Richins v. Bank of Am. Home Loans (In re Richins)

469 B.R. 375

In re Frank Vernon RICHINS and Allison Drown Richins, Debtors.Frank Vernon Richins and Allison Drown Richins, Plaintiffs,

v.Bank of America Home Loans, Defendant.

Bankruptcy No. 10–26048.

Adversary No. 10–02754.

United States Bankruptcy Court, D. Utah.

March 13, 2012.

Paul James Toscano, Salt Lake City, UT, for Plaintiffs.

Bank of America Home Loans c/o Pite Duncan, LLP, San Diego, CA, pro se.

MEMORANDUM DECISION DENYING MOTION FOR JUDGMENT VOIDING SECOND TRUST DEED OF BANK OF AMERICA HOME LOANS

WILLIAM T. THURMAN, Bankruptcy Judge.

The matter before the Court is the Plaintiffs' Motion for Entry of Judgment Voiding 2nd Trust Deed of Bank of America Home Loans and Disallowing Such Claim as Secured but Allowing Such Claim as a General Unsecured Claim Without Priority (“Motion”) filed by Frank Vernon Richins and Allison Drown Richins (“Plaintiffs”). A hearing on the Motion was conducted on February 9, 2012, in which the Court listened to argument by Paul James Toscano representing the Plaintiffs. Bank of America Home Loans (“Bank of America”) did not appear at the hearing and has not otherwise opposed the Motion. The primary issue is whether the Plaintiffs, as chapter 7 debtors, can strip off a wholly unsecured second mortgage lien under 11 U.S.C. § 506(a) and (d). ¹

The Court has carefully reviewed and considered the Plaintiffs' argument and submissions and has conducted its own independent research of the relevant case law and statutory provisions. The Court issues the following Memorandum Decision, which constitutes the findings of fact and conclusions of law of the Court.

I. Jurisdiction and Venue

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (K). Venue is properly laid in this Court under 28 U.S.C. § 1408 and 1409.

II. Facts and Background

Frank Vernon Richins and Allison Drown Richins, the Plaintiffs in this adversary proceeding, filed a chapter 7 bankruptcy petition on May 6, 2010. On Schedules A and D, the Plaintiffs listed residential real property located at 704 East 2025 South in Bountiful, Utah (“Property”) at a fair market value of $266,000. As indicated on Schedule D, the Property is encumbered by two mortgages, both held by held by Bank of America. The Chapter 7 Trustee filed a Report of No Distribution in the bankruptcy case and the Plaintiffs received a discharge on September 17, 2010.

On September 19, 2010, the Plaintiffs filed an adversary proceeding to void the second mortgage held by Bank of America on the Property under § 506(d). In the Amended Complaint filed in the adversary proceeding on June 28, 2011, Plaintiffs allege that the fair market value of the Property for 2010 is $237,000 as assessed by the Davis County Board of Equalization. The Amended Complaint states that Bank of America holds a first mortgage of $238,400 and a second mortgage of $108,638 on the Property.² No contrary evidence was presented at the hearing. Thus, because the first mortgage is in an amount greater than the fair market value of the property, the second mortgage is wholly unsecured. A default certificate was entered by the Clerk of this Court on September 9, 2011 and the Plaintiffs filed the Motion on December 21, 2011.

A hearing was set on the Motion for February 9, 2012. Notice of the hearing was properly served upon Bank of America. Bank of America did not appear at the hearing and has taken no action in opposition to the complaint and the Plaintiffs' requested relief. Although the Motion is not opposed by Bank of America, the Court has an independent duty to evaluate the relief being sought by the parties and accordingly, has done so here.³

III. Discussion

The Plaintiffs seek to strip off the wholly unsecured second mortgage on the Property under § 506(d). Section 506(a)(1) permits bifurcation of a secured creditor's claim into secured and unsecured portions. ⁴ The claim is secured up to the value of the collateral, while the excess over and above the value of the collateral is unsecured. Section 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void....” ⁵ The phrase “stripping off” refers to when a lien is wholly unsecured and the indebted party is attempting to remove the lien from the property, while the phrase “stripping down” refers to when a lien is partially secured and only partially removed.⁶ Here, the Plaintiffs contend that because the second mortgage on the Property is wholly unsecured, it can be stripped off the Property under § 506(d).

The presented issue, whether a chapter 7 debtor may use § 506(d) to strip off a wholly unsecured mortgage, has been the subject of great debate. The Court first examines the two Supreme Court cases central to the issue, before moving on to a discussion of the most recent case law on the subject of strip off in chapter 7 cases. Finally, the Court distinguishes the strip off of a wholly unsecured lien in the chapter 13 context.

