Creditor can’t manipulate senior claim to save junior lien

November 15, 2016

CourtroomA creditor holding two mortgages could not waive a portion of the amount owed on the senior mortgage in order to keep the junior mortgage from being stripped off in the homeowner’s Chapter 13 case.

Judge Diane Finkle of the U.S. Bankruptcy Court for the District of Rhode Island said this was the first time she had seen such an attempt.

In re Rougier, 2016 WL 5109803 (Bankr. D.R.I. Sept. 16, 2016).

The lender was Pawtucket Credit Union.

It held a first and a second mortgage on Chapter 13 debtor Sharon Rougier’s home, which the  parties agreed was worth $180,200.

Bankruptcy Code Section 1322(b)(2) prohibits Chapter 13 debtors from modifying the rights of holders of secured claims if the claim is “secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims.”

(Westlaw users: Click here for the latest from Bankruptcy Court Decisions News & Comment, and here for the latest from Consumer Bankruptcy News.)

If there is $1 in equity, then the entire claim is protected from modification. Therefore, in order for PCU’s second mortgage to be protected the amount of PCU’s claim secured by the first mortgage needed to be less than $180,200.

That was no problem, PCU said, because the principal amount owed on the claim secured by the first mortgage was $176,212.

Rougier said the promissory note and mortgage obligated her to pay interest of $6,654, escrow payments of $1,889, and foreclosure costs of $1,439 in addition to the principal amount.

PCU responded by waiving its claim for interest and costs leaving its first mortgage claim below the value of Rougier’s home.

Not so fast, said Judge Finkle.

The Bankruptcy Code defines “claim” as a “right to payment.” The parties agreed that the balance due (the “right to payment”) under the first mortgage was $186,195 including interest, escrow, penalties, fees and costs.

That amount was PCU’s claim. Because it exceeded the value of Rougier’s home, the second mortgage was wholly unsecured and subject to being stripped off through Rougier’s repayment plan.

PCU “does not have an unfettered right to manipulate its claim,” Judge Finkle concluded.

“While it might be true that PCU is entitled to waive its right to fully enforce or collect on its claim, doing so does not change this Court’s determination of the amount of the claim as $186,195.”