By James L. Windsor, Real Estate Claims & Title Insurance Solutions

Recently, Judge Huennekens of the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, issued an opinion relating to lien stripping where real property is held as joint tenants with rights of survivorship (“JTWROS”) in Lopez v. Specialized Loan Servicing LLC (In re Lopez) (Case No. 19-32600-KRH, Chapter 13, Adv. Pro. No. 19-03046-KRH, Decided October 7, 2019) (opinion attached).  
 
The sole issue presented in this Adversary Proceeding was whether a Chapter 13 debtor may strip off an unsecured lien from real property that is owned as JTWROS, where the joint tenant is not a joint debtor in the bankruptcy case. Judge Huennekens answered that question in the affirmative.
 
The Debtor filed a voluntary Chapter 13 petition. The Debtor and his non-filing brother owned a parcel of real property (the “Property”) as JTWROS. The Property was encumbered by two deeds of trust. The first priority deed of trust (the “First Priority Lien”) secured a promissory note (the “First Priority Note”) with a balance of not less than $158,413. The second priority deed of trust (the “Second Priority Lien”) secured a promissory note (the “Second Priority Note”) with a balance of not less than $36,110. Both the Debtor and his non-filing brother were grantors of the Second Priority Lien; however, only the Debtor signed the Second Priority Note. The Property had a market value of $154,000. Therefore, the Property was worth less than the amount owed on the First Priority Note.  
 
Judge Huennekens observed that when prior liens against a creditor’s collateral fully exhaust its value, any junior liens are void, and the creditor’s claim is properly treated as unsecured. Because there was no value in the Property remaining after the First Priority Lien to which the Second Priority Lien could attach, the entirety of the claim relating to the Second Priority Lien was unsecured. Further, by operation of Section 506(d) of the Bankruptcy Code, the Second Priority Lien was void because no portion of that claim was an allowed secured claim.  
 
Citing Jones v. Conwell, 227 Va. 176, 314 S.E.2d 61, 64 (Va. 1984), Judge Huennekens stated that, whereas tenants by the entirety have no power permanently to alienate their interest in real property unless they act together, a joint tenant has the power permanently to alienate such an interest acting alone. Judge Huennekens, therefore, concluded that, by the plain language of the Bankruptcy Code, the Second Priority Lien was void and could be stripped off the Property without regard to whether the Debtor’s joint tenant had filed bankruptcy.   
 
Judge Huennekens rejected an argument based on the non-binding authority of a case with similar facts, Harris v. Amerifirst Home Improvement (In re Harris), 494 B.R. 215 (Bankr. M.D. Pa. 2013) (“Harris”). In Harris, relying on Miller v. Sul (In re Miller), 299 F.3d 183 (3d Cir. 2002), the Bankruptcy Court for the Middle District of Pennsylvania had limited the amount of the lien strip on jointly-held property to the debtor’s one-half interest in the property. Judge Huennekens concluded that the Harris court’s reliance on Miller was misplaced because  Miller involved stripping a lien that impaired an exemption under Section 522(f) of the Bankruptcy Code, and did not involve Section 506. Judge Huennekens further distinguished Harris, because, in the case at bar, there was no concern that the Debtor would receive an equity windfall by stripping the worthless Second Priority Lien. Judge Huennekens stated that following Harris would not only contravene the clear requirements of the Bankruptcy Code, but would also needlessly frustrate the Debtor’s ability to obtain a fresh start.
 
Judge Huennekens further held that Fourth Circuit case law required that, in order for the Debtor to strip off the Second Priority Lien from the Property, he must propose and obtain confirmation of a Chapter 13 plan which provided for the stripping of the lien, and then successfully complete such a plan.

If you have any questions regarding this opinion, or title issues in general, please contact Jim Windsor at (757) 873.6308 or jlwindsor@kaufcan.com, or Dan Basnight at (757) 873.6309 or dfbasnight@kaufcan.com.  

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