On an issue where the courts are divided, Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., ruled that a joint tenant may strip an underwater lien from property even though the co-owner is not in bankruptcy.
The debtor owned real property with someone else as joint tenants with right of survivorship, or JTWROS. The second owner did not file bankruptcy.
The property was subject to two mortgages. The parties agreed that the property was worth slightly less than the outstanding balance on the first mortgage.
The debtor commenced an adversary proceeding to strip off the second mortgage. The holder of the second mortgage objected. Reciting the underlying statutory law under Section 506, Judge Huennekens sided with the debtor in his October 7 opinion.
Section 506(a)(1) says that a claim is an allowed secured claim only to the extent of the value of the property to which the attaches. Under Section 506(d), a lien is void to the extent that the lien secures a claim that is not an allowed secured claim.
As a result of Section 506(d), Judge Huennekens said that the second lien in an ordinary case would be “void” — that is, stripped off. The “remaining question,” he said, “is whether the Court should ignore the plain operation of the Bankruptcy Code due to the manner in which the Property is titled.”
Judge Huennekens was faced with a Fourth Circuit opinion holding that when a married couple own property as tenants by the entireties, but only one files bankruptcy, the debtor-spouse may not strip off an underwater lien. Alvarez v. HSBC Bank USA, N.A. (In re Alvarez), 733 F.3d 136 (4th Cir. 2013).
The result in Alvarez, Judge Huennekens said, was “dictated by the unique nature of the parties’ ownership interest in tenants by the entirety property.” With entireties property, one spouse cannot alienate or encumber his or her interest in the property. Stripping a lien on entireties property, he said, would be “impermissible” because it “would effectuate a unilateral severance of the entireties estate.”
“No similar proscription applies to real property titled as” JTWROS, Judge Huennekens said. In Virginia, there is no prohibition on unilateral severance of JTWROS property, thus making Alvarez “inapplicable,” he said.
To strip off the lien, Judge Huennekens had another hurdle: A bankruptcy court decision from Pennsylvania limited the amount of the lien strip on JTWROS property to the debtor’s one-half interest in the property. Miller v. Sul (In re Miller), 299 F.3d 183 (3d Cir. 2002).
Judge Huennekens was not persuaded by Miller, because it involved stripping a lien that impaired an exemption under Section 522(f), not a lien strip under Section 506. Stripping a lien under Section 506, he said, “is predicated upon a complete lack of equity in property.”
Judge Huennekens held that the second lien “may be stripped off the Property without regard to whether the joint tenant has filed bankruptcy,” because the “plain language of the Bankruptcy Code controls.” Ruling otherwise, he said, would “contravene the clear dictates of the Bankruptcy Code.”
Judge Huennekens added a caveat: To strip the underwater lien, the debtor must both confirm a chapter 13 plan and complete payments under the plan.
On an issue where the courts are divided, Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., ruled that a joint tenant may strip an underwater lien from property even though the co-owner is not in bankruptcy.
The debtor owned real property with someone else as joint tenants with right of survivorship, or JTWROS. The second owner did not file bankruptcy.
The property was subject to two mortgages. The parties agreed that the property was worth slightly less than the outstanding balance on the first mortgage.
The debtor commenced an adversary proceeding to strip off the second mortgage. The holder of the second mortgage objected. Reciting the underlying statutory law under Section 506, Judge Huennekens sided with the debtor in his October 7 opinion.
Section 506(a)(1) says that a claim is an allowed secured claim only to the extent of the value of the property to which the attaches. Under Section 506(d), a lien is void to the extent that the lien secures a claim that is not an allowed secured claim.
As a result of Section 506(d), Judge Huennekens said that the second lien in an ordinary case would be “void” — that is, stripped off. The “remaining question,” he said, “is whether the Court should ignore the plain operation of the Bankruptcy Code due to the manner in which the Property is titled.”