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Second Mortgage on Long Island voided as unsecured

In re Lavelle; Eastern District of New York Bk 09-72389-478 (Judge Eisenberg 11/19/09). Debtors on Long Island NY got the second mortgage on their house voided by a bankruptcy court as unsecured. The house was valued at $400,000 and the balance on the Bank of America first mortgage was $411,193. Bank of America also held a second mortgage in the amount of $10,127.99. This mortgage was in default, and the bank, by their attorney, Steven Baum, moved to lift the automatic stay of bankruptcy to allow a foreclosure to proceed. Mr. Baum operates a well-known foreclosure law office based in Buffalo. The debtors opposed the lift stay motion on the grounds, among others, that there was no equity in the house securing the second mortgage and so it should be declared void.

The bankruptcy judge bought the argument, despite the fact that 1) it was brought on as a defense to a motion, not as an adversary proceeding; 2) the automatic stay had actually been lifted prior to the motion by operation of law and 3) this was a Chapter 7 case, not a chapter 13 case. Interestingly the decision was entered November 19, 2009 (a slightly modified version, correcting typos, entered Nov. 25), but the bank did not appeal the order and the bankruptcy case was closed December 8.

I would not expect the bankruptcy judges in the Western District of New York to follow the decision. If the Eastern District continues this line, I would imagine the issue will eventually be appealed.

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