Walid I Obeid and Nina W. Obeid

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
IN RE: 	:
:
WALID I. OBEID 	: 	Case No. 08-19917PM
NINA W. OBEID 	: 	Chapter 13
Debtors 	:
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WALID I. OBEID 	:
NINA W. OBEID 	:
Movants 	:
vs. 	:
:
SUNTRUST BANK 	:
Respondent 	:
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MEMORANDUM OF DECISION
The Debtors filed a Motion (#15) to avoid the secondary lien held by SunTrust Bank
(“SunTrust”) on their principal residence located at 11003 Beall Place, Laurel, Maryland. They
contend that SunTrust’s lien is wholly unsecured and should be avoided if their Chapter 13 Plan
is confirmed, and they make all payments required thereunder. SunTrust opposed the Motion,
and the matter came on for hearing before the court on December 4, 2008. The parties stipulated
that the value of the residence is $254,000.00 and that the amount owing the senior lienholder,
whose claim is serviced by Countrywide Home Loan Servicing, LP, is $261,202.00.
The procedure in this court for avoidance of this type of lien is found in Local
Bankruptcy Rule 3012-1. Local Bankruptcy Form G found in the Appendix to the Local Rules is
Date signed December 12, 2008
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1 § 506. Determination of secured status
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate
has an interest, or that is subject to setoff under section 553 of this title, is a secured claim
to the extent of the value of such creditor’s interest in the estate's interest in such
property, or to the extent of the amount subject to setoff, as the case may be, and is an
unsecured claim to the extent that the value of such creditor’s interest or the amount so
subject to setoff is less than the amount of such allowed claim. 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.
2 § 1322. Contents of plan
(b) Subject to subsections (a) and (c) of this section, the plan may–
(2) modify the rights of holders of secured claims, other than a claim secured only
by a security interest in real property that is the debtor's principal residence, or of
holders of unsecured claims, or leave unaffected the rights of holders of any class
of claims[.]
3 SunTrust’s effort to find comfort in the concurring opinion of Justice Stevens in
Nobleman with respect to the bifurcation issue is misplaced. While joining in the opinion and
judgment, he observed that at first blush it seemed strange that the Bankruptcy Code provided
less protection to homeowners than owners of other assets. At the time Nobleman was decided,
unlike senior liens on their residences, debtors could strip down motor vehicle loans.
the Notice form for such motions and Local Bankruptcy Form H is a form of Order granting the relief.
The authority given for the relief sought by the Debtors is the case of Johnson v. Asset
Management Group, LLC, 226 B.R. 364 (D. Md. 1998). The essence of the Motion is that the
Johnson case’s holding that the Debtors may strip off a junior lien that is wholly unsecured due
to the fact that the senior lienholder’s claim exceeds the value of Debtors’ residence is in error.
This case involves two sections of the Bankruptcy Code, 11 U.S.C. § 506(a)(1) 1 and 11 U.S.C.
§ 1322(b)(2).2
SunTrust relies upon the case of Nobleman v. American Savings Bank, 508 U.S. 324
(1993), and particularly the concurring opinion of Justice Stevens.3 The court finds the
arguments of SunTrust wholly without merit. In Nobleman, American Savings Bank filed a
proof of claim for $71,335.00. The Noblemans modified Chapter 13 Plan valued their residence
at $23,500.00. This valuation was uncontroverted. The Noblemans’ Plan proposed to treat the
remainder of the claim as unsecured and, under their Plan, unsecured creditors received nothing.
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4 Some idea of the near-universality of support for the Debtors’ position may be obtained
from a review of Appendix M to the treatise, KEITH M. LUNDIN , CHAPTER 13 BANKRUPTCY , 3d
ed. 2007, entitled “Wholly Unsecured Mortgage and Modification, Organized by Circuit.” Judge
Lundin details the breadth of these holdings supporting by district and circuit.
The Supreme Court concluded its opinion in Nobleman by saying:
In other words, to give effect to § 506(a)’s valuation and bifurcation of
secured claims through a Chapter 13 plan in the manner petitioners propose
would require a modification of the rights of the holder of the security interest.
Section 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.
