The Coopers had a home equity line of credit with First Bank. They refinanced their home with AHMS, which directed First Bank to close the line of credit, but the closing attorney failed to do so. The Coopers subsequently drew the available funds from the line of credit and filed Chapter 13 bankruptcy, with First Bank owed approximately $90,000 and AHMS owed approximately $160,000 .
Extended litigation ensured between AHMS and First Bank, with a settlement ultimately providing that the lien of First Bank (at that point assigned to title insurance) would be subordinated to the AHMS lien.
The Coopers then sought to strip-off the lien of First Bank pursuant to 11 U.S.C. § 506 and In re Kidd, asserting a value for the house as of the petition date of $147,000 and currently $154,000. First Bank countered that the value was $212,000 based on the tax value at the date of filing.
The bankruptcy court evaluated the split in opinions regarding whether the property should be valued as of the petition date, as urged by First Bank, or at confirmation, as the Coopers contended. The court distinguish other decisions from the E.D.N.C. as either inapposite “dirt for debt” or judgment lien avoidance cases. Other cases that used an equitable analysis, including Aubain v. LaSalle Nat’l Bank (In re Aubain), 296 B.R. 624, 636 (Bankr. E.D.N.Y. 2003), and Wood v. LA Bank (In re Wood), 190 B.R. 788, 789, (Bankr. M.D. Pa. 1996), “both concluded that while a hard and fast rule did not apply, the petition date was the proper date for valuation for purposes of stripping a consensual lien after conducting an equitable analysis.” Even under the factors used in those cases, the applicable date for the Cooper’s valuation was the petition date.
The bankruptcy court then extended the application the Wood factors to determine which lien priority, viz. was First Bank or AHMS senior, was appropriate. These include:
1. The impact of the debtor’s efforts on the postpetition change in value.
2. The expectancies of the parties at the time they may have made the loan
agreement (if any).
3. The desirability of uniformity. Will the application of different dates for
valuation purposes reach an absurd result?
4. The convenience of administration.
5. The equitable concept that those who bear the risk should benefit from the
rise in value.
6. A resulting windfall to any one party should be discouraged.
7. The bankruptcy policy set forth in section 552(b) which extends prepetition
liens to postpetition proceeds in certain situations.
8. The bankruptcy policy set forth in 11 U.S.C. § 362(d) which encourages the
tendering of adequate protection payments to a creditor holding
9. The oft-stated policy of bankruptcy to secure the debtor a “fresh start.”
Based on the use by the Coopers’ “questionable action in drawing on a credit line designated for cancellation”, the equitable nature of bankruptcy, the court held that using the lien seniority as of the petition date was mandated and the First Bank lien could not be strip.
For a copy of the opinion, please see: