Ashely M. Chan, United States Bankruptcy Judge.
In this adversary proceeding, the debtor, Arlene J. Hawkins ("Debtor"), seeks a determination that the second mortgage against her principal residence is wholly unsecured pursuant to 11 U.S.C. § 506(a), because the first mortgage on her principal residence exceeds the property's value. As set forth below, the Court finds that the Debtor has established that the unpaid balance on the Debtor's first mortgage exceeds the value of her residence. Therefore, the Court concludes that the Debtor's second mortgage is wholly unsecured.
The Debtor owns and resides at 25 Berger Road, Easton, Pennsylvania ("Property"), a 119-year-old home built in 1900. Joint Pre-Trial St. Pt. II ¶ 1; Ex. P-1 p. 1; Ex. D-1 p. 1. The Property is situated on a 24,829 square foot lot in the Glendon Borough section of Easton, a residential neighborhood. Ex. P-1 p. 1; Ex. D-1 p. 1. The Property consists of seven rooms, including four bedrooms and one and a half bathrooms, and has an open front porch, an enclosed back porch, an unfinished basement, and a two-car driveway. Ex. P-1 p. 1; Ex. D-1 p. 1.
On March 2, 2006, the Debtor, jointly with non-debtor, Donald Hawkins ("Mr. Hawkins"), executed a note and mortgage against the Property in favor of Santander Bank, f/k/a Sovereign Bank ("Santander"), in the amount of $130,000 ("First Mortgage"). Proof of Claim #5, Subsequently, on September 21, 2007, the Debtor and Mr. Hawkins entered into a home equity line of credit with Santander which had a $25,000 credit limit secured by a second mortgage against the Property in favor of Santander ("Second Mortgage"). Pre-Trial St. Pt. II ¶5; Proof of Claim # 6.
On October 11, 2018, the Debtor commenced a voluntary chapter 7 bankruptcy case. Case No. 18-16784 ECF Doc. ("ECF") 1. The case was subsequently converted to a chapter 13 bankruptcy case on November 29, 2018. Id. at ECF 21. A chapter 13 plan was filed on November 30, 2018. Id. at ECF 26. On January 17, 2019, Santander filed a secured proof of claim in the amount of $113,689.09 in connection with the First Mortgage. Pre-Trial St. Pt. II ¶8; Proof of Claim # 5. On the same date, Santander filed a secured proof of claim in the amount of $24,794.46 in connection with the Second Mortgage. Pre-Trial St. Pt. II ¶ 9; Proof of Claim #6.
On February 27, 2019, the Debtor initiated this adversary proceeding against Santander, requesting that the Court determine the Second Mortgage to be wholly unsecured. Case No. 19-00040 ECF 1; Compl. ¶¶ 9, 10, 11. On March 13, 2019, Santander filed an answer denying that the balance due on the First Mortgage exceeds the value of the Property. Case No. 19-00040 ECF 5; Ans. ¶¶ 6, 8-11. On July 12, 2019, the Debtor filed the parties' joint pre-trial statement. Case No. 19-00040 ECF 16. Santander filed an identical pre-trial statement on July 15, 2019. Id. at ECF 17. The pre-trial statement describes the only fact in dispute as "the value of the subject Premises" and the only legal issue presented as "the value of the subject Premises." Pre-Trial St. Pt. III ¶ 1, Pt. V ¶ 1.
Trial in this adversary proceeding was held and concluded on October 4, 2019. Case No. 19-00040 ECF 21. The Debtor
The Property is located in Glendon Borough, an established residential neighborhood in Northampton County with homes of varying sizes. Ex. P-1 p. 1; Ex. D-1 Add. p. 2. The Property sits in front of a local landfill and is about 100 yards adjacent to an overpass for Interstate 78, which is visible from the Property. Ex. P-1 p. 1; Ex. D-1 Add. p. 2; Trial Tr. 10:11-14. The Debtor has made no updates to the Property in the last fifteen years. Ex. P-1 p. 1; Ex. D-1 p. 1. Accordingly, both appraisals gave the Property a "C-5" condition rating,
Mr. Markley testified that he has been a certified general appraiser since 2010,
There were only four sales of residential real estate in Glendon Borough in the past year and none actively listed for sale at the time Mr. Markley conducted the appraisal.
