In re Fisette

• Decision Date: 29 August 2011
• Docket Number: BAP No. 11–6012.
• Parties: In re Michael James FISETTE, Debtor.Michael James Fisette, Debtor–Appellant,v.Jasmine Z. Keller, Trustee–Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

455 B.R. 177

In re Michael James FISETTE, Debtor.Michael James Fisette, Debtor–Appellant,

v.Jasmine Z. Keller, Trustee–Appellee.

BAP No. 11–6012.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: July 27, 2011.Decided: Aug. 29, 2011.

Craig William Andersen, argued, Bloomington, MN, for appellant.

Margaret Henrietta Culp, argued, Minneapolis, MN, for appellee.Jeffrey D. Klobucar, argued, Minneapolis, MN, on behalf of the amicus.Before SCHERMER, VENTERS, and NAIL, Bankruptcy Judges.SCHERMER, Bankruptcy Judge.

Debtor, Michael James Fisette (the “Debtor”), appeals from the bankruptcy court's February 10, 2011 order confirming his modified Chapter 13 plan, over his objection. We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we reverse and remand this matter to the bankruptcy court for further proceedings consistent with this opinion.

ISSUES

The issue on appeal is whether the bankruptcy court may confirm the debtor's plan which provides for the avoidance of two junior liens on the Debtor's principal residence. In particular, we consider whether: (1) 11 U.S.C. § 1322(b)(2) prevents a debtor from modifying the rights of junior lienholders of liens on his principal residence if the value of the residence is less than the amount owed to the senior lienholder; and (2) if not, whether such modification is contingent upon the debtor's receipt of a Chapter 13 discharge.

BACKGROUND

Within one year before the filing of his Chapter 13 petition, the Debtor had filed a Chapter 7 bankruptcy case, and the Debtor received a discharge in his Chapter 7 case. Due to the proximity in the time of the filing of his Chapter 7 and Chapter 13 cases, the Debtor was not eligible for a Chapter 13 discharge pursuant to § 1328(f) of Title 11 of the United States Code (the “Bankruptcy Code”).

On his Schedule A, the Debtor listed his homestead. He valued the property at $145,000, indicating that the property was “appraised at” $145,000. On his Schedule D, the Debtor listed the claim of the senior secured creditor holding a lien on the Debtor's homestead in an amount that exceeded the appraised value of the property. The Debtor also listed on his Schedule D two creditors holding second and third liens on the homestead.

The Debtor's originally filed Chapter 13 plan treated the claim of the senior lienholder as secured, but avoided the liens of the second and third lienholders—treating their claims as wholly unsecured. It included nearly identical provisions for the “strip off” ¹ of the second and third liens held by the two junior lienholders. In paragraphs 14 and 15 (combined below), it provided, in pertinent part, that:

Confirmation of this plan without objection from [the second lienholder or the third lienholder], or its assignee, or over the objection of [the second lienholder or the third lienholder], or its assignee, shall constitute an acknowledgment and acceptance that there is no equity in the debtor's residential real property ..., over and above the first mortgage ... to which the lien of the [second or third] mortgage can attach. The order confirming the plan shall constitute a finding by the bankruptcy court that the fair market value of the real estate is $145,000; and that the balance owed to [the first lienholder] is $176,312.00; therefore the claim of [the second lienholder or the third lienholder] or its assignee is wholly unsecured. The real estate ... shall vest in the debtor free and clear of the [the second or third] mortgage upon completion of all payments due to the trustee under the plan. [The second lienholder or the third lienholder], or its assignee, shall cancel the [second or third] mortgage within 20 days after the trustee's final report to the court showing completion of the plan. If [the second lienholder or the third lienholder], or its assignee, fails to cancel the [second or third] mortgage, debtor may obtain an order and judgment voiding the [second or third] mortgage, its claim, if any, shall be paid as an unsecured, nonpriority claim.The Debtor's plan proposed to pay $4,922.00, the exact amount listed on his Schedule F as owed to unsecured creditors other than the second and third lienholders, to unsecured creditors. The Debtor's counsel explained that the plan proposed to strip off the junior lienholders' liens. Their claims were included in the plan as claims that are unsecured, but they would not receive any part of the distribution to unsecured creditors.

