PATRICIA C. WILLIAMS, United States Bankruptcy Judge:
THIS MATTER came on for hearing before the Honorable Patricia C. Williams on March 15, 2002 upon Litton Loan Servicing's Motion for Relief From Stay. Debtors were represented by Gregory Heline and creditor Litton Loan Servicing was represented by Katherine Kent. The court reviewed the files and records herein, heard argument of counsel, and was fully advised in the premises. The court now enters its Memorandum Decision.
This case presents the question of whether hypothetical costs of sale should be considered when determining if an inferior lien on a Chapter 13 debtor's home is totally unsecured.
This Chapter 13 was filed on February 22, 2001. As of October, 2001, the first position lien creditor was owed $96,899. Regular payments on the first lien were current at the time the case was commenced and remain so. Litton Loan Servicing has an inferior secured lien on the debtors' home, which has a principal balance of $45,437.73 and is in default. The debtors' plan proposes to continue the regular monthly mortgage payments to the first lien holder "outside" the plan and to treat Litton Loan Servicing as a general unsecured creditor. The basis for this treatment is the debtors' appraisal on the home which concludes that the fair market value is $87,000. Litton Loan Servicing, however, has an appraisal which reflects a fair market value between $98,000 and $100,000. Even assuming the highest value, i.e., $100,000, if hypothetical costs of sale were deducted, there would not be sufficient equity in the home to even satisfy the first lien holder.
11 U.S.C. § 1322(b)(2) bars a Chapter 13 debtor from modifying the rights of holders of claims secured by a debtor's home. The Supreme Court in Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) discussed this subsection of the Code which refers to "rights of holders" of claims rather than the claims themselves. In Chapter 13 plans, this subsection controls rather than § 506(a) which would ordinarily limit the amount of any secured claim to the value of the collateral resulting in the bifurcation of a claim into secured and unsecured portions. Under 11 U.S.C. § 1322(b)(2), the claim of a holder of a lien on the debtors' home cannot be bifurcated.
The Ninth Circuit Bankruptcy Appellate Panel concluded in In re Lam, 211 B.R. 36 (B.A.P. 9th Cir. 1997) that Nobelman is not applicable when there is no value in the property to which the lien can attach. In other words, if the value of the property is such that there is no portion of the lien which could be secured in a bifurcation situation under 11 U.S.C. § 506(a), the entire lien under 11 U.S.C. § 1322(b)(2) is unsecured. There must be some value in the property for the lien to attach. Holders of claims under 11 U.S.C. § 1322(b)(2) must have some rights in estate property rather than simply holding a lien. If there is absolutely no value in the estate property to which the lien may attach, due to the existence of superior lien or any other reason, there is no secured claim. Under Lam, if it is undisputed that the value of the property is less than the balance due the superior lien creditor(s), an inferior lienholder does not qualify as the holder of a claim under 11 U.S.C. § 1322(b)(2) and may be treated as a totally unsecured creditor.
In this case, assuming the highest value of $100,000, there would be some equity which would secure the lien of Litton Loan Servicing. If hypothetical costs of sale (typically 10% of price in this area) were deducted in determining market value, there would be no value above the first lien. Therefore, Litton Loan Servicing's lien would not attach.
The Ninth Circuit addressed this issue of hypothetical cost of sale even before the Lam decison. In re Taffi, 96 F.3d 1190 (1996) involved a federal tax lien on a Chapter 11 debtor's home. The debtor proposed to retain the home. Although the reference to Chapter 13 debtors is dicta, the court's holding at page 1192 of the opinion determined that hypothetical costs of sale should not be deducted in determining fair market value.
When a Chapter 11 debtor or a Chapter 13 debtor intends to retain property subject to a lien, the purpose of a valuation under section 506(a) is not to determine the amount the creditor would receive if it hypothetically had to foreclose and sell the collateral. Neither the foreclosure value nor the costs of repossession are to be considered because no foreclosure is intended. Instead, when the proposed use of the property is continued retention by the debtor, the purpose of the valuation is to determine how much the creditor will receive for the debtor's continued possession. Hypothetical sales costs are not to be considered because no sale is intended.
Id. at 1192. Although the
Taffi decision was focused on the determination of a secured claim under
11 U.S.C. § 506(a) and the
Nobelman and
Lam decisions focus on the rights of holders of claims under
11 U.S.C. § 1322(b)(2), the same rationale would apply. The debtor in this case proposes to retain the home. Under such circumstances hypothetical costs of sale should not be deducted to determine the amount of a secured claim under
11 U.S.C. § 506(a) or the rights of a holder of a lien under
11 U.S.C. § 1322(b)(2). If the home has any value to which Litton Loan Servicing's lien rights attach, Litton Loan Servicing qualifies for treatment under
11 U.S.C. § 1322(b)(2). That lien attaches before the question of any sale costs arises, and if the home is to be retained, the question of sale costs never arises.
Due to the dispute regarding the fair market value of the home, it will be necessary to conduct an evidentiary hearing in this case. If the debtor succeeds in demonstrating that the fair market value is $87,000 or indeed anything less than the $96,899 due the first position lien holder, Litton Loan Servicing may be treated in the plan as any other holder of a general unsecured claim. If Litton Loan Servicing demonstrates that the fair market value is. between $98,000 and $100,000, its mortgage must be paid as required by 11 U.S.C. § 1322(b) (2). Counsel are to contact chambers staff to schedule the evidentiary hearing.