CHAPTER 13 debtors are able to “strip” junior liens on their residences if there is no equity supporting the lien. To illustrate, debtor owes $100,000 of credit card debt, owns a house that he thinks is valued at $400,000. He has a home equity line of credit of $200,000. The balance of the first mortgage is $450,000. When he files for Chapter 13 relief, debtor files a motion to strip the HELOC of $200,000. He wants to get rid of the HELOC of $200,000. To support his motion to strip, he submits a current appraisal report that determines that the fair market value of his residence is $400,000. Since the balance of the first mortgage is $450,000 there is no equity supporting the HELOC so he is asking the court to get rid of the 2nd trust deed/HELOC of $200,000. The holder of the 2nd trust deed is debtor’s father in law, who upon receiving the motion to strip his 2nd trust deed, says to his wife, “I told you that our daughter should never have married that no good, good for nothing blob who calls himself our son in law!” Father in law hires me to oppose the motion to strip and I am able to submit an appraisal report for $500,000. At $500,000, there is $50,000 of equity supporting my client’s trust deed. Gov. Romney prepared our appraisal report. Pres. Obama prepared debtor’s appraisal report. Who will win?
In Re Strever, the Chapter 13 debtors said their home was worth $110,000, and subject to a first mortgage of $127,694, and a second mortgage of $24,625. Debtors filed a motion to strip the second mortgage. SunTrust Bank, the second mortgage holder opposed the motion to strip arguing that debtors undervalued their home.
The bank asserted that its lien could not be avoided because its claim was partially secured if the house was properly valued. Both sides had an appraiser testify at the valuation hearing. Debtor’s appraiser said the house was worth $105,000. She compared the price of the three recent sales of homes that in her view were similar to the debtors’ home. Two of the sales used were foreclosure sales. The debtors’ appraiser testified that appraisers did not use foreclosure sales in the past to estimate value, but because foreclosures had become so commonplace, it was appropriate to use them in current market valuations. She said that in today’s market, foreclosures contributed to a property’s market value. The bank’s appraiser disagreed. He said the house was worth $136,000. His appraisal was also based on the sale of three houses that were owned by the three little pigs that he viewed as being comparable to the debtors’ home. None of the sales involved foreclosures and the big bad wolf could not blow these houses down. He said foreclosures did not provide an accurate view of a property’s market value because banks tend to dump properties quickly to avoid owning a large number of properties. The bankruptcy court judge, who knew the three little pigs personally, found that when the debtors intend to keep their home and are attempting to strip off a second mortgage, then, for purposes of lien avoidance, the property’s fair market value should be determined without relying on foreclosure sales. “The fair market value best represents what a principal residence is worth to a debtor because it is the price that the residence would likely sell for in an arm’s length transaction. Even after a positive adjustment, foreclosure sales are not the most reliable indication of market value, as it merely estimates how much more the foreclosed property would have sold for in an arm’s length transaction between two individuals,” the court said. “For similar reasons, this Court finds that active listings are not reliable of an indication of value as arms length sales, as most properties likely sell for below the listing price.
Siding with the bank’s appraiser who was the judge’s son in law, the court denied the motion to strip.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.