HON. THOMAS J. TUCKER – (MODERATOR), U.S. BANKRUPTCY COURT (E.D.
MICH.); DETROIT, MICH.
CHARLES D. BULLOCK, STEVENSON & BULLOCK, PLC; SOUTHFIELD,
MICH.
MARK E. BREDOW, POTESTIVO & ASSOCIATES, P.C., ROCHESTER
HILLS, MICH.
11 U.S.C. § 1322 (b): Subject to subsections (a) and (c) of
this section, the plan may- (2) modify the rights of holders
of secured claims, other than a claim secured only by a
security interest in real property that is the debtor's
principal residence… 11 U.S.C. § 506 (a)(1): An allowed
claim of a creditor secured by a lien on property in which
the estate has an interest, … is a secured claim to the
extent of the value of such creditor's interest in the
estate's interest in such property, … and is an unsecured
claim to the extent that the value of such creditor's
interest … is less than the amount of such allowed claim.
Such value shall be determined in light of the purpose of
the valuation and of the proposed disposition or use of such
property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor's
interest.
I. WHAT DOES IT MEAN TO STRIP THE LIEN? 11 U.S.C. § 506
describes how to determine whether a claim is secured.
Section 506(a)(1) explains bifurcation (division) of an
allowed claim into secured and unsecured parts—the secured
part being “secured” by the collateral’s value, the
unsecured part being the remaining amount of the claim in
excess of the collateral’s value. For example, an allowed
claim of $200,000 with collateral valued at $170,000 is
bifurcated between a secured claim of $170,000 and an
unsecured claim of $30,000, resulting in “lien stripping” of
$30,000. If the $170,000 collateral is related to an allowed
first claim of $200,000 and an allowed second claim of
$10,000, the $10,000 claim can be “stripped” as well. The
distinction may be identified as “stripping down” (or a
“cramdown” of) the lien to the value of the collateral or
“stripping off” the lien completely.
II. CHAPTER 7 CASES – UNSECURED JUNIOR MORTGAGE MAY NOT BE
STRIPPED OFF.
Dewsnup v. Timm, 502 U.S. 410 (U.S. 1987) prohibited Chapter
7 debtors from using 11 U.S.C. § 506(d) to void an
undersecured lien on real property. Case law has extended
Dewsnup to prohibit lien stripping on wholly unsecured liens
(in Chapter 7 cases), holding that unless and until there is
a claims allowance process, there is no basis for the debtor
to avoid a lien under 11 U.S.C. § 506. The legislative
history of Section 506 also makes it clear that lien
stripping is permissible in reorganization chapters, but not
in Chapter 7. See In re Talbert, 344 F.3d 555 (6th Cir.
2003), Concannon v. Imperial Capital Bank (In re Concannon),
338 B.R. 90 (Bankr.Fed.App. 2006).
III. CHAPTER 13 CASES – UNSECURED JUNIOR MORTGAGE MAY BE
STRIPPED OFF.
a. Nobelman v. American Savings Bank, 508 U.S. 324 (U.S.
1993). A “strip down” or “cramdown” of claim that is secured
by real property that is the debtor’s primary residence is
prohibited. The United States Supreme Court held that after
applying 11 U.S.C. § 1322(b)(2) and 11 U.S.C. § 506, a lien
“strip down” of an undersecured home mortgage lien is
impermissible in a chapter 13 case for a claim secured by
the debtor’s principal residence, because it modifies the
total package of rights for which such a claim holder
bargained.
b. 11 U.S.C. § 1322(b), commonly known as the
anti-modification clause, prevents debtors from changing the
rights of creditors whose claims are secured only by a
security interest in real property that is the debtor's
principal residence. Under various Circuit Court decisions
interpreting Nobelman in Chapter 13 cases, §1322(b)(2)
protections are no longer available to a creditor whose lien
is a junior lien, and where the amount due to the senior
lienholder(s) is greater than the value of the property
pledged as security to that loan. Such creditor’s claims may
be treated as an unsecured claim in the plan and paid
consistent with other unsecured claimholders.