In a grid comparing the Debtor's Comparables to the subject Property, Mr. Markley adjusted the sales price of each of the Debtor's Comparables to account for differences between the properties, such as lot size, room count, gross living area, condition rating, the existence of amenities such as a finished basement, garage, deck, or patio, and other variables. Id. As a result of the adjustments, Mr. Markley concluded that each of the Debtor's Comparables were subject to the following net changes: (1) a total net decrease of $5,665
Notably, while Mr. Markley made a $10,000 downward adjustment to the price of the High Street Property to account for the C-3 condition rating, he did not make downward adjustments to the 3
After adjusting the prices of the Debtor's Comparables, Mr. Markley assigned them what he deemed appropriate weight based upon his view of their similarities and differences to the subject Property. Id. at 22:1-11, 46:2-10. He assigned the most weight to the 3
In describing the condition of the Property, Mr. Markley testified that part of the Property's roof needs to be replaced due to deterioration from water damage. Id. at 8:19-9:1, 15:9-13. His appraisal supports this, stating that:
In fact, Mr. Markley testified that the water damage to the second floor ceiling had caused multiple ceiling tiles to fall down, leaving holes in the ceiling reflected in photographs of the Property. Trial Tr. 15:11-13. See also Ex. P-1 Subj. Photo Page p. 3-5. With regard to the condition of the soffit, Mr. Markley elaborated in his testimony that the soffit in the northwest corner is so deteriorated that it needs to be replaced. Trial Tr. 8:24-9:1, Based on his own personal experience, Mr. Markley estimated that it would cost between $8,000 and $12,000 to cure all the aforementioned deficiencies in the Property and bring the Property's condition rating to a C-4. Id. at 15:14-18.
When asked to comment on Santander's Appraisal, which will be discussed supra, Mr. Markley testified that some of the comparable properties used in Santander's Appraisal are located in Wilson Borough, a much more attractive, desirable borough which has a hospital, shopping centers, and other amenities that Glendon Borough does not have. Id. at 23:3-21, 27:11-16. Wilson Borough also has a much larger population of 48,000 compared to Glendon Borough's population of 300 and, as a result, more municipal services are available in Wilson Borough than in Glendon Borough. Id. at 27:17-23, 28:3-8. Because of
After Santander raised on cross examination that the Northampton County assessed value of the Property for real estate tax purposes is $148,473, Mr. Markley explained that county tax assessments are generally not reliable indicators of actual market value, as they do not take into consideration property improvement or degeneration. Id. at 34:24-35:4, 44:22-24. In fact, county assessors do not perform interior inspections at all. Id. at 47:13-23. Ultimately, in Mr. Markley's view, counties depend on tax assessments to meet their budgetary needs and are generally not as concerned with accurately capturing a property's actual value. Id. at 44:13-21. With respect to this Property, Easton has not performed a new assessment in over twenty years, making the assessment associated with this Property a particularly poor indicator of the Property's value. Id. at 44:20-21, 47:24-48:1.
Mr. Laudone testified that he has been a certified general appraiser since 1999 and holds general appraiser licenses in both Pennsylvania and New Jersey. Trial Tr. 52:1-53:5. On average, he conducts approximately 200 residential appraisals per year with about 70% of his appraisals performed for banking purposes. Id. at 53:7-54:5. In preparing his appraisal report, Mr. Laudone also inspected the Property, including the interior, which he measured as having 1,618 square feet of gross interior living area,
Ultimately, Mr. Laudone used the following four properties, which he determined were similar to the Property ("Santander's Comparables"),
In a grid comparing all of Santander's Comparables, except for the Main Street Property
Mr. Laudone testified that, in selecting which properties to use for his comparison, he focused primarily on finding properties similar in square footage and condition rating to the Property. Trial Tr. 58:22-59:4. He did not find it necessary to limit his search to properties in Glendon Borough.
