U.S. Bankruptcy Court, Western District of New York
Second Mortgage — Encumbered by Prior Lien
Grano v. Wells Fargo Bank NA
Background: At issue before the court is whether the rationale of In re Pond, 252 F3d 122 (Second Cir. 2001) will allow a debtor in Chapter 7 to avoid a second mortgage on real property whose value is fully encumbered by a prior lien. Stated differently, the question is whether the Second Circuit’s decision in In re Pond creates an exception to the limitations on lien avoidance, as stated by the Supreme Court in Dewsnup v. Timm, 502 U.S. 410 (1992).
Joseph and Ann Grano own a residence at 90 Rollingwood St. in the Town of Amherst. After filing a petition for relief under Chapter 7 of the Bankruptcy Code, they commenced the present adversary proceeding against Wells Fargo Bank NA to avoid a second mortgage. In their complaint, the debtors allege their real estate has a current fair market value of $445,000 and is encumbered by two mortgages, a first lien with an outstanding principal balance of $511,000 and the second mortgage of Wells Fargo, with a current balance of $95,838. The Granos assert they can avoid the second mortgage pursuant to the authority of 11 U.S.C. §506(a) and (d). Wells Fargo moved to dismiss.
Ruling: The debtors’ argument contradicts the authority of Dewsnup v. Timm, 502 U.S. 410 (1992). Because there is no question the claim at issue here has been allowed pursuant to §502 of the code, and is secured by a lien with recourse to the underlying collateral, it does not fall within the scope of §506(d). The Supreme Court refused to recognize section 506(d) as a grant of authority to a debtor in Chapter 7 to cancel the lien of an undersecured mortgage.
In the present instance, the Granos contend the court should adopt for Chapter 7 the same exception the Second Circuit has recognized for cases in Chapter 13, to the effect of permitting the avoidance of secondary liens that are uncollateralized. “Unfortunately, this argument overlooks the unique statutory predicate of Chapter 13. In allowing a debtor in Chapter 13 to avoid a fully unsecured homestead mortgage, the decision in In re Pond utilized the authority of 11 U.S.C. §1322(b)(2). No parallel provision applies in Chapter 7.” The complaint is dismissed.
Denis Kitchen for the debtors and Bruce D. Mael of Berkman, Henoch, Peterson & Peddy PC for the plaintiff