Tag Archives: adversary proceeding

What Homeowners Should Know About Foreclosure Defense

10 Friday May 2019

Posted by in Banks and Lenders, Case Study, Credit, Federal Court, Foreclosure, Foreclosure Crisis, Foreclosure Defense, Fraud, Judicial States, Loan Modification, Mortgage fraud, Mortgage Laws, Non-Judicial States, Pro Se Litigation, State Court, Your Legal Rights

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Over the past few years, a growing number of homeowners in the foreclosure process have begun to fight back, by stalling foreclosure proceedings or stopping them altogether. The legal strategy employed by these homeowners is known as foreclosure defense.

Since 2007, nearly 4.2 million people in the United States have lost their homes to foreclosure. By early 2014, that number is expected to climb to 6 million. Historically, the legal process of foreclosure, one that requires a homeowner to return his or her house to a lender after defaulting on a mortgage, has tilted in favor of the banks and lenders — who are well-versed in the law and practice of foreclosure.

The simplest way to avoid foreclosure is by modifying the mortgage. In a mortgage modification, the homeowner convinces the lender to renegotiate the terms of the mortgage in order to make the payments more affordable.

A mortgage modification can include:

  • A reduction or change in the loan’s interest rate.
  • A reduction in the loan’s principal.
  • A reduction or elimination of late fees and penalties for non-payment.
  • A reduction in your monthly payment.
  • Forbearance, to temporarily stop making payments, or extend the time for making payments.

The goal of the foreclosure defense strategy is to prove that the bank does not have a right to foreclose. The chances of success rest on an attorney’s ability to challenge how the mortgage industry operates. The strategy aims to take advantage of flaws in the system, and presumes illegal or unethical behavior on the part of lenders.

Foreclosure defense is a new concept that continues to grow alongside the rising tide of foreclosure cases. While some courts accept foreclosure defense arguments, others find them specious and hand down decisions more beneficial to banks than to homeowners.

A growing number of victories by homeowners in state and federal courts have altered the foreclosure landscape dramatically, giving optimism to tens of thousands of other homeowners in similar situations. And because many of America’s large banks have acknowledged unorthodox, unaccepted or even illegal practices in the areas of mortgages, loan modifications and foreclosures, they inadvertently have given homeowners additional ammunition with which to fight.

Foreclosure Defense Varies by State

A major strategy of foreclosure defense is to make a bank substantiate clear chains of title for a mortgage and a promissory note. If any link in either chain is questionable, it can nullify a lender’s ability to make a valid claim on a property.

The foreclosure process varies somewhat from state to state, depending on whether your state uses mortgages or deeds of trust for the purchase of real property. A mortgage or deed of trust outlines a transfer of an interest in a property; it is not, in itself, a promise to pay a debt. Instead, it contains language that gives the lender the right to take the property if the borrower breaches the terms of the promissory note.

If you signed a mortgage, it generally means you live in a state that conducts judicial foreclosures, meaning that a lender has to sue in court in order to get a judgment to foreclose. If you signed a deed of trust, you live in a state that conducts non-judicial foreclosures, which means that a lender does not have to go to court to initiate a foreclosure action.

In a judicial state, homeowners have the advantage because they can require that the lender produce proof and perfection of claim, at the initial court hearing. In a non-judicial state, the lender does not have to prove anything because the state’s civil code gives it the right to foreclose after a notice of default has been sent. So in non-judicial states, a homeowner must file a civil action against the lender to compel it to provide proof of claim.

Regardless of whether you signed a mortgage or a deed of trust, you also signed a promissory note — a promise to pay back a specified amount over a set period of time. The note goes directly to the lender and is held on its books as an asset for the amount of the promised repayment. The mortgage or deed of trust is a public record and, by law, must be recorded in a county or town office. Each time a promissory note is assigned, i.e. sold to another party, the note itself must be endorsed with the name of the note’s new owner. Each time a deed of trust or mortgage is assigned to another entity, that transaction must be recorded in the town or county records office.

Foreclosure Defense and Chain of Title

Here is where foreclosure defense can begin to chip away at a bank’s claim on your property. In order for a mortgage, deed of trust or promissory note to be valid, it must have what is known as “perfection” of the chain of title. In other words, there must be a clear, unambiguous record of ownership from the time you signed your papers at closing, to the present moment. Any lapse in the chain of title causes a “defect” in the instrument, making it invalid.

In reality, lapses occur frequently. As mortgages and deeds began to routinely be bought and sold, the sheer magnitude of those transfers made it difficult, costly and time-consuming for institutions to record every transaction in a county records office. But in order to have some method of record-keeping, the banks created the Mortgage Electronic Registration System (MERS), a privately held company that tracks the servicing rights and ownership of the nation’s mortgages. The MERS holds more than 66 million American mortgages in its database.

When a foreclosure is imminent, MERS appoints a party to foreclose, based on its records of who owns the mortgage or deed of trust. But some courts have rejected the notion that MERS has the legal authority to assign title to a particular party in the first place. A court can decide MERS has no “standing,” meaning that the court does not recognize its right to initiate foreclosure since MERS does not have any financial interest in either the property or the promissory note.

And since MERS has essentially bypassed the county record-keeping system, the perfection of chain of title cannot be independently verified. This is where a foreclosure defense can gain traction, by questioning the perfection of the chain of title and challenging MERS’ legal authority to assign title.

Promissory Notes are Key to Foreclosure Defense

Some courts may also challenge MERS’ ability to transfer the promissory note, since it likely has been sold to a different entity, or in most cases, securitized (pooled with other loans) and sold to an unknown number of entities. In the U.S. Supreme Court case Carpenter v. Longan, it was ruled that where a promissory note goes, a deed of trust must follow. In other words, the deed and the note cannot be separated.

If your note has been securitized, it now belongs to someone other than the holder of your mortgage. This is known as bifurcation — the deed of trust points to one party, while the promissory note points to another. Thus, a foreclosure defense claims that since the relationship between the deed and the note has become defective, it renders the deed of trust unenforceable.

