Donald Robert Gurnari and Sharon A. Gurnari
O P I N I O N
Before the Court is U.S. Bank Trust National Association‘s Objection to Confirmation of the Second Amended Chapter 13 Plan filed by Debtors Donald and Sharon Gurnari (Debtors). At the evidentiary hearing on this matter, the Court determined that Debtors failed to meet their burden as to the feasibility of their proposed plan and denied confirmation on that ground. However, also at issue is whether Debtors are permitted to bifurcate U.S. Bank‘s secured claim through their plan, and if so, what the value of that claim is. As explained more fully below, the Court determines that Debtors may cramdown the value of the claim and the value of the residence is $85,000.
II. PROCEDURAL POSTURE
Debtors filed a joint voluntary Chapter 13 Bankruptcy Petition on June 2, 2023. On the same day, Debtors filed their schedules, statements, and Chapter 13 Plan. See Dkt. # 1, 7. On Schedule A/B, Debtors listed their residence at 1025 Mount Vernon Avenue, Scranton, Pennsylvania (Property) with a current value of $55,000. On Schedule D, Debtors listed a secured mortgage debt to Fay Servicing in the amount of $163,837.
U.S. Bank Trust National Association (Bank or U.S. Bank) filed a proof of claim asserting a secured claim against the Property in the amount of $167,125.83 (Claim). See Amended Claim No. 9-2. The Bank left blank the line indicating a value for the Property but did indicate that the entire amount of the Claim was secured. Debtors have not objected to the Claim.
On January 29, 2024, Debtors filed their Second Amended Chapter 13 Plan (Plan). Dkt. # 35. U.S. Bank filed its objection (Objection) on Fеbruary 6, 2024. Dkt. # 38. The Chapter 13 Trustee (Trustee) filed its Objection on February 7, 2024. Dkt. # 39.
The Trustee objected to confirmation of the Plan on the basis of feasibility. He argued that Debtors’ Schedules I and J do not evidence that Debtors have sufficient
After several continuances, the Court held an evidentiary hearing on the objections on June 6, 2024. Surprisingly, Debtors did not appear at the hearing to support their position. Debtors and U.S. Bank each had an appraiser testify as to the value of the Property. At the conclusion of the hearing, the Court denied confirmation of the Plan on the basis of feasibility but took the issues of crаmdown of the Claim and valuation of the Property under advisement. The Court requested briefing on the legal issue. U.S. Bank filed its brief on June 13, 2024 and Debtors filed their brief on June 20, 2024. See Dkt. # 44 & 45. This matter is ready for decision.
III. JURISDICTION
This Court has jurisdiction over this matter pursuant to
IV. FACTS
On April 29, 1999, Debtors executed a balloon note (Note) in the prinсipal amount of $53,600 secured by a mortgage (Mortgage) against the Property. See Amended Claim No. 9-2. The Note matured on April 29, 2014. U.S. Bank is the current holder of the Note and Mortgage. As stated above, U.S. Bank filed its Claim with a secured debt in the amount of $167,125.83.
Debtors reside at the Property, which is located at 1025 Mount Vernon Ave., Scranton, Pennsylvania. The Property is a duplex, which has separate units upstairs and downstairs, a full basement, two porches, a detached garage, and an above ground swimming pool. Overall square footage of the home is 1632 square feet. Debtors reside in the ground floor unit, which has two bedrooms, one bathroom, a kitchen, and a living room. Debtors rent the second unit to a tenant. Their Schedules indicate a rental of $675 per month. See Sch. G. The upstairs unit has three bedrooms, one bathroom, a kitchen, and a laundry room.
From the hearing testimony and appraisals submitted, it is clear that there is overall wеar and tear to the Property including the floors, walls, and ceiling. There are boarded up windows and the garage is in poor condition. There have been no updates to the home in over 15 years.
V. THE PARTIES’ POSITIONS
Debtors filed their Second Amended Plan which proposes to make monthly payments to the Trustee of $394 for 6 months, then $1,463.00 for 54 months. The total base amount under the Plan is $80,324. The Plan seeks to bifurcate U.S. Bank‘s secured claim under
Debtors cite to In re Scarborough, 461 F.3d 406 (3d Cir. 2006), as authority to cramdown the Property under their Plan. In Scarborough, the Third Circuit Court of Appeals determined that the mortgage debt which was secured by the debtor‘s multi-unit residence did not fall under the anti-modification provision of
Debtors however, failed to address the continued viability of Scarborough‘s holding. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. 109-8, § 306(c) (2005), which included new definitions of debtor‘s principal residence and incidental property which potentially affected the scope of
U.S. Bank objected to confirmation of the Plan asserting that the Plan is underfunded and does not propose to contribute funds sufficient to pay U.S. Bank‘s Claim in full. U.S. Bank asserts its claim is $167,125.83 plus 7.0% interest over the life of the plan. In its brief, U.S. Bank updated the total to $215,531.16. It further оbjected to the 6% interest rate the Plan proposes.3 U.S. Bank also echoed the Trustee‘s feasibility objection.
