MARTIN R. BARASH, Bankruptcy Judge.
On January 31, 2017 (the "Petition Date"), debtor Rodica Stoian (the "Debtor") commenced this chapter 13 case. On February 9, 2017, the Debtor filed the Debtor's Notice of Motion and Motion to Avoid Junior Lien on Principal Residence [11 U.S.C. § 506(d)] (Dkt. 14) (the "Motion"). The Motion seeks to avoid, contingent on the Debtor's receipt of a chapter 13 discharge in this case, the second priority deed of trust (the "2nd DOT") held by secured creditor NuLevel Partners Inc. ("NuLevel") against the Debtor's primary residence, located at 8445 Costello Avenue, Panorama City, CA 91402 (the "Real Property").
The Debtor seeks this relief pursuant to the holdings in Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002) and Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (B.A.P. 9th Cir. 1997), which held that a wholly unsecured lien is not protected by the anti-modification clause of Bankruptcy Code section 1322(b)(2). NuLevel, the holder of the 2nd DOT, objects to the Motion.
There is no dispute over the basic legal principles. The parties agree that the Debtor may avoid the 2nd DOT if the value of the Real Property does not exceed the amount of the debt owing under the 1st DOT. They agree further that the relevant date for valuation of the Real Property is the Petition Date. The parties disagree, however, on the amount of the Senior Lender's claim and the fair market value of the Real Property as of the Petition Date.
The Debtor argues, as of the Petition Date, that (i) the secured claim of the senior lender was $467,248.46, and (ii) the value of the Real Property was $445,000.00-$460,000.00. Motion at 3; Trial Exs. 1, 7. The Debtor contends that the senior secured claim against the Real Property exceeded the value of the Real Property at the Petition Date, rendering the second-position secured claim of NuLevel valueless.
NuLevel argues, as of the Petition Date, that (i) the secured claim of the senior lender was $464,204.25, as set forth in Proof Claim No. 7-1, filed by Ocwen Loan Servicing, LLC on behalf of the Secured Lender (the "POC"), and (ii) the value of the Real Property was $480,000. In other words, NuLevel contends that it holds a secured claim with a positive value, which precludes the avoidance of NuLevel's lien against the Real Property under In re Zimmer and In re Lam.
For all of the reasons set forth below, the Court determines that (i) the amount of the Senior Lender's claim as of the Petition Date was
The court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(a) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1409(a). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (K). Moreover, the Court has the constitutional authority to enter a final judgment on the Motion. Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015); Stern v. Marshall, 131 S.Ct. 2594 (2011).
The Court held an evidentiary hearing on the Motion on November 28, 2017. David M. Kritzer and Karen Dion appeared for the Debtor. Jamie Hanawalt and Todd S. Garan appeared for NuLevel. By stipulation of the parties, the Court treated the written declaration testimony of the parties' witnesses as direct testimony. The evidentiary hearing therefore was comprised of live cross-examination and live redirect examination of the declarants. The Court heard live testimony from: (i) the Debtor, (ii) Jennifer Bosco, the Debtor's first valuation expert, (iii) Laurie Powell, the Debtor's second valuation expert, and (iv) Jonathan Goldrich, NuLevel's valuation expert. As such, the Court had the opportunity to observe each of the witnesses, evaluate their demeanor, consider their testimony, and assess their credibility. The Court also admitted into evidence 15 trial exhibits by stipulation of the parties. Following the live testimony or admission of the exhibits, the Court heard legal argument from the parties and provided a limited opportunity for supplemental briefing.
The evidence offered by the parties on the question of the amount of the Senior Lender's claim was limited. The Debtor offered a mortgage account statement dated January 2, 2017, from the Senior Lender's servicer, showing a principal balance of $467,248.46 and an escrow balance of $1,688.85. Stoian Decl., Trial Ex. 1 (Ex. A. thereto). Nulevel offered the POC, which shows a claim amount of $464,204.25. Trial Ex. 8 at 2. Like the mortgage statements, the attachments to the POC show a principal balance of $467,248.46 and an escrow balance of $1,688.85, but ultimately calculate the amount of the claim differently.
The attachments to the POC show a total claim amount of $464,204.25, calculated by taking the principal balance of $467,248.46, adding $752.85 in interest due, and subtracting $3,797.06 in "funds on hand." Trial Ex. 8 at 4.
The Real Property is a single family residence located in Panorama City, California. A portion of the residence has been partitioned to create an unpermitted residential unit, with its own bedroom/living areas, kitchen area, bathroom, and separate entrance. Three experts conducted appraisals of the Real Property. Two were offered by the Debtor in support of the Motion. The third was offered by NuLevel in opposition to the Motion. The Court finds that all of the expert witnesses were qualified to provide expert testimony and that all of them were credible. As discussed infra in Section IV.B, however, the Court ultimately finds NuLevel's expert valuation opinion to be the most persuasive.