c. Majority view: While the anti-modification clause in §
1322(b) uses the term "claim" rather than "secured claim"
and, therefore, applies to both the secured and unsecured
part of a mortgage, the anti-modification clause still
states that the claim must be "secured only by a security
interest in ... the debtor's principal residence." 11
U.S.C. § 1322(b)(2) (emphasis added). If valuation of the
property under §506(a) determines that a junior mortgage
holder's claim is wholly unsecured, then the bank is not in
any respect a “holder of a claim secured by the debtor's
residence” under §1322(b). Accordingly, the junior mortgage
holder simply has an unsecured claim and the
anti-modification clause does not apply. On the other hand,
if any part of the mortgagee's claim is secured, then, under
Nobleman’s interpretation of the term "claim," the entire
claim, both secured and unsecured parts, cannot be modified.
The several Circuit Courts that have ruled on the issue,
including the Sixth Circuit, support the majority position
allowing lien stripping of wholly unsecured junior mortgage
liens. See Pond v. Farm Specialist Realty (In re Pond), 252
F.3d 122 (2nd Cir. 2001); McDonald v. Master Fin., Inc.(In
re McDonald), 205 F.3d 606 (3d Cir. 2000), cert. denied, 531
U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000); Bartee v.
Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277
(5th Cir.2000); Lane v. W. Interstate Bancorp (In re Lane),
280 F.3d 663 (6th Cir.2002); Zimmer v. PSB Lending Corp. (In
re Zimmer), 313 F.3d 1220, (9th Cir. 2002); Tanner v.
FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357 (11th
Cir. 2000). The only variance in this uniformity among the
circuits is an Eleventh Circuit opinion, which disagrees
with the In re Tanner panel that originally decided the
issue, but which followed the Tanner decision as established
precedent in that circuit. See In re Dickerson, 222 F.3d 924
(11th Cir.2000). See also Domestic Bank v. Mann (In re
Mann), 249 B.R. 831, 833 (B.A.P. 1st Cir. 2000); Griffy v.
U.S. Bank (In re Griffey), 335 B.R. 166 (B.A.P. 10th Cir.
2005); Waters v. The Money Store (In re Waters), 276 B.R.
879 (Bankr.N.D.Ill. 2002); In re King, 290 B.R. 641
(Bankr.C.D.Ill. 2003).
d. Minority view: While the Circuit Courts are nearly
uniform in support of the majority view, some Bankruptcy
Courts take a minority view. They hold that a properly
perfected mortgage claim is literally “secured only by a
security interest in real property that is the debtor's
principal residence” within the meaning of §1322(b),
irrespective of whether the claim is wholly or partially
secured, or totally unsecured after the application of
§506(a). They reason that this view is consistent with the
emphasis in the Nobelman decision on the state law
contractual rights bargained for by the mortgagor and
mortgagee, and with the legislative history which indicates
that §1322(b) was intended to encourage the flow of capital
into the home lending market and to exempt such Mortgages
from valuations and bifurcations as the result of an
application of § 506(a). Cases following minority view
include Barnes v. American Gen. Fin. (In re Barnes), 207
B.R. 588 (Bankr.N.D.Ill.1997).
e. The Hon. Keith Lundin has expressed support for the
minority view, that Nobleman was concerned about protecting
the state law rights of the residential mortgagee and did
not consider the issue to be a question of valuation.
Lundin’s view and the minority view is there is no
justification, following the Nobelman decision, for courts
to focus on the value, at the date of the petition, of the
real property securing a debt as the threshold of whether
the rights of the mortgagee may be modified. In the majority
view, a mortgagee with $1.00 in equity receives the
anti-modification protection of §1322(b), while the
mortgagee with no equity does not. Keith M. Lundin, Chapter
13 Bankruptcy, 3d. Ed. §14.1, p. 221 (2000 & Supp. 2004)
f. Lien stripping in the Seventh Circuit
i. Although every circuit court of appeals that has
considered the question has followed the majority view, the
Seventh Circuit Court of Appeals has not directly ruled on
the issue; thus, lower courts in the Seventh Circuit may
follow either the majority or the minority view.
ii. In the Northern District of Illinois, the cases go both
ways. Barnes v. American Gen. Fin. (In re Barnes), 207 B.R.
