In re Jarvis

• Decision Date: 09 July 2008
• Docket Number: No. 07-72281.,07-72281.
• Citation: 390 B.R. 600
• Parties: In re Trevor M. JARVIS, Debtor.
• Court: U.S. Bankruptcy Court — Central District of Illinois

390 B.R. 600

In re Trevor M. JARVIS, Debtor.

No. 07-72281.

United States Bankruptcy Court, CD. Illinois.

July 9, 2008.

John S. Narmont, Springfield, IL, for Debtor.

ORDER

MARY P. GORMAN, Bankruptcy Judge.

For the reasons set forth in an Opinion entered this day,

IT IS HEREBY ORDERED that confirmation of Debtor's Chapter 13 Plan be and is hereby denied.

IT IS FURTHER ORDERED that Debtor is granted 14 days from the date of this Order to file an Amended Plan consistent with the Opinion entered herewith. If Debtor fails to file an Amended Plan within 14 days of the date of this Order, Debtor's case will be dismissed without further notice or hearing.

OPINION

This case is before the Court for decision on confirmation of the Debtor's Chapter 13 Plan ("Plan"). The Plan provisions raise the issue of the extent to which the Debtor may obtain the permanent modification of a creditor's rights when the Debtor is not entitled to a discharge after completion of Plan payments. For the reasons set forth herein, this Court finds that the Debtor's ineligibility for a discharge limits his ability to modify the creditor's rights as proposed and, therefore, Plan confirmation must be denied.

Trevor M. Jarvis ("Debtor") filed his voluntary petition under Chapter 13 on October 31, 2007. Debtor previously filed a Chapter 7 case on December 15, 2006, and received a discharge in that case on March 22, 2007. Because of the prior discharge, the Debtor is ineligible to receive a discharge in this case. See 11 U.S.C. § 1328(f)(1). Debtor acknowledged that fact by filing a waiver of discharge on November 14, 2007.

Debtor's Schedule A discloses that the. Debtor owns residential real estate in Loami, Illinois valued at $66,700. Debtor's Schedule D shows that he owes $70,677 to South Central Illinois Mortgage secured by a first mortgage on the Loami property, and also owes $8,720 to Heartland Credit Union secured by a second mortgage on the Loami property. Further, Debtor acknowledges ownership of a 2000 Chevrolet truck valued at $9,750 which is encumbered by a lien of Banco Popular securing a debt of $8,734. Debtor's Chapter 7 Schedules filed in 2006 disclosed similar information about these assets and debts. None of these secured debts were reaffirmed by the Debtor in his Chapter 7 case.

Debtor's Schedule F consists of an eight-page listing of unsecured debts. Each of the 49 creditors listed is described as an "unknown claimant", and the amount of each claim is listed as "unknown". All of the unsecured creditors listed on Debtor's current Schedule F appear to have been listed on the Schedule F filed in the prior Chapter 7 case. On the Chapter 7 Schedule F, however, the actual consideration for and the specific amounts of many of the claims were disclosed by the Debtor.

On October 13, 2007, Debtor filed his Plan. In his Plan, the Debtor proposes to pay to the Chapter 13 Trustee ("Trustee") $1,051.08 for a period of 12 months. From the sums paid in, the Trustee is directed to make the Debtor's monthly first mortgage payment to South Central Illinois Mortgage in the amount of $689.14 and his monthly car payment to Banco Popular in the amount of $278.64. No payments are proposed for unsecured creditors. Presumably, the difference between the amounts to be paid in and the amounts to be distributed is sufficient to pay the Trustee's fees.

The Plan proposes the following treatment of Heartland Credit Union:

Debtors (sic) indicate the claim of Heartland Credit Union is fully unsecured as the value of the residence which is collateral for said claim does not exceed the value of the first mortgage and associated cost. As such claim is fully unsecured, the claim of Heartland Credit Union is void with respect to 11 USC 506(d) and such security interest is hereby stripped off upon confirmation of Debtor's Plan. Heartland Credit Union's lien is stripped off and Heartland Credit Union shall receive no payments through the Debtor's Plan and any security interest shall be stripped Off and considered void.

Plan at pp. 1-2.

