October 5, 2009
Avoiding Liens in Chap 7 - Response from Prof. Scarberry
If there is a free link someone could provide to the unpublished Montero order ("In re Montero, No. 6:08-bk-10797-KSJ (M.D. Fla. 5/27/09, Docket Entry 37)" as cited by Dan) that would be much appreciated. (Or I'd be happy to receive a pdf file or something like that as an attachment.)
The unpublished opinion in In re Arrieta, 2009 WL 1789576, Bankr. N.D. Ill., June 22, 2009, notes that
"However, of all the cases which have permitted the 'stripping off' of a second mortgage, only the Howard court has not been abrogated by a later decision."
And in fact Howard did not involve stripping off a mortgage but rather a nonconsensual judgment lien. The court in Howard relied rather heavily on the distinction that the lien in Dewsnup, by contrast, was consensual. The court in Howard thus refused to follow decisions that applied Dewsnup to nonconsensual liens. That was not the court's only basis for distinguishing Dewsnup, but it is not at all clear that the court in Howard would have reached the same result had the lien been consensual.
With regard to the Third Circuit, I wouldn't go so far as to say that the Third Circuit in McDonald (in a case dealing with chapter 13) expressly left the chapter 7 issue open; it did not have the issue before it and thus of course did not address the issue. By the way, if you are having trouble finding McDonald, the cite is 205 F.3d 606, not 605.
The Third Circuit noted that what mattered primarily to it was the discharge of personal liability in a chapter 7 case:
Because Dewsnup allowed the creditor in Chapter 7 to maintain a claim against the property for the unsecured balance, the decision prevented a Chapter 7 debtor from benefitting from an increase in the value of the home. But what matters for our purposes is that even under Dewsnup the debtor is still discharged of personal liability, so Dewsnup does not eliminate the incentive to switch from Chapter 13 to 7 in order to escape debt on a home that far exceeds the home's value. A debtor in the McDonalds' position would still view Chapter 7 as a better alternative than Chapter 13.
It is also worth noting that courts are split on whether Dewsnup's rejection of lien-stripping in Chapter 7 applies to a wholly unsecured lien, although of course *615 we express no view on that dispute. Compare In re Yi, 219 B.R. 394 (E.D.Va.1998), and Howard v. National Westminister Bank, 184 B.R. 644 (Bankr.E.D.N.Y.1995), with In re Laskin, 222 B.R. 872 (9th Cir.BAP 1998).
[End of quote]
A comment, really just an aside, that it is "worth noting" that courts are split on an issue, in a case in which the court did not have the issue even remotely before it -- and thus of course "express[ed] no view" -- doesn't seem to tell us much.
The idea that 506(d) means something different in chapter 7 than in chapter 13 is not, in my view, tenable. The same words, the same code section, made applicable by the code to both chapters, but interpreted differently in different chapters? Even a court that treats the same words in different places in a section to mean different things (which the S. Ct. has been criticized for supposedly doing in Dewsnup) couldn't go along with that.
What I think may be a live issue, however, is whether a *nonrecourse* mortgage can be stripped down or stripped off under section 506(d) in a chapter 7 case, because in a chapter 7 case the deficiency claim may be disallowed (most of us would say of course would be disallowed) even as an unsecured claim should its allowability be at issue. Dewsnup does seem to say that if a provision of the Code disallows a claim, then the lien is void for the disallowed amount. I posed that question a while back and didn't get any response, which is fine; I know list members are busy. But I think it is an important question.
Mark S. Scarberry
Pepperdine Univ. School of Law
(in London for fall semester 2009)
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Professor Scarberry said: "The idea that 506(d) means something different in chapter 7 than in chapter 13 is not, in my view, tenable. The same words, the same code section, made applicable by the code to both chapters, but interpreted differently in different chapters?"
See my "comment" in the original thread. There is no difference between Chapter 7 and 13, because 506(d) does not serve to strip the lien in Chapter 13 either. It is 1327(c) which vests the property free and clear of claims *and interests* that does the heavy lifting. As I said, see In re Claar, 368 B.R. 670 (Bankr. S.D. Ohio, 2007); In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio, 2003); for the Chapter 12 analog see In re Harmon, 101 F.3d 574, 581 (8th Cir., 1996).
Posted by: Brian Rookard | Oct 5, 2009 4:28:35 PM
If you look closely at Harmon you will see that it was not just the chapter 12 analogue of section 1327(c) that the court thought allowed strip down; rather it was also the provision for the claim in the plan, pursuant to the analogue to section 1325(a)(5)(B). Thus strip down in chapter 13 requires satisfaction of section 1325(a)(5)(B), which requires that the full amount of the allowed secured claim be paid off during the chapter 13 plan with interest.
In re Claar also references section 1325(a)(5). Here is one of the court's references to it: "Whether strip-off is effected under § 506(d), or through the confirmation process--and the combined operative effect of §§ 506(a) (valuation), 1322(b)(2) (modification), 1325(a)(5) (lien retention) and 1327(b) and (c) (vesting free and clear)--the ultimate result is the same." Where the mortgage has some value backing it (as opposed to the situation in Claar in which the second mortgage was junior to a first that exceeded the value of the property), there will be an allowed secured claim that, under section 1325(a)(5)(B), will need to be paid off with interest during the three to five year term of the plan.
Even the court in Hill references the essential role of section 1325(a): "The only other statutory provisions available to a Chapter 13 debtor to accomplish this task [stripping off a wholly unsecured lien] are 11 U.S.C. §§ 1322(b)(2), 1325(a)(5) and 1327(c). However, upon closer examination, only § 1327(c) serves to avoid the lien. Sections 1322(b)(2) and 1325(a)(5) simply define the permissible scope of a debtor's right to avoid pursuant to § 1327(c)." [Footnotes omitted.] Thus section 1325(a)(5)(B), with its requirement that the allowed secured claim be paid off during the plan, limits any lien stripdown that section 1327(c) might otherwise permit.
The Eleventh Circuit, in fact, has held that it is section 1325(a)(5) that accomplishes any stripdown. Here is a short quote from a footnote from my forthcoming article on mortgage stripdown: "Several courts have noted that it is compliance with section 1325(a)(5) that authorizes a plan to strip down a secured claim, where that is permitted in chapter 13. See, e.g., Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203, 1205-06 (11th Cir.), cert. denied, 537 U.S. 1097 (2002); In re Perry, 337 B.R. 649, 654 (Bankr. N.D. Ohio 2005)."
In any event, it is quite important to understand that section 506(d) cannot strip down or strip off any lien where the underlying claim has not been at least to some extent disallowed. A plan (in chapter 11, 12, or 13) can do it, but only if the requirements of the relevant chapter are met (assuming appropriate objections are made); that means that in a chapter 13 case, an undersecured claim may only be stripped down by paying off the entire amount of the allowed secured claim with interest over the life of the plan. At least that is the view of the Ninth Circuit in Enewally and of almost all post-Nobelman cases outside the First Circuit. And even within the First Circuit, any change in the amount of monthly payments on a mortgage or in the interest rate will require that the full allowed secured claim be paid off with interest during the plan. See In re Plourde, 402 B.R. 488, 490-92 (Bankr. D.N.H. 2009).
Posted by: Mark Scarberry | Oct 25, 2009 4:11:24 PM