Your promissory note must also have a clear chain of title, according to the nation’s Uniform Commercial Code (UCC), the body of regulations that governs these types of financial instruments. But over and over again, borrowers have been able to demonstrate that subsequent assignments of promissory notes have gone unendorsed.

In fact, it has been standard practice for banks to leave the assignment blank when loans are sold and/or securitized and, customarily, the courts have allowed blank assignment to be an acceptable form of proof of ownership. However, when the Massachusetts Supreme Court in U.S. Bank v. Ibenez ruled that blank assignment is not sufficient to claim perfection, it provided another way in which a foreclosure can be challenged.

In their most egregious attempts to remedy these glaring omissions, some banks have actually tried to reverse-engineer chains of title, using fraudulent means such as:

  • Robo-signing of documents.
  • False notary signatures.
  • Submission of questionable, inaccurate or patently counterfeit affidavits.

Exposure of these dishonest methods halted many foreclosures in their tracks and helped increase governmental scrutiny of banks’ foreclosure procedures.

Other Foreclosure Defense Strategies

Another option for a homeowner who wishes to expose a lender’s insufficient perfection of title is to file for bankruptcy. In a Chapter 7 filing, you can declare your home an “unsecured asset” and wait for the lender to object. This puts the burden of proof on the lender to show a valid chain of assignment. In a Chapter 13 bankruptcy, you can file an Adversary Proceeding, wherein you sue your lender to compel it to produce valid proof of claim. The Bankruptcy Code requires that your lender provide evidence of “perfected title.”

Another foreclosure defense argument explores the notion of whether the bank is a real party of interest. If it’s not, it doesn’t have the right to foreclose. For example, if your loan has been securitized, your original lender has already been paid. At that point, the debt was written off and the debt should be considered settled. In order to prove that your original lender has profited from the securitization of your mortgage, it is advised that you obtain a securitization audit. The audit is completed by a third-party researcher who tracks down your loan, and then provides you with a court-admissible document showing that your loan has been securitized.

A foreclosure defense can also argue that once a loan has been securitized, or converted to stock, it is no longer a loan and cannot be converted back into a loan. That means that your promissory note no longer exists, as such. And if that is true, then your mortgage or deed of trust is no longer securing anything. Instead of the bank insisting that you have breached the contract specified in the promissory note, foreclosure defense argues that the bank has actually destroyed that agreement itself. And if the agreement doesn’t exist, how can it be enforced? A corollary to this argument states that your loan is no longer enforceable because it is now owned by many shareholders and a promissory note is only enforceable in its whole entirety. How can thousands of people foreclose on your house?

While the foreclosure defense strategy is legal in nature, and can be handled differently by different courts, it should not be ignored when preparing a case.

The tactic of attacking a lender’s shoddy or illegal practices has proven to be the most successful strategy of foreclosure defense, since most courts are loathe to accept unlawful or unethical behavior, even from banks. If a homeowner can present clear instances of lost or missed paperwork, demonstrate that notes were misplaced or improperly endorsed, or prove that documents were forged, robo-signed, or reversed-engineered, the more likely a court will rule in his or her favor.

If you are considering a foreclosure defense, you have two options, you can either represent yourself in the Court as a Pro Se Litigant, (USING OUR FORECLOSURE DEFENSE PACKAGE), if you cannot afford to pay Attorneys Fees, as foreclosure proceeding can take years while you are living in your home WITHOUT PAYING ANY MORTGAGE. Or You may retain a Legal Counsel to Defend you. If you chose the second option, it is imperative that you retain the services of professional legal counsel. Regardless of how educated you are about the process, this is an area of law that requires a well-thought-out, competent presentation in a State or Federal court. Nonetheless, the Attorneys fees for foreclosure defense can accumulate over the years to thousands and even tens of thousands of dollars, that is why most homeowners, opt to represent themselves in the proceedings which can take anywhere between 1-7 years, while homeowners are living in their homes Mortgage-Free. The good news is that most foreclosure defense Attorneys equally use the same materials found in our foreclosure defense package to defend homeowner’s properties, and with these same materials, you can equally  represent yourself as a Pro Se (Self Representing), litigant.

A successful foreclosure defense may prohibit or delay the foreclosure process or it simply may induce a lending institution to negotiate a loan modification that allows you to stay in your home — which, of course, was the goal in the first place. You can equally be awarded damages by the courts for mortgage law violations by the lenders, in addition to loan modification.

When Homeowner’s good faith attempts to amicably work with the Bank in order to resolve the issue fails;

Home owners should wake up TODAY! before it’s too late by mustering enough courage for “Pro Se” Litigation (Self Representation – Do it Yourself) against the Lender – for Mortgage Fraud and other State and Federal law violations using foreclosure defense package found at https://fightforeclosure.net/foreclosure-defense-package/ “Pro Se” litigation will allow Homeowners to preserved their home equity, saves Attorneys fees by doing it “Pro Se” and pursuing a litigation for Mortgage Fraud, Unjust Enrichment, Quiet Title and Slander of Title; among other causes of action. This option allow the homeowner to stay in their home for 3-5 years for FREE without making a red cent in mortgage payment, until the “Pretender Lender” loses a fortune in litigation costs to high priced Attorneys which will force the “Pretender Lender” to early settlement in order to modify the loan; reducing principal and interest in order to arrive at a decent figure of the monthly amount the struggling homeowner could afford to pay.

If you find yourself in an unfortunate situation of losing or about to lose your home to wrongful fraudulent foreclosure, and need a complete package that will show you step-by-step litigation solutions helping you challenge these fraudsters and ultimately saving your home from foreclosure either through loan modification or “Pro Se” litigation visit: https://fightforeclosure.net/foreclosure-defense-package/

If you have received a Notice of Default “NOD”, take a deep breath, as this the time to start the FIGHT! and Protect your EQUITY!

