Friday, January 22, 2010

Junior Lender Lost $50,000 for Failure to Challenge Debtors Valuation

In re Hedenstrom, 08-27585 (Bankr. N.D.IL 2009)(J. Barbosa). The debtor sought to strip an allegedly wholly unsecured junior mortgage. Specifically, debtor alleged that the fair market value of the debtor’s homestead was $200,000 with a senior mortgage in the amount of $208,469. However, the senior lender filed a proof of claim in the amount of only $202,806. Therefore, the senior lender’s equity cushion was only $2,806. The junior lender filed a proof of claim in the amount of $51,578.

The junior lender failed to challenge the lien stripping on factual grounds. The lender failed to obtain an appraiser that showed the true fair market value of the property to be a mere $3,000 more than the debtor’s appraisal. Had the junior lender done so, the lender would have saved the entire $51,578 lien because its claim would have not been wholly unsecured.

The junior lender also failed to challenge the lien stripping on legal grounds. The lender could have argued that debtor failed to honor the Bankruptcy Code and Bankruptcy Rules by attempting to strip the lien via a motion instead of via an adversary proceeding.

Instead, the junior lender decided to challenge the lien stripping by denying that a wholly unsecured lien can be stripped-off no matter what, citing the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993). However, Judge Barbosa rejected creditor’s legal challenge after addressing the interplay of §506(a) and the anti-modification provision of §1322(b)(2). Then the court found that the junior mortgage lien was wholly unsecured. The court granted debtor’s motion to avoid the junior mortgage lender’s lien.

Lesson to learn:  a more aggressive defense could have won on valuation grounds or procedural grounds and saved the lender more than $50,000!

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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