In re Gerardin

• Decision Date: 28 March 2011
• Docket Number: 10–14885–BKC–RAM,09–33875–BKC–RAM,10–13622–BKC–RAM,09–36665–BKC–AJC.,Nos. 10–16511–RAM,10–11923–BKC–LMI,10–12684–BKC–LMI,s. 10–16511–RAM
• Citation: 447 B.R. 342,22 Fla. L. Weekly Fed. B 650
• Parties: In re Karin S. GERARDIN, Debtor.In re Jorge Luis Hernandez, Debtor.In re Bernd Kern, Debtor.In re Samuel Matos and Nilda E. Matos, Debtors.In re Pablita Tampus Ehlers, Debtor.In re Adrienne B. Caplan–Gawlikowski, Debtor.In re Donna Elizabeth Wong, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

447 B.R. 342

22 Fla. L. Weekly Fed. B 650

In re Karin S. GERARDIN, Debtor.In re Jorge Luis Hernandez, Debtor.In re Bernd Kern, Debtor.In re Samuel Matos and Nilda E. Matos, Debtors.In re Pablita Tampus Ehlers, Debtor.In re Adrienne B. Caplan–Gawlikowski, Debtor.In re Donna Elizabeth Wong, Debtor.

Nos. 10–16511–RAM

10–13622–BKC–RAM

10–14885–BKC–RAM

09–33875–BKC–RAM

10–11923–BKC–LMI

10–12684–BKC–LMI

09–36665–BKC–AJC.

United States Bankruptcy Court, S.D. Florida.

Feb. 17, 2011.As Amended March 28, 2011.

Karin Gerardin, Homestead, FL, James Schwitalla, Miami, FL, for Karin Sue Gerardin.Damaris D. Rosich–Schwartz, Office of the U.S. Trustee, Miami, FL, for U.S. Trustee.

MEMORANDUM OPINION ON ABILITY OF A CHAPTER 13 DEBTOR TO STRIP A LIEN WHEN THE CHAPTER 13 DEBTOR IS INELIGIBLE FOR A DISCHARGE

ROBERT A. MARK, LAUREL M. ISICOFF, A. JAY CRISTOL, Bankruptcy Judges.

A variety of procedural motions are pending in these cases, all of which require resolution of the same threshold legal issue—whether a chapter 13 debtor who is ineligible to receive a chapter 13 discharge may, nonetheless, strip off the lien of a wholly unsecured mortgage in a chapter 13 plan. The resolution of this issue rests on the applicability and interpretation of 11 U.S.C. § 506 and 11 U.S.C. § 1325(a)(5)(B). For the reasons set forth below, the Court ¹ answers the question in the negative.

PROCEDURAL BACKGROUND

Seven debtors filed Chapter 13 bankruptcy cases soon after receiving their discharge in a prior Chapter 7 case. There is no dispute that none of the debtors (collectively the “Debtors”) is eligible for a Chapter 13 discharge. The Debtor seeks to strip off a junior lien and motions to value have been filed in each case.² In three of the cases, orders granting the motions to value were entered and motions to vacate those orders are pending. The specific motions at issue are the following:

A. Karin S. Gerardin, Case No. 10–16511–RAM 1. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 17].

B. Jorge Luis Hernandez, Case No. 10–13622–RAM

1. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 12].

C. Bernd Kern, Case No. 10–14885–RAM

1. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 12].

D. Samuel Matos and Nilda Esther Matos, Case No. 09–33875–RAM

1. Debtors' Motion to Value Collateral in Plan [DE # 27].

2. Trustee's Motion for Rehearing of Order Granting Motion to Value and Certificate of Service of Notice of Hearing [DE # 43].

E. Pablita Tampus Ehlers, Case No. 10–11923–LMI

1. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 31].

2. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 33].

3. Wells Fargo Bank, N.A.'s Amended Motion to Vacate or Reconsider Debtor's Motion to Strip Lien of Wells Fargo, Object to Claim # 1–1 and with Respect to Confirmation Motion to Strike Motion Filed by Debtor(s) to Determine Secured Status of Wells Fargo Bank, N.A. Regarding Real Property [DE # 50].

F. Adrienne Beth Caplan–Gawlikowski, Case No. 10–12684–LMI

1. Debtor's Motion to Value and Determine Secured Status of Lien on Real Property [DE # 16].

G. Donna Elizabeth Wong, Case No. 09–36665–AJC

1. Debtor's Motion to Value Collateral in Plan [DE # 24].

2. Capital One, N.A.'s Motion to Set Aside Order Granting Motion to Value and Determine Secured Status of Lien on Real Property (Document No. 41) and for Reconsideration of Motion to Value Collateral (Document No. 24) [DE # 46].

(collectively the “Motions”).

Because the threshold legal issue in each of the seven cases is the same, the three judges before whom the seven cases are pending determined it would be efficient and helpful to conduct a joint hearing on all the Motions. Accordingly, the Court entered a joint scheduling order, setting all the Motions for hearing on August 24, 2010.