A. Stripping Down a Partially Secured Junior Lien in Chapter 7 and 13: Dewsnup and Nobelman

The Supreme Court dealt with whether a debtor in a chapter 7 case could strip down a partially secured lien on real property in Dewsnup v. Timm.⁷ In Dewsnup,the Supreme Court analyzed the meaning of the phrase “allowed secured claim” as it applies to § 506(a) and (d) and ultimately found that “allowed secured claim” in § 506(a) does not have the same meaning as § 506(d). Thus, the Court found that the phrase “allowed secured claim” in § 506(d) did not allow avoidance of the portion of the lien that is not an “allowed secured claim” under § 506(a).⁸

The Court explained that “given the ambiguity in the text, [the Court] was not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.” ⁹ The Court provided three underlying reasons for its conclusion:

(1) any increase in the value of the property from the date of the judicially determined valuation to the time of the foreclosure sale should accrue to the creditor; (2) the mortgagor and mortgagee bargained that a consensual lien would remain with the property until foreclosure; and (3) liens on real property survive bankruptcy unaffected.¹⁰

One year later, the Court dealt with the same lien avoidance issue in the context of a chapter 13 plan of reorganization. In Nobelman v. American Savings Bank, the Court found that a partially secured claim on a debtor's principal residence could not be stripped down to the fair market value of the residence under § 506(a) because the claim was protected from modification by § 1322(b)(2).¹¹ The Court reasoned that to use § 506(a) to strip down a partially secured mortgage lien in a chapter 13 case would “require a modification of the rights of the holder of the security interest” and that § 1322(b)(2) “prohibits such a modification where, as here, the lender's claim is secured only by a lien on the debtor's principal residence.” ¹²

In this case, the Plaintiffs cite to Dewsnup and Nobelman for their contention that they may strip off the wholly unsecured second mortgage on the Property in this chapter 7 case. This Court is sympathetic to the argument made by the Plaintiffs. While in private practice, the Court was counsel to the Dewsnups and advocated to the various courts that lien stripping should be permitted in the Dewsnup's chapter 7 case. However, the Supreme Court did not agree. The Court divines no reason that the analysis underlying Dewsnup's decision should differ depending on whether the chapter 7 debtor is attempting to strip a partially secured or wholly unsecured lien. Moreover, the Court finds Nobelman distinguishable, as it is a chapter 13 case that dealt with a code section, § 1322, that is inapplicable in this chapter 7 case.

B. Strip Offs in Chapter 7

While Dewsnup and Nobelman addressed the issue of whether a debtor could strip down a partially unsecured lien in a chapter 7 and 13 case, respectively, the question at issue now is whether a debtor in a chapter 7 case can strip off a wholly unsecured lien. Although the Tenth Circuit Court of Appeals (“Tenth Circuit”) has not ruled on this issue directly, other circuits have considered this issue. The majority view is that a debtor may not strip off a wholly unsecured lien in a chapter 7 case under § 506(d).¹³

The Fourth and Sixth Circuits have both ruled that a debtor may not strip off a wholly unsecured lien in a chapter 7 case under § 506(d) because it is prohibited by Dewsnup. The Fourth Circuit found that the Supreme Court's analysis in Dewsnup applied both to strip downs and strip offs of an unsecured junior lien in a chapter 7 case.¹⁴ In support of its position, the Fourth Circuit found that the purpose of § 506 is to “facilitate valuation and disposition of property in the reorganization chapters of the Code, not to confer an additional avoiding power on a Chapter 7 debtor.” ¹⁵ Furthermore, the Fourth Circuit found that the Supreme Court's analysis in Nobelman in no way affected the strip off of a wholly unsecured junior lien in a chapter 7 case because Nobelman did not discuss or even make reference the application of § 506(d).¹⁶

Similarly, the Sixth Circuit held in Talbert that “to permit a ‘strip off’ would mark a departure from the pre-Code rule that real property liens emerge from bankruptcy unaffected.” ¹⁷ The Sixth Circuit went on to explain that even though the value of the real property was insufficient to cover the secured creditor's junior lien, the claim was still secured and “that is all that is required” by the holding in Dewsnup.¹⁸ Furthermore, the Fourth Circuit found that the reasons for the Dewsnup decision remain applicable in a chapter 7 case when the lien is partially or wholly unsecured. The Court explained that both strip downs and strip offs in a chapter 7 case provide for the risk of a “windfall” to the...