588 (Bankr. N.D. Ill. 1997) (follows the minority view that
11 U.S.C. §1322(b)(2) prohibits stripping off wholly
unsecured mortgages.) Waters v. Money Store (In re Waters),
276 B.R. 879 (Bankr. N.D. Ill. 2002) follows the majority
position after a thorough analysis of both views. Also in
the Northern District of Illinois, the district court in In
re Holloway v. United States, 2001 U.S. Dist. LEXIS 16898
(N.D. Ill. Oct. 16, 2001) follows the majority view.
iii. In the Central District of Illinois, In re King, 290
B.R. 641 (Bankr. C.D. Ill. 2003) adopted Waters, supra.
iv. In In re Black, 2002 Bankr. LEXIS 1752 (Bankr. N.D. Ind.
2002), the Northern District of Indiana provides a
comprehensive review of cases following the majority and
minority views, and decides that stripping off a wholly
unsecured mortgage from the debtor’s residence “represents
the most appropriate reading of both [11 U.S.C.] §
1322(b)(2) and Nobelman.”
IV. EXCEPTIONS TO ANTI-MODIFICATION: - NOBELMAN EXCEPTIONS -
§ 1322(b)(2) provides that the Chapter 13 plan may modify
the rights of holders of secured claims, other than a claim
secured only by a security interest in real property that is
the debtor's principal residence. §1123(b)(5) says the same
thing for Chapter 11 cases.
a. Debtor’s Principal Residence –
Principal Residence defined U.S.C. 101(13A) The term
“debtor's principal residence”--(A) means a residential
structure, including incidental property, without regard to
whether that structure is attached to real property; and (B)
includes an individual condominium or cooperative unit, a
mobile or manufactured home, or trailer.
b. Liens on attached property or curtilage?
c. When is the Principal Use determined?
i. Origination date or petition date?
ii. Is pre-petition “use planning allowed?”
d. “Secured Only By” - Effect of lien on residence as well
as upon other assets.
i. Additional security interests in mortgage escrow
accounts. A majority of courts have ruled that the grant of
a security interest in an escrow fund for insurance and
taxes by a Chapter 13 debtor's second mortgage did not
convey additional collateral. The anti-modification
provision continues to apply. The debtor retained no
interest in the funds once placed in escrow and so any grant
of a security interest in such funds was meaningless and
conveyed essentially no interest at all. 1st 2nd Mortgage
Co. of NJ., Inc. v. Ferandos (In re Ferandos), 402 F.3d 147
(3d Cir. 2005). See also Boehmer v. Essex (In re Boehmer),
240 B.R. 837(Bankr. E.D.Pa. 1999); Rodriguez v. Mellon Bank,
N.A. (In re Rodriguez), 218 B.R. 764 (Bankr. E.D. Pa. 1998);
In re Abruzzo, 245 B.R. 201 (Bankr. E.D. Pa. 1999), vacated
In re Abruzzo, 245 B.R. 2000 U.S. Dist. LEXIS 4936 (E.D. Pa.
Apr. 7, 2000), on remand In re Abruzzo, 249 B.R. 78 (Bankr.
E.D. Pa. 2000)
ii. Other view: Residential mortgage debt was not one
secured “only by a security interest in real property” that
was debtor's principal home, within meaning of
anti-modification provision of Chapter 13, where mortgagee
had also been granted security interest in escrow for taxes
and insurance premiums; mortgagee had additional security
interest in escrowed funds, notwithstanding that, on
petition date, that interest had not been perfected by
delivery. Stewart v. U.S. Bank, 263 B.R. 728 (Bankr.W.D. Pa.
2001).
iii. Secured by additional assets other than the residence;
cross collateralization clauses, overly broad security
agreement?
1. Fixtures: will a security interest in fixtures destroy
§1322 antimodification protection?