Nobleman at 332. The Obeids take no issue with this proposition. Judge Garbis’ clearly
reasoned Johnson opinion, points out that where more than one lien exists, the junior lienholder
risks being unsecured and, further, that the unsecured junior lienholder has no “‘right’ to be
treated more favorably in bankruptcy than in foreclosure.” 	Johnson at 369.
While there is no Fourth Circuit case on this issue, overwhelming authority supports the
proposition stated in the Johnson case. 4 In the case of In re Pond, 252 F.3d 122, 127 (CA2
2001), the Second Circuit concluded that the mortgagee’s lien is not secured under 11 U.S.C. §
506(a) because there was insufficient equity to cover any portion of that lien. Thus, the junior
lienholders were not the holders of a claim secured only by a security interest in the debtor’s
principal residence and therefore not protected under the anti-modification exception of 11
U.S.C. § 1322(b)(2). The court considered the Nobleman decision and concluded that the anti-
modification exception applied only where a creditor’s claim is at least partially secured under
11 U.S.C. § 506(a). Id. at 125.
In the case of In re McDonald, 205 F.3d 606 (CA3 2000), the Third Circuit likewise
confronted the issues presented by the Nobleman case and 11 U.S.C. §§ 506(a) and 1322(b)(2)
and observed that its holding would not make holders of wholly unsecured residential mortgages
worse off following foreclosure. It concluded that a wholly unsecured mortgage is not subject to
the anti-modification exception clause of 11 U.S.C. § 1322(b)(2).
In the case of In re Bartee, 212 F.3d 277, 290-291 (CA5 2000), the Fifth Circuit
addressed this issue, reviewing the Nobleman case that had been decided by that Circuit. It
found no tension between the valuation and claim determination provisions of 11 U.S.C. §
506(a) and the anti-modification exception of 11 U.S.C. § 1322(b)(2). It similarly concluded
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that a wholly unsecured lien is not subject to the anti-modification exception clause in 11 U.S.C.
§ 1322(b)(2).
In the case of In re Lane, 280 F.3d 663 (CA6 2002), the Sixth Circuit reversed the
District Court’s affirmance of the Bankruptcy Court’s ruling that denied confirmation of a plan
that sought to modify the rights of a creditor who was the holder of a lien that was in a secondary
position to a first mortgagee to whom was due a sum in excess of the value of the residence. It
likewise analyzed the Nobleman decision and declined to afford lienholders asserting wholly
unsecured and valueless claims the protection of the anti-modification exception clause of 11
U.S.C. § 1322(b)(2). It concluded that “if a claimant’s lien on the debtor’s homestead has no
value at all, . . . , the claimant holds an ‘unsecured claim’ and the claimant’s contractual rights
are subject to modification by the plan.” Id. at 669.
In the case of In re Tanner, 217 F.3d 1357 (CA11 2000), the Eleventh Circuit had before
it an appeal from the dismissal of an action to “strip off” a wholly unsecured junior lien. It
likewise analyzed the interrelation of the provisions of 11 U.S.C. §§ 506(a) and 1322(b)(2) and
noted that the holding in the Nobleman decision was limited to prohibiting a Chapter 13 debtor
from relying on 11 U.S.C. § 506(a) to reduce an undersecured homestead mortgage to the fair
market value of the residence. Id. at 1358. However, the court noted that the Nobleman case left
open the issue in the appeal before it – namely whether the Supreme Court’s holding extended to
wholly unsecured homestead mortgages. Id. at 1358. Relying upon the holdings in Bartee and
McDonald, the Eleventh Circuit concluded that the“better reading of sections 506(a) and
1322(b)(2), therefore, protects only mortgages that are secured by some existing equity in the
debtor’s principal residence.” Id. at 1360. See also, Domestic Bank v. Mann (In re Mann), 249
B.R. 831, 840 (BAP CA1 2000).
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In the case of In re Zimmer, 313 F.3d 1220 (CA9 2002), the Ninth Circuit quoted the
Johnson case with approval, as well as the Lane, Pond, Bartee, Tanner and Mann cases, and
concluded that the District Court erred in holding that a wholly unsecured lien is protected by the
anti-modification exception clause of 11 U.S.C. § 1322(b)(2).
An appropriate order will be entered.
cc: 	Debtors
Debtors’ Counsel
SunTrust Bank
SunTrust Bank’s Counsel
Chapter 13 Trustee
End of Memorandum
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