In re Dobbs

597 B.R. 74

IN RE: Sabrina DOBBS, Debtor.

Case No. 17-77757-reg

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

Signed January 7, 2019

Fredrick P. Stern, Fredrick P. Stern, PC, Nesconset, NY, for Debtor.

Memorandum Decision Denying Motion Objecting to Claim

Robert E. Grossman, United States Bankruptcy Judge

Sabrina Dobbs (the "Debtor") filed a motion ("Motion") objecting to the proof of claim filed by Wells Fargo Bank, N.A., which holds a junior mortgage lien on the Debtor's residence ("Residence"). The Debtor appears to argue that Wells Fargo failed to perfect its mortgage lien under applicable state law, and as a result, the Debtor may permanently avoid the mortgage lien, reclassify the claim as unsecured and satisfy the claim by paying Wells Fargo a percentage of its total claim under a Chapter 13 plan. Wells Fargo has filed an objection to the Motion. However, neither the Debtor in its Motion nor Wells Fargo in its objection have adequately addressed the threshold issue of whether the Bankruptcy Code permits a Chapter 13 debtor to avoid a secured mortgage lien. In addition, the Debtor has failed to demonstrate how avoidance of the mortgage lien under the facts of this case will result in a personal benefit to the Debtor.

For the reasons set forth below, the Motion is denied. Regardless of whether the mortgage lien of Wells Fargo is perfected, the Debtor cannot utilize the claims objection process to avoid a secured mortgage lien that is otherwise enforceable under applicable law. Furthermore, the Bankruptcy Code does not grant to a Chapter 13 debtor the authority to bring a lien avoidance action under 11 U.S.C. § 544. This is a critical point because section 544 would be the proper vehicle to avoid the secured lien of Wells Fargo. The plain language of this statute confers this right solely on trustees in Chapter 13 cases, and the vast majority of cases interpreting this section find that only Chapter 13 trustees may avail themselves of this provision. While a Chapter 13 debtor has a limited right to bring an avoidance action under § 522(h) of the Bankruptcy Code if the trustee refuses, this provision is applicable so long as the transfer or granting of the mortgage lien was not voluntary and the debtor did not conceal the property transferred. In this case, the Debtor voluntarily granted the mortgage lien to Wells Fargo therefore the Debtor cannot utilize this provision. Even if the Chapter 13 trustee in this case brought an avoidance action against Wells Fargo and was successful, the Debtor could not claim a homestead exemption in proceeds from the sale of the Residence because § 522(g) of the Bankruptcy Code contains the same restrictions as set forth in § 522(h) of the Bankruptcy Code. Because the Debtor voluntarily granted the mortgage lien to Wells Fargo, the Debtor cannot assert her claimed homestead exemption to recover any of the proceeds of a sale of the Residence.

Procedural History

On December 15, 2017 (the "Petition Date"), the Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code. On January 16, 2018, Wells Fargo filed a proof of claim in this case. On February 27, 2018, the Debtor filed the Motion. On April 2, 2018, Wells Fargo filed an objection to the Motion. On April 8, 2018, the Debtor filed a reply. A hearing on the Motion was held on April 9, 2018 and adjourned several times to October 17, 2018. On October 17, 2018 the Motion was adjourned to November 28, 2018. On October 24, 2018, the Debtor filed an amended plan ("Amended Plan"). On November 28, 2018, the Debtor filed a letter by Stephen W. Hammell, Esq. in further support of the Motion and a supplemental reply, and the Debtor and Wells Fargo agreed to rest on their oral arguments and the papers submitted.

Facts

According to the Debtor's schedules, the Residence is valued at $ 485,000. The Debtor claims to hold a one/half interest in the Residence, but also describes her interest as one in "fee simple."¹ The Residence is encumbered by a first mortgage held by CIT, and the Debtor's husband, Jay Webster, is listed in the schedules as a co-debtor on the mortgage debt owed to CIT. On Schedule D, CIT is listed as the first mortgagee, and is owed $ 152,000 as of the Petition Date. On Schedule F, Wells Fargo is listed as an unsecured creditor with a debt in the amount of $ 220,000. There are no other unsecured creditors listed on Schedule F. On Schedule C, the Debtor claimed a homestead exemption in the amount of $ 165,550 pursuant to N.Y. CPLR § 5206(a). Wells Fargo filed the only proof of claim in this case, in the secured amount of $ 402,017.63. Attached to the proof of claim is a copy of the note and mortgage, both dated January 27, 2005, and both listing the Debtor as the sole borrower and mortgagor. On January 29, 2018, the Debtor filed a Chapter 13 plan which provided for 100% payment to the unsecured creditors over 60 months, and the Debtor pledged to pay $ 468.56 per month from her disposable income to fund the plan. The Chapter 13 plan was later amended to reflect that the Debtor proposes to make 60 monthly payments of $ 670.61, and to pay unsecured creditors not less than 7% of their allowed claims. The Amended Plan also contains a provision that the Debtor will move to reclassify the claim of Wells Fargo from secured to unsecured.

