge notwithstanding the discharge of personal liability in the prior case. King, 290 B.R. at 651; In re Akram, 259 B.R. 371, 378-79 (Bankr.C.D.Cal.2001). Nothing in the limited legislative history of BAPCPA suggests that Congress intended to change that result. Confirmation denied.
Subject: [NACBA-BK] Re: Bankr CD ILL: Strip-off plan could not be confirmed in no-discharge Chapter 13 case commenced by repeat filer.
David: Dan, you’re half right. The mortgage debt was discharged in the chapter 7 case, but the mortgage lien was NOT discharged. See Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)). A debtor can’t eliminate or “strip down” the mortgage lien in a chapter 7 case, Dewsnup v. Timm 502 US 410 (SCOTUS, 1992), but you can do that in a chapter 13 case if you follow Max’s mantra: “notice, notice and more notice” and make it clear in the plan that you’re doing that. This is the technique I used in In re Curtis, 322 BR 470 (Bkrtcy.D.Mass. 2005). That was a chapter 20 in which the 2nd mortgage was stripped off and no payments made because the debt was discharged in the 7. When the 2nd mortgagee violated the discharge injunction after my client completed her plan, we had a lovely Adversary Proceeding in which the 2nd mortgagee wound up paying my client $53,220, including my fee, its lien having been voided by the discharge order in the chapter 13 case. David Baker (Boston)
Dan: No, I’m confident that I’m 100% right. Unless the 2nd mortgagee SUED on the debt (or otherwise attempted to collect it as a personal liability), it was not the DISCHARGE injunction that was violated. It was the order avoiding the lien. That’s still a judicial order, and it’s still enforceable, and it can be recorded in land records to remove the 2nd from the chain of title. We don’t do this through the plan – an AP or motion is necessary, and no discharge in the 13 should be necessary for that order to be effective. Dan Press, Chung & Press, P.C. firstname.lastname@example.org
In re Goswami (9th Cir. BAP 2003) NO DEADLINE FOR AMENDED EXEMPTIONS OR JUDICIAL LIEN AVOIDANCE A debtor’s ability to amend his or her claim of exemptions does not terminate upon case closure. A debtor’s standing to move to avoid a judicial lien is based on the circumstances in existence at the time the lien attached, and not when the debtor moves to avoid it (debtor moved to avoid a judicial lien on his residence five years after case was closed; debtor was unaware of lien at time he filed bankruptcy).
Culver, L.L.C. v. Chiu, No. 01-56578 (9th Cir. September 18, 2002) The lien-avoidance provision of the Bankruptcy Code, 11 U.S.C. section 522(f)(1), allows that a debtor need not have an interest in property to avoid a judicial lien on that property. http://caselaw.lp.findlaw.com/data2/circs/9th/0156578p.pdf
In re Laskin, 222 B.R. 872 (9th Cir. BAP 1998). no lien stripping in chapter 7 case (2nd DOT totally unsecured by FMV. Cannot strip liens by motion, must use reorganizations in order to use 506(d) to strip. Rule 4003(d) only applies to lien avoidance actions under 522(f). Debtors argued Dewsnup v. Timm did not apply in that this was not an attempt to strip a lien in a chapter 7 where the lien is PARTIALLY secured, but was completed unsecured. (Dewsnup would not permitting the stripping of a partially secured lien in chapter 7).
Motions to Value Undersecured Claims, By: Louis J. Esbin email@example.com (1/2009)
A simple, but common fact scenario: Home purchased on January 1, 2003, at a price of $450,000, with a 80/10/10 loan; i.e., a first of $360,000, a second of $45,000, and $45,000 down. On August 31, 2007, a refinance takes place, with an appraised value of $700,000, and the advancing of a first of $500,000, and HELOC of $200,000. Chapter 13 Bankruptcy case is filed on December 31, 2008, with $55,000 in auto leases, and $210,000 in credit card and other unsecured debt, including a corporate guaranty of $50,000.
The issues are as follows: Does the debtor qualify under Chapter 13 if the HELOC is determined be a wholly undersecured claim? Is it a motion to value, a motion to avoid liens, an adversary, or some combination of all three?