If you do Nothing, you will see the WRONG parties WITHOUT standing STEAL your home right under your nose, and by the time you realize it, it might be too late! If your property has been foreclosed, use the available options on our package to reverse already foreclosed home and reclaim your most prized possession! You can do it by yourself! START Today — STOP Foreclosure Tomorrow!

If you are a homeowner already in Chapter 13 Bankruptcy and needs to proceed with Adversary Proceeding to challenge the validity of Security Interest or Lien on your home, Our Adversary Proceeding package may be just what you need.

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What Homeowners Must Know After they Have Been Sued in a Bankruptcy Adversary Proceeding

18 Monday Jun 2018

Posted by in Bankruptcy, Federal Court, Foreclosure Defense, Judicial States, Litigation Strategies, Non-Judicial States, Pleadings, Pro Se Litigation, Trial Strategies, Your Legal Rights

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This post will be helpful to the Debtor when defending against a creditor’s/trustee’s objection to your discharge or the filing of a Complaint for Nondischargeability based upon fraud/conversion; however, this post may also assist the Debtor in bringing an adversary proceeding should one be necessary.

Introduction

An adversary proceeding is a lawsuit brought within your bankruptcy. This lawsuit normally centers around whether a particular debt or all of your debts are dischargeable (or forgiven) through the act of your filing bankruptcy. These lawsuits usually focus around some alleged improper act on your part, including fraud, misrepresentation, or your failure to abide by the Bankruptcy Code and accompanying Rules.

You are now at the point of the adversary process where you have received, by mail or by personal service, the complaint filed by your creditor which asks the Court to decide whether or not that particular obligation should be part of your bankruptcy discharge or an objection to your overall discharge should be granted.

This section of the adversary proceeding packet is to inform you of what your obligations are in order to prepare for a trial. Note that there are references to the bankruptcy rules: Local Rules of Bankruptcy Practice = LR; Federal Rules of Bankruptcy Procedure = Fed.R.Bankr.P. You may also find both types of Rules at the county law library or you may access the Local Rules at the court’s website http://www.uscourts.gov. You should take a look at these rules if you have any questions about the information given in this section.

Step 1: Answer

After you receive a complaint, you must file an answer with the clerk of the Bankruptcy Court within 30 days after issuance of the summons. (Fed.R.Bankr.P. 7012) You must provide a copy of that answer to the creditor’s attorney.

Step 2: Pre-Trial Conference

Note that the cover sheet you receive from the Court will set forth a pre-trial conference date in the lower right-hand corner of the Summons. You must attend that hearing. At that time, the Court will set parameters for trial. The Court may also discuss with the parties whether or not any settlement is possible. Prior to this pre-trial conference with the Court, and within thirty (30) days after you have answered the complaint, you are required to meet with the attorney for the creditor to discuss how discovery will be conducted in the case. After you have had this discussion and no later than fourteen (14) days after the meeting with the attorney, the parties are required to submit a discovery plan. (Fed.R.Bankr.P. 7016 and LR 7016) This plan is a form which the creditor’s counsel will have and will be filled out by both parties. The form will then be submitted to the Court and the Court will then approve, disapprove or modify the discovery plan and enter any other orders that may be appropriate.

Step 3: Discovery

After you have gone through the preparation of the discovery plan and have had it approved by the Court, you will then conduct your discovery. Local Rule 7026 will provide you with information as to what the parties may or may not do during the discovery process. You may also want to look at Local Rules 7026 through and including 7036 and Fed.R.Bankr.P. 7026 through and including 7036 which gives further information regarding some of the discovery tools or requirements.

Step 4: Motions

You may find that throughout the time frame prior to trial that motions are being filed. Motions may be filed by either party. If you are served with a motion in your adversary proceeding, please be advised that you are required to file your opposition or response with the Court and serve your response to the creditor’s attorney not more than fifteen (15) days after you have received the motion and, in no event, not later than five (5) business days prior to the date set for the hearing on the motion. (Fed.R.Bankr.P. 9013 and Local Rule 9014) Make sure that you provide counsel with a copy of your response.

When you get to Court, you are basically going to supplement what is in your opposition or your motion so the Court can make a well-informed analysis of the situation and then deliver an appropriate decision. Please note that when you are in front of the Court, your time is limited. Generally, a motion is limited to approximately five minutes for both sides. It is the feeling of all judges in our district that if all motions and oppositions are well-drafted and timely filed, there is no reason to spend lengthy periods with oral argument. Therefore, you will be expected to come in to court, make a brief presentation and then sit down.

Step 5: Trial

After you have completed all discovery and all motions, you will then be at the point where the parties are ready to proceed with trial. Your trial date will be assigned to you at the pre-trial conference and the Court will generally schedule the trial within 60 and 120 days depending upon the nature of the matter being tried.

Approximately two weeks prior to the trial, you are required to file with the Court a trial statement, a list of witnesses, and a list of exhibits. You must also exchange these documents with the attorney for the creditor. If you and the attorney for the creditor can agree on what the basic issues in trial are going to be, the trial statement may be filed jointly. In other words, one statement will represent the facts and information for both sides to the Court.

The day before the trial, the parties will mark all the exhibits and any supplemental information that needs to be added to the trial statements. Although you are not required to agree with the attorney for the creditor as to what exhibits may be introduced into evidence, it is strongly encouraged that the parties try to agree to all exhibits to be placed before the Court in an effort to have an economical and efficient adjudication of the case.

Certain documents have been included in this packet so that you will have the ability to understand what needs to be filed with the Court prior to trial. However, it is strongly recommended that you access the court’s website at http://www.uscourts.gov and download a copy of the Local Rules. These will prove very useful to you through the course of the adversary proceeding. You may also wish to check with the county law library for a copy of the Local Rules.

All bankruptcy judges are willing to set up a time to discuss whether or not the case may be settled. Many times, having an impartial third party listening to the problems will allow negotiations to flow freely and hopefully obviate the need for the trial. If a settlement conference is set up, it will not be the judge in front of whom this matter will be heard, so you need not fear that you will be prejudiced in any way if this matter is not settled.

