Saturday, January 23, 2010

Bankruptcy Court Should Not Inject Equitable Powers Into Lien Stripping Analysis

A Pennsylvania bankruptcy court held that it did not have the discretion to ignore a debtor’s valid lien stripping action by exercising the court’s general equitable powers. In Korbe v. Department of Housing and Urban Development (In re Korbe), 18 CBN 741 (Bankr. W.D.Pa 2008), HUD held a third mortgage on debtor's homestead. Given that there was no equity in the debtor's residence above the first mortgage, the debtor sought an order stripping off HUD's lien.

The court said that there was no unique facts that would allow HUD to prevent the loss of its junior lien. The fact that the lien was secured by debtor's home did not change the outcome according to the court because Section 1322(b)(2)'s anti-modification provision does not apply to wholly unsecured junior mortgages.

HUD argued that the court had discretion to exercise its equitable powers as to the avoidance of HUD's lien, but the court disagreed. The court found that nothing in Section 506 of the Bankruptcy Code authorized the court to ignore a debtor’s valid lien stripping action in the name of equity. Indeed, equity follows the law and the United States Supreme court has declared that the bankruptcy courts’ equitable powers are to be exercised within the confines of the Bankruptcy Code.

While the facts of this case harmed the junior mortgagee's attempt to defend against the lien strip action, the court's holding may be helpful in future cases when the facts are reversed. This case revolved around a wholly unsecured junior mortgage. But, what if the facts showed that the mortgage was partially or negligibly secured --- say by a $1,000 or so.

First, a partially secured junior mortgagee would cerainly argue that the Supreme Court's decision in Nobelman controlled and prohibited the lien strip-down of any undersecured mortgages --- no matter how much of the lien was secured. Second, the Korbe case could also be cited in opposition to a debtor's argument that the court could utilize its equitable powers to strip a "barely" or "negligibly" secured junior mortgage. The argument would be that courts are not permitted to utilize their discretion and equitable powers to strip a negligibly secured junior mortgage --- since "equity follows the law" no matter the result.
Warmest Regards,

Bob Schaller

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

Bob is a member of the American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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