Christo et al v. Wells Fargo Bank et al

OCR transcription for search; preserved printed pages are authoritative

AUTHENTICATED 74
US. GOVERNMENT

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Randall and Cynthia Christo )
) Case No. 12-3068
Debtor(s) )
) (Related Case: 12-30083)
Randall A. Christo, et al. )
)
Plaintiff(s) )
)
v. )
)
Wells Fargo Bank, et al. )
)
Defendant(s) )
DECISION AND ORDER

This cause comes before the Court on the Motion to Dismiss filed by the Defendant, Wells
Fargo Bank, N.A. (Doc. No. 11). The Defendant brought its Motion to Dismiss against the adversary
proceeding filed by Plaintiffs entitled, “Complaint to Determine Dischargeability.” (Doc. No. 1).
Each of the Parties filed written arguments in support of their respective positions. The Court has
now had the opportunity to review these arguments, as well as the entire record of the case. Based
upon this review, and for the reasons explained herein, the Court finds that the Defendant’s Motion

to Dismiss should be Granted.
FACTS
On January 10, 2012, the Plaintiffs, Randall and Cynthia Christo, filed a petition in this Court
for relief under Chapter 7 of the United States Bankruptcy Code. At the time they filed their petition

for bankruptcy relief, the Plaintiffs held a fee interest in certain real property the Plaintiffs used as
their residence. A value of $84,200.00 was attached to the property by the county auditor. However,

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

a recent appraisal conducted of the property set forth that the property was worth significantly less,

with the appraisal assigning a value to the Plaintiffs’ residence of $68,300.00.

At the time they commenced their case, the Plaintiffs’ residence was encumbered by two
mortgages, both held by the Defendant: (1) a first mortgage in the amount of $68,329.93; and (2) a
second mortgage in the amount of $25,706.35. No proof of claim has been filed by the Defendant

regarding either of these claims.

During the pendency of their bankruptcy case, a discharge was entered in favor of the
Plaintiffs. Also, the trustee, charged with administering the Plaintiffs’ bankruptcy estate, determined

that no assets were available for distribution.

On May 2, 2012, the Plaintiffs filed the action now before the Court, entitled “Complaint to

Determine Dischargeability.” In their Complaint, the Plaintiffs sought the following relief:

... that the second mortgage be declared to be an unsecured mortgage. The
terminology lien be released. The amount owed on the second mortgage be
treated as an unsecured debt to be paid pro-rata along with other unsecured
debts ....

(Doe. No. 1). In response, the Defendant filed its Motion to Dismiss on the basis that the Plaintiffs
failed to state a claim upon which relief may be granted, Federal Rule of Civil Procedure 12(b)(6).
(Doc. No. 16).

DISCUSSION
The Plaintiffs have entitled their action before the Court as a “Complaint to Determine

Dischargeability.” This designate, however, is an improper characterization of the Plaintiffs’ cause

of action.

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

A complaint to determine dischargeability necessarily implicates § 523(a) of the Bankruptcy
Code. Nowhere in their Complaint, however, do the Plaintiffs cite to or otherwise make reference
to § 523(a), or its terminology. Instead, the substance of the Complaint brought by the Plaintiffs
seeks a determination that the second mortgage held by the Defendant against their residence should
be avoided. This type of action is more properly categorized, and will be treated! as “a proceeding
to determine the validity, priority, or extent of a lien or other interest in property.” FED.R.BANKR.P.
7001(2).

In 28 U.S.C. § 157(b)(2)(K), it is provided that a determination concerning the “validity,
extent, or priority of liens” is deemed to be a core proceeding, It is then set forth in 28 U.S.C.
§ 157(b)(1) that, with respect to a “core proceeding,” a bankruptcy court may enter final orders and
judgments. Accordingly, on the Plaintiffs’ Complaint to avoid the second mortgage held by the
Defendant, this Court has been conferred with jurisdiction to enter final orders and judgments. 28

U.S.C. § 157(b)(1).

