In re Saric

In re: Ramiz Saric & Sahiza Saric, Debtors.

Case No.: 12-60936

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF NEW YORK

Entered: December 13, 2013

Dated: December 12, 2013

Chapter 7

Hon. Diane Davis, U.S. Bankruptcy Judge

Memorandum-Decision and Order

On August 27, 2012, Ramiz and Sahiza Saric ("Debtors") filed a motion asking the Court to void the lien of Beneficial Finance Company ("Beneficial"), a junior mortgagee, on the basis that there is no equity in the collateral to secure Beneficial's claim (the "Motion," ECF No. 26). In the Motion, Debtors contend that the Court should grant the relief requested in accordance with the reasoning of the Second Circuit Court of Appeals in Pond v. Farm Specialist Reality (In re Pond), 252 F.3d 122 (2d Cir. 2001). On September 18, 2012, the Court directed Debtors to submit a memorandum of law in support of the Motion. Debtors submitted their memorandum on November 8, 2012 (ECF No. 32), in which they argued that the Court should grant the relief requested pursuant to 11 U.S.C. §§ 502(b)(9), 506(a) and (d), and, once again, In re Pond.¹ The Court heard further oral argument on November 12, 2012, at which time the Court took the matter under submission. Debtors properly served and noticed the Motion, but Beneficial did not appear in the matter. For the reasons stated below, the Court denies the Motion.

Jurisdiction

The Court has jurisdiction over this case pursuant to 28 U.S.C. §§ 157(a), (b)(1), and 1334. This contested matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(O).²

Facts

Debtors filed their petition for chapter 7 bankruptcy relief on May 18, 2012. Debtors own their residence located at 1125 Leeds Street, Utica, New York (the "Property"). There are two consensual liens on the Property. HFC holds a first mortgage lien with a balance of $42,083.65. Beneficial holds a junior mortgage lien with a balance of $19,369.29. Debtors value their residence at $40,000 based on an appraisal dated December 8, 2011.

Debtors' Arguments

Debtors make three arguments in support of their effort to void Beneficial's junior mortgage lien. First, Debtors take the position that Beneficial's mortgage lien does not secure a claim against the principal residence that is an "allowed secured claim" under § 506(d) because based on Debtors' appraisal valuing the real property at $40,000, the claim is wholly unsecured pursuant to § 506(a). Second, Debtors contend that the facts of this case are distinguishable from those cases that disallow the stripping off of a wholly unsecured mortgage lien in a chapter 7 because Beneficial does not hold an allowed claim under §§ 502(a) and 502(b)(9).³ Section 506(d) does not have an exception for claims that are disallowed as not timely filed by virtue ofan objection under § 502(b)(9). According to Debtors, because Beneficial did not file a proof of claim, it does not hold an allowed claim. Debtors therefore assert the Court should void Beneficial's lien using § 506(d). Third, Debtors argue this Court should extend the Second Circuit's holding from In re Pond, a chapter 13 case, to the facts of this chapter 7 case.

Discussion

Debtors' first argument for voiding Beneficial's lien—that Beneficial's mortgage is not an "allowed secured claim" under § 506(d) because an analysis to determine Beneficial's secured status under § 506(a) would result in a finding that Beneficial holds a wholly unsecured claim— requires the Court to decide whether a chapter 7 debtor may use § 506(d) to strip off the lien of a junior mortgagee, when the debtor still owes a senior mortgagee an amount that exceeds the value of the secured property. In pertinent part, § 506 provides:

(a) 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.

. . . .

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title, or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

11 U.S.C. § 506.

In Dewsnup v. Timm, 502 U.S. 410, 413 (1992), the Supreme Court was faced with a similar question when a chapter 7 debtor sought to strip down a consensual first mortgage lien against her real property to the fair market value of the collateral. There, the Supreme Court focused on the interplay of §§ 502 and 506(a) and (d). Section 502(a) states, "a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed unless a party in interest. . . objects." 11 U.S.C. § 502(a). The Supreme Court interpreted the words "allowed secured claim" in § 506(d) term-by-term, and concluded the language refers to "any claim that is first, allowed under § 502, and second, secured." Dewsnup v. Timm, 502 U.S. 410, 415 (1992). The value of the creditor's interest in the estate's interest in the underlying collateral as determined pursuant to § 506(a) was irrelevant under the Court's reading of §506(d)'s "allowed secured claim" language. See id. The creditor's interest could have had no value, but the creditor would still have had an "allowed secured claim" as the term is used in § 506(d) because the claim was "secured by a lien with recourse to the underlying collateral." Id.; In re Cook, 432 B.R. 519, 528-29 (Bankr. N.J. 2010), aff'd, Cook v. IndyMac Bank, FSB (In re Cook), 449 B.R. 664 (D.N.J. 2011) ("Dewsnup held that the definition of an 'allowed secured claim' for purposes of § 506(d) was independent of the § 506(a) determination."). Accordingly, the Court held that the debtor could not use § 506(d) to strip down the lien "because [the creditor's] claim [was] secured by a lien and [had] been fully allowed pursuant to § 502." Id. at 417. The Supreme Court reasoned:

