UNITED
STATES BANKRUPTCY COURT FOR
EASTERN
DISTRICT OF KENTUCKY
LEXINGTON
DIVISION
IN RE:
CARLA DENISE FARTHING
and TROY ALLEN FARTHING
DEBTORS CASE
NO. 04-52243
MEMORANDUM
OPINION
Introduction
Carla Denise
Farthing and Troy Allen Farthing (the “Debtors”) are before the court on the
amended Chapter 13 Plan that they filed in the above-styled case on July 11,
2004, as amended on December 10, 2004 (the “Plan”), and Equity One, Inc.
(“Equity One”) is before the court on the objection to confirmation of the Plan
that it filed on August 16, 2004, as supplemented on December 29, 2004 (the
“Objection”). Having considered the Plan, the Objection, and the arguments of
counsel, the court concludes that the Objection should be overruled and the
Plan confirmed.
Factual and Procedural Background
On July 3, 2004
the Debtors filed a voluntary petition commencing this Chapter 13 case. Their
schedules indicate that their residence (the “Property”) was encumbered by a
first mortgage in favor of the City of Richmond in the amount of $4,000.00, a
second mortgage in favor of The CIT Group/Consumer Finance, Inc. (“CIT”) in
the amount of $54,794.70, and a third mortgage in favor of Equity One in the
amount of $15,160.00. The schedules also indicate that the Property is encumbered
by outstanding property taxes aggregating $1,500.00. On August 9, 2004 CIT
filed a proof of claim asserting a claim in the amount of $63,207.76. On
September 22, 2004 Equity One filed a proof of claim asserting a claim in the
amount of $14,078.70. On November 14, 2004 the Debtors filed a proof of claim
on behalf of the City of Richmond, asserting a claim in the amount of $4,000.00
but without attaching a copy of the mortgage allegedly securing the claim. Also
on that date, the Debtors filed proofs of claim for real property taxes, which,
as amended by the Debtors on December 10, 2004, aggregate $2,500.42.
On July 11, 2004
the Debtors filed the Plan, valuing Equity One’s secured claim at zero and
providing that “Debtor proposes to pay the creditor, Equity One[,] at the same
rate [as] the other unsecured creditors as the debt owed [on] the first
mortgage on the real property exceeds the value of the real estate. Debtor
p[ro]poses the secured portion of the debt at .00.” The Plan did not provide
any specific treatment of the City of Richmond’s first mortgage. On December
6, 2004, after conducting an evidentiary hearing, the court entered an Order
establishing that the value of the Property is $68,000 for the purposes of the
Plan and the Objection. The court conducted a hearing on confirmation of the
Plan on January 4, 2005. At that time, counsel for the Debtors informed the
court that the $4,000 first mortgage was forgivable by the mortgagee and that
the mortgage was, in fact, forgiven on October 1, 2004.
Legal
Discussion
Equity
One contends that the Plan violates § 1322(b)(2) of the Bankruptcy Code, which
prohibits the modification of “the rights of holders of secured claims . . .
secured only by a security interest in real property that is the debtor’s
principal residence.” The Supreme Court of the United States has held that this
provision prohibits the “stripping down” of partially secured home mortgages,
treating the secured portion as secured and the unsecured portion as unsecured.
Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S. Ct. 2106 (1993). The
Sixth Circuit has held, however, that debtors may “strip off” mortgages that
are totally unsecured by virtue of there being no equity over and above prior
encumbrances. Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663
(6th Cir. 2002); accord, e.g., In re Williams, 161 B.R.
27, 29-30 (Bankr. E.D. Ky. 1993); In re Moncrief, 163 B.R. 492, 494
(Bankr. E.D. Ky. 1993). The question presented here is whether Equity One’s
mortgage is undersecured – in which case the Objection should be sustained –
or unsecured – in which case the Plan should be confirmed. That question is
controlled by the time that the determination is to be made: at the time this
case was commenced, there was no equity in the Property;[1]
at the time of the confirmation hearing, due to the forgiveness of the first
mortgage, there was $2,291.82 in equity to which Equity One’s mortgage could
attach.
Courts presented
with this issue hold that the determination as to whether a home mortgage is
secured, bringing § 1322(b)(2) into play, is to be made as of the date the
petition was filed. In re Cerminaro, 220 B.R. 518, 524-25 (Bankr. N.D.N.Y.
1998); Norwest Fin. Ga., Inc. v. Thomas (In re Thomas), 177 B.R. 750,
751-52 (Bankr. S.D. Ga. 1995) (citing Johnson v. GMAC (In re Johnson),
165 B.R. 524, 528 (S.D. Ga. 1994)); In re Wetherbee, 164 B.R. 212, 215
(Bankr. D.N.H. 1994); In re Amerson, 143 B.R. 413, 416 (Bankr. S.D.
Miss. 1992) (postpetition release of additional collateral does not bring
§ 1322(b)(2) into play); In re Green, 7 B.R. 8, 9 (Bankr. S.D.
Ohio 1980) (same); see Miller v. Green Tree Consumer Discount Co. (In re
Miller), Ch. 13 Case No. 99-13446DWS, Adv. No. 99-0334, 1999 WL 1052509
(Bankr. E.D. Pa. Nov. 5, 1999) (dictum); Moncrief, 163 B.R. at
493-94 (making determination as of petition date without discussion). Some of
the cases choose the petition date over an earlier date (such as the date the
mortgage debt was incurred) and other courts have selected the confirmation
hearing date as the date for determining the extent to which a partially
secured claim is secured. However, Lane instructs that the focus under Nobelman
is on the “rights of holders of secured claims,” and that the threshold
determination is whether the creditor is a holder of a secured claim at all. “A
‘claim’ in bankruptcy arises at the date of the filing of the petition.” Wetherbee,
164 B.R. at 215 (citing 11 U.S.C. § 502(b)). Thus, while it may be appropriate
to determine the value of collateral – and, therefore, the extent to
which a creditor’s claim is secured – as of confirmation or the date of the
valuation hearing, see 11 U.S.C. § 506(a) (last sentence), it is appropriate
to determine if the creditor holds a secured claim at all as of the
date the petition was filed.[2]
Conclusion
“This Court
holds that the crucial time for a determination as to whether a creditor
is entitled to invoke the protected status of a creditor secured only in
residential real estate is the time of the filing of the petition.” Green,
7 B.R. at 9. Accordingly, the court will enter separate orders overruling the
Objection and confirming the Plan.
Copies to:
Chris A. Carter, Esq.
Nathan L. Swehla, Esq.
Beverly M. Burden, Trustee
[1]According to the proofs of claim filed by or on behalf
of the City of Richmond, CIT, and the real property taxing authorities, see
11 U.S.C. § 502(a) (claim is allowed unless party in interest objects); Fed.
R. Bankr. P. 3001(f) (proof of claim constitutes prima facie evidence of
validity and amount of claim), the prior encumbrances total $69,708.18, which
is $1,708.18 more than the value of the Property as determined by the court.
[2]This conclusion is supported by the Congressional
policy that postpetition increases in equity inure to the benefit of the
Chapter 13 debtor. See 140 Cong.
Rec. H10,770 (Oct. 4, 1994) (regarding addition of Subsection (f) to 11
U.S.C. § 348).