Against the Plaintiffs’ action to avoid its second mortgage, the Defendant filed a Motion to
Dismiss. The Defendant’s Motion to Dismiss is brought pursuant to Federal Rule of Civil Procedure
12(b)(6). Rule 12(b)(6) of the Federal Rules of Civil procedure, which is made applicable to this
proceeding by Bankruptcy Rule 7012(b)(6), provides that a court may dismiss a case for “failure to
state a claim upon which relief can be granted.” Such relief, however, can only be entered when it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would
entitle him to relief. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 811, 113 S.Ct. 2891, 2917,
125 L.Ed.2d 612 (1993). Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed. 80 (1957). In

1

Because the Federal Rules of Procedure, and the applicable Bankruptcy Rules which incorporate
the Federal Rules of Procedure, are based on notice pleading, Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 585, 127 S.Ct. 1955 (2007), this Court has recognized that it may be proper to
amend the pleadings to conform to issues placed before court. See 11 U.S.C. § 105(a); In re
Barton, 321 B.R. 869, 875 (Bankr.N.D.Ohio 2004) (bankruptcy court, under its equitable
powers, may revise a pleading to conform to the evidence presented); Fed.R.Bankr.P. 7015(b).

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
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making this determination, the Court must construe the complaint in the light most favorable to the
plaintiff and must accept all factual allegations in the complaint as true. Allard v. Weitzman (In re

DeLorean Motor Co.), 991 F.2d 1236, 1240 (6"" Cir.1993).

The Bankruptcy Code recognizes that, when a debtor files for bankruptcy relief, a creditor
may hold an interest in the debtor’s property. John Graham, Trustee v. The Huntington Nat’! Bank.
(In re Medcorp. Inc.), 472 B.R. 444, 449 (Bankr. N.D.Ohio 2012). This interest is designated as a
“lien” which the Bankruptcy Code defines to mean a “charge against or interest in property to secure
payment of a debt or performance of an obligation.” 1 1 U.S.C. § 101(37). Each of the mortgages
held by the Defendant is deemed to be a “lien” for purposes of bankruptcy law; specifically, a
mortgage is deemed to be a “security interest” which the Bankruptcy Code defines as a “lien created

by an agreement.” 11 U.S.C. § 101(51).

In a bankruptcy case, a creditor holding a “lien” is afforded certain benefits beyond those of
creditors who do not hold liens — e.g., an unsecured creditor. Of import, it is the general rule that
liens will “pass through bankruptcy unaffected.” Dewsnup v. Timm, 502 U.S. 410, 418, 112 S.Ct.
773, 116 L.Ed.2d 903 (1992). As explained by the United States Supreme Court: “a bankruptcy
discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor
in personam — while leaving intact another — namely, an action against the debtor in rem.” Johnson
v. Home State Bank, 501 U.S. 78, 79, 111 S.Ct. 2150, 2151, 115 L.Ed.2d 66 (1991). The pass-

through nature of liens in bankruptcy, however, is not always applicable.

In certain circumstances, a creditor holding an otherwise valid lien may have that lien
avoided through the bankruptcy process. This process is sometimes referred to as lien stripping. A
creditor’s lien, however, will not be automatically stripped. Instead, for a lien to be avoided in
bankruptcy, the party seeking avoidance is required to take some sort of affirmative action to have
the lien avoided. As well, a lien may only be avoided where there exists specific statutory grounds

providing for the lien’s avoidance. Cen—Pen Corp. v. Hanson, 58 F.3d 89, 92-93 (4" Cir.1995),

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

In their Complaint, the Plaintiffs cited only to § 1322(b)(2) as a statutory basis to avoid the
Defendant’s second mortgage. This provision provides that, in proposing a plan of reorganization,
a debtor may “modify the rights of holders of secured claims,. .. .” The Plaintiffs’ reliance on this
provision, however, as a basis to avoid the Defendant’s mortgage, carries with it two inherent

weaknesses.

