ONLY CRAMDOWN LEFT? § 506 LIEN STRIPPING & VALUATION:
ABI article (11/2008)
In re Winitzky 1-80-bk-19337
Motion to
strip fully unsecured lien on residence (Central District of
CA, June 9, 2009) at
issue in this case is whether the Bankruptcy Code allows
Chapter 13 debtors who previously received chapter 7
discharges within the last 4 years could strip a completely
unsecured consensual lien off their primary residence.
This Court concluded that the Code does not allow this
because a discharge is required to lien strip in a Chapter
13 case.
In Re:
Mansaray-Ruffin, No. 05-4790
(U.S.
3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate
a lien on her property by providing for it as an unsecured
claim in her confirmed plan, without initiating an adversary
proceeding as required by the Federal Rules of Bankruptcy
Procedure.
Read more...
CHAPTER 20: In re Trevor M. JARVIS, Debtor. No.
07-72281 2008 WL 2682514--- B.R. ----, 2008 WL 2682514 (Bankr.C.D.Ill.)
United States Bankruptcy Court, C.D. Illinois. July 9, 2008.
Holdings: The Bankruptcy Court,
Mary P. Gorman,
J., held that:
(1)
debtor who, due to his receipt of discharge in prior Chapter 7
case, was ineligible to receive Chapter 13 discharge even if
he successfully completed his payments under plan could not
use his successive Chapter 13 filing to "strip off" a wholly
unsecured junior mortgage lien; and
(2)
even assuming that debtor's earlier Chapter 7 discharge,
shortly prior to commencement of his current Chapter 13
case, had not rendered him ineligible for discharge in
Chapter 13, plan proposed by debtor could not be confirmed.
Cases such as King which helped to develop the theory
of lien stripping of fully unsecured claims involved debtors
who had previously received a Chapter 7 discharge and did
not need the Chapter 13 discharge to extinguish personal
liability. Rather, those cases hold that the use of Chapter
13 to modify rights not discharged in the prior case
requires a second discharge to be fully effective. Courts
have consistently held that, because a portion--the in
rem portion--of a creditor's claim against a debtor
remains after the Chapter 7 discharge, the permanent
modification of that claim can only be effected by
completing the terms of the Chapter 13 and receiving a
discharge notwithstanding the discharge of personal
liability in the prior case. King, 290 B.R. at
651;
In re Akram,
259 B.R. 371, 378-79 (Bankr.C.D.Cal.2001). Nothing in
the limited legislative history of BAPCPA suggests that
Congress intended to change that result. Confirmation
denied.
Subject: [NACBA-BK]
Re: Bankr CD ILL: Strip-off plan could not be confirmed in
no-discharge Chapter 13 case commenced by repeat filer.
David: Dan, you're half right.
The mortgage debt was discharged in the chapter 7
case, but the mortgage lien was NOT discharged. See Johnson
v. Home State Bank, 501
U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)). A debtor
can't eliminate or "strip down" the mortgage lien in a
chapter 7 case, Dewsnup v. Timm 502 US 410 (SCOTUS,
1992), but you can do that in a chapter 13 case if you
follow Max's mantra: "notice, notice and more notice" and
make it clear in the plan that you're doing that. This is
the technique I used in In re Curtis, 322 BR 470 (Bkrtcy.D.Mass.
2005). That was a chapter 20 in which the 2nd mortgage was
stripped off and no payments made because the debt was
discharged in the 7. When the 2nd mortgagee violated the
discharge injunction after my client completed her plan, we
had a lovely Adversary Proceeding in which the 2nd mortgagee
wound up paying my client $53,220, including my fee, its
lien having been voided by the discharge order in the
chapter 13 case. David Baker (Boston)
Dan: No, I'm confident that I'm 100%
right. Unless the 2nd mortgagee SUED on the debt (or
otherwise attempted to collect it as a personal liability),
it was not the DISCHARGE injunction that was violated. It
was the order avoiding the lien. That's still a judicial
order, and it's still enforceable, and it can be recorded in
land records to remove the 2nd from the chain of title. We
don't do this through the plan - an AP or motion is
necessary, and no discharge in the 13 should be necessary
for that order to be effective. Dan Press, Chung & Press,
P.C.
dpress@chung-press.com
In re Goswami (9th Cir. BAP 2003) NO DEADLINE FOR AMENDED
EXEMPTIONS OR JUDICIAL LIEN AVOIDANCE
A debtor's ability to amend his or her claim of exemptions
does not terminate upon case closure. A debtor's standing to
move to avoid a judicial lien is based on the circumstances in
existence at the time the lien attached, and not when the
debtor moves to avoid it (debtor moved to avoid a judicial
lien on his residence five years after case was closed; debtor
was unaware of lien at time he filed bankruptcy).
