Fair v. First Choice America Community Federal Credit Unio

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
DEBRA S. FAIR,
Debtor.
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DEBRA S. FAIR,
Plaintiff,
v.
FIRST CHOICE AMERICA
COMMUNITY FEDERAL CREDIT
UNION,
Defendant.
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Case No. 13-387
Chapter 13
Adversary No. 13-56
MEMORANDUM OPINION
Debra S. Fair (the “Debtor”) seeks to “strip off” the consensual lien, in the form of a second-
priority deed of trust recorded against her principal residence, held by First Choice America
Community Federal Credit Union (“First Choice”). First Choice contends that the Debtor cannot
“strip off” its second-priority deed of trust because the Debtor’s residence is of sufficient value to
secure its claim. At issue here is the appropriate date on which to value the Debtor’s residence for
purposes of determining First Choice’s secured status under 11 U.S.C. § 506(a)(1). The issue is
significant because it impacts the Debtor’s ability to modify the rights of First Choice, as a junior
lienholder, and treat it as an unsecured claimant in her proposed Chapter 13 plan.
For the reasons stated herein, the court finds that the petition date is the appropriate valuation
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Dated: Monday, July 21, 2014 4:00:01 PM
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date for the purpose of determining whether a consensual lien is wholly unsecured under §
506(a)(1).
I. BACKGROUND
On March 27, 2013, the Debtor filed her Chapter 13 voluntary petition in this court. On
Schedule A filed with her petition, the Debtor listed her interest in her principal residence located
at 935 Wiley Ridge Road, New Cumberland, West Virginia (the “Property”). On April 8, 2013,
WesBanco Bank, Inc. (“WesBanco”), filed a proof of claim against the Debtor’s bankruptcy estate
in the amount of $64,993.31, which is secured by a first-priority deed of trust on the Property. On
May 2, 2013, First Choice filed a proof of claim against the Debtor’s bankruptcy estate in the
amount of $29,129.04, which is secured by a second-priority deed of trust on the Property. On
October 16, 2013, the Debtor filed this proceeding to determine the extent of First Choice’s secured
status under § 506(a)(1) — intending to treat First Choice as wholly unsecured in her proposed
Chapter 13 plan. 	On February 19, 2014, the court conducted an evidentiary trial to determine
whether the value of the Property is sufficient to secure First Choice’s claim.
At trial, the Debtor and First Choice each presented evidence of the value of the Debtor’s
residence by the use of qualified real estate appraisers. The Debtor’s expert testified that the value
of the Property was $60,000 as of November 1, 2012, almost five months prepetition. The Debtor
used this valuation in conjunction with valuing the Property at $60,000 on Schedule A filed with her
bankruptcy petition. First Choice’s expert testified that the value of the Property was $80,000 as of
January 22, 2014, less than one month before the trial in this proceeding and almost ten months
postpetition. 	The Debtor testified that any increase in the value of her Property is properly
attributable to certain improvements she made thereto postpetition. The court finds both experts’
opinions, as well as the Debtor’s testimony, to be credible and reliable. Notably, the Debtor’s expert
conceded that he likely would have valued the Property as of the date of trial, based on his exterior
view of the property that morning, at between $80,000 and $90,000. And First Choice’s expert
conceded that had he valued the Property at some time before the Debtor improved it, his opinion
as to its value would have been less than $80,000; although he did not articulate an opinion as to the
Property’s value in that regard.
II. DISCUSSION
Here, the parties dispute the appropriate valuation date the court should use in determining
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whether a junior lien holder is wholly unsecured for purposes of “stripping off” a lien under §§
506(a)(1) and 1322(b)(2).1 The Debtor urges the court to set the petition date as the appropriate
date for valuing real property in the context of an adversary proceeding to “strip off” a lien as wholly
unsecured. First Choice urges the court to follow the “flexible approach” outlined in In re Cahill,
503 B.R. 535, 539 (Bankr. D.N.H. 2013) as opposed to the “bright line rules approach for valuations
in specific circumstances,” and value the Property as of a date closer to the hearing affecting its
rights in the property. It asserts such approach is consistent with this court’s opinion in In re Nice,
355 B.R. 554 (Bankr. N.D.W. Va. 2006), wherein the court, in deciding the appropriate valuation
date in the context of a motor vehicle “cram down” in Chapter 13, used the effective date of the
confirmed plan. In re Nice, 355 B.R. at 562.
