In re: Cecilia Hernández Díaz v. Asociación de Empleados del Estado Libre Asociado de Puerto Rico, et als.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: January 11, 2016
• Docket: 14-00217
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2

4 IN RE: CASE NO. 14-07171 BKT Chapter 13 5 CECILIA HERNÁNDEZ DÍAZ 6

7 Debtor 8 CECILIA HERNÁNDEZ DÍAZ Adversary No. 14-00217 BKT 9

10 Plaintiff vs. 11

12 ASOCIACIÓN DE EMPLEADOS DEL ESTADO LIBRE ASOCIADO DE 13 PUERTO RICO, ET ALS 14 Defendants FILED & ENTERED ON 01/11/2016 15

16 17 OPINION AND ORDER 18 Before this Court is Plaintiff’s Motion for Summary Judgment filed by Plaintiff, Cecilia 19 Hernández Díaz (“Ms. Hernández” or “Plaintiff”) [Dkt. No. 35], the Statement of Uncontested 20 Facts in Support of Plaintiff’s Motion for Summary Judgment filed by Plaintiff [Dkt. No. 34], the 21 Opposition to Plaintiff’s Motion for Summary Judgment filed by Asociación de Empleados del 22 23 Estado Libre Asociado de Puerto Rico (“AEELA”) and Banco Santander – Puerto Rico 24 (“Santander” or, collectively with AEELA, “Defendants”) [Dkt. No. 43], the Response to 25 Statement of Uncontested Facts in Support of Plaintiff’s Motion for Summary Judgment filed by

Defendants [Dkt. No. 42], and the Plaintiff’s Reply to Defendant’s Opposition to Motion for 1 1 Summary Judgment filed by Plaintiff [Dkt. No. 50]. For the reasons set forth below, Plaintiff’s 2 Motion for Summary Judgment is GRANTED, in part, and DENIED, in part. 3 I. Factual Background 4 The facts in this case are straightforward, and for the most part, not in dispute. On August 5 29, 2014, Plaintiff filed for relief under Chapter 13 of the Bankruptcy Code. Plaintiff’s principal 6 7 place of residence is identified as property number 57820 at the Registry of Property of Puerto 8 Rico, Second Section of Carolina, recorded at page 136 of volume 1400 of Carolina, third 9 inscription (hereinafter “Property”). Both Plaintiff and Defendants agree that the Property has a 10 fair market value of $60,000.00 and is encumbered by two mortgages. Both mortgages are in 11 12 favor of AEELA.1 The first mortgage has an approximate balance due of $72,365.99. The second 13 mortgage has an approximate balance due of $18,091.76. 14 Pursuant to 11 U.S.C. §§ 506 & 1322, Plaintiff seeks a judgment: (1) determining that the 15 value of the property is $60,000.00; (2) declaring that AEELA’s interest in the Property is 16 wholly unsecured; and (3) determining that AEELA’s claim for its second mortgage be classified 17 18 as unsecured. Relying on United States Supreme Court jurisprudence, Defendants argue that 11 19 U.S.C. § 1322(b)(2) precludes this Court from modifying AEELA’s security interest in the 20 Property. However, it appears undisputed that pursuant to 11 U.S.C. § 506(a) and the stipulated 21 Property value, the second mortgage lien would be wholly unsecured. For the following reasons, 22 23 this Court agrees with the Plaintiff’s analysis and partially grants summary judgment in her 24 favor. 25

1 Santander is AEELA’s servicer. 2 1 II. Standard of Review 2 The role of summary judgment is to look behind the facade of the pleadings and assay the 3 parties' proof in order to determine whether a trial is required. Mulvihill v. Top-Flite Golf Co., 4 335 F.3d 15, 19 (1st Cir. 2003). Pursuant to Fed. R. Civ. P. Rule 56(c), made applicable in 5 bankruptcy by Fed. R. Bankr. P. 7056, a summary judgment is available if the pleadings, 6 7 depositions, answers to interrogatories, and admissions on file, together with the affidavits, if 8 any, show that there is no genuine issue as to any material fact and that the moving party is 9 entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Borges ex rel. S.M.B.W. v. 10 Serrano-Isern, 605 F.3d 1, 4 (1st Cir. 2010). As to issues on which the Movant, at trial, would be 11 12 compelled to carry the burden of proof, it must identify those portions of the pleadings which it 13 believes demonstrates that there is no genuine issue of material fact. In re Edgardo Ryan Rijos & 14 Julia E. Cruz Nieves v. Banco Bilbao Vizcaya & Citibank, 263 B.R. 382, 388 (B.A.P. 1st Cir. 15 2001). A fact is deemed "material" if it could potentially affect the outcome of the suit. Borges, 16 605 F.3d at 5. Moreover, there will only be a "genuine" or "trial worthy" issue as to such a 17 18 "material fact," "if a reasonable fact-finder, examining the evidence and drawing all reasonable 19 inferences helpful to the party resisting summary judgment, could resolve the dispute in that 20 party's favor." Id. at 4. The court must view the evidence in the light most favorable to the 21 nonmoving party. Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 26 (1st Cir. 2004). 22 23 Therefore, summary judgment is “inappropriate if inferences are necessary for the judgment and 24 those inferences are not mandated by the record.” Rijos, 263 B.R. at 388. 25 Although this perspective is favorable to the nonmoving party, she still must demonstrate,