2. Mortgage extending mortgagee's security interest to
non-fixture appliances, as well as other personalty,
removed mortgagee's claim from category of claims secured
only by residential realty, for purpose of preventing
Chapter 13 debtor from modifying mortgagee's rights. In re
Caster, 77 B.R. 8 (Bankr. E.D. Pa. 1987).
iv. Valuation- Under § 506 (a)(1), “value shall be
determined in light of the purpose of the valuation and of
the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or
on a plan affecting such creditor’s interest”(emphasis
added). If a valuation of the property under §506(a)
determines that a junior mortgage holder's claim is wholly
unsecured, then the mortgagee is not in any respect a
“holder of a claim secured by the debtor's residence” and
the jr. mortgage holder’s claim may be modified and treated
as an unsecured claim.
1. Date of Valuation –
a. Loan Origination Date or Date of Bankruptcy Petition?
2. Methodology of Valuation. Market value or liquidation
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. . . . The
fair market value is not ‘replacement value’ because the
house is not being replaced. The fair market value is the
price which a willing seller under no compulsion to sell and
a willing buyer under no compulsion to buy would agree upon
after the property has been exposed to the market for a
reasonable time. Taffi v. United States (In re Taffi), 68
F.3d 306, 309 (9th Cir. 1995)
3. Current use or highest-best use? Should not calculate the
value of the property on the value such property could
demand if it were converted to some other use. The purpose
of the valuation is to determine how much the creditor will
receive for the debtor’s continued possession . . .. The
foreclosure value is not relevant because no foreclosure is
intended by the Plan. . . . Consequently, the value has to
be the fair market value of what the debtors are using.
Taffi v. United States (In re Taffi), 68 F.3d 306, 309 (9th
Cir. 1995) Cannot deduct for hypothetical costs of sale –
Huntington Nat’l Bank v. Pees (In re McClurkin), 31 F.3d 401
(6th Cir. 1994)
v. When is the Lien Stripped Off? The unsecured junior lien
is not stripped off at confirmation. To allow lien strip at
confirmation would encourage “mischief” such as the debtor’s
post-confirmation sale of the property to an unsuspecting
purchaser. Under BAPCPA section 1325(a)(5)(B)(i)(I)(bb), the
plan must provide that the claim holder “retain[s] the lien
securing such claim until … discharge under section 1328….”
1. The junior lien is deemed satisfied and lien should be
discharged or released only upon conclusion of the
bankruptcy case. In re Jones, 152 B.R. 155 (Bankr. E.D.
Mich. 1993).
2. The right to avoid a lien has not fully matured in a
Chapter 13 context until a discharge is granted upon
successful completion of the Chapter 13 Plan. Accordingly,
the order confirming the Debtors' plan will specifically
provide that the Debtors' house shall remain property of the
estate, and shall not re-vest in the Debtors, until the
Debtors are granted a discharge. Castle v. Parrish, 29 B.R.
869, 874 (Bankr. S.D. Ohio 1983)
3. A plan is inconsistent with the provisions of Chapter 13
when it purports to effectuate irrevocable lien avoidance on
plan confirmation. In re McMillan 251 B.R. 484, 490 (Bankr..
E.D. Mich.2000)
4. If the Debtor is ineligible to receive a discharge due to
prior discharge under 11 U.S.C. 1328(f) then the Debtor may
not benefit from the lien stripoff. See In re Akram, 259
B.R. 371, 378-79 (Bankr.C.D.Cal.2001); In re King, 290 B.R.
641, 651(Bankr. C.D. Ill.2003)
vi. Hardship discharge? If the Debtor receives only a
“hardship discharge” under 11 U.S.C. 1328(b) is the debtor
entitled to the benefit of the lien strip and a discharge of
the junior mortgage lien?
1. One line of cases holds that a creditor's lien may be
extinguished pursuant to the debtor's plan. These cases use
the following two lines of reasoning: First, the creditor's
lien is void upon the payment of the allowed secured claim
pursuant to 11 U.S.C. § 506(d); and second, where
§1322(b)(2) does not prevent a modification to the
creditor's lien rights, any concern about the debtor
dismissing his case after the creditor's lien is released,
but prior to full payment under the plan, is outweighed by
the policy of affording the debtor a fresh start. See, e.g.,
Bank One, NA v. Flowers, 183 B.R. 509 (N.D. Ill. 1995); In
re Nicewonger, 192 B.R. 886 (Bankr.N.D.Ohio 1996); In re
Hernandez, 175 B.R. 962 (N.D. Ill. 1994); In re Wilson, 174
B.R. 215 (Bankr. S.D. Miss. 1994); McDonough v. Plaistow
Coop. Bank (In re McDonough), 166 B.R. 9 (Bankr. D. Mass.
