Bank of the Mountains granted a loan to debtors secured by a second mortgage on debtors’ primary residence.

Debtors filed a Chapter 7 bankruptcy, which was later converted to a Chapter 13 case.

Debtors listed the bank as an unsecured creditor since the value of their residence was less than the balance owing on the first mortgage, thereby leaving the bank with no equity on its second mortgage.

The question before this court is different than the issue resolved by the U.S. Supreme Court in the case of Nobelman v. American Savings Bank, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993).

In Nobelman, the court ruled that the Bankruptcy Code prohibits a Chapter 13 debtor from bifurcating a secured lender’s mortgage and treating the claim as secured only to the extent of the value of the security (debtor’s residence). There, debtors argued, any claim exceeding the fair market value of the mortgaged residence should be treated as an unsecured claim. The Supreme Court rejected debtors’ position and held that debtors could not split a mortgage holder’s claim into a “secured” and “unsecured” claim.

In the immediate case, however, neither the debtors, nor the second mortgagee, had any equity in the property, since its fair market value was less than the balance owing on the first mortgage.

Here, the court held that a Chapter 13 bankrupt could “strip-off” (as opposed to “cram-down”) the second mortgage holder’s lien. The Bankruptcy Code only protects a creditor holding a mortgage on debtors’ primary residence where the mortgagee has some equity in the property; since the fair market value of the real estate was less than the balance on the first mortgage, the court held the second mortgage was an unsecured claim. In re Williams, 161 B.R. 27.

Author: Charles R. Harroun, Attorney at Law