Wanda Collier-Abbott
MEMORANDUM OPINION AND DECISION
Wanda Collier-Abbott, the Debtor, has filed a Motion to Value the secured claim of RRA CP Opportunity Trust 2 (“Creditor“).1 Debtor provides her declaration and the Declaration and Broker‘s Price Opinion of Osceola Winnumucca Stephenson as evidence of value of the Debtor‘s primary residence, the real property commonly known as 3101 Spinning Rod Way, Sacramento, California (“Property“) that is the only collateral for Creditor‘s claim in this casе. Dckts. 154, 209, 210. Debtor asserts that exception provided in
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
Upon consideration of the evidence presented, the application of
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
(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 of 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 set off 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.
At dispute in this Contеsted Matter is whether Creditor‘s claim, secured only by Debtor‘s primary residence may be valued in this case pursuant to
DISCUSSION
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,3 Debtor
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 (2000); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 103 L. Ed. 2d 290, 109 S. Ct. 1026 (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, 117 L. Ed. 2d 391, 112 S. Ct. 1146 (1992); (quoting Caminetti v. United States, 242 U.S. 470, 485, 61 L. Ed. 442, 37 S. Ct. 192 (1917)); United Savings Association of Texas v. Timbers of Inwood Forest Associates, LTD., 484 U.S. 365, 371 (1988).
Beginning with the prohibition on modifying some secured claims in Chapter 13 plans, the Bankruptcy Code provides in
(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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; . . . .
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 collaterаl 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
Debtor asserts that the above restriction on modifying claims secured by the debtor‘s residence is itself limited by
(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law—
(1) . . . ; and
(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 thе 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.
Going to
(5) with respect to each allowed secured claim provided for by the plan—
///
(B)
(i) the plan provides that—
(I) the holder of such claim retain the lien securing such claim until the earlier of—
(aa) the payment of the underlying debt determined under nonbankruptcy law; or
(bb) discharge under section 1328; and
(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and
(iii) if—
(I) property to be distributed pursuant to this subsеction is in the form of periodic payments, such payments shall be in equal monthly amounts; . . . .
Looking at the “plain language” of
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 Pachen), 296 F.3d 1203 (11th Cir. 2002). In that case, the Eleventh Circuit concluded that the
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
Creditor directs the court to the Supreme Court decision, Nobelman v. American Savings Bank (In re Nobelman), 508 U.S. 324 (1993), for the proposition that the provisions of
In Nobelman, the Supreme Court determined that the provisions of
In 1994, one year after Nobelman, Congress amended this Code section, adding
Collier on Bankruptcy provides an extended discussion of this statutory exception in
¶ 1322.17 Exceptions to the Rule Against Modification of Home Mortgages; § 1322(c)(2)
Section 1322(c)(2) carves out an exception to the rule in section 1322(b)(2), which prohibits the modification of the rights of holders of claims secured solely by a security interest in real estate that is the debtor‘s principal residence. It provides that if the last payment on the original payment schedule for such a mortgage is due before the final payment under the plan is due the debtor may pay the claim as modified pursuant to section 1325(a)(5).
The legislative history of the provision states that it was intended to overrule the decision of the Court of Appeals for the Third Circuit in First National Fidelity Corp. v. Perry, which held that a debtor could not utilize section 1325(a)(5) to provide for a home mortgage protected from modification by section 1322(b)(2) . . .
Because the plan may not extend beyond five years, this section will encompass short-term mortgages, fully matured mortgages, long-term mortgages on which the debtor has nearly completed payments, and mortgages with balloon payments. Congress obviously believed that debtors with such mortgages needed additional protection. Short-term and balloon payment mortgages often have high rates or terms that are particularly unfavorable, which Congress has deemed deserving of close scrutiny . . .
The exception from the modification prohibition also overrules for such mortgages the Supreme Court‘s decision in Nobelman v. American Savings Bank. That decision was based solely on section 1322(b)(2), to which section 1322(c) is an [subsequently enacted] exception. Again, it is not surprising that Congress would create an exception for the types of mortgages described above, which are often undersecured.