CULVER, L.L.C. v. CHIU, No.
01-56578 (9th Cir. September 18, 2002) The
lien-avoidance provision of the Bankruptcy Code, 11 U.S.C.
section 522(f)(1), allows that a debtor need not have an
interest in property to avoid a judicial lien on that
property.
http://caselaw.lp.findlaw.com/data2/circs/9th/0156578p.pdf
In re Laskin, 222 B.R. 872 (9th Cir. BAP
1998). no lien stripping in chapter 7 case (2nd
DOT totally unsecured by FMV. Cannot strip liens by motion,
must use reorganizations in order to use 506(d) to strip.
Rule 4003(d) only applies to lien avoidance actions under
522(f). Debtors argued Dewsnup v. Timm did not apply in that
this was not an attempt to strip a lien in a chapter 7 where
the lien is PARTIALLY secured, but was completed unsecured. (Dewsnup
would not permitting the stripping of a partially secured lien
in chapter 7).
Motions to Value Undersecured Claims, By: Louis J.
Esbin
esbinlaw@sbcglobal.net (1/2009)
A simple, but
common fact scenario: Home purchased on January 1, 2003, at
a price of $450,000, with a 80/10/10 loan; i.e., a first of
$360,000, a second of $45,000, and $45,000 down. On August
31, 2007, a refinance takes place, with an appraised value
of $700,000, and the advancing of a first of $500,000, and
HELOC of $200,000. Chapter 13 Bankruptcy case is filed on
December 31, 2008, with $55,000 in auto leases, and $210,000
in credit card and other unsecured debt, including a
corporate guaranty of $50,000.
The issues are
as follows: Does the debtor qualify under Chapter 13 if the
HELOC is determined be a wholly undersecured claim? Is it a
motion to value, a motion to avoid liens, an adversary, or
some combination of all three?
There are
three steps in the analysis: (1) First, a motion (not an
adversary proceeding) is filed under Section 506 so that the
bankruptcy obligation to make adequate protection payments
is relieved, citing as authority
In re Timbers of Inwood, 484 U.S. 365 (1988).
Evidence includes a preliminary title report to establish
priority of liens and the original amount of the debt
secured, filed claims or loan documents, and an appraisal,
each supported by admissible attestations; (2) Second, under
state law, California Civil Code Section 2909, provides in
summary that once the underlying trust purpose is
extinguished, the deed of trust is extinguished (See,
Alliance Mortgage Co. v. Rothwell, 10 Cal.4th
1226, 1235 (1995);
Trowbridge v. Love, 58 Cal.App.2d 746, 751
(1943)); i.e., once the underlying debt has been discharged
through a chapter 13 or 11, as a matter of law, the deed of
trust must be avoided by the trustee or beneficiary. Until
such time as the trust purpose is extinguished the trust
(deed of trust) must remain secured by the real property.
Therefore, the lien remaining and the interest of the
creditor is as either a partially undersecured or wholly
undersecured creditor. But, the holder of a lien secured by
a deed of trust is at all times secured. The terminology
“undersecured” is important because it defines the creditor
as having a lien against real property, but whose underlying
trust purpose is not secured entirely by equity in the real
property. The creditor is not unsecured, because the lien
remains enforceable against the real property until the
trust purpose is extinguished. Remember that if the Chapter
13 plan is not finished and a discharge entered, the lien is
enforceable, confirming the application of state law as to
the relationship between the Trustor (debtor) and
trustee-beneficiary (lender); and (3) Third, and
accordingly, contrary to the split of authority in our
district, there is no need for an adversary proceeding to
avoid a lien in a Chapter 13 or Chapter 11 situation until
the underlying trust purpose is extinguished, and only if
the trustee (of the deed of trust) does not voluntarily
remove the lien. And, as a practical note, if the lien is
avoided before the trust obligation is discharged (or
extinguished), at the time of the filing, the now adjudged
unsecured obligation (because the lien is removed) would be
added to the amount of the general unsecured claims at the
time of the filing, thereby resulting in the jurisdiction of
the court for chapter 13 to be exceeded. Section 109(e)
would thereby be violated, not as a matter of law, but
because of a misinterpretation and misapplication of the law
and procedure.
The case of
In re Scovis, 249 F.3d 975 (9th Cir. 2001), is
quite disturbing and potentially could render hundreds, if
not thousands of Chapter 13 debtors ineligible for filing
under Chapter 13, forcing them into more complicated and
expensive Chapter 11 cases.
