Friday, January 22, 2010

Anti-Modification Provision Inapplicable to Wholly Unsecured Junior Mortgages

First Mariner Bank v. Johnson, 411 B.R. 221 (USDC D. Md. 2009). In First Mariner Bank, the court reviewed the interaction between two provisions of the Bankruptcy Code, 11 U.S.C. §506(a) and 11 U.S.C. §1322(b)(2). The issue before the court was whether the anti-modification provisions of §1322(b)(2) prohibited debtors from stripping-off and voiding a lien on debtors’ residential property if there was insufficient equity in the residence to cover any portion of that lien. The court held that debtors may strip-off and void wholly unsecured liens on residential property.


The First Mariner Bank court believed that the Bankruptcy Code’s anti-modification provision was inapplicable to wholly unsecured liens, which were not “secured claims” within the meaning of the code. Whether a lienholder has a “secured claim” depends on whether its interest in the collateral has economic value. Moreover, the court noted that such liens were usually second mortgages and thus permitting them to be stripped-off would not create an “absurd result.” The court further noted that second mortgages are rarely used to purchase homes and so finding wholly unsecured second mortgages NOT subject to anti-modification clause of §1322(b)(2) would have, at best, a minimal impact on discouraging home building and buying.
 
Warmest Regards,

Bob Schaller


Your Lien Stripping Defense Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm


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