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:
Emphasizing that other aspects of Section 1322(c)(2)—not highlighted in Witt [the prior Fourth Circuit decision being overruled]—indicate that Congress intended for the exception to permit modification of “claims,” not just “payment[s],” other courts universally have criticized Witt‘s finding of ambiguity and attendant reliance on the statute‘s legislative history. See, e.g., In re Paschen, 296 F.3d at 1209; In re Eubanks, 219 B.R. 471, 471-73 (B.A.P. 6th Cir. 1998); In re Tekavec, 476 B.R. 555, 556, n. 2 (Bankr. E.D. Wis. 2012); Geller v. Grijalva (In re Grijalva), No. 4:11-bk-25386-EWH, 2012 Bankr. LEXIS 1355, 2012 WL 1110291, at *3-4 (Bankr. D. Ariz. Apr. 2, 2012); In re Reeves, 221 B.R. 756, 760 (Bankr. C.D. Ill. 1998); In re Mattson, 210 B.R. 157, 158-59 (Bankr. D. Minn. 1997). Commentators have reached the same conclusion—the plain language of Section 1322(c)(2) authorizes Chapter 13 plans to modify claims, not just payment schedules. See Nat‘l Bankr. Rev. Comm‘n, Report of the National Bankruptcy Review Commission 237 (1997) (“[S]ection 1322(c)(2) authorizes a stripdown of an undersecured residentiаl mortgage if final payment would become due during the course of the Chapter 13 plan.“); 8 Collier on Bankr. (MB) ¶ 1322.17 (2018) (opining that “the plain language of [§ 1322(c)(2)] permits the modification of a claim on [a qualifying] home mortgage through the bifurcation of that claim into secured and unsecured components, with the unsecured component crammed down pursuant to section 1325(a)(5),” and characterizing Witt as a “strained reading of the language” that runs “contrary to accepted canons of statutory construction, as well as the great weight of authority, and inconsistent with other language in the subsection that specifically referred to section 1325(a)(5)“).
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
Moving to
To determine the allowed secured claim, Congress provides in
Debtor is correct that Congress has created an exception from the limitations of
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:
- No high ceilings
- No steeply pitched roof
- $96,050.00 worth of necessary repairs due to lack of maintenance since its construction
- House was built with defective windows that have caused dry rot
- 29 windows need replacement due to water damage
- Major systems not in proper working order
- Heating and air system did not function properly
- Main floor ceiling water intrusion to be replaced due to dry rot damage
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. Stephеnson 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 pеriod. 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 (Apprаisal 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,
The subject is of good quality construction that conforms to the local neighborhoods in quality and design . . . The subject features moderate upgrades and has some unique design features to include coffered сeilings in the dining room, but does not appear to have any recent updating. The kitchen has upgraded cabinetry, granite counters and back splash, standard grade appliances, and tile flooring . . . Overall the dwelling appears in average to fair condition and water staining was noted on the ceiling areas in the family room / kitchen areas due to apparent leaking. It is recommended that a professional be consulted to mitigatе further
damage . . . There is also a large hole in the corner of the ceiling hallway near the half bathroom (see photo addendum). It is unclear why this exists as no water damage was noted in the immediate area.
. . .
All utilities were on at the time of inspection and mechanical systems appear to be functioning in a normal manner . . .
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 piсture 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 mаrketing 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 аre 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.
Dated: May 27, 2020
By the Court
Ronald H. Sargis, Judge
United States Bankruptcy Court
Instructions to Clerk of Court
Service List - Not Part of Order/Judgment
The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document via the BNC or, if checked ____, via the U.S. mail.
| Debtor(s) | Attorney for the Debtor(s) (if any) |
| Bankruptcy Trustee (if appointed in the case) | Office of the U.S. Trustee Robert T. Matsui United States Courthouse 501 I Street, Room 7-500 Sacramento, CA 95814 |
| Attorney for the Trustee (if any) | Secured Creditor: Real Time Resolutions, Inc. c/o Renee M. Parker, Esq. 27455 Tierra Alta Way, Ste. B Temecula, CA 92590 |