1994); In re Cooke, 169 B.R. 662 (Bankr. W.D. Mo.1994); In
re Schultz, 153 B.R. 170 (Bankr. S.D. Miss.1993); In re Lee,
156 B.R. 628 (Bankr. D. Minn.1993).
2. Another line of cases holds that a debtor may not obtain
a release of a secured creditor's lien until he successfully
completes the confirmed plan and receives a §1328(a)
discharge. See, e.g., In re Zakowski, 213 B.R. 1003 (Bankr.
E.D. Wis.1997); In re Pruitt, 203 B.R. 134 (Bankr. N.D. Ind.
1996); In re Scheierl, 176 B.R. 498 (Bankr. D. Minn.1995);In
re Jordan, 164 B.R.. 89 (Bankr. E.D. Mo.1994); In re Jones,
152 B.R. 155 (Bankr. E.D. Mich.1993); Gibbons v. Opechee
Distribs. (In re Gibbons), 164 B.R. 207 (Bankr. D.N.H.
1993).
V. IS AN ADVERSARY PROCEEDING REQUIRED? Chapter 13 debtors
may not need to file an adversary proceeding to strip the
mortgagee’s lien. One court summarized the cases:
[I]t appears that no adversary proceeding is needed simply
to value and declare void a totally unsecured claim. The
majority of courts therefore hold that "the appropriate
procedure for lien avoidance under Section 506 is by motion
because lien avoidance is the inevitable byproduct of
valuing a claim, which is accomplished by motion pursuant to
Bankruptcy Rule 3012." In re Sadala, 294 B.R. 180, 183
(Bankr. M.D. Fla. 2003) (collecting cases); see also, In re
Millspaugh, 302 B.R. 90 (Bankr. D. Idaho 2003); In re
Fisher, 289 B.R. 544 (Bankr. W.D.N.Y. 2003) (court allows
proceedings to be prosecuted by motion in the absence of a
specific objection by the mortgage holder that the
proceeding be converted to an adversary proceeding); but
see, e.g., In re Kressler, 252 B.R. 632 (Bankr. E.D. Pa.
2000) (espousing the minority view that an adversary
proceeding is required); …Once the value of the secured
claim is determined, the attendant lien is stripped off
automatically under Section 506(d)." In re Sadala, 294 B.R.
180, 183 (Bankr. M.D. Fla. 2003) In re Robert, 313 B.R. 545,
549 (Bankr. N.D. N.Y. 2004).
These Courts have determined that lien stripping is a
valuation issue, not a challenge to the “validity, priority,
or extent of a lien” of F.R.B.P. 7001, requiring an
adversary proceeding.
a. Courts have considered the “lien-stripping” effect of §
506 in the context of:
i. an adversary proceeding. See, e.g., Gaglia v. First
Federal Sav. & Loan Asso., 889 F.2d 1304, 1305 (3d Cir.
Pa.1989), overruled by Dewsnup v. Timm, 502 U.S. 410 (U.S.
1992); In re Lindsey, 823 F.2d 189, 191 (7th Cir. Ill.
1987); In re Cobb, 122 B.R. 22, 24(Bankr.E.D. Pa.1990);
Bellamy v. Federal Home Loan Mortg. Corp., 122 B.R. 856, 857
(Bankr. D. Conn. 1991), aff'd In re Bellamy, 132 B.R. 810
(D.Conn.1991), aff'd In re Bellamy, 962 F.2d 176 (2d Cir.
