Bankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage

Posted by NCBRC - August 5, 2019

In 2004 the Debtors purchased their home with a $209,000.00 purchase money deed of trust held by Bayview Loan Servicing (Bayview). In 2006 the Debtors obtained a second mortgage from Madison Management Services (Madison). In 2017, the Debtors and Bayview entered into a loan modification agreement that provided for a new principal balance of $257,566.94.

The Debtors filed a chapter 13 bankruptcy. Bayview filed a claim indicating total indebtedness of $255,741.64. Madison filed a claim for $141,323.78. The stipulated value of Debtors’ is between $250,000.00 to $254,000.00.

Subsequently the Debtors filed a motion to avoid the second lien because it was completely unsecured.

Madison countered that its lien was not totally unsecured. Under Maryland state law, when a mortgage is refinanced to increase the principal balance, the amount of the increased balance is given lien priority as of the date of the loan modification, not the date of the original loan.  Therefore, Bayview effectively has two effective dates for its liens. The balance owed at the time of the refinance has priority as of 2004, and another lien (in the amount of the increased balance) with priority as of 2017. Therefore, when calculating whether Madison’s lien is totally unsecured the court should take Bayview’s first lien (approximately $207,000), then Madison’s lien ($141,323.78), then the balance of the Bayview’s increased lien ($48,566.94). Since Madison’s lien is no longer totally unsecured, its lien is protected by the anti-modification provision in 11 U.S.C. @ 1322(b)(2).

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