There are three steps in the analysis: (1) First, a motion (not an adversary proceeding) is filed under Section 506 so that the bankruptcy obligation to make adequate protection payments is relieved, citing as authority In re Timbers of Inwood, 484 U.S. 365 (1988). Evidence includes a preliminary title report to establish priority of liens and the original amount of the debt secured, filed claims or loan documents, and an appraisal, each supported by admissible attestations; (2) Second, under state law, California Civil Code Section 2909, provides in summary that once the underlying trust purpose is extinguished, the deed of trust is extinguished (See, Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 1235 (1995); Trowbridge v. Love, 58 Cal.App.2d 746, 751 (1943)); i.e., once the underlying debt has been discharged through a chapter 13 or 11, as a matter of law, the deed of trust must be avoided by the trustee or beneficiary. Until such time as the trust purpose is extinguished the trust (deed of trust) must remain secured by the real property. Therefore, the lien remaining and the interest of the creditor is as either a partially undersecured or wholly undersecured creditor. But, the holder of a lien secured by a deed of trust is at all times secured. The terminology “undersecured” is important because it defines the creditor as having a lien against real property, but whose underlying trust purpose is not secured entirely by equity in the real property. The creditor is not unsecured, because the lien remains enforceable against the real property until the trust purpose is extinguished. Remember that if the Chapter 13 plan is not finished and a discharge entered, the lien is enforceable, confirming the application of state law as to the relationship between the Trustor (debtor) and trustee-beneficiary (lender); and (3) Third, and accordingly, contrary to the split of authority in our district, there is no need for an adversary proceeding to avoid a lien in a Chapter 13 or Chapter 11 situation until the underlying trust purpose is extinguished, and only if the trustee (of the deed of trust) does not voluntarily remove the lien. And, as a practical note, if the lien is avoided before the trust obligation is discharged (or extinguished), at the time of the filing, the now adjudged unsecured obligation (because the lien is removed) would be added to the amount of the general unsecured claims at the time of the filing, thereby resulting in the jurisdiction of the court for chapter 13 to be exceeded. Section 109(e) would thereby be violated, not as a matter of law, but because of a misinterpretation and misapplication of the law and procedure.
The case of In re Scovis, 249 F.3d 975 (9th Cir. 2001), is quite disturbing and potentially could render hundreds, if not thousands of Chapter 13 debtors ineligible for filing under Chapter 13, forcing them into more complicated and expensive Chapter 11 cases. Scovis speaks to the issue of good faith determined at the time of the filing, based upon the filed schedules. Citing, Scovis, the BAP in In re Guastella, 341 B.R. 908 (9th BAP 2006) broadened the analysis of a totality of circumstances, allowing the court to look beyond the schedules to determine the debtors good faith intent where the tentative decision of a state court had found liability and the amount of liability. Importantly for our analysis, Scovis was a judicial lien that impaired a statutory homestead exemption. The HELOC is a consensual lien, a deed of trust that is not subject to the homestead exemption; a critical factual distinction when it comes to the timing of whether or when a lien is deemed undersecured versus unsecured.
In Scovis, the Ninth Circuit discussed the form over substance issue. In Scovis, however, California mortgage and deed of trust law was not considered. But, California law must be considered in determining the reality of the substance of the rights impaired with regards to, in our example, the HELOC. In the above scenario, as in most, the creditor is deemed “wholly undersecured,” and therefore, no adequate protection payments are made under Timbers. The term undersecured claim, rather than unsecured claim is an essential distinction, because if the case is converted, the lien “rides through,” and the creditor retains all remedies of a secured creditor, rather than losing the right to exercise nonjudicial remedies, as if an unsecured creditor, and as with the creditor in Scovis. Application of 11 U.S.C. § 506(a) results in a bifurcation of previously secured claims, but 11 U.S.C. § 506(d) does not allow the “stripping off” of the wholly undersecured lien in a Chapter 7 case. In re Dewsnup, 908 F.2d 588, 593 (10th Cir. 1990), aff’d, 502 U.S. 410 (1992); see also H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 5, reprinted in 1978 U.S. Code Cong. & Admin.News 5963, 6312.
Under In re Zimmer, 313 F.3d 1220 (9th Cir. 2002), and In re Lam, 211 B.R. 36 (9th Cir.BAP 1997), only through a Chapter 13 (or Chapter 11) can the lien ultimately be avoided upon entry of discharge, as the purpose is to further the effectuation of a plan in prospect. The 9th Circuit BAP adopted the reasoning in Dewsnup. Therefore, it is essential to apply Bankruptcy and California law together. Not until the discharge is entered will the underlying trust purpose be extinguished or discharged, and therefore, only at that time, will the deed of trust will be subject to avoidance. This is so as a matter of law without the need for an adversary proceeding, unless the trustee of the deed of trust fails to avoid the deed of trust whose trust purpose has been discharged.
Scovis is just wrongly applied in the above fact scenario, both under California law, as well as under Zimmer and Lam. Moreover, the creditor is scheduled at the time of filing in Schedule D as a secured creditor, and not in Schedule F as an unsecured creditor, and therefore, at the time the case is filed the creditor is “undersecured,” and not unsecured. As to the issue of good faith in filing as a Chapter 13, rather than a Chapter 11, again, the application of Bankruptcy law in concert with California law will lead to the correct result.