Jennifer Bosco ("Bosco") conducted the first of the appraisals for the Debtor. Relying on public records, Bosco appraised the house based on the existence of 2,588 square feet of gross living area and the existence of a total of five bedrooms. See Trial Ex. 1. Using the comparable sales approach, Bosco compared the Real Property to five prior completed sales of homes within one mile of the Real Property, which closed less than six months prior to the Petition Date. Id. Two of the comparables are noted as "short sales"
Laurie Powell ("Powell") conducted the second of the appraisals for the Debtor. Relying on her own measurements and inspection of the Real Property, Powell appraised the house based on the existence of 2,523 square feet of gross living area and the existence of a total of five bedrooms. See Trial Ex. 7. Using the comparable sales approach, Powell compared the Real Property to five prior completed sales of homes within 1.14 miles of the Real Property. Five of the sales were completed less than six months before the Petition Date. One was completed approximately 11 months before the Petition Date. Two of the five comparables include the same two "short sales" utilized by Bosco. Powell made certain adjustments to come up with an adjusted sale price for each comparable, including adjustments in gross living area. Powell did not make adjustments for room count or short sale status. Powell's valuation opinion considered the need for $35,000 in deferred maintenance to be made to the Real Property. Powell concluded that the value of the Real Property on the Petition Date was $460,000. See Trial Ex. 7.
Jonathan K. Goldrich ("Goldrich") conducted an appraisal of the Real Property for NuLevel. Relying on his own measurements and inspection of the Real Property, Powell appraised the house based on the existence of 2,587 square feet of gross living area and the existence of a total of six bedrooms. Tr. at 57:7-58:12; 60:25-61:6.
The value of a secured claim may be determined pursuant to a noticed motion under Bankruptcy Code section 506(a), and the valuation incorporated into the debtor's proposed plan. See 11 U.S.C. § 506(a); Fed. R. Bankr. P. 3012; see also In re Reyes, 401 B.R. 910 (Bankr. C.D. Cal. 2009). Under Bankruptcy Code section 506(d), a claim secured by a lien typically is bifurcated into a secured claim and unsecured claim, based on the value of the estate's interest in the property that is subject to that lien. The process of bifurcating a claim into secured and unsecured claims, and treating the claims differently under a plan, is commonly referred to as "lien stripping."
Generally, "lien stripping" is prohibited on a debtor's principal residence in chapter 13. A chapter 13 plan may not modify the rights of a creditor whose claim is secured "only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2); see Nobelman v. American Sav. Bank, 508 U.S. 324, 327-28 (1993). In Nobelman, the Supreme Court held that this provision precluded the modification of a claim secured by a lien that was partially secured and partially unsecured. However, when the claim of a lien holder secured only by the debtor's principal residence is a completely or wholly unsecured claim, the anti-modification provision in section 1322(b)(2) does not apply; in that circumstance, a debtor may utilize section 506(a) under a chapter 13 plan to effectively "strip off" a wholly unsecured lien. In re Zimmer, 313 F.3d at 1226-27; In re Lam, 211 B.R. at 40-41.
A lien is wholly or completely unsecured if there is not one dollar of value securing that lien. See In re Lam, 211 B.R. at 41 ("[A] one dollar difference in property value could have a profound effect on a secured creditor's rights. If property valued at $50,000.00 is encumbered by a first mortgage of $50,000.00 and a second mortgage of $20,000.00, the second mortgage has no secured claim under section 506(a)."). If the lien is "stripped," the lienholder's claim is treated as an unsecured debt under the proposed plan and the lien remains on the debtor's property until the debt is paid off or the debtor obtains a discharge. See 11 U.S.C. § 1325(a)(5)(B).
Notwithstanding a debtor's ability to "strip off" a wholly unsecured junior lien on a principal residence, the general anti-modification provision of Bankruptcy Code section 1322(b)(2) still applies to a partially secured lien. If even one dollar secures the lien on the principal residence, a debtor may not modify the rights of the creditor and "strip off" the lien. Thus, for example, if a chapter 13 debtor's principal residence is valued at $50,001.00 and is encumbered by a first mortgage of $50,000.00, and a second mortgage of $20,000.00, Bankruptcy Code section 1322(b)(2) precludes the second mortgage from being stripped off. In that circumstance, the second mortgage holder holds a secured claim of $1 and under Nobelman no modification is permissible under section 1322(b)(2). See In re Lam, 211 B.R. at 41.
