In re Hill

• Decision Date: 29 November 2010
• Docket Number: No. 09-19516-MM13,09-19516-MM13
• Citation: 440 B.R. 176
• Court: U.S. Bankruptcy Court — Southern District of California
• Parties: In re William HILL and Kathleen Hill, Debtors.

440 B.R. 176

In re William HILL and Kathleen Hill, Debtors.

No. 09-19516-MM13.

United States Bankruptcy Court, S.D. California.

Nov. 29, 2010.

Bruce R. Babcock, San Diego, CA, for Debtor.

MEMORANDUM DECISION ON LIEN STRIP AND CONFIRMATION OF PLAN

MARGARET M. MANN, Bankruptcy Judge.

Debtors William Hill and Kathleen Hill ("the Debtors") filed this Chapter 13 case five days after they received a Chapter 7 discharge in a previous case—a sequence of events colloquially described as a "Chapter 20" case. See Grandstaff v. Casey (In re Casey), 428 B.R. 519, 521 (Bankr.S.D.Cal.2010). In their Chapter 20 case, the Debtors seek to confirm their Chapter 13 plan and strip ¹ the junior lien of CIT/Vericrest Financial, Inc. ("CIT") against their principal residence pursuant to 11 U.S.C. §§ 506(a), (d), and 1322, because their home has insufficient value to support the lien. Since the Debtors received a discharge in their Chapter 7 case, the Debtors cannot receive a new discharge for four years. 11 U.S.C. § 1328(f).²

The Debtors' Chapter 20 lien strip motion raises a number of issues that have been debated in the courts:

1. Whether a lien strip can be granted under the authority of § 506(d) without regard to whether a plan is confirmed?

2. Whether a discharge is necessary to confirm a plan in Chapter 20?

3. What is the proper treatment of a stripped lien claim under a Chapter 20 plan?

4. How is the stripped lien claim quantified in Chapter 20?

5. Under what circumstances may a Chapter 20 plan be found to be filed in good faith?

The Court resolves these issues in this case as set forth in this Memorandum Decision, concluding that even though the CIT lien cannot be stripped under § 506(d), the Debtors can confirm a plan in good faith that provides for a lien strip even without a discharge. CIT's claim was already discharged in the Chapter 7 case, and the provisions of § 1325(b)(5) applicable to secured claims do not apply since there is no value in the residence to secure the CIT lien. CIT has an in rem claim as quantified in its proof of claim, to be treated as an unsecured claim under the Plan.

Accordingly, the Court will confirm the Debtors' plan and grant their motion to strip the CIT lien under the confirmed plan alone.

A. Jurisdiction

The Court has subject matter jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G).

B. Background

The Debtors filed a Chapter 7 petition on September 16, 2009 and received a discharge in that case on December 16, 2009. Five days after their Chapter 7 discharge was granted, on December 21, 2009, the Debtors filed this Chapter 13 case. The Debtors' income is below the median forthis district. Kathleen Hill is a self-employed web designer and William Hill now works as a glazier in the construction business, although he was unemployed until one month before the Debtors filed their Chapter 13 petition. They have three children, two of whom are minors. The Debtors have no equity in their assets, and no excess disposable income that they have not devoted to payment of their creditors. Nor have they a reason to project a higher income in the future.

On Schedule A of their Schedules of Assets and Liabilities, the Debtors listed their primary residence located at 762 Taft Ave. El Cajon, CA 92020 ("Residence") with a value of $300,000. They later submitted an appraisal valuing their Residence at $252,000. According to Schedule D, the Residence is encumbered by: 1) a senior lien securing a debt of $369,000; 2) CIT's junior lien securing a debt listed in its proof of claim at $78,955.81; and 3) a secured claim of $1,565 owed to the San Die go County Tax Collector. The Debtors also have student loans totaling $36,109. No party has challenged the accuracy of the Debtors' schedules or other financial disclosures in this case.

Paragraph 19 of the Debtors' initial and amended Chapter 13 Plans (collectively the "Plan") proposes to strip CIT's lien under § 1322 because the value of the Residence is less than the amount of the senior lien. The Debtors also brought a separate motion to strip the lien under § 506(a) and (d) ("Lien Strip Motion") for the same reason. The three-year Plan proposes monthly payments of $952, an amount that is $45 greater than the Debtors' disposal income calculated pursuant to the Official Form B 22.³ The Debtors' Plan does not seek a discharge, nor does it propose to modify any secured debt. The unsecured debts under the Plan are projected to receive a 16.6% dividend. CIT's secured and unsecured claims are valued at zero under the Plan and receive nothing.

