In re Dang

• Decision Date: 12 March 2012
• Docket Number: No. 3:11–bk–2970–PMG.,3:11–bk–2970–PMG.
• Citation: 23 Fla. L. Weekly Fed. B 285,467 B.R. 227
• Parties: In re Brenda Linh DANG, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

23 Fla. L. Weekly Fed. B 285

467 B.R. 227

In re Brenda Linh DANG, Debtor.

No. 3:11–bk–2970–PMG.

United States Bankruptcy Court, M.D. Florida,Jacksonville Division.

March 12, 2012.

E. Warren Parker, Jr., Felecia L. Falana, Parker & DuFresne, Jacksonville, FL, for Debtor.

ORDER ON TRUSTEE'S AMENDED OBJECTION TO CONFIRMATION

PAUL M. GLENN, Bankruptcy Judge.

THIS CASE came before the Court for hearing to consider the Trustee's Amended Objection to Confirmation of the Debtor's Chapter 13 Plan.

The Debtor, Brenda Linh Dang, received a discharge in a prior Chapter 7 case on March 8, 2011, and filed the current Chapter 13 case on April 25, 2011. The issue in the current case is whether the Debtor may “strip off” a wholly unsecured junior lien on her homestead property, even though she is not eligible for a Chapter 13 discharge.

The decision of the Eleventh Circuit Court of Appeals in In re Tanner, 217 F.3d 1357 (11th Cir.2000), governs the resolution of this case. In Tanner, the Eleventh Circuit determined that a wholly unsecured lien on a debtor's residence is not protected from modification under § 1322(b)(2). The Court finds that Tanner allows the Debtor in this case to strip the junior lien on her homestead, even though the lien “passed through” her prior Chapter 7 case, and even though the Debtor will not receive a Chapter 13 discharge in the current case.

Background

On September 14, 2010, the Debtor commenced her first bankruptcy case by filing a petition under Chapter 13 of the Bankruptcy Code. On her schedule of assets, the Debtor listed her homestead property located at 14421 Woodfield Circle North, Jacksonville, Florida, and listed the value of the property as $159,000.00. The homestead property was encumbered by three mortgages in the aggregate amount of $316,366.00.

On November 9, 2010, the Trustee filed a Motion to Dismiss the first case, and alleged that the Debtor was not eligible to be a debtor under Chapter 13 because her debts exceeded the limits provided by § 109 of the Bankruptcy Code.

On November 15, 2010, the Debtor converted the first Chapter 13 case to a case under Chapter 7 of the Bankruptcy Code. She received a discharge in the Chapter 7 case on March 8, 2011.

On April 25, 2011, the Debtor filed the petition that commenced the current Chapter 13 case. On her schedules in the current case, the Debtor again listed the homestead property with a value of $159,000.00, and again listed three mortgages on the property in the total amount of $316,366.00.

On April 27, 2011, the Debtor filed a Chapter 13 Plan in the current case. According to the Plan, the first and second mortgages on the property are not in default, and the Debtor proposes to continue making the regular payments on those mortgages outside the Plan. With respect to the third mortgage, the Plan provides:

Bank of America holds a third mortgage on the debtors' homestead property located at 14421 Woodfield Circle North, Jacksonville, Florida 32258. The debtors shall file an adversary proceeding against this creditor to value its lien against the homestead property at $0.00. A validly filed Proof of Claim, if any, by this creditor shall be wholly unsecured.

(Doc. 10, p. 2). As indicated by the Plan, the Debtor filed an adversary proceeding against Bank of America to value its interest in the Debtor's homestead at $0.00 and to strip the Bank's lien. (Adv. Pro. 3:11–ap–232–PMG). A Default Judgment was entered against the Bank on June 28, 2011.

Discussion

In his Objection to Confirmation, the Trustee asserts that the Debtor's Plan cannot be confirmed because it does not satisfy the requirements of § 1325 of the Bankruptcy Code. According to the Trustee, § 1325(a)(5)(B) does not permit the Debtor to strip Bank of America's lien from her homestead property, as proposed in the Plan, because the Debtor is not eligible for a Chapter 13 discharge.

The Court finds that the Debtor may strip the wholly unsecured junior lien from her homestead, even though the lien passed through her prior Chapter 7 case, and even though she will not receive a Chapter 13 discharge in the current case.

I. Wholly unsecured residential liens may be valued and modified in Chapter 13 cases.

In Chapter 13 cases, “[i]t is well settled law that where a lienor's collateral value is insufficient to support at least part of the lien, the creditor does not hold a secured claim for purposes of bankruptcy, and its lien can be ‘stripped off’ the collateral.” In re Gruenberg, 2011 WL 1115001, at *2 (Bankr.S.D.Fla.). The “well settled law,” as stated in Gruenberg, was established by the Eleventh Circuit Court of Appeals in In re Tanner, 217 F.3d 1357 (11th Cir.2000).