No written objections to the confirmation of the Debtor's original plan were filed and the Debtor's valuation of the property, which was based on an appraisal, was not contested during the plan confirmation process. The Debtor submitted a brief in support of confirmation of his plan. After a hearing during which the Debtor's counsel argued in favor of confirmation of the plan that allowed for the strip off of the junior liens and the bankruptcy court commented that “the law in this jurisdiction clearly does not allow the debtor to strip the second or third mortgage secured only by a lien on the debtor's homestead,” the court denied confirmation of the Debtor's plan. The Debtor sought leave to appeal from the bankruptcy court's interlocutory order denying confirmation of his plan, but the request was denied and the appeal was dismissed. The Debtor then filed an amended plan that provided that the junior lienholders would retain their liens and that treated their claims as secured. The bankruptcy court confirmed the amended plan over the Debtor's objection and this appeal ensued.

In this appeal, the Debtor asks us to decide that a Chapter 13 debtor may strip off a wholly unsecured junior mortgage lien on his principal residence, and that the strip off of such lien should be allowed in a case where a debtor is ineligible for a discharge. The Chapter 13 trustee disagrees with the Debtor on both issues, and amicus curiae TFC National Bank filed its brief in support of the Chapter 13 trustee's position.

STANDARD OF REVIEW

We review the bankruptcy court's conclusions of law de novo. Green Tree Servicing v. Coleman (In re Coleman), 392 B.R. 767, 769 (8th Cir. BAP 2008) (“Statutory interpretation is a question of law that [appellate courts] review de novo.”) (quoting Minn. Supply Co. v. Raymond Corp., 472 F.3d 524, 537 (8th Cir.2006)). The facts are not in dispute.

DISCUSSION

As an initial matter, we note that the Debtor's appeal of the order confirming his plan was proper. Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1141 (8th Cir.2008) (debtor was an “aggrieved party” with standing to appeal confirmation of her own plan).

I. Strip Off of Wholly Unsecured Liens

A determination of whether the Bankruptcy Code allows the “strip off” of the junior liens on the Debtor's principal residence if they are wholly unsecured “involves the interaction of two provisions of the Bankruptcy Code—[§ ] 506(a) and [§ ] 1322(b)(2).” Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122, 124 (2d Cir.2001).

Bankruptcy Code § 506(a) governs classification of a claim. It provides, in pertinent part, that:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, ..., is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, ..., and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

11 U.S.C. § 506(a).

With an exception, a Chapter 13 debtor may modify the rights of creditors, such as by avoiding their liens, through his plan. Section 1322(b)(2) of the Bankruptcy Code permits a Chapter 13 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, or of holders of unsecured claims....” 11 U.S.C. § 1322(b)(2).

In Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), the Supreme Court examined the relationship between § 1322(b)(2) and § 506(a) with respect to an undersecured lienholder. Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 285 (5th Cir.2000) (citing Nobelman, 508 U.S. 324, 113 S.Ct. 2106). It held that the debtor could not “strip down” the unsecured portion of the creditor's undersecured claim on the debtor's principal residence. Nobelman, 508 U.S. at 332, 113 S.Ct. 2106. The Court rejected the debtors' argument that § 1322(b)(2)'s antimodification clause should apply only to the secured portion of the claim, and not to the unsecured portions of the undersecured claim. Id. at 328–332, 113 S.Ct. 2106. The phrase “claim secured only by a security interest in real property that is the debtor's principal residence” in § 1322(b)(2) included both the secured and the unsecured portion of the Nobelman creditor's undersecured claim. Id. at 330–31, 113 S.Ct. 2106. The Court explained that the debtors could not modify the payment and interest terms for the unsecured portion of the claim without modifying the rights of the creditor with respect to the secured portion of the claim, thus violating § 1322(b)(2). Id. at 331, 113 S.Ct. 2106. “The decision in Nobelman then stands for the proposition that the antimodification clause of § 1322(b)(2) bars Chapter 13 debtors from stripping down a debtor's claim when any portion of that claim is secured by the debtor's home.” Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 168–69 (10th Cir. BAP 2005) (emphasis added).

The Nobelman court did not directly answer the question of whether a debtor could strip off a wholly unsecured lien on the debtor's principal residence.

Before and after Nobelman, bankruptcy courts in Minnesota have held that a debtor may not strip off a wholly unsecured lien on his principal residence without violating the provisions of § 1322(b)(2). See, e.g., In...