One Mortgage Securing Three Debts Equals Three Liens for Strip-Off Purposes

Posted by NCBRC - April 13, 2018

Three separate debts secured by one mortgage are properly treated as three liens and those junior liens that are wholly unsecured may be stripped in chapter 13. Poole v. First National Bank of Middle Tennessee, No.17-8 (E.D. Tenn. March 19, 2018).

David and Mary Poole took out three separate loans from First National Bank of Middle Tennessee (FNB) each of which were secured by the Pooles’ residence pursuant to an Open End Mortgage provision in the Deed of Trust providing security for future indebtedness. In their chapter 13 plan, the Pooles proposed to treat each loan as a separate secured debt and strip the two wholly unsecured junior liens under section 1322(b)(2). FNB objected arguing that there were not three liens, but one partially-secured lien that could not be modified. The bankruptcy court overruled the objection and confirmed the Pooles’ plan.

On appeal, FNB argued that under Johnson v. Home State Bank, 501 U.S. 78 (1991) and In re Glance, 487 F.3d 317 (6th Cir. 2007), the mortgage lien constitutes the “claim” in chapter 13 and therefore must be treated as a single lien regardless of the number of separate loans it secures. The court disagreed. Johnson and Glance dealt with the issue of whether a “claim” could be based on a mortgage instrument even though  the debtor’s personal liability had been discharged in a prior chapter 7 (Johnson) or the debtor had failed to sign the underlying promissory notes (Glance). Those cases were based on the broad definition of “claim” and did not alter the fact that the mortgage represented one method of enforcement—in rem—which would survive bankruptcy even when the underlying debt was unenforceable against the debtor personally. The court found that those cases stand for the proposition that the claim is associated with the debt, or debts, not the instrument of enforcement.

Relying on the reasoning in Johnson and Glance, the court found, “[i]n this case, there are three separate payment obligations, albeit all secured by a single mortgage instrument. Accordingly, although this issue perhaps presents a novel question of law, the Court agrees with the Bankruptcy Court that a new ‘claim’ arose with each payment obligation.”

Because FNB failed to raise the issue before the bankruptcy court, the court declined to address its argument that the bankruptcy court should have relied on Tennessee law rather than federal bankruptcy law when it determined that there were three separate liens.

The court affirmed the orders denying FNB’s objections and confirming the Pooles’ plan.

Poole ED Tenn opinion March 2018



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