COURTROOM ETIQUETTE BETWEEN THE COURT AND THE PARTIES

1.  Don’t take the argument personally (no personal slurs against the other party.)

2. Advocacy does not mean we cannot be civil and communicate with the other side.

3. Adversary proceedings are intended to be negotiated if possible.

4. If you cannot resolve the matter and proceed to trial, remember the following:

a. Dress Appropriately- Nice attire such as a suit or slacks is acceptable. Please no hats, shorts, thongs, tank tops, etc.

b. Your statements should be addressed to the court and not to the other side- The only time you should speak to opposing counsel is during breaks or with the Court’s permission after requesting a break.

a. Do not interrupt the other side or the judge when they are speaking.

b. Remember to follow the rules as explained in the attached documents regarding the filing of your trial statement, list of exhibits, witnesses, etc.

DEALING WITH THE LAW

1. Understand your responsibilities and respond accordingly. You are held to the same standard as an attorney when presenting your case and arguing the legal issues. You may need to educate yourself on the law at issue by visiting the law library and reading the Bankruptcy Code and cases dealing with those sections of the code involving your case.

2. Sanctions – Remember that if you act disrespectful to the Court or opposing attorney, or if you lie in your court pleadings or under oath at trial, the Court has the power to sanction you by either assessing a fee or ruling for the opposing party.

3. If you have any questions regarding your responsibilities, call the other side’s attorney they will answer procedural questions, but cannot assist you with your legal argument.

4. Know the Local Rules – you can obtain a copy by accessing the court’s website at http://www.uscourts.gov You may also be able to obtain the rules from the county law library or from opposing counsel.

 When Homeowner’s good faith attempts to amicably work with the Bank in order to resolve the issue fails;

Home owners should wake up TODAY! before it’s too late by mustering enough courage for “Pro Se” Litigation (Self Representation – Do it Yourself) against the Lender – for Mortgage Fraud and other State and Federal law violations using foreclosure defense package found at https://fightforeclosure.net/foreclosure-defense-package/ “Pro Se” litigation will allow Homeowners to preserved their home equity, saves Attorneys fees by doing it “Pro Se” and pursuing a litigation for Mortgage Fraud, Unjust Enrichment, Quiet Title and Slander of Title; among other causes of action. This option allow the homeowner to stay in their home for 3-5 years for FREE without making a red cent in mortgage payment, until the “Pretender Lender” loses a fortune in litigation costs to high priced Attorneys which will force the “Pretender Lender” to early settlement in order to modify the loan; reducing principal and interest in order to arrive at a decent figure of the monthly amount the struggling homeowner could afford to pay.

If you find yourself in an unfortunate situation of losing or about to lose your home to wrongful fraudulent foreclosure, and need a complete package that will show you step-by-step litigation solutions helping you challenge these fraudsters and ultimately saving your home from foreclosure either through loan modification or “Pro Se” litigation visit: https://fightforeclosure.net/foreclosure-defense-package/

What Homeowners Need to Know about Lien Stripping in Secured/Valuation of Claims in Bankruptcy & Adversary Proceeding

28 Monday Nov 2016

Posted by in Bankruptcy, Federal Court, Foreclosure Defense, Judicial States, Non-Judicial States, Pro Se Litigation

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SECTION 506 LIEN STRIPPING & VALUATION

11 U.S.C. § 1322 (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… 11 U.S.C. § 506 (a)(1): An allowed claim of a creditor secured by a lien on property in which the estate has an interest, … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest … 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.

I. WHAT DOES IT MEAN TO STRIP THE LIEN? 11 U.S.C. § 506 describes how to determine whether a claim is secured. Section 506(a)(1) explains bifurcation (division) of an allowed claim into secured and unsecured parts—the secured part being “secured” by the collateral’s value, the unsecured part being the remaining amount of the claim in excess of the collateral’s value. For example, an allowed claim of $200,000 with collateral valued at $170,000 is bifurcated between a secured claim of $170,000 and an unsecured claim of $30,000, resulting in “lien stripping” of $30,000. If the $170,000 collateral is related to an allowed first claim of $200,000 and an allowed second claim of $10,000, the $10,000 claim can be “stripped” as well. The distinction may be identified as “stripping down” (or a “cramdown” of) the lien to the value of the collateral or “stripping off” the lien completely.

II. CHAPTER 7 CASES – UNSECURED JUNIOR MORTGAGE MAY NOT BE STRIPPED OFF.
Dewsnup v. Timm, 502 U.S. 410 (U.S. 1987) prohibited Chapter 7 debtors from using 11 U.S.C. § 506(d) to void an undersecured lien on real property. Case law has extended Dewsnup to prohibit lien stripping on wholly unsecured liens (in Chapter 7 cases), holding that unless and until there is a claims allowance process, there is no basis for the debtor to avoid a lien under 11 U.S.C. § 506. The legislative history of Section 506 also makes it clear that lien stripping is permissible in reorganization chapters, but not in Chapter 7. See In re Talbert, 344 F.3d 555 (6th Cir. 2003), Concannon v. Imperial Capital Bank (In re Concannon), 338 B.R. 90 (Bankr.Fed.App. 2006).

