Docket Control No. RJ-6
MEMORANDUM OPINION AND DECISION
Ronald H. Sargis, Judge.
Wanda Collier-Abbott, the Debtor, has filed a Motion to Value the secured claim of RRA CP Opportunity Trust 2 ("Creditor").
Creditor has filed an Opposition, which is supported by the Declaration and Appraisal Report of Lynn Johnson. Dckt. 198. Creditor's claim is secured by the second deed of trust against the Property and it is not disputed that some value exists in the Property to secure this claim secured by
Creditor asserts that this is not a "short-term loan" to which the exception provided in 11 U.S.C. § 1322(c)(2) would apply, and therefore 11 U.S.C. § 1322(b)(2) prohibits modification (including a valuation pursuant to 11 U.S.C. § 506(a)) of Creditor's secured only by the Debtor's primary residence.
Upon consideration of the evidence presented, the application of 11 U.S.C. § 1322(c)(2), the last payment on the debt owed to Creditor having come due on April 1, 2020, this bankruptcy case having been filed on March 1, 2019, and that the five years of Chapter 13 plan payments are continuing well after the April 1, 2020 due date; the Motion to Value the secured claim of Creditor is granted, and Creditor's secured claim is determined to have a value of ($157,410.62).
VALUATION OF SECURED CLAIM
The valuation of property that secures a claim is the first step, not the end result of this Motion brought pursuant to 11 U.S.C. § 506(a). The ultimate relief is the valuation of a specific creditor's secured claim.
11 U.S.C. § 506(a) instructs the court and parties in the methodology for determining the value of a secured claim.
11 U.S.C. § 506(a) (emphasis added).
At dispute in this Contested Matter is whether Creditor's claim, secured only by Debtor's primary residence may be valued in this case pursuant to 11 U.S.C. § 506(a), thereby bifurcating the claim into a secured claim for the value in the Property which exists to secure Creditor's second deed of trust lien position, and the balance as a general unsecured claim. As addressed below, Creditor's claim may properly be valued pursuant to 11 U.S.C. § 506(a), notwithstanding that Creditor's only collateral is Debtor's primary residence.
Determination of 11 U.S.C. § 1322(c)(2) Exception to the Application of 11 U.S.C. § 1322(b)(2)
In a matter that the Ninth Circuit Court of Appeals has not yet addressed,
Review of Claim
Proof of Claim No. 4-1 was filed on May 6, 2019, for Creditor. The attachments to Proof of Claim No. 4-1 include a Note which is titled "NOTE With Balloon Payment." Proof of Claim 4-1, p. 14. The date of the NOTE is March 24, 2005, and Paragraph 3 of the Note states that all amounts then owing on April 1, 2020, will be due in full on that date. The bankruptcy case was filed on March 1, 2019, approximately one year before the NOTE With Balloon Payment obligation being due in full on April 1, 2020, which is before the final payment will be due during the 60-month term of the plan in this case.
Review of Statutory Provisions
In considering this issue, the court begins with the well-established doctrine for statutory construction. The Supreme Court has been very clear in reading and applying the "plain language" stated by Congress in statutes. Hartford Underwriters Insurance Company v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L. Ed. 2d 290 (1989). The basic direction is that Congress says in a statute what it means and means in a statute what it says. Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L. Ed. 2d 391 (1992); (quoting Caminetti v. United States, 242 U.S. 470, 37 S.Ct. 192, 61 S.Ct. 442 (1917)); United Savings Association of Texas v. Timbers of Inwood Forest Associates, LTD., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).
Beginning with the prohibition on modifying some secured claims in Chapter 13 plans, the Bankruptcy Code provides in 11 U.S.C. § 1322(b)(2) (emphasis added):
As the Ninth Circuit Court of Appeals addressed in Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002); if there is no value in the collateral for the holder of the secured claim, then it may be valued at $0, there being no "secured claim" to be protected by the above. However, if there is any value, then the entire secured claim is protected from valuation under 11 U.S.C. § 506(a).
Debtor asserts that the above restriction on modifying claims secured by the debtor's residence is itself limited by 11 U.S.C. § 1322(c)(2), which provides (emphasis added):
Going to 11 U.S.C. § 1325(a)(5), it states in the provisions applicable to the treatment of Creditor's claim (emphasis added):
Looking at the "plain language" of 11 U.S.C. § 1325(a)(5), as made applicable by 11 U.S.C. § 1322(c)(2), it allows for the debtor to provide for the claim of a creditor secured only by the debtor's primary residence by paying that creditor the value of the secured claim, as determined pursuant to 11 U.S.C. § 506(a), and not any amount in excess of the 11 U.S.C. § 506(a) as part of the allowed secured claim.
Discussion of Applicable Law
The court begins with the Circuit Court of Appeals decision cited by Debtor, American General Finance, Inc. v. Paschen (In re Paschen), 296 F.3d 1203 (11th Cir. 2002). In that case, the Eleventh Circuit concluded that the 11 U.S.C. § 1322(c)(2) exception works through 11 U.S.C. § 1325(b)(5) to allow not only payment terms to be modified, but also to allow for an 11 U.S.C. § 506(a) valuation.
