October 5, 2009
Avoiding Liens in Chapter 7
This is such a good comment that I wanted to post it. From Brian Rookard:
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).
Brian's comment from the original thread.
I work in the Sixth Circuit, I'm a consumer bankruptcy attorney, and I'm convinced that it is correct. While Dewsnup seems an odd construction of 506(d) at first, when you go back and look at the legislative history and the reports, the Dewsnup construction was in line with what was intended. 506(d) cannot be used to "strip" liens, and it is not the section that is used in the reorganization chapters to strip liens. For example, in Chapter 13 cases, it is 1327(c) which vests the property in the debtor free and clear of claims and interests. 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). 506(d) goes to the claims allowance process. Is a claim allowed? Is it secured? To the extent that it is not "allowed," then the lien will be void. Thus, in order to avoid a lien under 506(d) one would actually have to object to a claim and get it disallowed. Then it would be void. Courts that hold that 506(d) can be used to just strip liens, and where the claim has been allowed, unfortunately, got it wrong, IMHO. While Dewsnup seems odd, I have to admit that it agrees with what was originally intended by Congress, and is the correct decision.
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I don't think Brian Rookard and I are disagree on the role of section 506(d), but section 1327(c) is not alone in doing heavy lifting where strip down or strip off are permissible. I've copied below the comment I left on the original post in response to Brian's comment.
Mark S. Scarberry
Pepperdine Univ. School of Law
Scarberry Comment on Brian Rookard's comment:
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 26, 2009 4:10:02 AM
The perils of editing posts early in the morning; that should have been "I don't think Brian and I are in disagreement" or "I don't think Brian and I disagree." The way it came out, "I don't think Brian and I are disagree," reminds me of the old story about the kid who went off to school. On his return, when asked to give an example of what he had learned, he said, "The area of a circle: pi r squared." And he was met with derision from the large crowd that had assembled to welcome him home, because, as his father pointed out, everyone knows "pie are round."
Posted by: Mark Scarberry | Oct 26, 2009 4:19:32 AM