III. CHAPTER 13 CASES – UNSECURED JUNIOR MORTGAGE MAY BE STRIPPED OFF.
a. Nobelman v. American Savings Bank, 508 U.S. 324 (U.S. 1993). A “strip down” or “cramdown” of claim that is secured by real property that is the debtor’s primary residence is prohibited. The United States Supreme Court held that after applying 11 U.S.C. § 1322(b)(2) and 11 U.S.C. § 506, a lien “strip down” of an undersecured home mortgage lien is impermissible in a chapter 13 case for a claim secured by the debtor’s principal residence, because it modifies the total package of rights for which such a claim holder bargained.

b. 11 U.S.C. § 1322(b), commonly known as the anti-modification clause, prevents debtors from changing the rights of creditors whose claims are secured only by a security interest in real property that is the debtor’s principal residence. Under various Circuit Court decisions interpreting Nobelman in Chapter 13 cases, §1322(b)(2) protections are no longer available to a creditor whose lien is a junior lien, and where the amount due to the senior lienholder(s) is greater than the value of the property pledged as security to that loan. Such creditor’s claims may be treated as an unsecured claim in the plan and paid consistent with other unsecured claimholders.

c. Majority view: While the anti-modification clause in § 1322(b) uses the term “claim” rather than “secured claim” and, therefore, applies to both the secured and unsecured part of a mortgage, the anti-modification clause still states that the claim must be “secured only by a security interest in … the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2) (emphasis added). If valuation of the property under §506(a) determines that a junior mortgage holder’s claim is wholly unsecured, then the bank is not in any respect a “holder of a claim secured by the debtor’s residence” under §1322(b). Accordingly, the junior mortgage holder simply has an unsecured claim and the anti-modification clause does not apply. On the other hand, if any part of the mortgagee’s claim is secured, then, under Nobleman’s interpretation of the term “claim,” the entire claim, both secured and unsecured parts, cannot be modified.

The several Circuit Courts that have ruled on the issue, including the Sixth Circuit, support the majority position allowing lien stripping of wholly unsecured junior mortgage liens. See Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2nd Cir. 2001); McDonald v. Master Fin., Inc.(In re McDonald), 205 F.3d 606 (3d Cir. 2000), cert. denied, 531 U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000); Bartee v. Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277 (5th Cir.2000); Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir.2002); Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, (9th Cir. 2002); Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000). The only variance in this uniformity among the circuits is an Eleventh Circuit opinion, which disagrees with the In re Tanner panel that originally decided the issue, but which followed the Tanner decision as established precedent in that circuit. See In re Dickerson, 222 F.3d 924 (11th Cir.2000). See also Domestic Bank v. Mann (In re Mann), 249 B.R. 831, 833 (B.A.P. 1st Cir. 2000); Griffy v. U.S. Bank (In re Griffey), 335 B.R. 166 (B.A.P. 10th Cir. 2005); Waters v. The Money Store (In re Waters), 276 B.R. 879 (Bankr.N.D.Ill. 2002); In re King, 290 B.R. 641 (Bankr.C.D.Ill. 2003).

d. Minority view: While the Circuit Courts are nearly uniform in support of the majority view, some Bankruptcy Courts take a minority view. They hold that a properly perfected mortgage claim is literally “secured only by a security interest in real property that is the debtor’s principal residence” within the meaning of §1322(b), irrespective of whether the claim is wholly or partially secured, or totally unsecured after the application of §506(a). They reason that this view is consistent with the emphasis in the Nobelman decision on the state law contractual rights bargained for by the mortgagor and mortgagee, and with the legislative history which indicates that §1322(b) was intended to encourage the flow of capital into the home lending market and to exempt such Mortgages from valuations and bifurcations as the result of an application of § 506(a). Cases following minority view include Barnes v. American Gen. Fin. (In re Barnes), 207 B.R. 588 (Bankr.N.D.Ill.1997).

e. The Hon. Keith Lundin has expressed support for the minority view, that Nobleman was concerned about protecting the state law rights of the residential mortgagee and did not consider the issue to be a question of valuation. Lundin’s view and the minority view is there is no justification, following the Nobelman decision, for courts to focus on the value, at the date of the petition, of the real property securing a debt as the threshold of whether the rights of the mortgagee may be modified. In the majority view, a mortgagee with $1.00 in equity receives the anti-modification protection of §1322(b), while the mortgagee with no equity does not. Keith M. Lundin, Chapter 13 Bankruptcy, 3d. Ed. §14.1, p. 221 (2000 & Supp. 2004)

f. Lien stripping in the Seventh Circuit:
i. Although every circuit court of appeals that has considered the question has followed the majority view, the Seventh Circuit Court of Appeals has not directly ruled on the issue; thus, lower courts in the Seventh Circuit may follow either the majority or the minority view.
ii. In the Northern District of Illinois, the cases go both ways. Barnes v. American Gen. Fin. (In re Barnes), 207 B.R. 588 (Bankr. N.D. Ill. 1997) (follows the minority view that 11 U.S.C. §1322(b)(2) prohibits stripping off wholly unsecured mortgages.) Waters v. Money Store (In re Waters), 276 B.R. 879 (Bankr. N.D. Ill. 2002) follows the majority position after a thorough analysis of both views. Also in the Northern District of Illinois, the district court in In re Holloway v. United States, 2001 U.S. Dist. LEXIS 16898 (N.D. Ill. Oct. 16, 2001) follows the majority view.

iii. In the Central District of Illinois, In re King, 290 B.R. 641 (Bankr. C.D. Ill. 2003) adopted Waters, supra.
iv. In In re Black, 2002 Bankr. LEXIS 1752 (Bankr. N.D. Ind. 2002), the Northern District of Indiana provides a comprehensive review of cases following the majority and minority views, and decides that stripping off a wholly unsecured mortgage from the debtor’s residence “represents the most appropriate reading of both [11 U.S.C.] § 1322(b)(2) and Nobelman.”