In 2019, the Fourth Circuit Court of Appeals revisited and reversed a prior decision that went contrary to the ruling in Paschen. In Hurlburt v. Black, 925 F.3d 154 (4th Cir. 2019), the Fourth Circuit Court of Appeals concluded that the 11 U.S.C. § 1322(c)(2) exception providing for the 11 U.S.C. § 1325(a)(5) treatment for claims that come due in full during the period of the plan to be modified, includes an 11 U.S.C. § 506(a) valuation of such claims.
Creditor directs the court to the Supreme Court decision, Nobelman v. American Savings Bank (In re Nobelman), 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), for the proposition that the provisions of 11 U.S.C. § 1332(b)(2), when read in conjunction with 11 U.S.C. § 506, precludes the bifurcation of any and all claims secured by the debtor's primary residence if there is any value to protect such lien.
In Nobelman, the Supreme Court determined that the provisions of 11 U.S.C. § 1322(b)(2) focuses on the "rights" of the creditor being protected from modification. Nobelman v. American Savings Bank (In
In 1994, one year after Nobelman, Congress amended this Code section, adding 11 U.S.C. § 1322(c) as it now exists (relettering former paragraph (c) as (d)) to add the exception to 11 U.S.C. § 1322(b)(2). When the Supreme Court issued its ruling in Nobelman, there was not, and there could not have been, consideration of the then yet to be enacted exception to 11 U.S.C. § 1322(b)(2) residence secured claim valuation limitation.
Collier on Bankruptcy provides an extended discussion of this statutory exception in 11 U.S.C. § 1322(c)(2) to the residence secured claim limitations in 11 U.S.C. § 1322(b)(2), which includes, in pertinent part:
8 Collier on Bankruptcy, ¶ 1322.17 (Sixteenth Edition) (emphasis added)
The most recent Circuit Court authority is the Hurlburt v. Black, 925 F.3d 154 (4th Cir. 2019) decision. In analyzing these interlocking Bankruptcy Code sections, the Hurlburt court states:
Hurlburt v. Black, 925 F.3d 154, 161 (4th Cir. 2019).
This court's reading of the plain language of these interlocking statutory provisions renders the same result. The plain language states that the limitations under 11 U.S.C. § 1322(c)(2) does not "protect" the allowed claim coming due before the end of the plan from plan treatment as provided under 11 U.S.C. § 1325(a)(5).
Moving to 11 U.S.C. § 1325(a)(5), it provides that for an allowed secured claim, the plan treatment allows for payment of the value of such allowed secured claim over the life of the plan.
To determine the allowed secured claim, Congress provides in 11 U.S.C. § 506(a) that a creditor who has a lien to secure its allowed claim can have both an allowed secured claim to "the extent of the value of such creditor's interest in the estate's interest" in the property securing the claim, and an unsecured claim for the amount of the claim in excess of the value of the property securing the claim.
Debtor is correct that Congress has created an exception from the limitations of 11 U.S.C. § 1322(b)(2) for Creditor's balloon payment note that has come due under the original terms of the note on April 1, 2020 — which is before the last payment will be made on a plan in this case (assuming one is confirmed). Creditor's claim may be valued as provided in 11 U.S.C. § 506(a) to determined the allowed secured claim, and then the allowed secured claim amount be paid as provided in 11 U.S.C. § 1325(a)(5).
Determination of the Value of the Creditor's Interest in the Estate's Interest In the Property (The Value of Creditor's Collateral)
Creditor filed the Declaration of Appraiser Lynn W. Johnson, accompanied
Debtor replied with what Debtor refers to as a "more refined Broker Price opinion" and the Declaration of Osceola Winnumucca Stephenson in support of the Reply. Dckt. 209, 210. Stephenson is a real estate agent licensed in California. Declaration, Dckt. 209. After a physical examination of the Property on February 8, 2020, Stephenson values the property, as of March 1, 2019, at $470,000.00. Stephenson arrives at this value due to several features of the residence:
Stephenson points out that Creditor's Appraisal Report did not address the needed repairs to the Property.
Analysis of Expert Testimony
Evidence Presented by Debtor
The court begins with the evidence of value presented by Debtor. Stephenson's declaration was filed on April 21, 2020. Dckt. 209. Stephenson testifies to being a licensed real estate agent by the State of California who works with Red Dog Real Estate. Stephenson has prepared the Broker's Price Opinion ("BPO") for the value of the Property as of March 1, 2019 (the date this bankruptcy case was filed). The BPO is filed as an exhibit with Stephenson's Declaration. BPO, Dckt. 210.
The BPO states that in its As-Is condition, the Property has a Probable Sales Price Value of $465,000.00 with a 90-day marketing period and $475,000.00 with a 180-day marketing period. BPO, Value Estimation section; Id.