Scovis speaks to the issue of good faith
determined at the time of the filing, based upon the filed
schedules. Citing,
Scovis, the BAP in
In re Guastella, 341 B.R. 908 (9th BAP 2006)
broadened the analysis of a totality of circumstances,
allowing the court to look beyond the schedules to determine
the debtors good faith intent where the tentative decision
of a state court had found liability and the amount of
liability. Importantly for our analysis, Scovis was a
judicial lien that impaired a statutory homestead
exemption. The HELOC is a consensual lien, a deed of trust
that is not subject to the homestead exemption; a critical
factual distinction when it comes to the timing of whether
or when a lien is deemed undersecured versus unsecured.
In
Scovis, the Ninth Circuit discussed the form
over substance issue. In
Scovis, however, California mortgage and deed
of trust law was not considered. But, California law must be
considered in determining the reality of the substance of
the rights impaired with regards to, in our example, the
HELOC. In the above scenario, as in most, the creditor is
deemed “wholly undersecured,” and therefore, no adequate
protection payments are made under
Timbers. The term undersecured claim, rather
than unsecured claim is an essential distinction, because
if the case is converted, the lien “rides through,” and the
creditor retains all remedies of a secured creditor, rather
than losing the right to exercise nonjudicial remedies, as
if an unsecured creditor, and as with the creditor in
Scovis. Application of 11 U.S.C. § 506(a)
results in a bifurcation of previously secured claims, but
11 U.S.C. § 506(d) does not allow the “stripping off” of the
wholly undersecured lien in a Chapter 7 case.
In re Dewsnup, 908 F.2d 588, 593 (10th Cir.
1990),
aff’d, 502 U.S. 410 (1992);
see also H.R. Rep. No. 95-595, 95th Cong., 1st
Sess. 5, reprinted in 1978 U.S. Code Cong. & Admin.News
5963, 6312.
Under
In re Zimmer, 313 F.3d 1220 (9th Cir. 2002),
and
In re Lam, 211 B.R. 36 (9th Cir.BAP 1997),
only through a Chapter 13 (or Chapter 11) can the lien
ultimately be avoided upon entry of discharge, as the
purpose is to further the effectuation of a plan in
prospect. The 9th Circuit BAP adopted the reasoning in
Dewsnup. Therefore, it
is essential to apply Bankruptcy and California law
together. Not until the discharge is entered will the
underlying trust purpose be extinguished or discharged, and
therefore, only at that time, will the deed of trust will be
subject to avoidance. This is so as a matter of law without
the need for an adversary proceeding, unless the trustee of
the deed of trust fails to avoid the deed of trust whose
trust purpose has been discharged.
Scovis
is just wrongly applied in the above fact scenario, both under
California law, as well as under
Zimmer and
Lam. Moreover, the creditor is scheduled at
the time of filing in Schedule D as a secured creditor, and
not in Schedule F as an unsecured creditor, and therefore,
at the time the case is filed the creditor is
“undersecured,” and not unsecured. As to the issue of good
faith in filing as a Chapter 13, rather than a Chapter 11,
again, the application of Bankruptcy law in concert with
California law will lead to the correct result.
The recent
iteration of the proposed Amendments also supports the above
analysis, providing in pertinent part that Section 109 of
title 11, United States Code, is amended—
“(1) by adding at the end of subsection (e) the following:
‘’For purposes of this subsection, the computation of debts
shall not include the secured or unsecured portions of—
‘(1) debts secured by the debtor’s principal residence if
the current value of that residence is less than the secured
debt limit; or . . . ‘”
It is evident
that Congress intends to deal with the interpretation of
Scovis and the application of
Zimmer. The proposed Amendment seems to
address the wrong application of
Scovis and the issue arising there from issue
where the wholly undersecured creditor’s claim would cause
the secured portion of the Chapter 13 jurisdiction to be
exceeded. Therefore, it seems that the proposed Amendment
would provide the treble benefit of: (1) reducing the
secured portion only to that amount of the secured claims
that are actually secured by the value in the residence; (2)
not adding to the unsecured portion that portion of the
secured claims that are either partially undersecured, or
wholly undersecured (see discussion below on the definition
of undersecured); and (3) raising the secured jurisdiction
of Chapter 13 to the extent of the value of the residence,
regardless of the face amount of the underlying debt secured
by the undersecured liens.
As the largest district in
the country, we must recognize the use of the terminology
wholly undersecured versus wholly unsecured when speaking of
deeds of trust to the extent to which their security
interest is determined through a “Motion to Value,” rather
than a “Motion to Avoid Lien,” and, further, only requiring
an adversary proceeding following entry of a discharge, if
necessary. However, such a Motion to Value must be supported
by competent and admissible evidence of priority of liens,
amount of original and outstanding debt secured
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