IV. EXCEPTIONS TO ANTI-MODIFICATION: – NOBELMAN EXCEPTIONS – § 1322(b)(2) provides that the Chapter 13 plan may 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. §1123(b)(5) says the same thing for Chapter 11 cases.

a. Debtor’s Principal Residence –
Principal Residence defined U.S.C. 101(13A) The term “debtor’s principal residence”–(A) means a residential structure, including incidental property, without regard to whether that structure is attached to real property; and (B) includes an individual condominium or cooperative unit, a mobile or manufactured home, or trailer.

b. Liens on attached property or curtilage?

c. When is the Principal Use determined?
i. Origination date or petition date?
ii. Is pre-petition “use planning allowed?”

d. “Secured Only By” – Effect of lien on residence as well as upon other assets.
i. Additional security interests in mortgage escrow accounts. A majority of courts have ruled that the grant of a security interest in an escrow fund for insurance and taxes by a Chapter 13 debtor’s second mortgage did not convey additional collateral. The anti-modification provision continues to apply. The debtor retained no interest in the funds once placed in escrow and so any grant of a security interest in such funds was meaningless and conveyed essentially no interest at all. 1st 2nd Mortgage Co. of NJ., Inc. v. Ferandos (In re Ferandos), 402 F.3d 147 (3d Cir. 2005). See also Boehmer v. Essex (In re Boehmer), 240 B.R. 837(Bankr. E.D.Pa. 1999); Rodriguez v. Mellon Bank, N.A. (In re Rodriguez), 218 B.R. 764 (Bankr. E.D. Pa. 1998); In re Abruzzo, 245 B.R. 201 (Bankr. E.D. Pa. 1999), vacated In re Abruzzo, 245 B.R. 2000 U.S. Dist. LEXIS 4936 (E.D. Pa. Apr. 7, 2000), on remand In re Abruzzo, 249 B.R. 78 (Bankr. E.D. Pa. 2000)
ii. Other view: Residential mortgage debt was not one secured “only by a security interest in real property” that was debtor’s principal home, within meaning of anti-modification provision of Chapter 13, where mortgagee had also been granted security interest in escrow for taxes and insurance premiums; mortgagee had additional security interest in escrowed funds, notwithstanding that, on petition date, that interest had not been perfected by delivery. Stewart v. U.S. Bank, 263 B.R. 728 (Bankr.W.D. Pa. 2001).
iii. Secured by additional assets other than the residence; cross collateralization clauses, overly broad security agreement?
1. Fixtures: will a security interest in fixtures destroy §1322 antimodification protection?
2. Mortgage extending mortgagee’s security interest to non-fixture appliances, as well as other personalty, removed mortgagee’s claim from category of claims secured only by residential realty, for purpose of preventing Chapter 13 debtor from modifying mortgagee’s rights. In re Caster, 77 B.R. 8 (Bankr. E.D. Pa. 1987).
iv. Valuation- Under § 506 (a)(1), “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”(emphasis added). If a valuation of the property under §506(a) determines that a junior mortgage holder’s claim is wholly unsecured, then the mortgagee is not in any respect a “holder of a claim secured by the debtor’s residence” and the jr. mortgage holder’s claim may be modified and treated as an unsecured claim.

Date of Valuation –
a. Loan Origination Date or Date of Bankruptcy Petition?

2. Methodology of Valuation. Market value or liquidation value? When a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditor would receive if it hypothetically had to foreclose and sell the collateral. Neither the foreclosure value nor the costs of repossession are to be considered because no foreclosure is intended. . . . The fair market value is not ‘replacement value’ because the house is not being replaced. The fair market value is the price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree upon after the property has been exposed to the market for a reasonable time. Taffi v. United States (In re Taffi), 68 F.3d 306, 309 (9th Cir. 1995)

3. Current use or highest-best use? Should not calculate the value of the property on the value such property could demand if it were converted to some other use. The purpose of the valuation is to determine how much the creditor will receive for the debtor’s continued possession . . .. The foreclosure value is not relevant because no foreclosure is intended by the Plan. . . . Consequently, the value has to be the fair market value of what the debtors are using. Taffi v. United States (In re Taffi), 68 F.3d 306, 309 (9th Cir. 1995) Cannot deduct for hypothetical costs of sale – Huntington Nat’l Bank v. Pees (In re McClurkin), 31 F.3d 401 (6th Cir. 1994)
v. When is the Lien Stripped Off? The unsecured junior lien is not stripped off at confirmation. To allow lien strip at confirmation would encourage “mischief” such as the debtor’s post-confirmation sale of the property to an unsuspecting purchaser. Under BAPCPA section 1325(a)(5)(B)(i)(I)(bb), the plan must provide that the claim holder “retain[s] the lien securing such claim until … discharge under section 1328….”
1. The junior lien is deemed satisfied and lien should be discharged or released only upon conclusion of the bankruptcy case. In re Jones, 152 B.R. 155 (Bankr. E.D. Mich. 1993).

2. The right to avoid a lien has not fully matured in a Chapter 13 context until a discharge is granted upon successful completion of the Chapter 13 Plan. Accordingly, the order confirming the Debtors’ plan will specifically provide that the Debtors’ house shall remain property of the estate, and shall not re-vest in the Debtors, until the Debtors are granted a discharge. Castle v. Parrish, 29 B.R. 869, 874 (Bankr. S.D. Ohio 1983)

3. A plan is inconsistent with the provisions of Chapter 13 when it purports to effectuate irrevocable lien avoidance on plan confirmation. In re McMillan 251 B.R. 484, 490 (Bankr.. E.D. Mich.2000)

4. If the Debtor is ineligible to receive a discharge due to prior discharge under 11 U.S.C. 1328(f) then the Debtor may not benefit from the lien stripoff. See In re Akram, 259 B.R. 371, 378-79 (Bankr.C.D.Cal.2001); In re King, 290 B.R. 641, 651(Bankr. C.D. Ill.2003)
vi. Hardship discharge? If the Debtor receives only a “hardship discharge” under 11 U.S.C. 1328(b) is the debtor entitled to the benefit of the lien strip and a discharge of the junior mortgage lien?
1. One line of cases holds that a creditor’s lien may be extinguished pursuant to the debtor’s plan. These cases use the following two lines of reasoning: First, the creditor’s lien is void upon the payment of the allowed secured claim pursuant to 11 U.S.C. § 506(d); and second, where §1322(b)(2) does not prevent a modification to the creditor’s lien rights, any concern about the debtor dismissing his case after the creditor’s lien is released, but prior to full payment under the plan, is outweighed by the policy of affording the debtor a fresh start. See, e.g., Bank One, NA v. Flowers, 183 B.R. 509 (N.D. Ill. 1995); In re Nicewonger, 192 B.R. 886 (Bankr.N.D.Ohio 1996); In re Hernandez, 175 B.R. 962 (N.D. Ill. 1994); In re Wilson, 174 B.R. 215 (Bankr. S.D. Miss. 1994); McDonough v. Plaistow Coop. Bank (In re McDonough), 166 B.R. 9 (Bankr. D. Mass. 1994); In re Cooke, 169 B.R. 662 (Bankr. W.D. Mo.1994); In re Schultz, 153 B.R. 170 (Bankr. S.D. Miss.1993); In re Lee, 156 B.R. 628 (Bankr. D. Minn.1993).

