Bankr. E.D.N.C.: In re Cooper – Valuation and Lien Seniority Determined as of Petition Date for Lien Strip

Summary:

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
depreciating collateral.
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:

Cooper – Valuation and Lien Seniority Determined as of Petition Date for Lien Strip

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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