In re James Jennings And Rubye Jennings

• Decision Date: 11 July 2011
• Docket Number: Nos. 11–50570–CRM,10–88514–CRM.,s. 11–50570–CRM
• Citation: 454 B.R. 252
• Parties: In re James JENNINGS and Rubye Jennings, Debtors.In re Bryce Hill and Dena Hill, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

454 B.R. 252

In re James JENNINGS and Rubye Jennings, Debtors.In re Bryce Hill and Dena Hill, Debtors.

Nos. 11–50570–CRM

10–88514–CRM.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

July 11, 2011.

E.L. Clark, Clark & Washington, P.C., Atlanta, GA, for Debtors.

MEMORANDUM OPINION ON CHAPTER 20 LIEN STRIPPING

C. RAY MULLINS, Bankruptcy Judge.Introduction

The issue before the Court is whether a “chapter 20 debtor”—a debtor who is ineligible for a chapter 13 discharge pursuant to section 1328(f) of the Bankruptcy Code because of a recent chapter 7 discharge—may strip off ¹ the lien of a wholly underwater second mortgage (“lien stripping”). For the reasons set forth herein, the Court finds that if the plan is filed in good faith, a chapter 20 debtor may strip off such a lien in a chapter 13 plan.

Procedural Posture

Nancy Whaley, the chapter 13 trustee (the “Trustee”) has objected to plan confirmation in two cases: James and Rubye Jennings, 11–50570–CRM, and Bryce and Dena Hill, 10–88514–CRM. Given the similarity in facts, procedural posture, legal issue, and counsel, the Court asked the parties to brief the chapter 20 lien stripping issue before the May 18, 2011 confirmation hearings.

BackgroundJennings

On December 1, 2007, James and Rubye Jennings filed chapter 13 case 07–80069–CRM (the “Jennings '07 Case”). The plan in the Jennings '07 Case was confirmed on March 4, 2008, and thereafter modified. The Jennings paid a total of $14,342.19 to the Trustee (Document No. 84) before they requested conversion to chapter 7 (Document No. 75). The Jennings '07 Case was converted to chapter 7 on December 22, 2009. On March 5, 2010, the chapter 7 trustee filed a report of no distribution, and the Jennings received their chapter 7 discharge on April 7, 2010. The Jennings filed chapter 13 case 11–50570–CRM on January 3, 2011, almost nine months after their chapter 7 discharge. The Jennings's current schedules indicate their home is worth $102,000, subject to a first mortgage to America's Servicing Company for $202,000, a materialman's lien to Data Processing Services, Inc. for $3,800, and a second mortgage to Lendmark for $24,800. Document No. 1.

Hill

On March 6, 2009, Bryce and Dena Hill filed chapter 13 case 09–66049–CRM (the “Hill '09 Case”). The plan in the Hill '09 Case was confirmed June 16, 2009. Document No. 29. On January 28, 2010, the Hills requested conversion to chapter 7, (Document No. 48), which was granted on January 29, 2010. The chapter 7 trustee filed a report of no distribution on February 23, 2010, and the Hills received their chapter 7 discharge on May 20, 2010. The Hills filed chapter 13 case 10–88514–CRM on September 27, 2010, a little over four months after their chapter 7 discharge. The Hills value their home at $105,000, subject to a first mortgage to Wells Fargo for $143,668.36 and a second mortgage to Wells Fargo for $31,366.54.

Lien Stripping in Chapter 13

Before a creditor can recover in a chapter 13 case it must first hold a ‘claim,’ as defined by the Bankruptcy Code. 11 U.S.C. § 101(5). Next, the claim must be allowed under section 502 of the Bankruptcy Code. 11 U.S.C. § 502. Section 506(a) further classifies the holder of an allowed claim as the holder of an allowed secured claim or an allowed unsecured claim. 11 U.S.C. § 506(a)(1). The 506(a) classification is based on the value of the underlying collateral: “An allowed claim of a creditor secured by a lien on property ... 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.” Id.

Classification as a holder of a secured claim under the Bankruptcy Code is not synonymous with holding a security interest outside of bankruptcy. “ ‘Secured claim’ is a term of art within the Bankruptcy Code, and means something different than it does for a creditor to have a security interest or lien outside of bankruptcy.” In re Nwogbe, 451 B.R. 90, 93 (Bankr.D.Nev.2011) (Markell, J.).² Having a lien outside of bankruptcy is translated under bankruptcy law as having the ‘rights' of a secured creditor, not necessarily as being a holder of a secured claim. This leads to the arguably counter-intuitive possibility that in bankruptcy a holder of an unsecured claim could have the ‘rights' of a secured creditor. In other words, a second mortgagee whose debt is secured (under state law) by collateral valued less than the debt owed on the first mortgage, under bankruptcy law is classified as a holder of an allowed unsecured claim but also has ‘rights' of a secured creditor. See Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357 (11th Cir.2000); Nobelman v. Am. Sav. Bank (In re Nobelman), 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993); Dewsnup v. Timm (In re Dewsnup), 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992).