“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 . . . .” 11 U.S.C. § 506(a)(1). “Such value shall be determined in light of
the purpose of the valuation and of the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s
interest.” Id. Based on the discretion left to the court under § 506(a)(1) to determine how and as
of what date to value collateral, a split of authority exists regarding the proper valuation date when
a Chapter 13 debtor seeks to “strip off” a lien as being wholly unsecured. See Reconco v. Partners
for Payment Relief De III, LLC (In re Reconco), Adv. Proc. No. 13-1196, 2014 WL 1295721, at *2
(Bankr. E.D. Va. Mar. 31, 2014) (indicating a split of authority); In re Gilpin, 479 B.R. 905, 907
(Bankr. M.D. Fla. 2011) (same).
1 The parties do not dispute that a Chapter 13 debtor generally may employ §§ 506(a)(1)
and 1322(b)(2) of the Bankruptcy Code, to “strip off” a wholly unsecured lien and treat the
holder thereof as an unsecured claimant in a proposed Chapter 13 plan. See Weekly v. Bank One
Wheeling-Steubenville, N.A. (In re Weekly), Adversary No. 07-01, 2008 WL 1791974, at *1
(Bankr. N.D.W. Va. Apr. 17, 2008) (citation omitted) (“While Congress has prohibited Chapter
13 debtors from “cramming down” the secured portion of a mortgage debt on a debtor’s
principal residence to the value of the collateral, no similar prohibition exists preventing the
“strip off” of liens that are wholly in excess of the value of the collateral.”); Dean v. LaPlaya
Investments Inc., 319 B.R. 474, 476 (Bankr. E.D. Va. 2004) (citation omitted) (“A wholly
unsecured lien receives no protection under the antimodification provision of § 1322(b)(2) . . .
.”).
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Based upon the arguments and authority presented by the parties, as well as the court’s
survey of cases related to the issue presented here, the court adopts the petition date is the
appropriate valuation date for purposes of “stripping off” a wholly unsecured lien on real property
where the debtor wishes to retain the subject property in conjunction with proposing a Chapter 13
plan of repayment. Notably, the United States Court of Appeals for the Fourth Circuit has suggested
in dicta that a second-priority lien is valueless when, as of the petition date, the value of the property
upon which the lien is attached is less than the full amount owed on the first-priority lien. See
Alvarez v. HSBC Bank USA, N.A. (In re Alvarez), 733 F.3d 136, 139 (4th Cir. 2013) (noting in dicta
that “the value of the property when the petition was filed was less than the full amount owed on the
first-priority lien, rendering the second-priority lien valueless”). Additionally, the court is persuaded
by those cases noting that the petition date is the “‘watershed date of a bankruptcy proceeding.’”
Dean v. LaPlaya Investments Inc., 319 B.R. 474, 478 (Bankr. E.D. Va. 2004) (quoting Johnson v.
GMAC (In re Johnson), 165 B.R. 524, 528 (S.D.Ga. 1994)). As of the petition date, “creditors’
rights are fixed (as much as possible), the bankruptcy estate is created, and the value of the debtor’s
exemptions are determined.” Id.; In re Gilpin, 479 B.R. 905, 908 (Bankr. M.D. Fla. 2011). And the
debtor’s intent regarding the retention and use of the property is known at or near the petition date;
if the debtor does not file a proposed plan with the petition, the plan must be filed within fourteen
days thereafter unless the court finds that cause exists for an extension. See In re Reconco, 2014 WL
1295721, at *2 (“Using the petition date is consistent with the fixing of the debtor’s and creditor’s
rights in light of the intended use of the property — retention as the debtor’s principal residence —
and the amount of the claims necessary to be determined in connection with the strip-off
proceeding.”); Fed. R. Bankr. 3015.
Moreover, because claims are determined as of the petition date, 11 U.S.C. § 502(b), and it
is likely that the value of the collateral will increase or decrease postpetition, “[d]etermining the
parties’ rights early will discourage them from improperly delaying or accelerating the proceeding
(or using other improper tactics) to change their substantive legal rights.” TD Bank, N.A. v. Landry
(In re Landry), 479 B.R. 1, 7 (D.Mass. 2012); see In re Reconco, 2014 WL 1295721, at *1 (noting
a junior lienholder’s willingness to partially pay off a senior lienholder to cause the amount due to
the first lienholder to be less, even if by just $1.00, than the value of the property thus defeating the
debtor’s proposed “strip off”).
