Update on Stripping second Mortgages
Lien Stripping Case Summary
“The Chapter 20 Case”: Issue: Can A chapter 13 debtor “strip-off” a wholly unsecured junior lien on the debtor’s principal residence even when the debtor is ineligible for discharge because of a prior chapter 7 discharge pursuant to 11 U.S.C § 1328(f )(1)?
(Pro Stripping) In re SANDRA LEE FAIR, No 10-1128 (E.D. Wisc. 2011). – Says Nobelman v. Am. Savings Bank, 508 U.S. 324 (1993) holds that completely underwater liens are unsecured under § 506(a) and are, therefore, not subject to the anti-modification provision set forth in section 1322(b)(2). The Court next divorces discharge from lien stripping. Turning to section 1328, the court, citing Johnson v. Home State Bank, 501 U.S. 78 (1991), observed that where a discharge releases only in personam liability, the availability of discharge can have no bearing on the survival of a lien. “The Court must presume that Congress understood the distinction between discharging in personam liability and modifying the terms of an in rem lien when it enacted § 1328(f)(1).” Addressing the impact of section 1325 on the issue, the court found that the “secured” status of a lien under section 506(a) controls whether that lien is an “allowed secured claim” for purposes of section 1325. Holds that good faith by debtor is required for a lien stripping. Remands for factual findings.
(Pro Stripping) In re Davis, No. 09-26768 (Bankr. Md. March 30, 2011) – Starts with Nobelman’s valuation argument and states that proper starting point is 506 valuation. Notes that only secured claims are protected by § 1322(b)(2)’s anti-modification provision. Finds under 506 you can strip the claim.
Then distinguishes In re Jarvis (leading case against lien stripping) by saying it misapplied the law. States that unsecured claims as determined by § 506(a) automatically make § 1325(a)(5)(b) inapplicable. Really good discussion destroying Jarvis. Also distinguishes In re Fenn by the same logic. Also notes that § 349(b)(1)(c) allows the springing back of the lien if the debtors case is dismissed. Finally, determines that plan was in good faith and strips the lien.
(Anti Stripping) Lindskog v. M&I Bank FSB, No. 10-2278 (Bankr. E.D. Wisc. 2011): Judge Shapiro, for reasons discussed and rejected in Fair v. GMAC, agrees with In re Gerardin’s (20II WL 1118495 (Bankr. S.D.Fla.)) reasoning that the code does tie stripping to discharge. Says that § 1325(a)(5)(B)(i)(I) controls which states that liens are retained until debt is repaid or debtor receives § 1328 discharge. Also agrees with Jarvis reasoning that stripping violates the Congressional Intent of § 1328(f), and then uses fact that debtor’s plan does not allow for a “spring back” as required under §§348 and 349 as further support for invalidity of lien stripping theory and the plan in general. Finally, says stripping runs aground on Dewsnup’s (Chap 7, not Chap 13, case) principle that “liens pass through bankruptcy unaffected.” Fails to mention Nobelman.
(Anti-Stripping) – In Re Woolsey 438 B.R. 432 (D. Utah – 2010) – Says Dewsnup does not allow 506(d) Lien Stripping. States that under § 502’s “recourse to property” language defines “allowed secure claim” in § 1325 (not 506(a)), so that § applies and therefore the lien can’t be stripped.
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