Conn. 1992); Goins v. Diamond Morttg. Corp., 119 B.R. 156,
157 (Bankr. N.D. Ill.1990); In re Garnett, 88 B.R. 123, 124
(Bankr. W.D. Ky.1988), aff'd United States on behalf of
Farmers Home Admin. v. Garnett, 99 B.R. 757 (W.D. Ky. 1989);
In re Crouch, 80 B.R. 364, 365 (Bankr. W.D. Va.1987); In re
O'Leary, 75 B.R. 881, 882(Bankr. D. Or. 1987);
ii. a motion to avoid a lien. See, e.g., In re Jablonski, 88
B.R. 652, 653 (E.D. Pa. 1988); In re Chavez, 117 B.R. 733,
734 (Bankr. S.D. Fla. 1990); In re Marshall, 111 B.R. 325,
326 (Bankr. D. Mont. 1990); In re Demoff, 109 B.R. 902, 903
(Bankr. N.D. Ind.1989); In re Anderson, 88 B.R. 877, 878
(Bankr. N.D. Ind. 1988), In re Robert, 313 B.R. 545 (Bankr.
N.D.N.Y. 2004) and,
iii. in an objection to a proof of claim. See, e.g., In re
Jablonski, 88 B.R. 652, 653 (E.D. Pa. 1988); In re Chavez,
117 B.R .733, 734 (Bankr. S.D. Fla. 1990); In re Marshall,
111 B.R. 325, 326 (Bankr. D. Mont. 1990); In re Demoff, 109
B.R. 902, 903 (Bankr. N.D. Ind. 1989); In re Anderson, 88
B.R. 877, 878 (Bankr. N.D. Ind.1988).
b. Eastern District Court of Michigan- The Court has not to
date required an adversary proceeding in any published
opinion. In the case, In re Jones 152 B.R. 155 (Bankr. E.D.
Mich. 1993); the Hon. Arthur Spector held that F.R.Bankr.P.
3012 permits § 506 valuations to be requested by motion, and
noted that the advisory committee note relating to that rule
distinguishes valuation proceedings from those subject to
F.R.Bankr.P. 7001, and ruled that the debtor need not file
an adversary proceeding to avoid a creditor's lien under §
506. In re Hoskins, 262 B.R. 693(Bankr. E.D. Mich. 2001)
c. Western District of Michigan- a junior lien which is
totally unsupported by any equity in property may be
extinguished through Chapter 13 plan confirmation process,
without need for adversary proceeding, as long as language
in plan is sufficiently clear to put lienholder on notice of
debtor's intentions) (See also, In re Hoskins, 262 B.R.
693(Bankr. E.D. Mich. 2001)(Judge Spector), In re Fuller 255
B.R. 300, 306 (Bankr. W.D. Mich. 2000); In re Hudson, 260
B.R. 421 (Bankr. W.D. Mich. 2001); see also, In re Calvert,
907 F.2d 1069, 1072 (11th Cir. Ala. 1990);
i. Best Practice- Circuits have not specifically ruled.
Debtors may wish to be cautious when deciding whether an
adversary proceeding is required. If future appellate court
decisions decide that an adversary proceeding is required,
the lien strip-off may be subject to collateral attack. Cf.
Ruehle v. Educ. Mgmt. Corp. (In re Ruehle), 412 F. 3d 679,
680 (6th Cir. 2005) (student loan discharge in plan void
because adversary proceeding required).
VI. EFFECT OF DISMISSAL – A dismissal acts to undo
bankruptcy and to restore property rights to the position in
which they were found at commencement of case, as far as
practicable, given facts of each case. Bankr.Code, 11 U.S.C.
§ 349(b).
i. Unless the court indicates otherwise, the general effect
of an order of dismissal is to "restore the status quo ante;
"it is as if the bankruptcy petition had never been filed.
France v. Lewis & Coulter, Inc. (In re Lewis & Coulter,
Inc.), 159 B.R. 188, 190 (Bankr. W.D. Pa. 1993); Lawson v.
Tilem (In re Lawson), 156 B.R. 43, 45 (B.A..P. 9th Cir. Cal.