A. The law of the Circuit

In the federal judicial system, “[w]hen no Supreme Court decision has been issued, the decisions of the court of appeals for a particular circuit are binding on all lower courts within the circuit.” In re Barakat, 173 B.R. 672, 677 (Bankr.C.D.Cal.1994). “A decision of a panel on the court of appeals becomes the law of the circuit.” In re Barakat, 173 B.R. at 677.

Under this system, Bankruptcy Courts in Florida are bound by decisions issued by the Eleventh Circuit Court of Appeals. In re Itzler, 247 B.R. 546, 548 (Bankr.S.D.Fla.2000); In re Petersen, 222 B.R. 382, 385 (Bankr.M.D.Fla.1998). With respect to the modification of wholly unsecured residential liens, therefore, this Court is bound by the decision of the Eleventh Circuit in In re Tanner, 217 F.3d 1357 (11th Cir.2000). See In re Dickerson, 222 F.3d 924, 926 (11th Cir.2000)(“[U]nder the prior precedent rule we must apply the rule established by this court in In re Tanner.”)

B. Tanner

In In re Tanner, 217 F.3d 1357 (11th Cir.2000), a Chapter 13 debtor asked the Bankruptcy Court to value the second mortgage on her homestead at $0.00, because the value of the home did not exceed the amount owed on the first mortgage, and then to strip off the second mortgage as an unsecured claim. The Bankruptcy Court found that the second mortgage was a secured claim that could not be modified under the debtor's Chapter 13 plan, and denied the debtor's request. The District Court affirmed.

On appeal, the Eleventh Circuit reversed the lower Courts' decision, finding that the appeal “lies at the intersection of two provisions of the bankruptcy code: 11 U.S.C. § 506(a) and 11 U.S.C. § 1322(b)(2).” In re Tanner, 217 F.3d at 1358. Section 506(a) “defines the secured and unsecured components of debts according to the value of the underlying collateral,” and § 1322(b)(2) permits a Chapter 13 debtor's plan to “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.”

The Eleventh Circuit evaluated the two provisions against the backdrop of the Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). In Nobelman, the Supreme Court had determined that § 1322 “prohibits a Chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence.” Nobelman, 508 U.S. at 325–26, 113 S.Ct. 2106(Emphasis supplied). Under this ruling, a Chapter 13 debtor cannot modify a residential lien that is partially secured and partially unsecured, based on a valuation under § 506(a), because the mortgagor is the holder of a secured claim that is protected by § 1322(b)(2).

The issue before the Eleventh Circuit in Tanner was whether the Nobelman decision applies not only to residential liens that are partially secured and partially unsecured, but also to residential liens that are wholly unsecured.

The Eleventh Circuit found that § 1322(b)(2) “protects only mortgages that are secured by some existing equity in the debtor's residence.” In re Tanner, 217 F.3d at 1360.

We agree with those courts that the only reading of both sections 506(a) and 1322(b)(2) that renders neither a nullity is one that first requires bankruptcy courts to determine the value of the homestead lender's secured claim under section 506(a) and then to protect from modification any claim that is secured by any amount of collateral in the residence. (Citations omitted). Any claim that is wholly unsecured, however, would not be protected from modification under section 1322(b)(2). To hold otherwise and extend the antimodification clause to even wholly unsecured claims would vitiate the Nobelman Court's pronouncement that “[debtors] were correct in looking to § 506(a) for a judicial valuation of the collateral to determine the status of the bank's secured claim.” 508 U.S. at 328, 113 S.Ct. at 2110.

In re Tanner, 217 F.3d at 1360(Emphasis supplied). According to the Eleventh Circuit, its decision was consistent with the rights that a wholly unsecured creditor would possess outside of bankruptcy, since the foreclosure of the property would not produce any return to the lienholder. Id. at 1360(quoting In re Lam, 211 B.R. 36, 40 (9th Cir. BAP 1997), appeal dismissed, 192 F.3d 1309 (9th Cir.1999)).

In Tanner, therefore, the Eleventh Circuit Court of Appeals determined that § 1322(b)(2) does not protect a wholly unsecured residential lien from modification in a Chapter 13 plan. This Court is bound by the decision in Tanner as the law of the Circuit.

In the matter before the Court, the Debtor had disclosed her residence and Bank of America's lien in a prior bankruptcy case. The Debtor received a Chapter 7 discharge, and Bank of America's lien survived the prior case. Shortly after receiving her discharge, the Debtor commenced the current case, and filed a Chapter 13 Plan which proposes to “strip” the Bank's lien from her homestead. The Debtor acknowledges that she is not eligible to receive a discharge in the current case. (Doc. 31, ¶ 12). The question before the Court is whether the circumstances of the prior Chapter 7 case and the Debtor's discharge distinguish the present case...