| Lien Stripping Allowed |
| Sunday, 15 February 2004 | |
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Lien Stripping Allowed In the case of Chase Manhattan Mortgage Corporation v. Thompson, 2003 WL 22889778, the U.S. Court of Appeals, Second Circuit, on October 9, 2003, affirmed the district court?s ruling, which had upheld the bankruptcy court?s decision allowing the stripping of Chase?s mortgage. This decision, published on December 9, 2003, was made despite the fact that Chase?s mortgage was secured by rental income that, if included in the value of the security, would have fully secured Chase?s debt. (The Second Circuit encompasses Connecticut, New York, and Vermont.) The factual background: On May 2, 2000, the debtor filed a Chapter 13 petition and listed ownership of a three-family dwelling. The debtor resided in one unit of the property and rented two units to tenants. Chase held the first mortgage on the property, which had an outstanding balance on the date of the petition in the amount of $138,900.88. The Chase mortgage also contained an assignment of rents provision. On June 8, 2000, the debtor filed a motion for determination of secured status requesting that the court determine whether Chase?s claim was secured to the extent of the property?s fair market value of $74,900. Chase objected to the debtor?s motion, contending that the assignment of rents provided it with collateral in addition to the underlying real property, and that the value of the future rents should therefore be added to the value of the realty in determining the extent to which Chase?s claim was secured. At the hearing, it was stipulated by Chase and the debtor that the real estate appraisers would find the fair market value of the property to be $75,000. There was testimony from a Chase employee that the present value of the rent was $183,908.46, from the date of the hearing to the date of the final payment under the note. Chase contended that the value of its security interest was the sum of the fair market value of the underlying real property ($75,000) plus the present value of the rental income stream ($183,908.46). The bankruptcy court found this contention to be meritless. Because Chase stipulated that the property had a fair market value of $75,000, which included the rental income, Chase?s secured debt was reduced to $75,000. Chase appealed this decision to the district court, which agreed with the bankruptcy court that the inclusion of an assignment of rents provision in the mortgage held by Chase did not create additional collateral for Chase?s claim that was distinct from that which is normally incidental to ownership of the underlying real property itself. Then, Chase appealed the district court?s ruling to the U.S. Court of Appeals for the Second Circuit. The Second Circuit found that because of Chase?s stipulation, the fair market value was $75,000, and affirmed the lower court decision for substantially the same reasons stated by the district and bankruptcy courts. If you currently do not have access to our web site, you can
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