2. Another line of cases holds that a debtor may not obtain a release of a secured creditor’s lien until he successfully completes the confirmed plan and receives a §1328(a) discharge. See, e.g., In re Zakowski, 213 B.R. 1003 (Bankr. E.D. Wis.1997); In re Pruitt, 203 B.R. 134 (Bankr. N.D. Ind. 1996); In re Scheierl, 176 B.R. 498 (Bankr. D. Minn.1995);In re Jordan, 164 B.R.. 89 (Bankr. E.D. Mo.1994); In re Jones, 152 B.R. 155 (Bankr. E.D. Mich.1993); Gibbons v. Opechee Distribs. (In re Gibbons), 164 B.R. 207 (Bankr. D.N.H. 1993).

V. IS AN ADVERSARY PROCEEDING REQUIRED? Chapter 13 debtors may not need to file an adversary proceeding to strip the mortgagee’s lien. One court summarized the cases:
[I]t appears that no adversary proceeding is needed simply to value and declare void a totally unsecured claim. The majority of courts therefore hold that “the appropriate procedure for lien avoidance under Section 506 is by motion because lien avoidance is the inevitable byproduct of valuing a claim, which is accomplished by motion pursuant to Bankruptcy Rule 3012.” In re Sadala, 294 B.R. 180, 183 (Bankr. M.D. Fla. 2003) (collecting cases); see also, In re Millspaugh, 302 B.R. 90 (Bankr. D. Idaho 2003); In re Fisher, 289 B.R. 544 (Bankr. W.D.N.Y. 2003) (court allows proceedings to be prosecuted by motion in the absence of a specific objection by the mortgage holder that the proceeding be converted to an adversary proceeding); but see, e.g., In re Kressler, 252 B.R. 632 (Bankr. E.D. Pa. 2000) (espousing the minority view that an adversary proceeding is required); …Once the value of the secured claim is determined, the attendant lien is stripped off automatically under Section 506(d).” In re Sadala, 294 B.R. 180, 183 (Bankr. M.D. Fla. 2003) In re Robert, 313 B.R. 545, 549 (Bankr. N.D. N.Y. 2004).

These Courts have determined that lien stripping is a valuation issue, not a challenge to the “validity, priority, or extent of a lien” of F.R.B.P. 7001, requiring an adversary proceeding.

a. Courts have considered the “lien-stripping” effect of § 506 in the context of:
i. an adversary proceeding. See, e.g., Gaglia v. First Federal Sav. & Loan Asso., 889 F.2d 1304, 1305 (3d Cir. Pa.1989), overruled by Dewsnup v. Timm, 502 U.S. 410 (U.S. 1992); In re Lindsey, 823 F.2d 189, 191 (7th Cir. Ill. 1987); In re Cobb, 122 B.R. 22, 24(Bankr.E.D. Pa.1990); Bellamy v. Federal Home Loan Mortg. Corp., 122 B.R. 856, 857 (Bankr. D. Conn. 1991), aff’d In re Bellamy, 132 B.R. 810 (D.Conn.1991), aff’d In re Bellamy, 962 F.2d 176 (2d Cir. Conn. 1992); Goins v. Diamond Morttg. Corp., 119 B.R. 156, 157 (Bankr. N.D. Ill.1990); In re Garnett, 88 B.R. 123, 124 (Bankr. W.D. Ky.1988), aff’d United States on behalf of Farmers Home Admin. v. Garnett, 99 B.R. 757 (W.D. Ky. 1989); In re Crouch, 80 B.R. 364, 365 (Bankr. W.D. Va.1987); In re O’Leary, 75 B.R. 881, 882(Bankr. D. Or. 1987);
ii. a motion to avoid a lien. See, e.g., In re Jablonski, 88 B.R. 652, 653 (E.D. Pa. 1988); In re Chavez, 117 B.R. 733, 734 (Bankr. S.D. Fla. 1990); In re Marshall, 111 B.R. 325, 326 (Bankr. D. Mont. 1990); In re Demoff, 109 B.R. 902, 903 (Bankr. N.D. Ind.1989); In re Anderson, 88 B.R. 877, 878 (Bankr. N.D. Ind. 1988), In re Robert, 313 B.R. 545 (Bankr. N.D.N.Y. 2004) and,
iii. in an objection to a proof of claim. See, e.g., In re Jablonski, 88 B.R. 652, 653 (E.D. Pa. 1988); In re Chavez, 117 B.R .733, 734 (Bankr. S.D. Fla. 1990); In re Marshall, 111 B.R. 325, 326 (Bankr. D. Mont. 1990); In re Demoff, 109 B.R. 902, 903 (Bankr. N.D. Ind. 1989); In re Anderson, 88 B.R. 877, 878 (Bankr. N.D. Ind.1988).

