572 B.R. 160
Bankr. E.D.N.C.2017Background
- Debtor Larry Hurlburt filed chapter 13 while living at 130 S. Navassa Rd., Leland, NC; he bought the property in 2004 with seller financing from Juliet Black, who holds a purchase-money deed of trust and filed a claim for ~$181,000.
- The loan matured prepetition (May 26, 2014). Debtor values the property far below the claim (asserted $40,000–$47,000).
- Debtor sought to treat Black’s claim as secured only to the value of the property (~$41,132.19) and to pay that amount through the plan, with no treatment of the remaining balance.
- Black objected, arguing §1322(b)(2) (anti-modification for claims secured only by the debtor’s principal residence) bars any reduction of her rights; she conceded §1322(c)(2) permits curing a matured loan but contends the full claim must be paid.
- The dispute implicates interaction of §§502(b), 506(a), 1322(b)(2), 1322(c)(2) and North Carolina’s anti-deficiency statute (N.C. Gen. Stat. §45-21.38), and whether a debtor can ‘‘cram down’’ a seller-financed residential mortgage to collateral value in chapter 13.
Issues
| Issue | Hurlburt's Argument | Black's Argument | Held |
|---|---|---|---|
| Whether a chapter 13 debtor may reduce a seller-financed purchase-money deed of trust on the debtor’s principal residence to the value of the property (i.e., treat excess as no-claim) | The anti-deficiency statute means Black only has an in-rem right to property value; under §506(a) her secured claim is limited to collateral value, so debtor may pay that amount through the plan and not the remainder. | Black has an allowed claim under §502 that is secured only by the debtor’s principal residence; §1322(b)(2) forbids modification of such rights, so debtor cannot reduce the claim to property value. | Court held §1322(b)(2) applies and debtor cannot cram down Black’s claim to collateral value; proposed treatment impermissibly modifies Black’s rights. |
| Effect of §1322(c)(2) where the loan matured prepetition | §1322(c)(2) allows modifying payment terms (and, per related arguments, permits bifurcation or limiting secured claim to collateral value). | Even if §1322(c)(2) applies to matured loans, Witt controls in the Fourth Circuit and limits §1322(c)(2) to payment scheduling; it does not permit bifurcation or reduction of the secured claim amount. | Court, bound by Witt, concluded §1322(c)(2) as interpreted in Witt does not authorize reducing the claim to collateral value; debtor may stretch payments but not eliminate portion of claim. |
| Interaction of NC anti-deficiency statute with bankruptcy valuation (§506/§502) | The statute prevents a personal deficiency remedy so creditor only ever had in-rem rights; thus bankruptcy should treat excess as non-claim rather than unsecured claim. | Even if in-personam deficiency is barred under state law, Black still possesses a §502 "claim" enforceable in chapter 13 and secured solely by the residence; federal anti-modification protection applies to that claim. | Court held state anti-deficiency protection does not permit sidestepping §1322(b)(2); Black’s in-rem claim remains a protected claim under §1322(b)(2). |
| Application of precedent permitting lien-stripping in Chapter 20 or valueless-lien contexts | Cases allowing lien-stripping where lien has zero value support debtor’s position to limit treatment to collateral value. | Those cases are distinguishable because here the collateral has some value; §1322(b)(2) protects a claim with even minimal collateral value. | Court distinguished lien-stripping precedents (Davis, Sweitzer) as inapplicable where collateral has value; held those do not allow the proposed cramdown here. |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- United States v. Diebold, 369 U.S. 654 (summary judgment view of facts for nonmoving party)
- Nobelman v. American Savings Bank, 508 U.S. 324 (anti-modification protection for claims secured only by debtor’s principal residence)
- Witt v. United Cos. Lending Corp., 113 F.3d 508 (4th Cir.) (§1322(c)(2) permits only payment modification for matured residential loans, not bifurcation)
- American Gen. Fin., Inc. v. Paschen, 296 F.3d 1203 (11th Cir.) (statutory interpretation permitting bifurcation under §1322(c)(2))
- Johnson v. Home State Bank, 501 U.S. 78 (mortgage surviving Chapter 7 as in-rem claim enforceable in Chapter 13)
- Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir.) (chapter 20 lien-stripping where lien had zero value)