With regard to other notable elements of the Property, Mr. Laudone's appraisal states that "major items of deferred maintenance include the ceiling damage, peeling paint and the porch ceiling." Ex. D-1
Ultimately, the Debtor is only entitled to relief in this proceeding with respect to the Second Mortgage if the value of the Property is less than the amount owed on the First Mortgage pursuant to 11 U.S.C. § 506(a)(1). The Court finds that, because most of the Santander Comparables are located farther from the Property than the Debtor's Comparables and are located in much better boroughs than the Property, Santander's Appraisal contains some concerning deficiencies, and the Property is obviously in serious disrepair, the Debtor's Appraisal more accurately reflects the value of this Property. Accordingly, the Debtor has met her burden in demonstrating that the value of the Property is less than the First Mortgage and, therefore, the Second Mortgage is deemed wholly unsecured.
Pursuant to 11 U.S.C. § 506(a)(1),
This means that "[i]n general, secured claims can be bifurcated into allowed secured and unsecured components, with the secured claim limited by the value of the collateral." Mahmud v. JTH Inv. Group, LLC (In re Mahmud), Bankr. No. 08-10855bf, Adv. No. 08-0175, 2008 WL 8099115, at *3 (Bankr. E.D. Pa. Dec. 4, 2008). However, in chapter 13 cases, § 1322(b)(2) prohibits the modification of "a claim secured only by a security interest in real property that is the debtor's principle residence." DiMauro v. Wilmington Trust Co. (In re DiMauro), 548 B.R. 685, 687 (Bankr. D. Del. 2016). See also In re Mahmud, 2008 WL 8099115, at *3 ("[a] recognized exception to this bifurcation principle is found in section 1322(b)(2) of the Bankruptcy Code. This provision prohibits a chapter 13 debtor from modifying the rights of a secured creditor who holds only a security interest in the debtor's principal residence.").
The Supreme Court has interpreted § 1322(b)(2) as prohibiting the bifurcation of a partially undersecured homestead mortgage claim. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 332, 113 S.Ct. 2106, 2111, 124 L.Ed. 2d 228 (1993). However, the Third Circuit Court of Appeals subsequently clarified that § 1322(b)(2)'s antimodification clause does not apply to a junior mortgage which is wholly unsecured and that the Supreme Court's holding in Nobleman only applies to claims which are at least partially secured.
Since the Property at issue here is the Debtor's principal residence, the Second Mortgage can only be treated as wholly unsecured pursuant to § 506(a) if the value of the Property does not exceed the balance on the First Mortgage.
In the context of a valuation under § 506(a), the party attempting to modify a secured claim, in this instance, the Debtor, bears the initial burden of proof.
Based upon the appraisals, pictures, and testimony of Mr. Markley and Mr. Laudone, it is clear that the condition of the Property is well below average with many significant deficiencies. The Debtor has deferred substantial maintenance on the Property, causing a troubling amount of deterioration, disrepair, and damage, especially to the roof and ceiling. Furthermore, the Property is located in an undesirable borough adjacent to a huge highway overpass and in front of a landfill. All these factors would undoubtedly deter potential buyers from even looking at the Property and substantially diminish the Property's value.
Ultimately, the Court's determination turns on the quality of each appraiser's comparable sales data. The Court finds Mr. Markley's comparable sales data superior to the comparable sales data used by Mr. Laudone. Mr. Markley's appraisal focused on comparable sales in the same borough as the Property, whereas Mr. Laudone's appraisal compared the Property to three properties in much more attractive neighboring boroughs farther from the Property than the properties Mr. Markely considered, although Mr. Laudone did make a location adjustment for the property in Palmer Township. Nevertheless, the Court simply cannot give the Santander Comparables which did not account for the difference in location, particularly the Wilson Borough Santander Comparables, as much weight as properties which are located in the same borough as the Property.