Although CIT did not oppose the Lien Strip Motion or object to the Plan, the Court requested further briefing on the issues addressed in this Memorandum Decision to satisfy its independent duty to ensure that the Plan meets all confirmation requirements. In re Szostek, 886 F.2d 1405, 1412 (3d Cir.1989). David Skelton, the Chapter 13 Trustee, then objected to confirmation on several grounds, including that the Debtors' Plan was not proposed in good faith because of the Debtors' previous discharge.⁴

The Debtors have complied with all of their pre-confirmation obligations under their Plan and the Code. Upon resolution of the issues addressed in this Memorandum Decision, the Debtors' Plan is ready for confirmation.

C. Section § 506(d) Does Not Authorize Chapter 13 Lien Strips.

Although the lien strip was sought as part of the Plan, the Debtors' Lien Strip Motion separately sought a declaration that CIT's lien was void under § 506(d), citing Hart v. San Diego County Credit Union, No. 09CV1017 JLS (POR) (S.D.Cal. March 1, 2010) (order reversing and remanding decision of bankruptcy court). See also In re Fuller, 255 B.R. 300, 306 (Bankr.W.D.Mich.2000) (same). Hart held that a lien could be stripped under § 506(d) relying upon a number of bankruptcy court decisions, and noting the absence of contrary Ninth Circuit analysis. Hart at 10-11.

While Hart is a decision of the District Court in this district, the Court respectfully does not feel it is binding authority.⁵ Rather, this Court feels compelled to follow the Supreme Court's statutory interpretation of § 506(d) found in Dewsnup v. Timm, 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which held § 506(d) does not authorize a lien strip in a Chapter 7 case:

We hold that § 506(d) does not allow petitioner to "strip down" respondents' lien, because respondents' claim is secured by a lien and has been fully allowed pursuant to § 502. Were we writing on a clean slate, we might be inclined to agree with petitioner that the words "allowed secured claim" must take the same meaning in § 506(d) as in § 506(a). But, given the ambiguity in the text, we are not convinced that Congress intended to depart from the pre-Code rule that liens pass through bankruptcy unaffected.

The statutory ambiguity to which the Supreme Court referred in its holding is that two subsections of the same statute, § 506(a) and (d), use the same terminology: "allowed secured claim," but then apply the term differently. Subsection (a) of § 506, as implemented by Bankruptcy Rule 3012, is the basis for lien strips because it reduces the amount of the secured claim to the value of the collateral. Subsection (d) of § 506 renders a lien void if the claim is disallowed under § 502, for reasons other than the value of the collateral. Hence, Dewsnup, 502 U.S. at 419-20, 112 S.Ct. 773, held that whether a lien can be avoided under § 506(d) turns on whether its underlying claim has been disallowed, not on the value of the collateral. See also In re Fenn, 428 B.R. 494, 498 (Bankr.N.D.Ill.2010). To resolve the statutory ambiguity inherent in § 506, the Supreme Court declined to permit "the security-reducing provision of (a)" to alter the plain language of the "lien-voiding provision of § 506(d)." It therefore held that § 506(d) must be limited in use to where the underlying claim is invalid under § 502, because that subsection cannot be used to allow lien strips under § 506(a). Dewsnup, 502 U.S. at 413, 112 S.Ct. 773.

Dewsnup found this limited use for § 506(d) was consistent with pre-Code practice that did not permit lien strips except in reorganization cases. Id. at 419-20, 112 S.Ct. 773. The Ninth Circuit in In re Enewally v. Washington Mutual Bank, 368 F.3d 1165, 1169-70 (9th Cir.2004), recognized this distinction, and held § 506(d) did not permit lien strips in Chapter 7 cases:

The rationales advanced in the Dewsnup opinion for prohibiting lien stripping in Chapter 7 bankruptcies, however, have little relevance in the context of rehabilitative bankruptcy proceedings under Chapters 11, 12, and 13, where lien stripping is expressly and broadly permitted, subject only to very minor qualifications.

The legislative history of the Code makes clear that lien stripping is permitted in the reorganization chapters.

(Citations omitted.)

Since § 506(d) does not permit lien strips in Chapter 7 cases, the Bankruptcy Code operates to prevent it from being the statutory basis for lien strips in reorganization cases as well. Under a bankruptcy specific rule of statutory construction, § 103(a), § 506(d) must apply in all bankruptcy cases if it is to apply in any. Section 103(a) specifies that the provisions of Chapter 5 of the Code, such as § 506(d), are applicable to all bankruptcy cases. If lien strips were to be authorized by § 506(d) alone, that sub-section would apply in equal force in Chapter 7 and reorganization cases. Allowing lien strips in Chapter 7 cases would run afoul of Dewsnup, which barred lien strips in Chapter 7. Dewsnup, 502 U.S. at 419-20, 112 S.Ct. 773. See 4 Collier on Bankruptcy ¶ 506.06 at 506.06[1][c] (16th ed. 2010) ("there is no principled way to conclude that, although section 506(d) does not authorize lien stripping in chapter 7 cases, it has a different...