The Bank also objected because the Plan improperly attempts to cramdown the secured claim. The Bank argued that pursuant to
A. Debtors are Permitted to Cramdown
The general rule is that a secured claim may be separated under
(b) Subject to subsections (a) and (c) of this section, the plan may -
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor‘s principal residence ....
The issue here is whether Debtors’ Mortgage can be crammed down pursuant to
(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law--
(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor‘s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.
Thus, Section 1322(c)(2) carves out a narrow subset of secured claims where the last payment of a secured claim on the original payment schedule is due before the date on which the final payment under a debtor‘s plan is due, i.e. short term or matured debt. In re Mendez, 600 B.R. 321, 328 (Bankr. D.N.J. 2019) (emphasis in original) (citation omitted). For these claims, a debtor may cramdown the mortgage loan under
Based on the above two options in this case, it is unnecessary to deсide the legal issue of whether the Claim is secured only by a security interest in real property that is the debtor‘s principal residence. If the Court determines that notwithstanding the 2005 amendments, the Property is a multi-unit residence and Scarborough applies (i.e., the Property is not secured only by a security interest in real property that is the debtor‘s principal residence), Debtors would be permitted to cramdown the value because the anti-modification provisiоn would not apply. If the Court determines that the 2005 amendments clarified and expanded the scope of the anti-modification provision, and concludes that the Property is secured only by a security interest in real property that is the debtor‘s principal residence, Debtors would still be able to cramdown the value by operation of
Next, the Court will turn its focus to the valuation of the Property.
B. Valuation of the Property
1. Applicable Legal Principles
Section 506(a)(1) provides:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value оf such creditor‘s interest in the estate‘s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor‘s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor‘s interest.
The United States Supreme Court in Assoc. Com. Corp. v. Rash, 520 U.S. 953 (1997), considered the question of what standard of valuation should be utilized when a debtor seeks to retain and use a creditor‘s collateral pursuant to a Chapter 13 plan. The Rash Court determined that
The Third Circuit Court of Appeals in In re Heritage Highgate, Inc., 679 F.3d 132, 139 (3d Cir. 2012), held that a burden-shifting approach applies to valuations of сollateral under
The initial burden should be on the party challenging a secured claim‘s value, because 11 U.S.C. § 502(a) and Bankruptcy Rule 3001(f) grant prima facie effect to the validity and amount of a properly filed claim. It is only fair, then, that the party seeking to negate the presumptively valid amount of a secured claim—and thereby affect the rights of a creditor—bear the initial burden. If the movant establishes with sufficient evidence that the proof of claim overvalues a creditor‘s secured claim because the collateral is of insufficient value, the burden shifts. The creditor thereafter bears the ultimate burden of persuasion ... to demonstrate by a preponderance of the evidence both the extent of its lien and the value of the collateral securing its claim.
Id. at 140 (internal citations omitted). With these principles in mind, the Court considers the evidence presented by the parties.
2. The Appraisals
The parties stipulаted that both appraisers are certified as experts. Both appraisers submitted their written appraisals which were admitted at the close of testimony.
The Bank offered the testimony of Mr. Albert Read, IV who has been an appraiser for 18 years. He performed an appraisal of the Property on February 12, 2024, using all three approaches (i.e., the cost aрproach, sales comparison approach, and the income capitalization approach) to determine his assessment of value.
He testified that he researched the market and pulled comparable properties that he believed were as close to the Property as he could locate using both recent sales and listings. He scanned the properties available in the whole area, finding сomps that were within 8 or 9 months to 4 months and all were in Scranton. He stated that he visited each of the six comps.
He further testified that he visited the Property and took photographs of inside and outside of Property while he was on the premises. The main issue about the Property that he immediately identified was that there were deferred maintenance issues. The areas he highlighted in his testimony included: the rear staircase was significantly deteriorated аnd would not pass inspection, many areas of the Property both interior and exterior have peeling paint, there are boarded up windows, and staining on ceiling tiles on the second floor which could indicate mold issues. He also pointed out the detached garage that is located on the Property is in poor condition, is falling down, and in his opinion should be razed. He testified that because of its condition, he assigned no value to the gаrage.
He testified that in his opinion $5,000 would need to be invested in the Property to bring the Property up to average condition. Otherwise, he opined that the Property was in fair condition at the time of his visit. Mr. Read testified that if the $5,000 was invested in repairs, he believed that the Property was worth $100,000 based upon the sales approach.6 He stressed that the $5,000 adjustment had been made to the appraisal value and he believed that it was the only conditiоn adjustment that was needed to arrive at the $100,000 value.