As described by Mr. Markley, Wilson Borough has a much larger population than Glendon Borough and offers more amenities than Glendon Borough, resulting in higher sales prices for residential real estate in Wilson Borough than in Glendon Borough. While the Court does not question Mr. Laudone's representation that applicable appraisal standards permitted him to expand his search for comparable properties beyond Glendon Borough, the Court nevertheless finds the Wilson Borough properties simply less probative of the value of this Property than properties located in the same borough, even if the condition of the Wilson Borough Santander Comparables is relatively similar to the Property. In the Court's experience, a premium is placed by potential buyers on proximity to shopping and service accessibility related to a home's location. See In re Weichey, 405 B.R. at 163. Accordingly, selection of properties in the same borough as the subject Property provides more support for the value offered. In the Court's view,
Additionally, the Court found Santander's Appraisal deficient for other significant reasons. First, Santander's Appraisal did not sufficiently account for the impact of the Property's proximity to Interstate 78, failing to make any adjustments for it because the traffic during Mr. Laudone's visit was not as loud as he had expected. It seems to the Court that noise from an interstate will almost certainly vary depending on the time of day. Furthermore, the Court is convinced, despite Mr. Laudone's belief to the contrary, that the appearance of an interstate overpass in proximity to a residence would very likely impair a property's marketability and deter potential buyers from visiting in the first place even in a seller's market. Failing to account for this, not to mention the landfill behind the Property, at all in the comparables grid is concerning. Relatedly, Mr. Laudone's $5,000 positive adjustment for location in connection with the Main Street Property for its proximity to railroad tracks seems, at the very least, too high given the Property's own issues with Interstate 78.
Furthermore, the Court questions how Mr. Laudone could have concluded that only $6,000 worth of repairs could potentially upgrade the Property to a
Finally, the Court questions some of Mr. Laudone's adjustments made for the Main Street Property, as the discrepancy from the sale price appears excessive. As discussed earlier, the Court feels that the adjustment based on location was excessive given the subject Property's proximity to Interstate 78 and a landfill. Additionally, Mr. Laudone never mentioned in his testimony any adjustment on account of the Property's inferior condition rating, which certainly would have significantly reduced the adjusted price. Ultimately, because Santander failed to provide a complete grid analysis for the Main Street Property, the Court simply cannot conceive of what other adjustments would have justified
Thus, the Court concludes that the Debtor's Appraisal and the testimony offered by her appraiser are more persuasive, credible, and accurate than the evidence offered by Santander.
AND NOW, this 25th day of October 2019, for the reasons given in the accompanying opinion, it is hereby ORDERED that:
1. as of June 3, 2019, the value of 25 Berger Road, Easton, Pennsylvania ("the Property") was equal to $105,000 and, therefore, the first mortgage on the Property in favor of Santander Bank, f/k/a Sovereign Bank ("Santander Bank"), exceeded the value of the Property as of such date;
2. the second mortgage on the Property in favor of Santander Bank is deemed wholly unsecured pursuant to 11 U.S.C. § 506(a);
3. the secured interest of Santander Bank on account of its second mortgage
4. Santander Bank's claim attributable to its second mortgage as set forth in Proof of Claim No. 6 shall be reclassified in its entirety as a general unsecured claim.
A C-2 rating means "[t]he improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs . . . dwellings in this category either are almost new or have been recently completely renovated and are similar in condition to new construction." Id.
A C-3 rating means "[t]he improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well maintained." Id.
A C-4 rating means "[t]he improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate." Id.
A C-6 rating means "[t]he improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many or most major components." Id.
One additional sale from the past year, 116 Main Street, Glendon, Pennsylvania, is located in Glendon Borough. Id. at 33:1-3. Mr. Markley did not use this property as part of his valuation analysis because he felt the property had certain amenities and features which made it too dissimilar to the subject Property. Id. at 32:16-25.
In any event, in filing the adversary proceeding, Santander was provided with more formal process and procedural safeguards than a mere motion. Bennett v. Bank of Am. N.A. (In re Bennett), 531 B.R. 68, 82 n.16 (Bankr. E.D. Pa. 2015) (B.J. Frank). Compelling the Debtor to file a motion instead would have exalted form over substance. Id.