Having considered the Motions and all other relevant pleadings, including various memoranda of law, and having considered the arguments presented at the joint hearing, the Court has determined that a debtor who is not qualified to receive a discharge under 11 U.S.C. § 1328 may not use 11 U.S.C. § 506 to value an allowed secured claim and thereby remove a lien from the debtor's property in a chapter 13 plan.

I. Lien Stripping and Bankruptcy

The Bankruptcy Code recognizes that obligations secured by collateral may be bifurcated into an unsecured claim and a secured claim depending on the value of the collateral.

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)(1). Moreover, with some exceptions not applicable here, “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void....” 11 U.S.C. § 506(d). Thus, in bankruptcy cases a debtor or trustee may seek to value a creditor's collateral for the purpose of reducing that creditor's secured claim to the value of its collateral, while the remaining allowed claim is treated as an unsecured claim. When the secured claim is partially reduced this is known as a “strip down”. When the lien is completely removed because the claim is not secured at all (usually a second or third mortgage on real estate), this is known as a “strip off”.

There are limitations on a debtor's ability to strip down or strip off a lien. First, a chapter 7 debtor may not use section 506 to strip a lien, Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ( “[T]he creditor's lien stays with the real property until the foreclosure.”). In Dewsnup, the Supreme Court held that § 506(d) did not mean that a lien would be modified based solely upon a § 506(a) valuation. Instead, it held that § 506(d) acts to avoid liens only if the underlying claim is disallowed. The Court rejected an interpretation of § 506(d) that would depart from the well-established pre-Code rule that liens pass through bankruptcy unaffected. 502 U.S. at 417, 112 S.Ct. 773.

Dewsnup was a strip down case, but this Court agrees with the majority of courts, including the only two circuit courts to address the issue, which have interpreted Dewsnup as also prohibiting strip offs in a Chapter 7 case. See, e.g., Talbert v. City Mortgage Servs. (In re Talbert), 344 F.3d 555, 562 (6th Cir.2003); Ryan v. Homecomings Fin. Network, 253 F.3d 778, 783 (4th Cir.2001); In re Laskin, 222 B.R. 872, 876 (9th Cir.BAP1998); In re Hoffman, 433 B.R. 437, 440 (Bankr.M.D.Fla.2010). In In re Hoffman, the court recognized that public policy concerns may favor modification of the rights of secured creditors in economic crises such as the present one, where a significant number of homes are worth less than the senior liens encumbering them (let alone the junior liens). Nonetheless, the court held that it “cannot deviate from the Supreme Court's binding interpretation of § 506(d) in Dewsnup. Congress has had many years to overturn Dewsnup by legislative action but has enacted no statutory change. Until it does, Dewsnup remains the law of the land.” In re Hoffman, 433 B.R. at 441.

Dewsnup does not preclude lien stripping in chapter 13 cases. However, a chapter 13 debtor may not strip down a lien secured solely by a debtor's principal residence. 11 U.S.C. § 1322(b)(2); Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Nonetheless, in the Eleventh Circuit, as well as several other circuits, ³ a debtor may strip off a lien even if it is secured solely by a debtor's principal residence, if the creditor's claim is completely unsecured because the property is worth less than the senior liens. Tanner v. FirstPlus Financial, Inc. (In re Tanner), 217 F.3d 1357 (11th Cir.2000).

In Tanner, the Eleventh Circuit held that, notwithstanding Nobelman, the protections of 11 U.S.C. § 1322(b)(2) afforded to holders of secured claims “secured only by a security interest in real property that is the debtor's principal residence,” do not apply to wholly unsecured homestead mortgages. “[O]nly the rights secured by some remaining equity will be protected from modification.” 217 F.3d at 1360. Because the Debtors here are in chapter 13, they argue that Tanner supports their efforts to value collateral and strip off the junior liens.

However, Tanner⁴ is inapposite. The Eleventh Circuit focused its attention on the interplay between section 506(a) and section 1322(b)(2) in light of the Nobelman holding. It did not consider how section 1325(a) and a prior bankruptcy discharge might impact the treatment of a lien.

As discussed later, there are several decisions addressing the precise issue here, some allowing a post-discharge strip off, others finding it impermissible. Before reviewing these decisions, the Court will discuss the nature of the creditors' claims that survived the chapter 7 discharge and show why a § 506(a) valuation must be implemented in conjunction with another provision of the Bankruptcy Code to accomplish the strip down or strip off of a lien. In the cases before the Court, § 1325 is the applicable section, and as discussed in section IV infra, lien stripping may not be accomplished under § 1325 when a debtor is ineligible to receive a discharge.

II. The Creditors Have An Allowed Secured Claim

To analyze the Debtors' ability to strip a lien in a chapter 13 case filed after the Debtors discharged their personal liability for the obligation secured by the lien in prior chapter 7 cases, the Court must first determine the nature of the claim that survived discharge. In Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991), the Supreme Court ruled...