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52 LEGAL INDUSTRY UPDATE STATE FOCUS OHIO PRIMARY RESIDENCE CRAM DOWN CASE LAW IN OHIO BANKRUPTCY COURTS By LeAnn E. Covey In a Chapter 13 bankruptcy, debtors have the ability to modify their mortgages. A modification is generally called a "cram down" and it occurs when a mortgage claim is bifurcated into a secured portion equal to the current market value of the property and the remainder of the claim is deemed unsecured debt. A cram down usually happens with an investment property or second home because mortgage creditors are protected from modification during a Chapter 13 bankruptcy proceeding, if it is a first lien on the primary residence. Even if the property is underwater, that first lien remains fully secured through the Chapter 13 bankruptcy proceeding as long as the debtors resided in the property at the time of filing (11 USC §1322(b)(2)). However, there is currently a worrisome string of case law that is allowing for a cram down on primary residences, starting with the In Re Stevens, Case 14-41709, in the Northern District of Ohio with Judge Kay Woods (Youngstown). Adversary case 14-41709 styled as Daniel E. Stevens, Jr. v. SunTrust Mortgage, Inc. was filed and SunTrust promptly filed a motion to dismiss the case based on violation of 11 USC §1322(b) (2). In a surprising opinion in response to the motion, Judge Woods indicated that the mortgage took more than just an interest in the property and therefore, the protection of 11 USC §1322(b) (2) did not apply. is additional property was the pledge for escrow funds found in the mortgage. e position caused great alarm among creditors' attorneys as most standard mortgage forms in Ohio contain the escrow provision cited in Judge Woods' opinion. is case was settled rather than litigated, but the Judge's opinion clearly laid out her position and has been discussed aggressively by debtors' attorneys in Ohio as a way to get a Chapter 13 cram down provision on a primary residence. is opinion travelled south and the next case to explore this issue was In Re Lindsey, Case 15-10255 in the Southern District of Ohio that was assigned to Judge Jeffrey P. Hopkins (Cincinnati). An adversary proceeding was filed, Randall Lindsey v. Beneficial Financial I, Inc. as Case 15-01025, and Beneficial filed a motion to dismiss. Judge Hopkins issued an order denying the motion to dismiss and indicated that he agreed with Judge Woods. Judge Buchanan (Cincinnati) agreed with this same position in the In Re Eldridge, Case 15-13881 in the Southern District of Ohio. While In Re Lindsey was being decided, a second case came out of the Northern District of Ohio that was extremely favorable to mortgage creditors. In Re Capretta, Case 15-11057 (Judge Arthur I. Harris, Cleveland) was similar in fact to In Re Stevens. Judge Harris denied confirmation of the plan and issued an opinion outlining why a primary cram down was not proper and that Judge Woods was incorrect. Judge Harris states that allowing for primary cram down was against the legislative intent of the code section. As of this date, every single case with cram down provisions in the plan pending before the court has been settled, usually allowing bifurcation of the claim or coming up with another solution agreeable to parties. At this point, a secured creditor would need to make the decision to allow the case to be confirmed over objection and appeal the case to the higher courts to challenge the issue. Judge Harris laid the groundwork for an excellent issue to appeal in the 6th Circuit so there can be final clarity on this issue, rather than allowing debtors to use these lines of cases as a bargaining tool to get a cram down when it is not warranted. LeAnn E. Covey is VP of the Bankruptcy Loss Mitigation Departments at Clunk, Hoose Co. LPA. Covey has been with the firm for 15 years and has overseen various departments in the office. OHIO EIGHTH DISTRICT COURT OF APPEALS EXPANDS OHIO SUPREME COURT'S HOLDEN DECISION By Michael Carleton Recently, the Ohio Eighth District Court of Appeals expanded upon the Ohio Supreme Court's Holden decision. In Holden, the court had determined that a foreclosure plaintiff is not barred from enforcing its mortgage interest against the property when the borrower's personal obligation to pay the mortgage loan has been discharged in bankruptcy. According to the Eighth District, Holden applies to permit the foreclosure plaintiff to enforce its mortgage interest even if the plaintiff is barred from enforcing the promissory note because the statute of limitations has expired. e facts of the Walker case at