First, the text of § 1322(b)(2), which allows the modification of a secured creditor’s claim,
is circumscribed by additional language providing that it does not apply when the claim is “secured
only by a security interest in real property that is the debtor’s principal residence . . . .” In this case,
the mortgage sought to be avoided is held by the Defendant against the Plaintiffs’ residence, thereby
bringing into play this restriction.” Even if this were not the case, the Plaintiffs’ reliance on

§ 1322(b)(2) has an absolutely fatal deficiency.

The Plaintiffs sought relief under Chapter 7 of the Bankruptcy Code, while the applicability
of § 1322(b)(2), being a Chapter 13 provision, is strictly limited to debtors who seek relief under
Chapter 13 of the Bankruptcy Code. As set forth in § 103() of the Code, “Chapter 13 of this title
applies only in a case under such chapter.” Accordingly, as the Plaintiffs sought relief under Chapter
7 of the Bankruptcy Code, they are not entitled to any benefit bestowed by § 1322(b)(2), which is
limited to those debtors who seek to repay their debts by filing for relief under Chapter 13 of the
Code. See H.R.Rep.No.595, 95" Cong. 1* Sess. 5 (1977) (the policy behind the enactment of Chapter

13 was to encourage debtors to repay their debts).

Under Chapter 7 of the Bankruptcy Code, there is simply no basis for a debtor to avoid an

otherwise valid mortgage or consensual lien. This, however, was not always the case. Prior to the

2

Section 1322(b)(2) specifically proscribes a debtor from modifying the rights of a secured
creditor who holds a security interest in real property that functions as the debtor’s principal
residence. In Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993), the United
States Supreme Court held that this proscription meant that a debtor could not seek to use § 506
to avoid a creditor’s mortgage on the debtor’s residence.

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
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United States Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773,116
L.Ed.2d 903 ( 1992), some courts had permitted Chapter 7 debtors to avoid a creditor’s consensual
lien to the extent that, with respect to the underlying collateral, the lien did not attach to any equity.
See, e.g., Gaglia v. First Federal Sav. & Loan Ass’n, 889 F.2d 1304 (3 Cir. 1989). The rationale

for this conclusion rested upon the interplay between subsections (a) and (d) of § 506.

Section 506(a) of the Bankruptcy Code allows a debtor to bifurcate a claim into its secured
and unsecured components so that a creditor’s secured claim is limited to the value of its collateral,
while that portion of the claim above the collateral’s value is treated as an unsecured claim.’ Section
506(d) then provides that, subject to some exceptions, a lien held by a creditor is void to the extent
that the lien secures a claim against the debtor that is not an allowed secured claim. (see statutory
language, infra). Based upon a reading of these two provisions together, some courts had reasoned
that “a lien on the debtor’s property could be avoided to the extent it secured the portion of an
allowed claim that was not an ‘allowed secured claim’ by virtue of its conversion into an unsecured
claim pursuant to the bifurcation provisions of section 506(a).” 4-506 Collier on Bankruptcy q

506.06[1].

The Supreme Court’s decision in Dewsnup v. Timm put an end to this practice. In Dewsnup,
the Court held that a lien could not be avoided under § 506(d), even though undersecured, and that
the lien securing the entire amount of the indebtedness survived a Chapter 7 bankruptcy undisturbed.
502 U.S. at 417, 112 S.Ct. at 778. In coming to this conclusion, the Supreme Court cited to the fact
that it could not discern any clear evidence that Congress intended to change the traditional rule that,
in liquidation cases, a lien remained with the collateral until foreclosure. Jd. Yet, even with the
Supreme Court’s pronouncement in Dewsnup, there still remained an unanswered question: Whether

a lien that was completely unsecured was still subject to avoidance?

3
Section 506(a) provides in, pertinent part, “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 ....”

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

In Dewsnup, the lien at issue was partially secured. Thus, what the debtor sought to do in
Dewsnup was reduce the value of the lien to the value of the collateral, yet still leaving the lien,
itself, intact. Given this factual situation as presented in Dewsnup, however, the possibility was still
left open that a debtor could avoid a lien when, as is the situation in this case, superior lien(s) on the
underlying collateral exceeded its value, leaving the junior lien completely unsecured. In the case
of Talbert v. City Mortgage Services (In re Talbert), 344 F.3d 555 (6" Cir.2003), this exact issue,
as to whether an unsecured junior lien is subject to avoidance in light of the Supreme Court’s

decision in Dewsnup, was addressed by the Sixth Circuit Court of Appeals.