By the Motion, the Debtor seeks to avoid the mortgage of Wells Fargo under §§ 1322(b) and 502(b)(1) of the Bankruptcy Code and Fed. R. Bankr. P. 4003(d). The basis of the Debtor's objection is that the legal description of the Residence annexed to the mortgage is incorrect. Therefore, the Debtor reasons that the claim of Wells Fargo is unsecured as it is not validly perfected against the Residence. Because the mortgage lien of Wells Fargo is unperfected, the Debtor asserts that the claim of Wells Fargo should be reclassified as "unsecured" under § 502 of the Bankruptcy Code. In addition, the Debtor relies on § 506(a) of the Bankruptcy Code to establish that the secured claim of Wells Fargo "cannot be allowed." Because the claim is not an allowed, secured claim, the second mortgage lien is null and void. As a result, Wells Fargo's claim is unsecured.

Wells Fargo objects to the Motion on the basis that errors in the legal description of the Residence annexed to the mortgage were due to a scrivener's error, and that the legal description otherwise properly identifies the Residence. The recorded mortgage is correctly indexed against the proper section, block and lot, and references the deed which contains the correct description. In addition, in the foreclosure action commenced by Wells Fargo prepetition, on November 9, 2015, an order of reference was granted reforming the legal description by substituting the correct legal description of the Residence. In response, the Debtor claims that the new description contained in the order of reference is also incorrect and the order of reference is insufficient because it contains vague language. Even if the order of reference did correct the errors, it was never recorded, which is a requirement under New York law, according to the Debtor. The Debtor concludes in her reply papers that because Wells Fargo does not have a validly perfected mortgage lien on the Residence, the Debtor may utilize Bankruptcy Code § 544(a)(3) to "defeat" the lien.

Discussion

1) Debtor's Legal Interest in the Residence

In order to analyze the Motion, the relevant facts must be determined. First, the Debtor describes her ownership interest in the Residence as a one-half interest, as well as a fee simple interest, which terms are inherently contradictory. The deed annexed to the objection filed by Wells Fargo states that in 1999, Jay Webster, the Debtor's husband, transferred the Residence to the Debtor. Therefore, unless a subsequent transfer took place, the Debtor is the 100% owner of the Residence. The Debtor values the Residence at $ 485,000, which valuation is not challenged by Wells Fargo. The Residence is encumbered by a first mortgage granted by Jay Webster to CIT when he was the sole owner of the Residence, and as of the Petition Date, CIT is owed $ 152,000. After subtracting the amount due to CIT, there remains approximately $ 333,000. If the second mortgage of Wells Fargo in the stated amount of $ 402,017.63 is taken into consideration, there would be no equity remaining to account for the Debtor's claimed homestead exemption if the Residence were sold at the present value.

2) Treatment of Claims Secured by Liens on Property of the Estate

At various times, the Debtor alleges that the secured claim of Wells Fargo is "null and void" because the mortgage lien is unperfected, and also alleges that the Debtor has the ability to "avoid" the lien under § 544 of the Bankruptcy Code. Even if the Court were to assume that the mortgage lien of Wells Fargo is unperfected² , the Debtor's assertion that the lien of Wells Fargo is therefore void or subject to avoidance by the Debtor is incorrect as a matter of law.

The Debtor first attempts to utilize the claims objection process to remove the mortgage lien of Wells Fargo. However, a review of the operative statute, § 502(b), reveals that the claims objection process cannot accomplish this task. Section 502(b) provides that a filed claim shall be "allowed" except to the extent as follows:

(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.

11 U.S.C. § 502(b).

An example of an "unenforceable" claim would be a mortgage obligation that has already been satisfied or that is prohibited by law based on a legal determination of a court of competent jurisdiction. However, "an objection based upon failure to perfect does not extinguish the lien... The lien remains enforceable against the debtor." In re Ramsey , 356 B.R. 217, 225 (Bankr. D. Kan. 2006). Section 502 cannot be used to "avoid" a lien against property...