Classification as a holder of a secured or unsecured claim is important because in a chapter 13 case, section 1322(b)(2) of the Bankruptcy Code permits a debtor, through the chapter 13 plan, to modify the rights of creditors (both secured and unsecured) but specifically protects “the rights of holders of secured claims” that are “secured only by a security interest in real property that is the debtor's principal residence.” 11 U.S.C. § 1322(b)(2) (the “anti-modification provision”). The anti-modification provision only protects the rights of creditors classified as holders of secured claims after applying section 506(a). In re Tanner, 217 F.3d at 1357; In re Nobelman, 508 U.S. at 324, 113 S.Ct. 2106; In re Nwogbe, 451 B.R. at 93. The anti-modification provision does not protect all creditors holding security interests as defined outside of bankruptcy—specifically, the anti-modification provision does not protect creditors classified by section 506(a) as holders of unsecured claims. In re Tanner, 217 F.3d at 1357. It only applies to holders of secured claims as defined under bankruptcy law. “This logic is ‘compelled by the Supreme Court's decision in Nobelman,’ and has been embraced by all six circuit courts that have considered the question.” ³

Thus, in a chapter 13 case in which the debtor is eligible for a discharge, the debtor is able to use the chapter 13 plan to void the liens of mortgagees holding unsecured claims. Because in a typical chapter 13 case plan completion and discharge generally occur around the same time,⁴ there is some confusion as to when and by what mechanism the lien is voided—does plan completion void the lien or does discharge void the lien? ⁵

Plan completion voids the lien. Discharge cannot be the legal mechanism that voids the lien. The Bankruptcy Code and the United States Supreme Court in Johnson v. Home State Bank state that discharge only voids in personam liability. 11 U.S.C. § 524(a) (“A discharge in a case under this title—(1) voids any judgment ... to the extent such judgment is a determination of the personal liability of the debtor ...”); Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (“[A] discharge extinguishes only ‘the personal liability of the debtor.’ Codifying the rule in Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886) ... the Code provides that a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy.”). The theory that plan completion rather than discharge voids the lien is supported by the fact that debtors may void liens in chapter 13 (utilizing the chapter's plan provisions) but not in chapter 7 (where debtors receive discharges but do not propose, perform, and complete plans). In re Dewsnup, 502 U.S. at 410, 112 S.Ct. 773; In re Nobelman, 508 U.S. at 324, 113 S.Ct. 2106; In re Tanner, 217 F.3d at 1357.

This arguably confusing ⁶ legal framework provides for lien stripping in a chapter 13 case where the debtor is eligible for a chapter 13 discharge. The question before the Court is whether a chapter 13 debtor who is ineligible for a chapter 13 discharge is prevented from utilizing this legal framework as well.

Lien Stripping in Chapter 20

There is an accruing split of authority among courts across the country regarding the permissibility of chapter 20 lien stripping.⁷ Generally speaking, this split of authority can be grouped into three approaches. In the first approach courts hold that chapter 20 lien stripping is impermissible because it amounts to a de facto discharge.⁸ These courts rely on Dewsnup and Congress's inclusion of a discharge requirement in section 1325(a)(5), and treat the wholly underwater second mortgagee as a holder of a secured claim. Courts that adopt the second approach permit chapter 20 lien stripping; however after plan consummation, without a discharge, the parties' pre-bankruptcy rights are reinstated.⁹ These courts contend that discharge is the mechanism that voids the lien and that chapter 20 plans end in dismissal. The courts utilizing the third approach allow chapter 20 lien stripping because nothing in the Bankruptcy Code prevents it.¹⁰ These courts contend that the mechanism that voids the lien is plan completion and that chapter 20 cases end in administrative closing.

The Chapter 13 Trustee's Argument

The Trustee argues that the subject chapter 13 plans fail to comply with section 1325(a)(5) of the Bankruptcy Code. The Trustee contends that in a typical chapter 13 plan that seeks to strip a lien, section 1325(a)(5) applies and is satisfied because the debtor receives a discharge. Section 1325(a)(5) of the Bankruptcy Code provides, in relevant part, “with respect to each allowed secured claim provided for by the plan—(B)(i) the plan provides that—(I) the holder of such claim retain the lien securing such claim until the earlier of—(aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328.” 11...