It is this provision of Debtor's Plan which bestows more relief than the Debtor is entitled to receive given the fact that no discharge order will be entered. Accordingly, Plan confirmation must be denied.

The ability of debtors to avoid, "strip down", or "strip off liens has been the subject of significant litigation throughout the years. Generally, liens on property pass through bankruptcy unaffected. See Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 1829, 114 L.Ed.2d 337 (1991); Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991) (a bankruptcy discharge leaves in tact in rem actions); City of Richmond v. Bird, 249 U.S. 174, 177, 39 S.Ct. 186, 187-38, 63 L.Ed. 543 (1919) (construing Section 67d of the 1898 Bankruptcy Act to prohibit lien avoidance).

The passage of the Bankruptcy Reform Act of 1978 introduced the Bankruptcy Code, and § 506 of the Code was initially thought to constitute a significant change in the law by providing a basis to avoid undersecured liens. See Gaglia v. First Federal Savings & Loan Assn., 889 F.2d 1304, 1306-11 (3d Cir.1989). The relevant portions of § 506 are the following:

(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. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

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(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.

11 U.S.C. § 506(a) & (d).¹

Simply put, the theory of lien stripping is that § 506(a) allows a bifurcation of an undersecured claim into two separate claims. A secured claim is allowed to the extent of the value of the collateral, and the balance of the claim is allowed as unsecured. Using § 506(d), the creditor's lien is then limited to the amount of the allowed secured claim only, and the balance of the lien, which is unsecured, is stripped.

In 1992, however, the Supreme Court of the United States held that the provisions of § 506(d) do not allow a Chapter 7 debtor to strip a hen on property based on the undersecured status of the creditor holding the lien. Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). The Court found the provisions of § 506 to be ambiguous, but determined that there was no legislative intent to alter "the pre-Code rule that liens pass through bankruptcy unaffected." Dewsnup, 502 U.S. at 417, 112 S.Ct. at 778.

Dewsnup held that, because the creditor had an allowed secured claim pursuant to § 502 of the Code, the creditor's claim did not come within the scope of § 506(d) and the lien could not be avoided. Id. Dewsnup ended the practice of stripping undersecured consensual liens in Chapter 7 cases using § 506 of the Code.

Notwithstanding Dewsnup, hen stripping remains available to some degree in Chapter 13 cases due to § 1322(b)(2), which provides in relevant part:

(b) Subject to subsections (a) and (c) of this section, the plan may —

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(2) 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 of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]

11 U.S.C. § 1322(b)(2).

Because Chapter 13 expressly allows the modification of the rights of creditors, lien rights may be altered by the terms of a confirmed Chapter 13 plan. However, the Supreme Court has held that the lien rights of an undersecured creditor with a claim secured only by a lien on the debtor's principal residence may not be modified. See Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Relying on Dewsnup and the interpretation of § 506 contained therein, the Court found that the right to "retain the lien until the debt was paid off" was one of the creditor's rights which could not be modified pursuant to § 1322(b)(2) when the creditor's collateral consisted only of the debtor's residence. Nobelman, 508 U.S. at 329, 113 S.Ct. at 2110.

Although Nobelman seemed to sound the death knell for lien stripping on debtors' residences in Chapter 13 further line of cases subsequently developed dealing with the limited circumstance of the creditor's lien being fully unsecured due to a total lack of any equity in the residential collateral to support the lien. Many courts have held that, when a junior lien is totally unsecured because the senior liens exceed the value of the property, the anti-modification provisions of § 1322(b)(2) relating to residential property do not apply. See, e.g., In re McDonald, 205 F.3d 606 (3d Cir.2000); In re Pond, 252 F.3d 122 (2d Cir.2001); In re Lane, 280 F.3d 663 (6th Cir.2002); In re Holloway, 2001 WL 1249053 (N.D.Ill.2001); In re Waters, 276 B.R. 879 (Bankr.N.D.Ill.2002); In re King, 290 B.R. 641 (Bankr.C.D.Ill.2003). Contra In re Barnes, 207 B.R. 588 (Bankr. N.D.Ill.1997).

In King, the requirements for the strip off of a totally unsecured lien were outlined. The proposed strip off may be raised as a contested matter and...