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To the extent that First Choice urges the court to adopt a flexible approach, similar to that
outlined in In re Cahill, 503 B.R. 535 (Bankr. D.N.H. 2013), and value the Property at some later
date postpetition, which it asserts would be more consistent with the court’s holding in In re Nice,
355 B.R. 554 (Bankr. N.D.W. Va. 2006), the court is unpersuaded for a several reasons. First, the
court in Cahill, relying on the final sentence of § 506(a)(1), found it appropriate to determine
whether a junior lienholder is wholly unsecured “in conjunction with the plan which affects [the
creditor’s] rights.” In re Cahill, 503 B.R. at 540. It found that “valuing all secured claims as of the
petition date would render the last sentence of § 506(a)(1) superfluous.” Id. at 541. This court
disagrees. The last sentence of § 506(a)(1) states, in part, that “value shall be determined . . . in
conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s
interest.” 11 U.S.C. § 506(a)(1). This court finds that the better interpretation of § 506(a)(1), at
least in Chapter 13, is that the court may determine the value of collateral securing a claim “in
conjunction with any hearing” at various stages of a case, but that § 506(a)(1) is silent as to the
valuation date to be used by the court in conjunction with such a hearing. See In re Reconco, 2014
WL 1295721, at *2 (“While § 506(a) allows valuation hearings at any time during the pendency of
a case, it is not determinative because it does not specify the date of the valuation to be used at the
valuation hearing.”).
The court is also unpersuaded by Cahill, particularly as it relates to First Choice’s reliance
on this court’s opinion in Nice, because the courts’ respective holdings in Cahill and Nice were
based, at least in part, on an analysis of requirements to obtain confirmation of a proposed plan.2
The court is thus unpersuaded by either of those cases because whether a junior lien is wholly
unsecured is a determination to be made independent of, and generally before, the plan confirmation
process in Chapter 13. Specifically, at least in this district, a debtor can only “strip off” a wholly
unsecured lien only through the commencement of an adversary proceeding, which, according to
accepted practice, is most typically resolved before confirmation of a proposed Chapter 13 plan.
Because Nice presented an issue entirely different than the one presented here, the court declines to
2 The Cahill court analyzed the issue, at least in part, as it related to the “best-interest-of-
creditors test” in Chapter 11, and this court’s analysis in Nice was based in large part upon the
confirmation requirement found in § 1325(a)(5)(B)(ii).
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extend its holding to the facts of this case. 	Moreover, although the court in Cahill held that a
valuation date near confirmation should be used based upon “the equitable principle . . . that the
secured creditor should receive the benefit of an increase in the collateral value,” In re Cahill, 503
B.R. at 541, it made that determination based upon the increased value being attributable to
something other than the debtor’s efforts. 	Id. at 542 (distinguishing In re Wood, 190 B.R. 788
(Bankr. M.D. Pa. 1996), where the court used the petition date for valuation based upon the post-
petition increase in the property’s value being caused by the debtor’s efforts).
Turning to the evidence here, the Debtor presented credible and reliable evidence that the
value of her property securing First Choice’s lien was $60,000 as of November 1, 2012, almost five
months prepetition. 	According to First Choice, the value of the same property was $80,000 on
January 22, 2014. Because the court finds that the petition is the appropriate valuation date, it looks
to the appraisal made closest to the Debtor’s petition date of March 27, 2013. Based on the evidence
presented at trial — primarily that the property was worth $60,000 on November 1, 2012, and that
the property value increased postpetition as a result of the Debtor’s post-petition improvement
thereof — the court finds that it is more likely than not that the Debtor’s real property, to which First
Choice’s second-priority lien is attached, was worth no more than $60,000 as of the Debtor’s
petition date of March 27, 2013.
III. CONCLUSION
Based on the foregoing findings of fact and conclusions of law, the second-priority lien held
by First Choice against the Debtor’s residence located at 935 Wiley Ridge Road, New Cumberland,
WV, is wholly unsecured.
Consistent with Fed. R. Civ. P. 58(a), made applicable to this proceeding by Fed. R. Bankr.
P. 7058, the court will enter a separate order granting the Debtor judgment on her complaint.
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