On a chapter 13 debtor's motion to establish the value of property under Bankruptcy Code section 506(a), for the purpose of "stripping" an allegedly unsecured junior lien, the debtor bears the ultimate burden of proof. See, e.g., In re Henderson, 2010 Bankr. LEXIS 5014, *10-11 (Bankr. C.D. Cal. Nov. 5, 2010) (citing burden of proof authorities under section 506(a)). In accordance with the foregoing discussion, the Debtor's burden is to demonstrate that the value of the property, as of the Petition Date, i.e., January 31, 2017, was equal to or less than the amount of the senior secured claim on the property. Id.
The Debtor contends that the Court should disregard the total claim amount set forth in the POC, $464,204.25, because it reflects a reduction of certain funds that the Senior Lender had "on hand." See Dkt. 58 at 3-4.
The Court is persuaded on the record presented that the amount stated in the POC is the correct amount to use as the allowed secured claim of the Senior Lender, for purposes of determining the value of the secured claim of the junior lender, NuLevel. The Court believes that there is merit to NuLevel's legal argument. Although the Debtor contends that it would be unusual for a debtor to object to a proof of claim on the grounds that the claim amount stated is too low
Ultimately, however, the Court does not need reach this legal question. Even if the Court assumes that the Debtor, for purposes of a motion to strip a junior lien, may challenge the allowed amount of the senior lender's secured claim without actually filing an objection to that claim, the Debtor has failed to rebut the presumed validity of the Senior Lender's claim. The Debtor insists that the mortgage account statement somehow resolves the issue in favor of the principal balance stated in that document. But the Debtor does not point the Court to any evidence or legal authority establishing why it is not proper for the Senior Lender to offset its debt by the $1,688.85 in escrow funds reflected in that document. Nor does the Debtor point the Court to any evidence or legal authority establishing why it is not proper for the Senior Lender to offset its debt by the additional $2,108 in "unapplied funds" reflected in the POC.
At closing argument, in contending that the mortgage account statement should somehow "control," counsel for the Debtor stated, "It was the last mortgage statement before filing so, you know, I suppose it is possible that amounts changed in between if a payment was received or something. . . ." Tr. 101:22-25. The implication of the argument is that the $2,108 in "unapplied funds" that are reflected in the POC may have been paid to Senior Lender after the Petition Date. This argument directly contradicts the POC, which states that the unapplied funds balance existed as of January 31, 2017. See Trial Ex. 8 at 4. But argument is not a substitute for evidence. The Debtor provides no evidence establishing that the unapplied funds balance should have been disclosed in the mortgage account statement or that those funds were actually paid by the Debtor postpetition.
Thus, even if it is assumed that the Debtor may rebut the presumption of validity accorded the POC without formally objecting to it, the Debtor has failed to do so. Stated alternatively, NuLevel's introduction of the POC demonstrates by a preponderance of the evidence that the secured claim of the Senior Lender is $464,204.25.
After considering all of the evidence and argument presented, the Court finds that the expert opinion of the value of the Real Property offered by Goldrich, $480,000, is the most persuasive. The principal reason is that Goldrich gave a persuasive explanation for why the short sale and REO comparables utilized by Bosco and Powell were not appropriate in assessing the fair market value of the Real Property and why he excluded them from his own appraisal. See Tr. at 66:22-68:2, 68:19-71:4. Goldrich identified this issue in his Supplemental Declaration, criticizing the Bosco and Powell appraisals for including short sales and REO sales among the comparables used without including adjustments for these types of sales or providing an analysis on the impact of these types of sales. Trial Ex. 12, ¶¶ 29.d, 30.d.
At trial, Goldrich testified that he excluded short sales and REO sales because they generally result in lower sales prices than a typical arm's length transaction. See Tr. at 66:22-68:2, 68:19-71:4. With respect to short sales, Goldrich explained that because the seller in a short sale does not have the final decision on whether to approve the sale, and the motivations of the bank and seller are different, the purchase offer that the seller is able to negotiate from a buyer is not typically the highest and best price. Goldrich acknowledged that because of "an inventory issue," the market "is becoming less interested in the differences" between arm's length sales and short sale/REO sales. But he testified that during the time frame of the sales included in the Debtor's appraisals "it was obvious that they had sold at a discount when I reviewed them." Tr. at 67:19-68:2.
In contrast, Bosco expressed at trial the opinion that it was appropriate to use short sale and REO comparables, that they were representative of a true arm's length transaction, and that they did not result in lower sale prices. Tr. at 27:8-28:13. But she failed to persuade the Court of her opinions or demonstrate any infirmity in Goldrich's critique. During cross-examination, in response to a question about whether short sales resulted in a discount, Bosco answered, "Not in this market." Tr. at 27:23-28:6. Bosco's qualified answer actually lends support for Goldrich's opinion. Goldrich opined that although current market forces have rendered the price impact of short sales and REOs less meaningful, these factors were nevertheless meaningful at the time of the subject comparables. Further, when Bosco was asked whether she had supplemented her appraisal with any evidence of the impact of short sales or REO sales in the area, she responded simply that she had not been asked to do so. Tr. at 28:7-13.