In the BPO, Stephenson identifies ($96,050.00) of repairs needed for the Property which are taken into account in Stephenson developing the BPO of value. Stephenson states the Property is in fair condition, with immediate repairs to be taken by the buyer to include replacement of windows and that "major systems" not being in "proper working order."
Stephenson identifies three listing comparables that he uses and three closed sales comparables (all with sales dates of January 2019), for which the properties are within 0.3 miles of the Property. Id., p. 2.
Stephenson explains his condition and style considerations in coming to the value. Declaration, Dckt. 209. Stephenson also discusses: (1) the water damage caused by leakage at the windows and the need for the replacement of 29 windows; (2) that the heating and air conditioning system did not "function properly" (but did not explain what did not work) and that it needs to be replaced; and (3) necessary
Stephenson also discusses that the valuation provided in the appraisal testimony provided by Johnson, which while consistent with that of Stephenson in considering comparable properties, does not take into account the damages and necessary repairs that a buyer would consider.
Evidence Presented by Creditor
Creditor has provided the Declaration and Appraisal Report of Johnson. Dckt. 198 (Appraisal Report Exhibit attached to the Declaration). The Declaration and Appraisal Report review Johnson's experience and knowledge to provide expert witness testimony. Johnson testifies that the Property was inspected, interior and exterior, as part of Johnson's acts in coming to an opinion of $513,000.00 for the value of the Property.
In the Appraisal Report, Johnson identifies three comparable property sales, with the comparables 0.9 miles to 1.62 miles from the Property. Appraisal Report page 2 of 6; Dckt. 198. The three comparables are for sales in April 2018, December 2018, and January 2019.
For the valuation, in the Supplemental Addendum (Dckt. 198 at 12), Johnson states,
Johnson includes pictures of the Property. Dckt. 198 at 19-22. The picture of the rear of the home shows garbage, appliances, and other "stuff" strewn around the patio. Id. at 19. A side view picture appears to be a structure with "stuff" piled up inside, including rolled up carpeting. Id. at 20.
The picture titled "Water Damage in Ceiling" (Id.) shows a large, jagged hole in the ceiling, with something hanging out of the hole (which the court could not identify even when the picture was enlarged). Water stains on the ceiling to the right of the hole are visible.
There are two other water damage pictures from the family room, showing water stains near a ceiling fan. Id.
A picture of the garage shows it filled (but for a narrow walkway) with open boxes of "stuff." Id. at 21. It appears that Debtor has piled up "stuff" on "stuff," creating a large, disorganized pile of "stuff."
In another ceiling picture, there is a hole in the ceiling and wall where two walls meet. Id. It appears, that in addition to the hole, the crown molding on a wall is missing.
The last picture is one showing water damage and staining at a window. Id. at 22. Through the window, one can see into
Determination of Value
The evidence presented by both experts presents the court with documentation of there being significant damage to the Property. As shown by the photos and the Stephenson Declaration, there are multiple holes in the ceiling, water damage in the ceiling and windows, and the need for significant repairs. Additionally, the photographs further show a lack of maintenance in and around the Property, including the trash and "stuff" piled up around the house on the patio, in the backyard, and in the garage.
Creditor's appraiser opinion of value is $513,000.00. While acknowledging that there is significant damage to the structure, Johnson makes no clear adjustments for it. Rather, Johnson's Appraisal Report states that further investigation is required of the damage.
The three comparables used by Johnson, Creditor's expert, in the Appraisal Report had sales prices of $510,000.00, $520,000.00, and $525,000.00. In reaching the $513,000.00 value for the Property, Johnson makes no adjustment for condition, stating in the Appraisal Report that the Property and the three comparables are all of Good Construction and in Average Condition. Appraisal Report, p. 2 of 6; Dckt. 198. There is nothing provided by Johnson to indicate that the three comparables were "Average Condition" properties with water stained ceilings, a gaping hole in the ceiling and another hole in the wall, water damage around the windows, and no treatment or repairs for the obvious and significant visible and the hidden damage to the structure.
Stephenson, the Debtor's expert, states that Stephenson's opinion of value is in line with Johnson, with a downward adjustment of ($95,000.00) for the obvious necessary repairs. Actually, it appears that Stephenson may have started with a higher value or has not made a full adjustment of ($95,000.00) in coming to the BPO Value of $470,000.00 (based on a 120-day marketing period, which is not commercially unreasonable).
While opining for the BPO Value that the repair costs of ($95,000.00) are necessary, there is no other testimony from a contractor or other construction expert as to the costs of such repairs. The court recognizes that though real estate professionals do have knowledge of real property values and have addressed adjusting sales prices due to repairs, they are not contractors or construction experts.
From the evidence presented, the court determines that the value of the property securing Creditor's claim is $470,000.00. That is within $40,000.00-$50,000.00 of Johnson's comparables, the values of which are without any adjustment for damages.
The court shall issue a separate order granting the relief consistent with this Memorandum Opinion and Decision.