hand are a common set. e borrower has defaulted on the promissory note, but through a series of circumstances, the matter was not referred for foreclosure until after the six-year statute of limitations governing negotiable instruments has expired. ese facts beg the question: Can the mortgagee pursue foreclosure even after the statute of limitations for enforcing the borrower's obligation to pay the note expires? e Walker case answers the question in the affirmative. e Eighth District has applied the longer statutes of limitations governing contracts in writing and actions against real estate to permit mortgagees to recover on the mortgage instead of the promissory note. Under Ohio law, the statute of limitations governing negotiable instruments is six years from the acceleration date. Accordingly, while a party may be entitled to enforce the promissory note, it may not be entitled to obtain a judgment on the note because the six-year statute of limitations has expired. Notwithstanding this conclusion, the mortgagee may still have the right to pursue an ejection action or foreclosure because actions on the mortgage are governed by longer statutes of limitations under Ohio law. As a result, the Ohio courts have provided a means by which mortgagees can enforce otherwise time-barred mortgage loan defaults. While this approach denies the mortgagee a personal judgment against the borrower, it solves the larger problem of permitting the mortgagee to liquidate the mortgaged property under many circumstances. Michael Carleton is an Ohio Attorney with Manley Deas Kochalski, LLC. For over 10 years, Carleton has represented creditors in all facets of litigation. 1 In the context of movable property, the policy may instead contain a lender's loss payable endorsement, rather than a mortgage clause. e substance of a lender's loss payable endorsement is equivalent to the substance of a standard mortgage clause and affords a mortgagee the same protection.; 2 Foremost Ins Co. v. Allstate Ins Co., 439 Mich 378, 383; 486 NW2d 600, 602 (1992).; 3 Cole v. Michigan Mut Ins. Co., 116 Mich App 51, 55; 321 NW2d 839, 841 (1982). ; 4 Singer v. Am States Ins, 245 Mich App 370, 379; 631 NW2d 34, 40 (2001).; 5 ISO stands for Insurance Services Office, Inc.; 6 Foremost Ins. Co., 439 Mich. 378; 7 Wells Fargo Bank, NA v. Null, 304 Mich App 508; 847 NW2d 657 (2014).; 8 In Boyd v. Gen Motors Acceptance Corp., 162 Mich App 446; 413 NW2d 683 (1987) Foremost Ins Co v. Allstate Ins. Co., 439 Mich 378; 486 NW2d 600 (1992), Auto Club Insurance Association succeeded in persuading the Court of Appeals that the insured 's act of arson took the loss outside the scope of coverage under a standard mortgage clause. Boyd was later overruled by the Supreme Court in Foremost Ins. Co., 439 Mich. 378 However, more recently, in Waterstone Bank, SSB v. Am Family Mut Ins Co, 348 Wis 2d 213; 832 NW2d 152 (2013), an insurer persuaded the Wisconsin Court of Appeals that the lender was not entitled to payment where the insured failed to occupy the insured premises for 60 consecutive days before the loss. is case appears to be an outlier and nationally, courts have rejected its reasoning. See, e.g., Old Second Nat Bank v. Indiana Ins Co., 29 NE3d 1168 (Ill App Ct 2015). ; 9 Citizens State Bank of Clare v. State Mut Rodded Fire Ins Co. of Michigan, 276 Mich 62; 267 NW 785 (1936).; 10 Citizens Mortg Corp. v. Michigan Basic Prop Ins Ass'n, 111 Mich App 393; 314 NW2d 635 (1981).; 11 In Perry State Bank .v Farmers All. Mut Ins Co., 953 SW2d 155 (Mo Ct App 1997), the Missouri Court of Appeals upheld an insurer's denial of coverage under a standard mortgage clause to a mortgagee which knew the insured property had been unoccupied for a substantial period of time.; 12 137 S. Ct. 1718, (2017).; 13 15 U.S.C. §1692a(6). [Emphasis added.]; 14 Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1722 (2017).; 15 Id. pg. 1721.; 16 Id., pg. 1722.; 17 See Maguire v. Citicorp Retail Servs., Inc. 147 F.3d 232, 235 (2nd Cir. 1998.) ; 18 Henson., pg. 1724.; 19 Id.; 20 Id. [Emphasis in original.]; 21 Id. [Emphasis added.]; 22 See McKinney v. Caldeway Properties, Inc., 548 F.3d 496, 501 (7th Cir., 2008) and FTC v. ; 23 Check investors, Inc., 502 F.3d 159, 173-174 (3rd Circ. 2007).; 24 Henson, pg. 1725.; 25 Id., pg. 1724-1725.; 26 Id., pg. 1725.; 27 Id.; 28 See Tusen v. M&T Bank, 2017 U.S. Dist. LEXIS 180163, (D.Minn., 2017) *8, (holding that servicer's possession of debt, rather than ownership, was not sufficient to permit the debt "to fall outside the statutory definition of a debt collector.")

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