In re Cooke, Bankruptcy No. 92-40292-2.
| Decision Date | 08 July 1994 |
| Docket Number | Bankruptcy No. 92-40292-2. |
| Citation | 169 BR 662 |
| Parties | In re Thomas COOKE and Patricia Cooke, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
R. Gregory Gore, Independence, MO, for debtors.
Marilyn S. Gussman, Kansas City, MO, for GMAC.
This matter comes before the Court on the Debtors' Motion to Redeem Tangible Personal Property filed April 25, 1994. General Motors Acceptance Corporation (GMAC) filed an answer to the motion, and the Court held a hearing to consider the issues raised by the parties. Having duly considered the motion and the arguments of counsel, the Court finds as follows:
Facts
The facts in this case are not in dispute. The Debtors, Thomas and Patricia Cooke filed for Chapter 13 relief on January 30, 1992. The Debtors financed the purchase of a 1988 Chevrolet Cavalier (the Vehicle) through GMAC. The Debtors scheduled GMAC as secured to the value of the Vehicle and unsecured for any amount beyond that value. GMAC filed a proof of claim in the amount of $8324.98. The fair market value of the Vehicle was determined to be $6012.50, leaving GMAC with an unsecured claim of $2312.48.
The Debtors proposed a Chapter 13 plan in which secured creditors were to be paid in full on their allowed secured claims with interest accruing at 9%. Unsecured claims, including GMAC's unsecured deficiency claim, were to be paid 59% of their allowed amount. The Court confirmed the Debtors' 36 month plan on May 29, 1992.
At the time the original petition was filed, the Debtor, Thomas Cooke, was employed at Sealright as a product designer, and his co-Debtor wife, Patricia Cooke, was employed at John Knox Village as a secretary. The Debtors earned $2,237.22 and $1,160.23 respectively. During late 1993, Debtor Patricia Cooke was hospitalized due to illness. She is now disabled. The Debtors missed two plan payments, and the Chapter 13 Trustee moved to dismiss or convert the case.
On January 24, 1994, this case was converted to a Chapter 7 liquidation. The Chapter 7 schedules demonstrated that the Debtor Thomas Cooke was the sole wage earner in the family, and that the co-Debtor Patricia Cooke was unemployed. Patricia Cooke's unemployment reduced the Debtors' combined income by one-third.
At the time of conversion, the Debtors had paid $6012.50 in principal and $574.06 in interest on GMAC's secured claim. The Chapter 13 Trustee's final report indicated that $0.00 remained on the secured claim. The Debtors also paid $262.10, an 11% dividend, on GMAC's unsecured claim. GMAC filed a new proof of claim in the converted case, listing a $2665.67 secured claim. The parties agreed that the fair market value of the Vehicle is now $3812.50.
The Debtors filed a motion to redeem personal property, alleging that the Vehicle may be redeemed for $0.00, the balance due on the secured claim in the Chapter 13 proceeding. GMAC filed an answer to the motion, arguing that lien stripping in Chapter 13 does not survive a conversion to Chapter 7. GMAC argued that the Debtors must pay the full amount of the GMAC claim to redeem the Vehicle, or in the alternative, the Debtors must reaffirm the debt.
Section 722 allows Chapter 7 debtors to redeem tangible personal property intended primarily for personal, family or household use. 11 U.S.C. § 722. To redeem, a debtor must pay the value of the property or the value of the secured creditor's claim, whichever is less. Id. Here, the agreed value of the Vehicle, $3812.50, exceeds the value of the secured claim whether the Court uses the creditor's or the Debtors' figures. Thus, the Debtors' must pay GMAC the value of its secured claim to redeem their automobile. The basic question before this Court is whether GMAC's secured claim was satisfied under the Debtors' Chapter 13 plan, in which case the secured claim is $0.00, or whether the secured claim is $2050.38, the remaining balance on GMAC's claim after the Debtors' Chapter 13 payments are considered.1
This Court previously addressed the conversion/redemption issue in In re Tluscik, 122 B.R. 728 (Bankr.W.D.Mo.1991). Ironically, the Tluscik debtors owned a 1984 Chevrolet Cavalier when they filed for Chapter 13 relief, and the secured creditor was GMAC. Id. at 729. The debtors bifurcated GMAC's claim into its secured and unsecured portions, paying all but $135.26 of the secured claim through their Chapter 13 plan. Id. The debtors converted the case to Chapter 7 and sought to redeem the automobile for $135.26. Id. This Court determined that:
it is the Chapter 13 secured value which is determinative and not the secured claim value at the time of conversion.
