In re Hargis, Bankruptcy No. 1-85-02644.
| Decision Date | 21 August 1989 |
| Docket Number | Bankruptcy No. 1-85-02644. |
| Citation | 103 BR 912 |
| Parties | In re John Barry HARGIS, Tammy Welch Hargis, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
John P. Van Cleave, Chattanooga, Tenn., for debtors Hargis.
Gary E. Lester, Mayfield & Lester, Chattanooga, Tenn., for creditor.
The issue in this case is whether upon conversion of a chapter 13 case to a chapter 7 case an undersecured creditor retains a lien in its collateral despite full payment of the secured portion of the creditor's claim during the chapter 13 case. The parties have submitted the case for decision upon stipulated facts.
The debtors filed a petition for relief under chapter 13 of the Bankruptcy Code on December 31, 1985. Jernigan's Furniture filed a proof of claim in the amount of $2,237.37. The claim was secured by certain items of furniture in which Jernigan's held a purchase-money security interest.
As originally filed, the debtors' chapter 13 plan proposed that Jernigan's collateral would be valued at $1,500 and the secured portion of the claim would be paid at the rate of $60 per month. At the creditors' meeting held on January 30, 1986, Jernigan's collateral was valued by agreement of the parties at $1,760, and the secured portion of the claim was scheduled to be paid at the rate of $60 per month plus 18% interest on the unpaid balance. The plan provided the unsecured portion of Jernigan's claim would be paid in full. On January 30, 1986, the plan was confirmed.
On April 7, 1989, the debtors converted their chapter 13 case to a case under chapter 7. At the time of the conversion, Jernigan's secured claim including interest had been paid in full by the trustee as provided in the plan. The unsecured portion had been partially paid leaving an unpaid balance of $245 at the time the case was converted.
At the chapter 7 creditors' meeting on May 3, 1989, Jernigan's Furniture asserted a purchase-money security interest in the collateral to the extent of the unpaid balance of the account, an amount claimed by Jernigan's Furniture to be $799.14. The debtors declined to recognize a purchase-money security interest in the collateral, asserting that the collateral, in effect, had been paid for during the pendency of the chapter 13. Thereafter, Jernigan's Furniture filed a motion to lift the automatic stay. Jernigan's argues that because of the conversion of the case it presently holds a purchase-money security interest in the collateral which it now wishes to repossess.
In a bankruptcy case, a secured creditor's claim is subject to the provisions of § 506(a) of the Code which reads in pertinent part:
11 U.S.C.A. § 506(a), (d) (West 1979 & Supp.1989).
The provisions of § 506 apply in cases under chapter 7, 11, 12, and 13 of the Bankruptcy Code. See 11 U.S.C.A. § 103(a) (West Supp.1989). If a debtor wishes to provide for the claim of an undersecured creditor in a chapter 13 plan, the debtor must divide the undersecured creditor's claim into two claims — a secured claim and an unsecured claim. The amount of the secured claim is equal to the value of the collateral. The balance of the claim is unsecured. Subject to certain exceptions not applicable here, under § 506(d) a creditor's lien is void to the extent it secures a claim against the debtor that is not an allowed secured claim. See Garnett v. Farmers Home Admin. (In re Garnett), 88 B.R. 123 (Bankr.W.D.Ky.1988), aff'd sub nom. United States ex rel. Farmers Home Admin. v. Garnett, 99 B.R. 757 (W.D.Ky. 1989); 5 Collier on Bankruptcy ¶ 1300.734 (15th ed.1989).
Assuming the creditor has filed a proof of claim in the bankruptcy case, no objections are filed to the claim, and no issue exists with respect to the valuation of collateral which determines the amount of the secured claim, the secured claim provided for in the debtor's chapter 13 plan becomes the allowed secured claim upon confirmation of the plan. See 11 U.S.C.A. §§ 502(a), 506(a) (West 1979 & Supp.1989); see also In re Hartford, 7 B.R. 914, 917 (Bankr.D. Me.1981) ().
Section 1325(a)(5) of the Code states how a chapter 13 plan is to treat an allowed secured claim. It reads:
11 U.S.C.A. § 1325(a)(5) (West 1979 & Supp.1989).
In the instant case, the chapter 13 plan treated Jernigan's allowed secured claim in the manner required by § 1325(a)(5)(B). The pertinent plan provision reads:
As it relates to Jernigan's allowed secured claim, the confirmation order recited that the plan "provides that the holder of each such allowed secured claim retain the lien securing such claim; and the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim."
Pursuant to the terms of § 1325(a)(5)(B)(i) and the debtors' confirmed plan, Jernigan's retained a lien only to the extent of its allowed secured claim. The lien did not extend to the unsecured portion of Jernigan's claim. Moreover, as the legislative history accompanying § 1325 points out, once the present value of a creditor's allowed secured claim is paid in full in a chapter 13 case, the lien will have been satisfied.
The parties have stipulated the present value of Jernigan's allowed secured claim was paid in full under the debtor's chapter 13 plan. Thus, at the time the allowed secured claim was paid off, the lien securing such claim was satisfied and all the creditor had left was an unsecured claim. The crucial question is what effect does conversion from chapter 13 to chapter 7 have upon this satisfied lien. Does it spring back into existence to secure all or a portion of the creditor's remaining claim?
Jernigan's relies primarily upon Dennis v. W.S. Badcock Corp. (In re Dennis), 31 B.R. 128 (Bankr.M.D.Ga.1983) to support its argument that it still has a lien securing the balance of its claim. The facts in Dennis are similar to those here. A debtor sought to avoid a lien on her household furnishings after she had converted her chapter 13 case to a chapter 7 case. The debtor originally owed the undersecured creditor Badcock Corporation $697. Of that amount, it was determined the creditor had a secured claim of $460 and an unsecured claim of $237. During the pendency of her chapter 13 case, the debtor paid the creditor's secured claim in full and partially paid the creditor's unsecured claim. Upon converting her chapter 13 case to a chapter 7 case, the debtor attempted to avoid the creditor's purchase-money security interest in her household furnishings arguing the creditor's security interest had been extinguished because...
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