The cases cited by NuLevel lend support to Goldrich's expert opinion. In Taffi v. United States (In re Taffi), 96 F.3d 1190 (9th Cir. 1996), the court of appeals held that that "fair market value" for purposes of valuation under Bankruptcy Code section 506(a) means "the price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree upon after the property has been exposed to the market for a reasonable time." Id. at 1192. Applying Taffi, the bankruptcy court in In re Serda, 395 B.R. 450 (Bankr. E.D. Cal. 2008), rejected the methodology of an appraiser who used several comparable sales of bank-owned properties to develop a value for a residential property—like the one here—which was to be occupied by the owner pursuant to the owner's chapter 13 plan. Id. at 454.
The Court in In re Serda observed: "Generally, an owner-occupant will try to realize the highest and best price for her property in an open market. Conversely, a bank-owned property is marketed to liquidate the bank's inventory of foreclosed properties and minimize the bank's losses in a time of economic stress." Id. Relying on expert testimony that bank-owned properties comprised 30-50% of the relevant real estate market, and inferring that lenders were therefore under pressure to liquidate homes, the court held that it could not assume that the bank was a "willing seller under no compulsion to sell" within the meaning of Taffi. Id. at 455. The court further observed that "[a] bank simply does not have the same incentive to market a foreclosed property as patiently as an owner-occupant, or to necessarily realize the highest and best price." Id.
Here, the evidence does not specifically address how much of the relevant real estate market is bank owned, as was the case in In re Serda. But there is expert testimony from Goldrich in the case at bar indicating that short sales and REO sales during the relevant period yielded significantly less than ordinary sales, i.e., independent sales by an owner occupant. Goldrich's expert testimony is supported by the court's reasoning in In re Serda that an owner occupant making a decision to sell and a lender making a decision to sell may have different objectives and motivations with respect to that decision—which result in lower prices in the case of the latter. Further, Goldrich's acknowledgement that this phenomenon is subject to market forces and currently on the wane is consistent with In re Serda's market-oriented analysis.
The Debtor contends that Goldrich's opinion of value is inferior for myriad other reasons, but the Court is not persuaded by these arguments.
Another series of complaints centers on Goldrich's assumption that the Real Property has six bedrooms, and that his square footage number is slightly higher than those of the Debtor's appraisers. The Debtor contends that Goldrich's appraisal is flawed because he assumed that there were two bedrooms in the partitioned unit, and a total of six bedrooms in the entire house. The Debtor and Powell testified, based on their personal observations, that the house only has a total of five bedrooms. On cross examination, Goldrich stood by his room count but explained the difficulty in characterizing the partitioned portion of the house where it appeared that rooms were converted from other uses to create a partitioned "suite." Tr. at 57:7-58:12. But even if it is assumed that Goldrich was incorrect in his room count, the Court is persuaded that this does not render his appraisal infirm. In adjusting comparable sales to conform to the Real Property, Goldrich did not make adjustments for room count. He only made adjustments for differences in gross living area. This is consistent with the approach utilized by Powell.
The Debtor also contends that Goldrich's appraisal is flawed because it is based on a measurement of 2,587 square feet of gross living area, as compared to the measurement of 2,523 square feet by Powell. The Court is not persuaded that this difference of 64 square feet is material or indicative of a flawed methodology. On cross examination, Powell acknowledged that even when an appraiser measures a home there will be different methodologies which lead to different results. Tr. 43:4-21. One of those recognized differences in approach pertains to whether the appraiser includes a stairwell in the total area, which Powell also acknowledged might have explained the discrepancy between her gross living area measurement and that of Goldrich. Tr. 49:24-50:18. Moreover, although obtained from public records rather than her own measurement, Bosco relied on a total gross living area of 2,588 square feet, which is only one square foot more than Goldrich's measurement. On this record the Court cannot conclude that Goldrich's measurement is wrong or indicative of a flawed methodology.
The Court concludes that the Debtor has failed to meet her burden to demonstrate by a preponderance of the evidence that, as of the Petition Date, the value of the Real Property was equal to or less the allowed secured claim that is secured by the 1st DOT. To the contrary, the Court concludes that NuLevel has demonstrated by a preponderance of the evidence that the allowed secured claim that is secured by the 1st DOT was $464,204.25 and that the fair market value of the property was $480,000.00. Accordingly, the 2nd DOT against the Real Property is not wholly unsecured. As such, the 2nd DOT is subject to the anti-modification clause of Bankruptcy Code section 1322(b)(2) and may not be modified or "stripped" pursuant to In re Zimmer and In re Lam. The Court will enter a separate order denying the Motion.