“through submissions of evidentiary quality, that a trial worthy issue persists.” Iverson v. City of 3 1 Boston, 452 F.3d 94, 98 (1st Cir. 2006). Moreover, “[o]n issues where the non Movant bears the 2 ultimate burden of proof, [she] must present definite, competent evidence to rebut the motion.” 3 Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991). These showings may not rest upon 4 “conclusory allegations, improbable inferences, and unsupported speculation.” Medina-Muñoz v. 5 R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990). The evidence offered by the 6 7 nonmoving party “cannot be merely colorable, but must be sufficiently probative to show 8 differing versions of fact which justify a trial.” Id.; See also Horta v. Sullivan, 4 F.3d 2, 7-8 (1st 9 Cir. 1993) (holding that the materials attached to the motion for summary judgment must be 10 admissible and usable at trial). “The mere existence of a scintilla of evidence” in the nonmoving 11 12 party's favor is insufficient to defeat summary judgment. Anderson v. Liberty Lobby, Inc., 477 13 U.S. 242, 252 (1986); González-Pina v. Rodríguez, 407 F.3d 425, 431 (1st Cir. 2005). 14 III. Legal Analysis 15 The main issues before the court are: (1) whether the value of the Property is $60,000.00; 16 and (2) whether Defendants’ second mortgage security interest in the Property may be modified. 17 18 As to the first issue, both parties agree that the value of the Property is $60,000.00. Therefore, 19 this Court holds that the value of the Property is, indeed, $60,000.00. 20 The second issue before court is heavily contested. The issue centers on the interplay 21 between Section 506(a) and Section 1322(b)(2) of the Bankruptcy Code. Section 506(a)(1) states 22 23 that: 24 An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under 25 section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, 4 1 and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the 2 amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed 3 disposition or use of such property, and in conjunction with any 4 hearing on such disposition or use or on a plan affecting such creditor's interest. 5 11 U.S.C. § 506(a). In other words, “[t]he effect of § 506(a) is that a claim that is ‘secured’ under 6 7 commercial law may or may not be a ‘secured claim’ in the context of the Bankruptcy Code.” In 8 re Mann, 249 B.R. 831, 833 (B.A.P. 1st Cir. 2000) (citations omitted). “Rather, pursuant to § 9 506(a), a claim is deemed secured only to the extent of the value of the creditor's interest in the 10 debtor's interest in the subject collateral.” Id. A conflict arises when the aforementioned Section 11 12 is read in conjunction with Section 1322(b)(2). 13 Section 1322(b)(2) allows Chapter 13 debtors to modify the rights of secured claimants. 14 Id. However, said Section contains an exception: the debtor’s plan may “modify the rights of 15 holders of secured claims, other than a claim secured only by a security interest in real property 16 that is the debtor's principal residence.” 11 U.S.C. § 1322(b)(2) (emphasis added). Thus, the 17 18 issue becomes “does the § 1322(b)(2) exception refer to the security interest as viewed under 19 nonbankruptcy commercial law or to the allowed secured claim determined after application of § 20 506(a)?” Mann, 249 B.R. at 833. Relying on Nobelman v. American Savings Bank, 508 U.S. 324 21 (1993), Defendants argue that the former is the proper interpretation. 22 23 The Nobleman Court dealt with the limited issue of “whether a Chapter 13 debtor could 24 bifurcate an undersecured residential mortgage claim into its secured and unsecured components 25 pursuant to § 506(a), leaving only the secured portion protected by the § 1322(b)(2)

antimodification clause.” Mann, 249 B.R. at 834. The facts in Nobleman involved a first priority 5 1 mortgage claim for $71,335.00 on a residence valued at $23,500.00. Nobelman v. Am. Sav. 2 Bank, 508 U.S. 324, 326 (1993). The Chapter 13 debtors proposed to bifurcate their claim 3 pursuant to Section 506(a) into a $47,835.00 unsecured claim and a $23,500.00 secured claim. 4 Id. While the debtors offered to pay the entire secured portion, they offered to pay nothing on the 5 unsecured portion. Id. “The debtors argued that § 1322(b)(2) should be construed to apply the 6 7 restrictive clause ‘other than a claim secured only by a security interest in ... the debtor's 8 principal residence’ only to the allowed secured claim, after application of § 506(a), rather than 9 to the entire lien claim.” Mann, 249 B.R. at 834. 10 The Nobleman Court rejected the debtors’ argument and held that “to give effect to § 11 12 506(a)'s valuation and bifurcation of secured claims through a Chapter 13 plan in the manner [the 13 debtors’ propose] would require a modification of the rights of the holder of the security 14 interest.” Nobelman, 508 U.S. at 332. Thus, the Court held that “Section 1322(b)(2) prohibits 15 such a modification where . . . the lender's claim is secured only by a lien on the debtor's 16 principal residence.” Id. However, the Nobleman Court did not address the specific issue before 17 18 this Court. 19 The main issue in this case differs from Nobleman. The issue is not whether a Chapter 13 20 debtor may bifurcate an undersecured residential mortgage and modify a creditor’s rights in the 21 unsecured portion, but rather whether the debtor may strip “off a [second] mortgage on a 22 23 principal residence where there is no collateral value whatsoever for that mortgage.” Mann, 249 24 B.R. at 834. Said issue was addressed by the First Circuit Bankruptcy Appellate Panel in In re 25 Mann, 249 B.R. 831 (B.A.P. 1st Cir. 2000). The Facts in Mann are almost identical to the ones in

