493 B.R. 46
Bankr. N.D. Ill.2013Background
- Hernandezs filed a Chapter 13 case on April 9, 2012 to determine lien extent on their primary residence at 4447 S. Keating Ave., Chicago.
- Property is owned by Plaintiffs and encumbered by three mortgages all held by TCF Bank; two junior liens may be unsecured depending on value.
- First Mortgage balance: $55,850.91; Second Mortgage balance: $92,698.10; Third Mortgage balance: $5,000 as of petition date.
- Plaintiffs retained Orlowski (value $50,000) and Defendant retained Farrelly (value $110,000) to appraise value of the Property.
- Court ultimately finds the Property’s fair market value at $110,000 as of the petition date.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Third Mortgage can be stripped as wholly unsecured | Third lien lacks value to senior claim | Value supports some secured status for third lien | Third Mortgage wholly unsecured and voided |
| What is the Property’s value for §506(a) purposes | Orlowski’s $50,000 value should control as true market value | Farrelly’s $110,000 value reflects market conditions | Property value fixed at $110,000 |
| Status of the Second Mortgage under §506(a) given value | Second Mortgage should be fully unsecured if value is insufficient | Second Mortgage remains at least partially secured | Second Mortgage is partially secured; cannot be stripped |
| Appropriate valuation date and comparables methodology | Distressed sales should drive valuation due to local market | Arms’-length comparables provide a full market view | Court favored Farrelly’s arms’-length comparables; used 2012 data near petition date |
| Credibility of appraisals and use of distressed vs. non-distressed sales | Orlowski relied solely on distressed sales to justify low value | Farrelly identified non-distressed comparables supporting higher value | Farrelly’s credible; Orlowski’s reliance on distressed sales rejected |
Key Cases Cited
- Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir. 2001) (strip-off of wholly unsecured junior liens in Chapter 13 context)
- Serda v. Bank of America (In re Serda), 395 B.R. 450 (Bankr.E.D.Cal. 2008) (valuation approach for principal residence in §506(a))
- Strever (In re Strever), 468 B.R. 776 (Bankr.D.S.C. 2012) (foreclosure vs. open-market valuation considerations)
- Rash, Assoc. Commercial Corp. v., 520 U.S. 953 (Supreme Court, 1997) (disposition or use governs valuation when debtor keeps collateral)