Mr. Read also testified that based on his analysis of the market, he believed that market conditions were increasing due, in part, to the current shortage of supply. His report concluded that northeastern Pennsylvania is seeing its lowest inventory of homes in many years. U.S. Bank Appraisal at 3. He testified that two-unit properties have increased approximately 106% since the 2020 pandemic. Furthermore, to provide some comparison to Debtors’ appraisal, he testified that if he had performed his appraisal in June of 2023, his valuation would have been lower. He estimates that he would have assigned a value of approximately $15,000 less. The Court also notes that Mr. Read included a rental analysis in his report.
Debtors offered the testimony of Mr. Derek Define who has been an appraiser for 13 years and licensed for 5 years. He conducted his appraisal on June 9, 2023. Mr. Define used the sales comparison approach exclusively for his appraisal.
He tеstified that at the time of his visit to the Property, he was unable to gain entry to the interior of the Property because the occupants of both units reportedly had CoVid-19. He was able to take an exterior measurement to determine the square footage of the Property.
Similar to Mr. Read‘s assessment, Debtors’ appraiser believed the Property was in fair condition. He also identified the same deferred maintenance issues; however, at the time of his appraisal, the detached garage was in better condition. The roof had been patched but Mr. Define did not believe that the garage had to be razed.
As for housing market conditions, he believed that the market at the time of his appraisal was stable but he agreed with the Bank‘s appraiser that the market in February 2024 was increasing and that the value of the Property would be worth more now than in June 2023.
Based upon all of the above, Mr. Define assigned a value of $46,000 to the Property.
3. Determination of Value
Valuation of property for the purpose of plan confirmation is made as of the date of confirmation. See In re Seidle, 2013 WL 828303, at *3 (Bankr. M.D. Pa. 2013). As Judge France observed several years ago, real estate valuations are matters of art more than science. In re Hildreth, 2011 WL 1332036 at *5 (Bankr. M.D. Pa. 2011). The Court believes that the value of the Property is closer to Mr. Read‘s appraisal; however, the condition issues appeаr to be more severe than Mr. Read opined. Judging from the photographs and the experts’ testimony, more than $5,000 of repairs will need to be expended to bring the Property up to average condition.
In this case, the appraisers were fairly congruent as to the condition of the Property and the areas that were in need of repair. Despite this perceived agreement, they were far apart on value—$46,000 vs. $100,000. When weighing confliсting appraisal testimony, courts generally evaluate a number of factors, including: the appraiser‘s education, training, experience, familiarity with the subject of the appraisal, manner of conducting the appraisal, testimony on direct examination, testimony on cross-examination, and overall ability to substantiate the basis for the valuation presented. Seidle, 2013 WL 828303, at *4 (citing In re Smith, 267 B.R. 568, 572-73 (Bankr. S.D. Ohio 2001)) (citations omitted). A bankruptcy court is not bound to accept the values contained in the parties’ appraisals; rather, it may form its own opinion of the value of the subject property after considering the appraisals and expert testimony. Smith, 267 B.R. at 572-73.
It is clear to the Court that the Bank‘s appraisal is more thorough and should be given greater weight in evaluating the value of the Property. In reviewing the appraisals, several factors support this finding:
- Mr. Read has substantially more experience;
- The Bank‘s appraisal was recently completed and Debtors’ is over one year old;
- Mr. Read employed all 3 approaches to his valuation (cost, sales and income)
vs. only the sales approach by Mr. Define; - Mr. Read used 6 comparable properties vs. 3 by Mr. Define; and
- Mr. Read testified that he visited each comparable but Mr. Define did not.
Significantly, Mr. Read testified that he also physically inspected each apartment at the Property and Mr. Define indicated that he was not able to gain access because the oсcupants had CoVid-19.7 Further, as stated above, both appraisers agreed that the Scranton market for rental properties has increased since Mr. Define‘s report. Accordingly, Mr. Define‘s valuation is admittedly low.
Given all of these considerations, the Court will adopt Mr. Read‘s appraisal but will add an additional $10,000 to the $5,000 condition adjustment given the glaring condition deficiencies identified at the hearing. Therefore, the Court determines the fair markеt value of the Property is $85,000.
4. Interest Rate
Lastly, the parties were unable to agree on the applicable interest rate. A secured claim subject to modification under
Utilizing the formula apрroach endorsed by the United States Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004), the Court determines that the applicable interest rate is the national prime rate (currently 8.5%) plus 2%, which totals 10.5%. Because the Court determined at the hearing that there are feasibility issues, the Court accepts the interest rate of 10.5% proposed by U.S. Bank.
VII. CONCLUSION
For the reasons stated above, the Court determines that Debtors are permitted to bifurcate U.S. Bank‘s secured claim pursuant to
Accordingly, the Court grants Debtors leave to amend their Chapter 13 Plan on or before August 16, 2024.8 An appropriate order will be entered.
By the Court,
Mark J. Conway, Bankruptcy Judge
Dated: July 31, 2024