the above captioned case. The Chapter 13 debtors’ residential property was valued at 6 1 $118,000.00 and was encumbered by two mortgages. Id. at 832. The first mortgage had an 2 approximate balance due of $119,000.00, and the second mortgage had an approximate balance 3 due of $23,800.00. Id. The debtors intended to strip off the entire second mortgage and treat it as 4 totally unsecured. Id. The debtors argued that balance on the second mortgage should "be treated 5 as an unsecured claim pursuant to 11 U.S.C. § 506 and the lien securing said portion of the 6 7 indebtedness should be void.” Id. The mortgagor of the second mortgage argued “that § 8 1322(b)(2) precludes the voiding of its lien.” Id. The Mann Court held in the debtors’ favor. 9 Specifically, the Mann Court held that “[p]ursuant to § 506(a) and § 1322(b)(2), and 10 notwithstanding the antimodification provision in the latter, Chapter 13 plans may void 11 12 residential real property liens that are wholly unsecured.” Id. at 840. The First Circuit B.A.P. 13 reasoned “that a literal reading of § 1322(b)(2) and § 506(a) mandates this result and that [this] 14 view is congruent with the Nobelman decision which relegated the role of the antimodification 15 provision of § 1322(b)(2) to claims first made subject to § 506(a) treatment.” Id. “Thus, in the 16 First Circuit, a wholly unsecured claim on a principal residence—that is, a home mortgage where 17 18 there is insufficient value in the home to support even a penny of the claim—may be modified 19 (and possibly avoided in full) in the Chapter 13 plan.” TD Bank, N.A. v. Landry, 479 B.R. 1, 4 20 (D. Mass. 2012). Therefore, this Court will apply the aforementioned First Circuit precedent to 21 the above captioned matter. 22 23 As in Mann, the second mortgage encumbering the Property is indisputably unsecured 24 based on the parties’ agreed upon valuation of said Property.2 Relying on Nobleman, the 25

2 Based on the agreed upon valuation, the Defendants’ senior mortgage is partially secured. Thus, this court denies Plaintiff’s to declare AEELA’s interest in the Property is wholly unsecured, as such a broad declaration could be interpreted to apply to the senior mortgage. 7 1 Defendants argue that their second mortgage security interest over Plaintiff’s principal residence 2 is protected by statute, and may not be modified. However, as the Mann Court noted, “[o]utside 3 of bankruptcy, a lien with no collateral value cannot deliver any funds to the lienholder upon 4 foreclosure[,]. . . [and thus,] [s]uch a lien should not deliver better rights in the bankruptcy 5 court.” Mann, 249 B.R. at 837-38. Defendants further speculate that the Supreme Court’s 6 7 holding in Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015) will someday apply to Chapter 8 13 debtors.3 This Court is not in the business of speculation. Suffice to say that until said day 9 comes, this Court is bound to obey the current First Circuit precedent. See In re Mann, 249 B.R. 10 831 (B.A.P. 1st Cir. 2000). Lastly, as the Plaintiff concedes that the cancellation of the second 11 12 mortgage lien may not take place before the completion of the proposed Chapter 13 plan 13 payments and the issuance of the discharge order, no trial-worthy claims of material fact remain. 14 This Court hold’s that the second mortgage encumbering the Property is unsecured. 15 IV. Conclusion 16 WHEREFORE, IT IS ORDERED that Plaintiff’s request to determine the value of the 17 18 Property at $60,000.00 is hereby GRANTED. 19 IT IS FURTHER ORDERED that Plaintiff’s request to declare AEELA’s interest in the 20 Property is wholly unsecured is hereby DENIED. 21 IT IS FURTHER ORDERED that Plaintiff’s request to determine that AEELA’s claim 22 23 for its second mortgage be classified as unsecured is hereby GRANTED. 24 25

3 In Caulkett, the Supreme Court held that a “Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.” Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995, 2001 (2015). 8 1 In San Juan, Puerto Rico this the 11" day of January, 2016. 2 3 4 : CE Brian K. Tester 6 U.S. Bankruptcy Judge 7 for the District of Puerto Rico 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25