b. Eastern District Court of Michigan- The Court has not to date required an adversary proceeding in any published opinion. In the case, In re Jones 152 B.R. 155 (Bankr. E.D. Mich. 1993); the Hon. Arthur Spector held that F.R.Bankr.P. 3012 permits § 506 valuations to be requested by motion, and noted that the advisory committee note relating to that rule distinguishes valuation proceedings from those subject to F.R.Bankr.P. 7001, and ruled that the debtor need not file an adversary proceeding to avoid a creditor’s lien under § 506. In re Hoskins, 262 B.R. 693(Bankr. E.D. Mich. 2001)

c. Western District of Michigan- a junior lien which is totally unsupported by any equity in property may be extinguished through Chapter 13 plan confirmation process, without need for adversary proceeding, as long as language in plan is sufficiently clear to put lienholder on notice of debtor’s intentions) (See also, In re Hoskins, 262 B.R. 693(Bankr. E.D. Mich. 2001)(Judge Spector), In re Fuller 255 B.R. 300, 306 (Bankr. W.D. Mich. 2000); In re Hudson, 260 B.R. 421 (Bankr. W.D. Mich. 2001); see also, In re Calvert, 907 F.2d 1069, 1072 (11th Cir. Ala. 1990);
i. Best Practice- Circuits have not specifically ruled. Debtors may wish to be cautious when deciding whether an adversary proceeding is required. If future appellate court decisions decide that an adversary proceeding is required, the lien strip-off may be subject to collateral attack. Cf. Ruehle v. Educ. Mgmt. Corp. (In re Ruehle), 412 F. 3d 679, 680 (6th Cir. 2005) (student loan discharge in plan void because adversary proceeding required).

VI. EFFECT OF DISMISSAL – A dismissal acts to undo bankruptcy and to restore property rights to the position in which they were found at commencement of case, as far as practicable, given facts of each case. Bankr.Code, 11 U.S.C. § 349(b).
i. Unless the court indicates otherwise, the general effect of an order of dismissal is to “restore the status quo ante; “it is as if the bankruptcy petition had never been filed. France v. Lewis & Coulter, Inc. (In re Lewis & Coulter, Inc.), 159 B.R. 188, 190 (Bankr. W.D. Pa. 1993); Lawson v. Tilem (In re Lawson), 156 B.R. 43, 45 (B.A..P. 9th Cir. Cal. 1993)).
ii. The legislative history of 11 U.S.C. § 349 states: The basic purpose of the subsection is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case…. Where there is a question over the scope of the subsection, the court will make the appropriate orders to protect rights acquired in reliance on the bankruptcy case. H.R.Rep. No. 595, 95th Cong., 1st Sess., 338 (1977); 1978 U.S.Code Cong. & Admin.News, 5963, 6294.
iii. 11 U.S.C. § 1325(a)(5)(B)(i)(II) requires a plan to provide that if a Chapter 13 case is “dismissed or converted without completion of the plan,” the lien is retained by the lien holder “to the extent recognized by applicable nonbankruptcy law.”

VII. CREDITOR DEFENSES

a. Mortgage is not a “Junior Lien”
i. Failure to record or properly record a senior mortgage. If junior lienholder lacked notice of the prior lien, consider action to determine whether a “junior lien” has priority.
ii. Defective/invalid liens. If a senior lien has defects that render the security instrument void, consider action to determine lien priority (e.g., acknowledgment, signatures, witnesses, description of the property).
iii. Can junior lienholder compel Ch. 13 Trustee or Debtor to avoid a senior lien, thus preserving Jr. lien? No, because any such senior lien avoided would be preserved to the bankruptcy estate to prevent a junior lienholder from improving his position. 11 U.S.C. § 551

b. Valuation of property supports Junior Lien- Appraisals of property may establish that the property actually is worth more than the amount of the senior lienholder’s secured claim.
1. Claims of senior lienholder may be overstated. In a close case, it may be useful to examine the claim of the senior lienholder for components that may improperly inflate the amount of the claim.

Consider objections to the claim for:
a. Fees and costs incurred after the petition was filed;
b. Property taxes, insurance premiums, or property preservation expenses that were incurred after the petition was filed;
c. Fees and costs that are not authorized to be charged to the borrower under the note and mortgage, unless or until notice to the debtor is given;
d. Unlawful fees and costs;
e. Whether funds in escrow account should be credited.
c. Motions to convert case to chapter 7.
i. See note above, regarding §1325(a)(5)(B)(i)(II) (effect of dismissal or conversion)
ii. General grounds to convert case. Strategic reasons to convert to Chapter 7?
The borrower cannot strip lien in Ch. 7 case. Nobelman v. American Savings Bank, 508 U.S. 324 (U.S. 1993); In re Talbert, 344 F.3d 555 (6th Cir. 2003).

VIII. SETTLEMENT CONSIDERATIONS /CREDITOR CONCEDES THAT LIEN STRIP IS AUTHORIZED- WHAT NEXT?
a. Seek a judgment, plan provision, or order that protect junior lienholder until conclusion of the case.
i. Order should confirm lien is preserved until successful completion of all payments and issuance of § 1328(a) Order of Discharge.
ii. The judgment and the order confirming the plan should state that any property encumbered by liens securing an allowed secured claim shall remain property of the estate until the plan is fully performed.
iii. Seek favorable judgment provisions that protect the junior lienholder until the case is concluded, such as “Future Default” provisions , and provisions requiring maintenance of adequate hazard insurance coverage, and prompt payment of property taxes.

b. Make a close examination of Debtor’s Income and Expenses and file timely objections to under reported income, and unsubstantiated, unreasonable and luxury expenditures, to maximize dividends to unsecured creditors.

c. Consider valid objections to untimely or defective claims of other unsecured creditors to maximize junior lienholder’s pro rata share.

d. Monitor plan payments, prompt payment of property taxes, and maintenance of adequate hazard insurance and seek dismissal in appropriate circumstances.

IX. OTHER EXCEPTIONS:
a. Short Term Mortgages – First Union Mortg. Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998) (Section 1322(c)(2) creates a statutory exception to the protection from modification for “short term” home mortgages in Chapter 13 cases; debtor can bifurcate undersecured second mortgage and pay allowable secured portion in full with interest consistent with § 1325(a)(5), while paying unsecured portion with other unsecured claims.)


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