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Wholly unsecured second mortgage declared void in Chapter 13 bankruptcy proceeding.

A Chapter 13 bankruptcy debtor (Debtor) filed an adversary proceeding seeking a declaration that a creditor's second mortgage lien on his residence was void. The Debtor's residence is located on an irregularly shaped lot consisting of 0.34 acres and is improved with a single-story detached ranch-style structure with a brick exterior. The home is sixty-two years old, has a built-in one-car garage, three bedrooms, one bath, and gross living space of 1,300 square feet.

The residence is encumbered by two mortgages, both held by creditor PNC Bank (PNC). The first mortgage debt is $135,000 and the second is $103,000. The Debtor valued the property at $125,000 in his bankruptcy schedule. PNC valued the property at $125,000 in its proof of claim for the first mortgage, at $158,000 in its proof of claim for the second mortgage, at $205,000 in its answer to the complaint, and at $155,000 during the trial. Debtor seeks to void the second mortgage in his Chapter 13 plan.

Under Chapter 13, the lien may not be modified if there exists any value that would secure some or all of the second mortgage debt. On the other hand, if there is no excess equity beyond the amount due on the first mortgage, then the second mortgage lien may be modified by the Bankruptcy Court. To determine if the second mortgage is wholly unsecured, the court must value the property.

Debtor's appraiser valued the property at $125,000. Debtor's appraiser used comparable sales of ranch homes located in the same borough as the Debtor's residence. The court found the choice of similarly styled and closely located comparables increased the probative weight of the appraiser's conclusions.

PNC's appraiser used comparable sales of Cape Cod-style homes located outside the borough of the Debtor's residence. The court found these comparables less probative than the comparables used by Debtor's appraiser because the Cape Cod structure has one and one-half floors compared to one floor in a ranch home, and the homes were located outside the municipality of Debtor's residence.

Debtor's appraiser noted that Debtor's residence was not as well maintained as homes in the immediate area or as well as the comparable sales used. The appraiser noted specific items that needed attention and included pictures in his appraisal report. Accordingly, the appraiser adjusted his comparable sales downward to reflect the condition of Debtor's residence. Conversely, PNC's appraiser took a more holistic approach, making no adjustments to comparable sales based on the condition of Debtor's residence.

The court held that the evidence weighed heavily in favor of the estimate of value of Debtor's appraiser, and the value of the property was not more than $125,000. As a consequence, PNC's second mortgage was determined to be wholly unsecured and declared void.

In re Verratti v. PNC Bank

United States Bankruptcy Court

Eastern District of Pennsylvania

September 19, 2014

2014 WL 4654576

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Title Annotation:Recent Court Decisions
Publication:Appraisal Journal
Geographic Code:1U2PA
Date:Jan 1, 2015
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