Appeal from: U.S.B.C. No. 10-45569 Adversary No. 11-227
The opinion of the court was delivered by: James F. Holderman, Chief Judge:
MEMORANDUM OPINION AND ORDER
Debtors Leonard Marsh and LunYe Marsh appeal from the judgment of the bankruptcy court in an adversary proceeding denying their attempt under 11 U.S.C. § 506(d) to "strip off" a junior lien on their residence held by the United States Department of Housing and Urban Development ("HUD"). The bankruptcy court's judgment was based on its determination that the Marshes' residence should be valued as of the date of bankruptcy plan confirmation. This court believes that determination was not correct in the circumstances of this case. Accordingly, the judgment of the bankruptcy court is reversed, and the case is remanded to the bankruptcy court for further proceedings consistent with this opinion.
The Marshes, who are husband and wife, filed for bankruptcy protection under Chapter 13 of the United States Bankruptcy Code on October 12, 2010. (Bankr. Dkt. No. 1.*fn1 ) Their petition listed total assets of $94,925, including their home at 7701 S. Paxton Ave. in Chicago valued at $90,000. (Id. at 6, 8.) They also listed total liabilities of $158,294, including a senior mortgage on their home in the amount of $113,438 and a junior mortgage owned by HUD in the amount of $29,312. (Id. at 6, 14.) On December 15, 2010, the Marshes filed a modified Chapter 13 bankruptcy plan which would allow them to retain their home. (Bankr. Dkt. No. 26, at 5.) The modified plan proposed "stripping off" HUD's junior mortgage by treating it as an unsecured claim under 11 U.S.C. § 506. (Id.) The modified plan has not yet been confirmed by the bankruptcy court, and a confirmation hearing is scheduled for September 17, 2012. (Bankr. Dkt. No. 57.)
On January 20, 2011, the Marshes filed an adversary complaint under Bankruptcy Rule 7001(2), which allows an adversary proceeding "to determine the validity, priority, or extent of a lien." (Adv. Dkt. No. 1.) The adversary complaint alleged that the fair market value of the Marshes' home at the time of the bankruptcy petition was $90,000, and that the home was thus inadequate to secure the senior mortgage. (Id. ¶¶ 7, 8.) According to the Marshes, HUD's junior mortgage was thus entirely unsecured, and should be void under 11 U.S.C. § 506(d). (Id. ¶ 11.)
At trial, the Marshes presented evidence that the value of their home was $90,000 as of the petition date, October 12, 2010. (Adv. Dkt. No. 15, at 3.) The court held, however, that the value of the property must be determined "as of the effective date of the plan as required by 11 U.S.C. § 1325(a)(5)(B)(ii)." (Adv. Dkt. No. 21.) Because the Marshes had presented no evidence with respect to the value of the property at that date, the bankruptcy court held that they had not met their burden of establishing that the value of the property was insufficient to secure HUD's junior mortgage. (Id.) The bankruptcy court thus entered judgment in favor of HUD. (Adv. Dkt. No. 22.) On February 25, 2012, the bankruptcy court denied the Marshes' motion to alter or amend the judgment (Adv. Dkt. No. 29), and this appeal followed.
A federal district court reviews a bankruptcy court's factual findings for clear error, and reviews the bankruptcy court's legal conclusions de novo. Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D. Ill. 1995). The only issue here is purely legal: as of what time should the bankruptcy court value the Marshes' residence under 11 U.S.C. § 506? HUD defends the bankruptcy court's holding that the valuation should occur as of plan confirmation, while the Marshes contend that the valuation should occur as of the filing of the bankruptcy petition.
Section 506(a) provides that:
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 . . . 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.
After the bifurcation of a claim into secured and unsecured portions
under § 506(a), "to the extent that a lien secures a claim against the
debtor that is not an allowed secured claim, such lien is
11 U.S.C. § 506(d). For the purposes of this appeal,*fn2
that provision allows a debtor to "strip off," or void, any
junior lien on property that is entirely unsecured by the value of the
The Supreme Court provided guidance on the valuation mechanism of § 506(a) in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997). The Court established there that § 506(a) does not require that the same valuation procedure be used in each case. Instead, as the second sentence of § 506(a) explains, the value "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property."*fn4 Accordingly, the proper method of valuation will vary depending on two things. The first is the proposed disposition or use of the property, such as whether the debtor proposes to retain the property or to surrender it to the creditor. See id. at 962 ("[T]he 'proposed disposition or use' of the collateral is of paramount importance to the valuation question."). Second, the proper method of valuation will turn on the purpose of the valuation. In Rash, for example, the purpose of the valuation was to determine if the debtor's bankruptcy plan should be confirmed under the "cram down" provisions of § 1325(a)(5)(B). See id. at 960("In such a "cram down" case, we hold, the value of the property (and thus the amount of the secured claim under § 506(a)) is the price a willing buyer in the debtor's trade, business, or situation would pay to obtain like property from a willing seller." (emphasis added)); see also id. at 966 (Stevens, J., dissenting) ("In this context, the 'purpose of the valuation' is determined by 11 U.S.C. § 1325(a)(5)(B)."). As one treatise explains:
As explained in Rash, before selecting an appropriate valuation standard, the court must first identify the purpose of the valuation. . . . [E]stablishing the purpose of the valuation is necessary to fix the specific context in which the valuation is to be conducted. In general, the purpose of the valuation is to be determined in light of the particular proceeding or Code provision to which the valuation pertains, such as a request for adequate protection under section 363(e), a motion for relief from stay under section 362(d), or the determination of the amount of a secured creditor's claim for purposes of confirming a plan. 4 Collier on Bankruptcy ¶ 506.03. It is important to note that this evaluation of context does not extend to "allowing use of different valuation standards based on the facts and circumstances of ...