The petition date is the proper date for deciding whether there is equity to prevent a subordinate lien from being stripped off in chapter 13, according to Bankruptcy Judge Christopher J. Panos of Worcester, Mass.
Judge Panos also rejected the lender’s contention that the Supreme Court’s Caulkett decision changed the law and no longer allows underwater subordinate liens to be stripped off in chapter 13.
The facts were simple. The second mortgage lender agreed that the debtors’ home was worth less than the first mortgage on the filing date. However, the subordinate lender had an appraisal showing some equity in the second mortgage nine months after filing, when the debtor’s motion to strip off the subordinate lien came up for hearing.
In his March 29 opinion, Judge Panos said that the statute, Section 506, “provides minimal guidance” about the valuation date when it comes to strip-off. He followed the “general consensus” that courts adopt a “flexible approach” in determining secured status.
Using the “flexible approach,” Judge Panos chose the filing date, “absent unusual circumstances.” He said the filing date “is commonly the most logical point to establish the value of the debtor’s property and the status of a secured claim.”
Using the filing date, he said, would discourage parties from “improperly delaying or accelerating” the valuation proceeding.
The lender contended that Bank of America v. Caulkett, 135 S. Ct. 1995, 192 L.Ed.2d 52 (2015), means that strip-off is also not permissible in chapter 13. In Caulkett, the Supreme Court held that debtors cannot strip off wholly unsecured subordinate mortgages in chapter 7, as lower courts are permitting them to do in chapter 13.
Judge Panos said that “Caulkett did address subparagraph (a) of Section 506 of the Bankruptcy Code and certainly did not address the interplay between that section and Section 1322(b)(2) in the chapter 13 context.”