In Inre Talbert, the Sixth Circuit framed the question before it as this: “whether a debtor who
has filed for Chapter 7 bankruptcy may avoid a valueless lien under § 506(d) of the Bankruptcy
Code, 11 U.S.C. § 506(d).” Jd. at 557. After considering the “analytical underpinnings” of the
Supreme Court’s holding in Dewsnup, the Court concluded that § 506(d) could not, in a Chapter 7

case, be used to “strip off” a creditor’s lien. In the words of the Court:

Section 506 was intended 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. When a debtor proceeds under

Chapter 7, creditors are entitled to their lien position until foreclosure or other

permissible final disposition is had. Thus, we conclude that a Chapter 7

debtor may not use 11 U.S.C. § 506 to ‘strip off’ an allowed junior lien where

the senior lien exceeds the fair market value of the real property.
Id. at 561-62 (internal quotations and citations omitted). For purposes of this matter, the Court’s
decision in In re Talbert is directly on point, meaning that the Plaintiffs cannot rely on § 506 to avoid
the Defendant’s second mortgage, notwithstanding the Defendant’s acknowledgment that, for
purposes of its Motion to Dismiss, the second mortgage it holds against the Plaintiffs’ residence does

not attach to any equity.

In looking at their arguments in opposition to the Defendant’s Motion to Dismiss, the
Plaintiffs rely heavily on the Defendant having failed to file a proof of claim in support of its second

mortgage. According to the Plaintiffs, “it is clear from the case law that the creditor has to file a

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
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proof of claim in order for the [debtor] to object to the claim. Since no claim was filed, the

Defendant cannot rely on Section 502 Allowance of Claims.” (Doc. No. 17, at pg. 2).

It is fair to state that the position advanced by the Plaintiffs holds that the pass-through nature
of liens in bankruptcy is contingent upon the lien holder filing a proof of claim so as to afford a
debtor the opportunity to object to the creditor’s interest. This position, however, seeks to make a
connection between the filing of a proof of claim and the allowance of a creditor’s lien where no

such connection exists.

A creditor holding a lien does not need to file proof of claim to retain its lien interest. Instead,
a creditor who holds a lien is entitled to ignore the proof of claim process altogether and look solely
to its lien for the satisfaction of its claim. In re Gordon, 471 B.R. 614 (D.Colo. 2012). This is not
to say that a secured creditor stands to gain by not filing a proof of claim. To the contrary, the filing
of a proof of claim, and the allowance of that claim, is the sine gua non for receiving a distribution
from the bankruptcy estate or, in a Chapter 13 case, from a debtor’s confirmed plan of
reorganization. In this case, however, the filing of a proof of claim by the Defendant would have
been a vain act as the Plaintiffs’ bankruptcy estate had no assets available for distribution. In fact,
in this particular case, the Court, pursuant to Bankruptcy Rule 2002(e),’ had sent notice to the

Defendant not to file a proof of claim unless notified otherwise.

This lack of connection between avoiding a creditor’s lien and the filing of a proof of claim

is part of the structure of the Bankruptcy Code and Rules. First, in § 502(d)(2) it is provided:

4

Notice of no dividend

In a chapter 7 liquidation case, if it appears from the schedules that there are no assets from
which a dividend can be paid, the notice of the meeting of creditors may include a statement to
that effect; that it is unnecessary to file claims; and that if sufficient assets become available for
the payment of a dividend, further notice will be given for the filing of claims.

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

To the extent that a lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void, unless—

(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.
The effect of this provision is, thus, to decouple any notion that a creditor’s lien can be avoided

simply because the creditor did not file a proof of claim, thereby partially codifying the principle that

liens will generally pass through a debtor’s bankruptcy case.

