EASTERN DISTRICT OF KENTUCKY

                                                             LEXINGTON DIVISION








DEBTORS                                                                               CASE NO. 04-52243



                                                         MEMORANDUM OPINION


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]



“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).