Sperry Associates Federal Credit Union v. U.S. Bank (In re White)

Citation: 514 B.R. 365Docket: Case No. 12-47895-CEC; Adv. Proc. No. 13-01144-CEC

Court: United States Bankruptcy Court, E.D. New York; August 14, 2014; Us Bankruptcy; United States Bankruptcy Court

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Sperry Associates Federal Credit Union, as the junior lien holder, sought a declaratory judgment to subordinate the senior mortgage held by U.S. Bank National Association and others to its own mortgage on the property owned by Delroy Anthony White. Sperry argued that its interest was impaired when the senior mortgage servicer, JP Morgan Chase Bank, N.A., modified the senior mortgage without its consent. However, the court found that since the modification did not alter the principal or interest rate of the senior mortgage, there were no grounds for subordination. Consequently, the court granted the Defendants' motion for summary judgment and denied Sperry's motion. Jurisdiction was established under specific U.S. Code provisions and the Eastern District of New York's standing order. The background confirmed that the Chase Mortgage was recorded in 2005, assigned to a trust in 2012, and that Sperry's mortgage was recorded in 2007. Although the Debtor modified the senior mortgage in 2009 and 2010, Sperry did not claim that these modifications impaired its position as a junior mortgagee.

The 2010 Modification, part of the HAMP program, altered the Debtor's loan terms by reducing monthly payments and extending the maturity date of the Note to January 1, 2036. It capitalized arrears and deferred $65,300 of the principal, interest-free, to the end of the loan term. The interest rate was reduced to 2% for the first five years, increasing to 4.25% by year eight. No new funds were provided under this modification, which was executed without the consent of Sperry, a junior mortgage holder.

On November 15, 2012, the Debtor filed for Chapter 13 bankruptcy. Chase filed a proof of claim for $314,832.34, while Sperry claimed $54,477.42. The property was appraised at approximately $300,000. The Debtor sought to deem Sperry’s secured claim as wholly unsecured, a motion granted on May 23, 2013, with the Chapter 13 plan confirmed shortly thereafter.

On May 2, 2013, Sperry initiated an adversary proceeding to subordinate the Chase Mortgage to its own or, alternatively, to subordinate the $65,300 deferred amount under the 2010 Modification. Both parties filed motions for summary judgment on January 22, 2014. 

Sperry contends that the deferral of the principal payment heightens the risk of default at maturity and negatively impacts its own mortgage by increasing the amount due at foreclosure. Conversely, Defendants argue that the modification does not impair Sperry’s position, as the deferred amount is interest-free and not due until well after Sperry’s Note matures, asserting the lowered monthly payments actually improved Sperry’s position by stabilizing the Debtor’s ability to make payments.

Summary judgment is permissible when the moving party demonstrates no genuine dispute exists regarding any material fact and is entitled to judgment as a matter of law, as outlined in Fed. R. Civ. P. 56(a) and clarified in relevant case law. A material fact is one that could influence the lawsuit's outcome, and a genuine issue is present only if sufficient evidence supports the nonmoving party's case. Evidence must be substantial and not merely speculative or conclusory. In situations involving cross-motions for summary judgment, each motion is assessed independently, with all reasonable inferences drawn against the party whose motion is being considered.

In property law, successive mortgages generally hold priority based on the order of their lien attachment. Senior lienholders can modify mortgage terms without junior lienholder consent unless such modifications harm the rights of junior lienholders or impair their security. In cases where modifications adversely affect junior lienholders, courts may revoke the senior lienholder's priority. Factors influencing whether a modification subordinates a senior mortgage include changes to interest rates and principal amounts. Extensions of payment time typically do not require junior lienholder consent, but increasing the interest rate or principal does result in prejudice.

Sperry contends that a 2010 modification negatively impacted the Sperry Mortgage by altering the amortization of the Chase Mortgage to include a balloon payment of $65,300, which may heighten the risk of default at maturity.

Sperry contends that deferring the principal payment of $65,300 adversely impacts the Sperry Mortgage by increasing the potential payment due on the Chase Mortgage in the event of foreclosure. However, key points undermine this argument: 

1. The interest rate on the Chase Mortgage was significantly lowered in the 2010 Modification compared to the 2009 Modification, reducing the total payable amount. 
2. The deferred principal does not accrue interest, further decreasing the total debt under the Chase Mortgage.
3. Although the maturity was extended by one month, the overall financial benefit from the reduced interest over a 26-year period outweighs any additional interest accrued during that month.
4. At the time of the 2010 Modification, the Debtor was already in default on the Chase Mortgage. The modification was intended to facilitate ongoing payments, improving the Debtor's financial situation rather than hindering it.
5. Sperry's claim of prejudice from the deferral assumes the Debtor could have paid both mortgages without the modification, which was not the case, as the Debtor indicated financial hardship and inability to make payments.
6. The Sperry Mortgage matures 14 years before the Chase Mortgage, meaning the deferral does not increase the risk of non-payment for Sperry at maturity.

Consequently, the 2010 Modification did not impair the Sperry Mortgage, leading to the conclusion that there is no basis for subordinating any part of the Chase Mortgage to the Sperry Mortgage. The court grants the Defendants’ motion for summary judgment and denies Sperry’s motion. Sperry's counsel acknowledged during the hearing that the 2010 Modification reduced the amount owed under the Chase Mortgage.