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In re Marsh

United States District Court, N.D. Illinois, Eastern Division

March 13, 2013

In re: LEONARD MARSH & LUN YE MARSH, Debtors. LEONARD MARSH & LUN YE MARSH, Appellants,
v.
UNITED STATES DEPARTMENT OF HOUSING & URBAN DEVELOPMENT, Appellee

Appeal fro: U.S.B.C. No. 10-45569, Adversary No. 11-227.

For Leonard A Marsh, Jr., Lun Ye Marsh, Appellants: Jonathan D. Parker, LEAD ATTORNEY, Geraci Law LLC, Chicago, IL; Kyle Thomas Dallmann, Geraci Law L.L.C., Chicago, IL; Lovejoie E. McInnis, Randall S. Miller & Associates, Chicago, IL.

For U.S. Department of Housing & Urban Development, Appellee: Joel Robert Nathan, United States Attorney's Office (NDIL), Chicago, IL.

For Service List, Appellee: U.S. Bankruptcy Court, Clerk, Clerk, U.S. Bankruptcy Court, Chicago, IL; United States Trustee, Office of the United States Trustee, Chicago, IL; Judge Cox, United States Bankruptcy Court, Chicago, IL.

OPINION

JAMES F. HOLDERMAN, Chief United States District Judge.

MEMORANDUM OPINION AND ORDER

On December 15, 2011, the bankruptcy court entered judgment in an adversary proceeding denying the attempt of debtors Leonard Marsh and LunYe Marsh 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. On July 19, 2012, this court reversed, holding that valuing the Marshes' residence as of the date of bankruptcy plan confirmation was incorrect in the circumstances of this case. Marsh v. U.S. Dep't of Hous. & Urban Dev. (In re Marsh), 475 B.R. 892 (N.D. Ill. 2012). The court remanded, requesting the bankruptcy court to determine in the first instance whether valuation should occur as of

Page 853

the date of the filing of the bankruptcy petition or as of the date of the judgment resolving the adversary proceeding. Id. at 897-98.

On January 4, 2013, the bankruptcy court entered judgment in favor of HUD, holding that valuation should occur as of the date of the judgment in the adversary proceeding. The Marshes appealed that determination, contending that valuation should occur as of the date of the bankruptcy petition. For the reasons explained below, the judgment of the bankruptcy court is reversed, and the case is remanded with instructions that the bankruptcy court determine the value of the Marshes' residence as of the date of the filing of the bankruptcy petition.

BACKGROUND

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.[1]) 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 June 3, 2013. (Bankr. Dkt. No. 69.)

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 the Marshes then appealed. (Adv. Dkt. No. 30.)

This court reversed the bankruptcy court holding that it was improper in these circumstances to value the Marshes' residence as of the effective date of the plan. Specifically, the court held that it was impossible for the bankruptcy court to determine at the conclusion of the adversary proceeding the value of the Marshes' residence at plan confirmation, which at that point was still in the future. Marsh, 475 B.R. at 896-97. Because ...


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