The recent iteration of the proposed Amendments also supports the above analysis, providing in pertinent part that Section 109 of title 11, United States Code, is amended—
“(1) by adding at the end of subsection (e) the following: ‘’For purposes of this subsection, the computation of debts shall not include the secured or unsecured portions of—
‘(1) debts secured by the debtor’s principal residence if the current value of that residence is less than the secured debt limit; or . . . ‘”
It is evident that Congress intends to deal with the interpretation of Scovis and the application of Zimmer. The proposed Amendment seems to address the wrong application of Scovis and the issue arising there from issue where the wholly undersecured creditor’s claim would cause the secured portion of the Chapter 13 jurisdiction to be exceeded. Therefore, it seems that the proposed Amendment would provide the treble benefit of: (1) reducing the secured portion only to that amount of the secured claims that are actually secured by the value in the residence; (2) not adding to the unsecured portion that portion of the secured claims that are either partially undersecured, or wholly undersecured (see discussion below on the definition of undersecured); and (3) raising the secured jurisdiction of Chapter 13 to the extent of the value of the residence, regardless of the face amount of the underlying debt secured by the undersecured liens.
As the largest district in the country, we must recognize the use of the terminology wholly undersecured versus wholly unsecured when speaking of deeds of trust to the extent to which their security interest is determined through a “Motion to Value,” rather than a “Motion to Avoid Lien,” and, further, only requiring an adversary proceeding following entry of a discharge, if necessary. However, such a Motion to Value must be supported by competent and admissible evidence of priority of liens, amount of original and outstanding debt secured.
The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
Some attorneys say “yes” and others “no”.
25-215. Liability of community property and separate property for community and separate debts
A. The separate property of a spouse shall not be liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the contrary.
B. The community property is liable for the premarital separate debts or other liabilities of a spouse, incurred after September 1, 1973 but only to the extent of the value of that spouse’s contribution to the community property which would have been such spouse’s separate property if single.
C. The community property is liable for a spouse’s debts incurred outside of this state during the marriage which would have been community debts if incurred in this state.
D. Except as prohibited in section 25-214, either spouse may contract debts and otherwise act for the benefit of the community. In an action on such a debt or obligation the spouses shall be sued jointly and the debt or obligation shall be satisfied: first, from the community property, and second, from the separate property of the spouse contracting the debt or obligation.
In Schilling v. Embree , 118 Ariz 236, 575 P2d 1262 (App. 1977), the court of Appeals held that this language subjects community property only to pre-marital separate debts, not separate debts incurred during marriage.
25-214. Management and control
A. Each spouse has the sole management, control and disposition rights of each spouse’s separate property.
B. The spouses have equal management, control and disposition rights over their community property and have equal power to bind the community.
C. Either spouse separately may acquire, manage, control or dispose of community property or bind the community, except that joinder of both spouses is required in any of the following cases:
1. Any transaction for the acquisition, disposition or encumbrance of an interest in real property other than an unpatented mining claim or a lease of less than one year.
2. Any transaction of guaranty, indemnity or suretyship.
3. To bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Both spouses must be named in an Arizona lawsuit to obtain a judgment which is collectable from any portion of the community property. The non-liable spouse is entitled to litigate two issues: 1. The whether the other spouse is in fact liable, and 2. The other spouse’s contribution to the community. Flexmaster Aluminum Awning Co. v. Hirschbert, 173 Ariz. 83, 839 P.2d 1128 (App. 1992). Flexmaster involved a premarital debt.
Beware that, as with many areas of law, lawyers will disagree about the applicability of these statutes to certain factual situations.
Subsection (a) of 11 U.S.C. §524(a)(3) addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition. That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property. It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b). No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002)
Community Guardian Bank v. Hamlin, 182 Ariz. at 629, 898 P.2d at 1007. A creditor obtained a default judgment against the wife for unjust enrichment based on her husband’s unauthorized use of funds for the benefit of the community. In determining whether the creditor could garnish the wife’s post-dissolution earnings, we found that the default judgment established a community obligation for which the wife was jointly liable. Id.at 630-32, 898 P.2d at 1008-10. Applying Arizona law, the court held that the former spouses remained jointly liable for the community debt after their divorce, and therefore the creditor could garnish the wife’s post-dissolution wages.Id. at 631, 898 P.2d at 1009.
Question: Creditor has a judgment against a debtor. The judgment does not name debtor’s wife. It isn’t clear whether the debt from the judgment was a community obligation or not. Regardless, the wife was not named in the judgment. Creditor is trying to go after the wife’s separate property. Is there a statute or case that says that even if the debt is a community debt (again, not clear if it is or not), the creditor can’t go after the separate property of the spouse who is not named in the judgment?
Answer: Yes. See ARS 25-215(A) and (D). In fact, the judgment creditor cannot even go after the community property. Both spouses must be joined as defendants in the lawsuit before a creditor can obtain and execute on a judgment against the marital community and community property. ARS 25-215(D) (“[I]n an action on [a debt against the community] the spouses shall be sued jointly….”) Additionally, see Flexmaster v. Hirschberg, 173 Ariz. 83 (1992) and the law cited therein. Similarly, the non-debtor spouse is a necessary and proper party in a suit to establish the limited liability of the marital community for the separate, premarital debt of the other spouse. Flexmaster v. Hirschberg, supra.