Bankruptcy Rule 3002(a) reinforces this conclusion by providing that only an unsecured
creditor is required to file a proof of claim for the claim to be allowed. Specifically, this Rule
provides, in relevant part: “An unsecured creditor or an equity security holder must file a proof of
claim or interest for the claim or interest to be allowed,. . .” FED.R.BANKR.P. 3002(a) (emphasis
added). Neither this Rule, nor any other Rule, requires a secured creditor to file a proof of claim as
a condition precedent for the allowance of its lien. See also In re Nowak, 586 F.3d 450, 455 (6
Cir.2009) (citing to § 506(d) and Bankruptcy Rule 3002(a) and observing that a “secured creditor
is usually not required to file a proof of claim to maintain its interest in the collateral to which its

security interest attaches.”).

As a final point in opposition to the Defendant’s Motion to Dismiss, the Plaintiffs set forth
that the precedent set by the Supreme Court in Dewsnup should be discounted because, in their
words, the “case is a really old case that has been largely overruled by more recent cases... .” (Doc.
No. 17, at pg. 2). This argument, however, is specious, as otherwise controlling Supreme Court

precedent does not go stale merely because of its age.

Furthermore, the principal case cited by the Plaintiffs in support, Pond v. Farm Specialist
Realty (Inre Pond), 252 F.3d 122, 126 (2™ Cir.2001), does nothing to help their position. The facts
presented in Jn re Pond involved a Chapter 13 case and whether a debtor could utilize § 1322(b)(2),

discussed supra, to avoid a lien. The Jn re Pond case is, thus, not applicable in this Chapter 7 case;

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Randall A. Christo, et al. v. Wells Fargo Bank, et al.
Case No. 12-3068

nor does its holding contradict the Supreme Court’s holding in Dewsnup which was also a Chapter

7 case.

In sum, based upon the precedents set forth by the Supreme Court in Dewsnup and the Sixth
Circuit in Jn re Talbert, the Defendant has sustained its burden for its Motion to Dismiss. As such,
this adversary proceeding will be Dismissed. In reaching the conclusions found herein, the Court has
considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they

are specifically referred to in this Decision.
Accordingly, it is

ORDERED that Motion to Dismiss filed by the Defendant, Wells Fargo Bank, be, and is
hereby, GRANTED.

ITIS FURTHER ORDERED that this adversary complaint, be, and is hereby, DISMISSED.

Dated: September 4, 2012

4.
Richard L. Speer
United States

Bankruptcy Judge

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Certificate of Service

This is to certify that a copy of the foregoing Decision and Order has been sent this 4"
day of September 2012 by ordinary US Mail to the following:

James E Hitchcock
650 W Ist St
Defiance, OH 43512-2102

Randall A Christo
5209 Riverview Drive
Payne, OH 45880

Cynthia L Christo
5209 Riverview Drive
Payne, OH 45880

Phyllis A Ulrich

Carlisle McNellie Rini Kramer and Ulrich
24755 Chagrin Blvd

#200

Cleveland, OH 44122-5690

Wells Fargo Servicing Center
P.O. Box 536210
Atlanta, GA 30353

Wells Fargo Home Mortgage
3480 Stateview Blvd.

MAC X 7802--03H

Fort Mills, SC 29715

Wells Fargo Bank

c/o Primary Financial Services
3115 N. 3rd Ave. Ste. 112
Phoenix, AZ 85013

Wells Fargo Bank NA

c/o Csc-Lawyers Incorporating
Statutory Agent

50 West Broad Street
Columbus, OH 43215

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Nationsbanc Mortgage Corp.
1616 W. Market Street
Johnson City

Greenville, TN 37743

NAF, Inc.. New America Financial
3131 Turtle Crek Blvd. Suite 1300
Dallas, TX 75219

Paulding County Treasurer
Paulding County Courthouse
Room 102

115 N. Williams

Paulding, OH 45879

jy
ra Defuty Clerk” ¢
CS

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