1993)).
ii. The legislative history of 11 U.S.C. § 349 states: The
basic purpose of the subsection is to undo the bankruptcy
case, as far as practicable, and to restore all property
rights to the position in which they were found at the
commencement of the case.... Where there is a question over
the scope of the subsection, the court will make the
appropriate orders to protect rights acquired in reliance on
the bankruptcy case. H.R.Rep. No. 595, 95th Cong., 1st
Sess., 338 (1977); 1978 U.S.Code Cong. & Admin.News, 5963,
6294.
iii. 11 U.S.C. § 1325(a)(5)(B)(i)(II) requires a plan to
provide that if a Chapter 13 case is “dismissed or converted
without completion of the plan,” the lien is retained by the
lien holder “to the extent recognized by applicable
nonbankruptcy law.”
VII. CREDITOR DEFENSES
a. Mortgage is not a “Junior Lien”
i. Failure to record or properly record a senior mortgage.
If junior lienholder lacked notice of the prior lien,
consider action to determine whether a “junior lien” has
priority.
ii. Defective/invalid liens. If a senior lien has defects
that render the security instrument void, consider action to
determine lien priority (e.g., acknowledgment, signatures,
witnesses, description of the property).
iii. Can junior lienholder compel Ch. 13 Trustee or Debtor
to avoid a senior lien, thus preserving Jr. lien? No,
because any such senior lien avoided would be preserved to
the bankruptcy estate to prevent a junior lienholder from
improving his position. 11 U.S.C. § 551
b. Valuation of property supports Junior Lien- Appraisals of
property may establish that the property actually is worth
more than the amount of the senior lienholder’s secured
claim.
1. Claims of senior lienholder may be overstated. In a close
case, it may be useful to examine the claim of the senior
lienholder for components that may improperly inflate the
amount of the claim.
Consider objections to the claim for:
a. Fees and costs incurred after the petition was filed;
b. Property taxes, insurance premiums, or property
preservation expenses that were incurred after the petition
was filed;
c. Fees and costs that are not authorized to be charged to
the borrower under the note and mortgage, unless or until
notice to the debtor is given;
d. Unlawful fees and costs;
e. Whether funds in escrow account should be credited.
c. Motions to convert case to chapter 7.
i. See note above, regarding §1325(a)(5)(B)(i)(II) (effect
of dismissal or conversion)
ii. General grounds to convert case. Strategic reasons to
convert to Chapter 7?
The borrower cannot strip lien in Ch. 7 case. Nobelman v.
American Savings Bank, 508 U.S. 324 (U.S. 1993); In re
Talbert, 344 F.3d 555 (6th Cir. 2003).
VIII. SETTLEMENT CONSIDERATIONS /CREDITOR CONCEDES THAT LIEN
STRIP IS AUTHORIZED- WHAT NEXT?
a. Seek a judgment, plan provision, or order that protect
junior lienholder until conclusion of the case.
i. Order should confirm lien is preserved until successful
completion of all payments and issuance of § 1328(a) Order
of Discharge.
ii. The judgment and the order confirming the plan should
state that any property encumbered by liens securing an
allowed secured claim shall remain property of the estate
until the plan is fully performed.
iii. Seek favorable judgment provisions that protect the
junior lienholder until the case is concluded, such as
“Future Default” provisions , and provisions requiring
maintenance of adequate hazard insurance coverage, and
prompt payment of property taxes.
b. Make a close examination of Debtor’s Income and Expenses
and file timely objections to under reported income, and
unsubstantiated, unreasonable and luxury expenditures, to
maximize dividends to unsecured creditors.
c. Consider valid objections to untimely or defective claims
of other unsecured creditors to maximize junior lienholder’s
pro rata share.
d. Monitor plan payments, prompt payment of property taxes,
and maintenance of adequate hazard insurance and seek
dismissal in appropriate circumstances.
IX. OTHER EXCEPTIONS:
a. Short Term Mortgages – First Union Mortg. Corp. v.
Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998)
(Section 1322(c)(2) creates a statutory exception to the
protection from modification for “short term” home mortgages
in Chapter 13 cases; debtor can bifurcate undersecured
second mortgage and pay allowable secured portion in full
with interest consistent with § 1325(a)(5), while paying
unsecured portion with other unsecured claims.)
