In re Hernandez, Bankruptcy No. 92 B 28177.
| Decision Date | 29 December 1993 |
| Docket Number | Bankruptcy No. 92 B 28177. |
| Citation | 162 BR 160 |
| Parties | In re Ruth HERNANDEZ, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
David A. Mucklow, Chicago, IL, for debtor.
John A. Cox, Jr., Coston, Lande & Sapir, Chicago, IL, for creditor Volkswagen Credit, Inc.
Ruth Hernandez ("Hernandez" or "Debtor") filed for protection under Chapter 13 of the Bankruptcy Code on December 18, 1992. Debtor objected to the secured claim filed by Volkswagen Credit, Inc. ("VCI"). She asserts that VCI's claim is secured only up to the value of the collateral, pursuant to Section 506(a) of the Bankruptcy Code, and unsecured for the balance of that claim. Accordingly, Debtor's Chapter 13 Plan provides separately for the secured and unsecured portions of that debt. VCI filed a claim as secured. The issue presented is whether a Chapter 13 debtor is prohibited from bifurcating the claim of a creditor whose claim is secured by the debtor's vehicle into a secured portion amounting to fair market value of the vehicle, and an unsecured portion amounting to the balance of the claim, and thereby reducing the amount of the lien against the security. As the question is colloquially posed, can a Chapter 13 debtor "strip down" a claim secured by personal property?
For reasons discussed, a debtor in a Chapter 13 case can modify a claim secured by personalty so as to bifurcate the undersecured portion, but cannot strip down the lien so as to eliminate it from the collateral after the bankruptcy proceeding has ended.
The material facts are undisputed. VCI provided financing in the amount of $13,310.07 for Debtor's purchase of an automobile. VCI filed a proof of claim in Debtor's bankruptcy for the balance due of $9,422.20. Debtor objected to the amount of VCI's secured claim, asserting under 11 U.S.C. § 506(a) that this secured claim should be limited to the market value of the auto securing the debt.
Debtor initially argued, according to N.A.D.A. used car statistical data compiled for this region, that the collateral had an average loan value of $4,475.00 and an average retail value of $6,300.00 for an approximate fair market value of $5,387.50. However, the parties have since stipulated that the fair value of the auto securing VCI's claim of $9,422.20 is $5,924.50.
Debtor's confirmed Chapter 13 Plan provides for 100% payment to secured creditors and 10% payment to unsecured creditors. That Plan requires payments of $200.00 to the Chapter 13 Trustee each month for 60 months. It includes a provision that the holder of "each allowed secured claim" shall "retain the lien securing such claim . . .". (That language effectively tracks 11 U.S.C. § 1325(a)(5)(B)(i).) There is no express provision for reduction of the amount of lien on the vehicle.
This matter is before the Court pursuant to 28 U.S.C. § 157, and is referred under Local District Court Rule 2.33. The Court has subject matter jurisdiction under 28 U.S.C. § 1334, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B).
VCI relies upon the Supreme Court's recent decisions in Nobelman v. American Sav. Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), and Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). It argues that Debtor may not bifurcate the secured and unsecured portions of the debt and treat each differently under the Chapter 13 Plan. Debtor asserts that no provision of the Code prohibits her from bifurcating or "stripping down" VCI's lien against her car. She argues that Nobelman does not prohibit lien stripping of vehicles in Chapter 13 proceedings. She reasons that Section 1322(b)(2) of Title 11 U.S.C. prohibits modifying only those liens secured by a debtor's principal residence. Under that reasoning, liens not secured by a debtor's principal residence are modifiable and secured only to the extent of collateral market value in Chapter 13 proceedings, due to the limited application of § 1322(b)(2). Therefore, § 506 of Title 11 U.S.C. is said to control:
Determination of Secured Status
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim.
. . . . .