Id. Thus, the debtor was permitted to redeem the collateral by paying only $135.26, the unpaid balance of the secured claim under the Chapter 13 plan. Id. This Court refused to allow a second valuation of the secured creditor's claim as of the date of conversion because it would give that creditor "two bites of the same apple." Id.
Since this Court rendered Tluscik, the Supreme Court decided Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which arguably affects Tluscik's continued vitality. Recently, Judge Barry Schermer in the Eastern District of Missouri held Dewsnup bars lien stripping in a converted case. In re Jordan, 164 B.R. 89 (Bankr.E.D.Mo.1994). While recognizing Judge Schermer's excellent analysis of the issue, the Court notes that there is a distinct split of authority on whether a debtor may strip down a lien in Chapter 13, convert to Chapter 7, and void the lien to the extent it is unsecured. In re Gammon, 155 B.R. 15, 17 (W.D.Okla.1993). Some courts have found, like Judge Schermer, that such a process violates Dewsnup's absolute prohibition on lien stripping in Chapter 7. See, e.g., Id.; In re McDonough, 166 B.R. 9 (Bankr.D.Mass. 1994); In re Jones, 152 B.R. 155 (Bankr. E.D.Mich.1993). Other courts have found that no lien stripping occurs when a lien is fully satisfied under chapter 13 and the case is subsequently converted to Chapter 7 because the lien is not revived upon conversion. See, e.g., In re Lee, 162 B.R. 217, 226 (D.Minn.1993); In re Stoddard, 167 B.R. 98 (Bankr.S.D.Ohio 1994); In re Peterson, 163 B.R. 581 (Bankr.D.Idaho 1993); In re Pickett, 151 B.R. 471 (Bankr.M.D.Tenn.1992); In re Murry-Hudson, 147 B.R. 960 (Bankr. N.D.Cal.1992).
Like Hercules battling the Hydra, each time the courts resolve one lien stripping issue, another two grow in its stead. Perhaps it is with the complexities of the present case in mind that Justice Blackmun in Dewsnup stated:
Hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations.
Dewsnup v. Timm, ___ U.S. at ___, 112 S.Ct. at 778. Having struggled through its own Labors with this case, the Court finds that Tluscik as applied to facts of this case does not violate Dewsnup. The Court begins with a review of Dewsnup.
"Lien stripping" is a process through which a debtor reduces the value of a secured claim to the value of the property. David Epstein, Steve Nickles and James White, 2 Bankruptcy § 7-47 at 441 (1992). Lien stripping can be effected through § 722, and prior to Dewsnup, the majority of courts allowed lien stripping through the use of § 506 alone, without resort to § 722. Id. § 7-47 at 441 n. 2 and cases cited therein. Section 506 provides in relevant part:
11 U.S.C. § 506(a), (d). Normally, Chapter 7 trustees abandon property which is overencumbered because such property has no value to the estate. 2 Bankruptcy § 7-47 at 441. Using the § 506 lien stripping powers, debtors lien stripped abandoned property, retained possession of the property by curing defaults and owed the secured creditor only the value of the property. See In re Zlogar, 101 B.R. 1, 3-10 (Bankr.N.D.Ill.1989) (), aff'd, 126 B.R. 53 (N.D.Ill.1991).
In Dewsnup, the Supreme Court held that § 506(d) did not void a secured creditors lien in chapter 7. Dewsnup v. Timm, ___ U.S. at ___, 112 S.Ct. at 778. In Dewsnup, the debtor borrowed $119,000 to finance the purchase of farmland which was valued at $39,000 in the bankruptcy proceedings. Id. at ___, 112 S.Ct. at 776. The debtor filed an adversary proceeding to bifurcate the mortgagee's claim into a secured and unsecured portion pursuant to § 506(a) and avoid the unsecured portion pursuant to § 506(d). Id. The lower courts refused to void the mortgage lender's lien on the property, and the Supreme Court affirmed. Id. The Supreme Court believed that the practical effect of the debtor's proposal would be:
to freeze the creditor\'s secured interest at the judicially determined valuation. By this approach, the creditor would lose the benefit of any increase in the value of property by the time of the foreclosure sale. The increase would accrue to the benefit of the debtor, a result some of the parties describe as a "windfall."
Id. at ___, 112 S.Ct. at 778. The Supreme Court assigned a different meaning to the phrase "allowed secured claim" as used it is used in § 506(a) from the meaning of the phrase as it is used in § 506(d). Id. The Supreme Court stated:
The voidness language sensibly applies only to the security aspect of the lien and then only to the real deficiency in the security. Any increase over the judicially...
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