For most people, bankruptcy law isn’t the most newsworthy thing. For bankruptcy practitioners like myself, I try to pay attention to EVERYTHING that’s going on, including in different courts around the country. (It’s a good way to learn new arguments, techniques and theories to better serve my clients.) Most bankruptcy practitioners that represent consumer debtors were waiting to hear how the U. S. Supreme Court would rule in a case that presented whether junior mortgages that were completely underwater may be avoided in a chapter 7 bankruptcy case. Unfortunately, the Supreme Court decided that, no, junior mortgages may not be stripped in a chapter 7 case. To me, the language in the opinion is very conflicting, and may have raised the question of whether stripping these mortgages was still valid in chapter 13 cases (stripping these underwater mortgages in a chapter 13 case has been accepted for years now in most every court around the country).
A case was recently decided right here in our own U. S. District Court for the Southern District of New York. In this case, the debtors had filed a chapter 13 case. They had two mortgages on the property. The principal outstanding on the first mortgage was greater than the value of the house at the time of the filing. Thus, the second mortgage was underwater. The debtors moved to avoid (“strip”) the second mortgage to an unsecured claim, since it was underwater. The servicer of that second mortgage, however, objected, arguing that since the bank that owns the first note and mortgage didn’t file a claim, that it’s claim is supported by value in the property.
The bulk of this case revolved around what the meaning of a proof of claim in a bankruptcy case is, and the court stated the rule that proofs of claim are, generally, for unsecured creditors seeking payment in a chapter 13 case. The key, for purposes of this piece, is the court’s language concerning valuation and stripping liens. This court reinforced the idea that, pursuant to section 506(d), a secured claim may be stripped in chapter 13 cases, provided the value of the real property is less than the principal balance of the first mortgage at the time of filing. Again, because of the U. S. Supreme Court’s confusing language in the Caulkett case, there was some concern that banks would try to chip away at stripping liens in chapter 13 cases. From the language in this case, it appears that stripping underwater liens in chapter 13 cases isn’t going anywhere. (Green Tree Servicing, LLC v. Wilson, 14-CV-9543(CS) (In re Wilson, 14-35413, (S. D. N. Y.).
If you would like to speak to a bankruptcy attorney, whether you are a creditor or a debtor, contact LORK.