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless — (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title, or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
VCI asserts three reasons why Debtor should not be allowed to strip-down the lien outstanding on her vehicle. First, it uses the reasoning of Dewsnup in support of its position that a debtor cannot use § 506 of the Bankruptcy Code to strip down a lien otherwise allowed under § 502. Second, it argues that the policy underlying the Supreme Court's decisions in Dewsnup and Nobleman is to respect the lien rights the creditor and debtor bargained for in bankruptcy. VCI argues that allowing Debtor to strip down the lien against her car would result in a windfall to her rather than the fresh start intended by Congress when the Bankruptcy Code was enacted. It cites authorities following Dewsnup that do not allow a debtor to strip down a lien on personal property in Chapter 7, and suggests by analogy that a debtor should not be allowed to strip down such a lien in a Chapter 13 proceeding.
Lastly, VCI asserts that, while § 1322(b)(2) does allow a Chapter 13 debtor to modify the rights of a holder of a secured claim, the language therein can be read consistently with Dewsnup and Nobelman to allow modification of payment terms without allowing stripdown of an undersecured portion of the claim.
As shown below, some of VCI's arguments have merit, and accordingly Debtor is not allowed to strip down VCI's lien under § 506(d) so as to reduce lien rights of the secured creditor. However, Debtor is allowed to bifurcate VCI's claim in bankruptcy pursuant to § 506(a), so as to pay 100% of only the collateral value as part of the Chapter 13 Plan, and to that extent Debtor's objection to the claim will be sustained. But, after the Chapter 13 Plan is completed, VCI will retain its full security interest in the automobile, even though Debtor's personal debt will be discharged by Plan completion. Thus, the terms of payment on the car will be modified and the claim in bankruptcy bifurcated, but the lien will fully pass through the bankruptcy process for debtor to deal with afterward if she then wishes to keep the car.
In Dewsnup and Nobelman, the Supreme Court considered whether a debtor may use the Bankruptcy Code to "strip down" a lien. Prior to Dewsnup, the lower courts had often approved a Chapter 13 debtor's use of § 506(a) and § 1322(b)(2) to bifurcate a lien to secured and unsecured portions, and to strip down an unsecured lien to the value of the underlying collateral, except where the collateral was the debtor's residence. William E. Callahan, Jr., Dewsnup v. Timm and Nobelman v. American Savings Bank: The Strip Down of Liens in Chapter 12 and Chapter 13 Bankruptcies, 50 Wash. & Lee Law Rev. 405, 425 (Winter 1993).
In Dewsnup, the Supreme Court held that § 506(d) does not permit a Chapter 7 debtor to strip down an undersecured claim to the market value of the collateral, notwithstanding language in § 506(a) which bifurcates a secured creditor's claim into secured and unsecured portions. Dewsnup reasoned that the language of § 506 regarding secured claims did not overrule the longstanding principle that a lien on real property survives bankruptcy proceedings. ___ U.S. at ___, 112 S.Ct. at 778. In Dewsnup the Court held that a creditor's lien stays with real property until foreclosure, as bargained for by the mortgagor and mortgagee. Id. Following reasoning in Dewsnup, it has been held that a lien on any property can only be completely voided under § 506(d) if the claim on which the lien is based is not an allowed claim under § 502. In re Windham, 136 B.R. 878, 882 (Bankr.M.D.Fla.1992). In the present case, it is not contended that VCI's claim is not allowed at all under § 502. Thus the lien here cannot be viewed as eliminated under § 506(d).
Following Dewsnup, it remained undecided by the Supreme Court whether a Chapter 13 debtor is allowed to strip a lien and limit a secured claim to market value of the collateral. Section 1322(b)(2) provides that a Chapter 13 Plan may:
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 holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.
A line of lower court cases had held that a Chapter 13 debtor's use of 11 U.S.C. § 506(d) to strip down a mortgagee's lien secured only by the debtor's residence did not violate § 1322(b)(2). In re Hirsch, 155 B.R. 688 (Bankr.E.D.Pa.1993), citing Sapos v. Provident Institution of Savings in Town of Boston, 967 F.2d 918, 926 (3d Cir.1992); Wilson v. Commonwealth Mortgage Co., 895 F.2d 123, 126-28 (3d Cir.1990). The reasoning was summarized as follows:
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