The practical effect of [the debtor's] argument is to freeze the creditor's secured interest at the judicially determined valuation. By this approach, the creditor would lose the benefit of any increase in the value of the property by the time of the foreclosure sale. The increase would accrue to the benefit of the debtor, a result some of the parties describe as a 'windfall.'

We think, however, that the creditor's lien stays with the real property until the foreclosure. That is what was bargained for by the mortgagor and the mortgagee. The voidness language sensibly applies only to the security aspect of the lien and then only to the real deficiency in the security. Any increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor, not to the benefit of the debtor and not to the benefit of other unsecured creditors whose claims have been allowed and who had nothing to do with the mortgagor-mortgagee bargain.

Id. As a matter of policy, the Supreme Court stated that it could not "attribute to Congress the intention to grant a debtor the broad new remedy against allowed claims to the extent that theybecome 'unsecured' for purposes of section 506(a) without the new remedy being mentioned somewhere in the Code itself or in the annals of Congress." Id. at 419-20. The Supreme Court espoused to do so would be contrary to basic bankruptcy principles, including that apart from reorganization proceedings, no provision of the pre-Code bankruptcy statute permitted involuntary reduction of the amount of a creditor's lien for any reason other than the payment on the debt and that liens on real property pass through bankruptcy unaffected. Id. at 417-19.

The Supreme Court did not decide in Dewsnup whether a chapter 7 debtor may strip off the lien of a wholly unsecured junior mortgagee pursuant to § 506(d), and this issue remains an open question in the Second Circuit and a matter of first impression in the Northern District of New York. The majority of courts that have considered this issue have concluded that such use of § 506(d) is impermissible. See Talbert v. City Mortg. Servs. (In re Talbert), 344 F.3d 555, 559 (6th Cir. 2003) (rejecting the minority position and declining to allow a chapter 7 debtor to strip off the lien of a junior mortgagee); Ryan v. Homecomings Fin. Network, 253 F.3d. 778, 781-82 (4th Cir. 2001) (same); Wachovia Mortg. v. Smoot (In re Smoot), 478 B.R. 555, 568 (E.D.N.Y. 2012) (same); In re Cook, 432 B.R. 519, 525 (Bankr. N.J. 2010), aff'd, Cook v. IndyMac Bank, FSB (In re Cook), 449 B.R. 664 (D.N.J. 2011) (holding the same and noting, "[p]ost Dewsnup . . . the majority of courts addressing the issue . . . [conclude] that . . . a 'strip off' and a 'strip down' . . . both . . . are foreclosed by Dewsnup.") (internal citations omitted). But see McNeal v. GMAC Mortg., L.L.C. (In re McNeal), 477 F. App'x 562, 563 (11th Cir. 2012) (following pre-Dewsnup Eleventh Circuit precedent permitting strip off in chapter 7 because under the Eleventh Circuit's "prior panel precedent rule," a later panel could depart from an earlier panel's decision only when an intervening Supreme Court decision was "clearly on point,"and having addressed strip down, not strip off, Dewsnup was not clearly on point with the facts at issue before the Eleventh Circuit Court of Appeals).

This Court finds the decision of the Sixth Circuit Court of Appeals in Talbert v. City Mortgage Services (In re Talbert), 344 F.3d 555, 559 (6th Cir. 2003) to be persuasive on the question now before it. In Talbert, the Sixth Circuit Court of Appeals, one of the highest courts to have decided this issue to date, adopted the majority view. 344 F.3d at 559. The Court of Appeals concluded the Supreme Court's interpretation of § 506 in Dewsnup, as well as the three considerations serving as the...