In re McDonough

• Decision Date: 29 March 1994
• Docket Number: Bankruptcy No. 93-42569-HJB. Adv. No. 93-4276.
• Citation: 166 BR 9
• Parties: In re Marguerite C. McDONOUGH, Debtor. Marguerite C. McDONOUGH, Plaintiff, v. PLAISTOW COOPERATIVE BANK, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

166 B.R. 9 (1994)

In re Marguerite C. McDONOUGH, Debtor Marguerite C. McDONOUGH, Plaintiff, v. PLAISTOW COOPERATIVE BANK, Defendant.

Bankruptcy No. 93-42569-HJB. Adv. No. 93-4276.

United States Bankruptcy Court, D. Massachusetts.

March 29, 1994.

Peter M. Stern, Springfield, MA, for debtor.

L. Jed Berliner, Springfield, MA, for Plaistow Co-op. Bank.

MEMORANDUM

HENRY J. BOROFF, Bankruptcy Judge.

I. BACKGROUND

The matter before the Court arises from a "Complaint to Determine Extent and Priority of Liens" ("Complaint") filed by Plaintiff, Marguerite C. McDonough (the "Plaintiff" or the "Debtor"), against Defendant, Plaistow Cooperative Bank (the "Defendant" or "Plaistow"), in which the Plaintiff, pursuant to 11 U.S.C. § 506(d), seeks to avoid a judicial lien held by Plaistow on the Debtor's real estate located at 48 Hillcrest Park, South Hadley, MA (the "Property").

The procedural history of this case is not complex. The case was commenced under Chapter 13 of the Bankruptcy Code on September 22, 1993. On October 15, 1993, the Debtor filed her Chapter 13 Plan (the "Plan"), which provided, inter alia, for treatment of the judicial lien claim of Plaistow. Pursuant to the Plan, Plaistow was described as an "undersecured creditor" and treated as "an unsecured creditor." Plaistow filed no timely objection to the Plan,¹ and the Plan was confirmed by an order entered by Judge Queenan on November 17, 1993. On December 3, 1993, Plaistow filed "Motion to Revoke Order of Confirmation; Alternative Motion for Rule 2004 Examination." The latter alternative was allowed by the Court on December 10, 1993.

On November 17, 1993, the Debtor filed the instant adversary proceeding. In her Complaint, the Debtor alleges that: (i) the value of the Property is approximately $65,000, (ii) the Debtor has claimed an exemption on the Property, pursuant to 11 U.S.C. § 522(d), in the amount of $7,500, and (iii) the Property is encumbered by a first mortgage held by People's Savings Bank, with the outstanding balance due on the underlying note and mortgage of approximately $77,000. Inasmuch as Plaistow holds a judicial lien on the Property in the approximate amount of $38,000 junior to the first mortgage, the Debtor requests that the Court determine the lien void pursuant to § 506(d).

In its Answer to the Complaint, and again at the Pre-Trial Conference on the Complaint, Plaistow asserted three arguments. First, Plaistow argues that the voiding of its lien, pursuant to § 506(d), is proscribed by the Supreme Court's decision in Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). Second, Plaistow argues that its judicial lien is secured only by the Debtor's residence and, therefore, any modification of its "rights" are proscribed by the Supreme Court's decision in Nobelman v. American Savings Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). Third, Plaistow argues that the voiding of its lien is not timely until after the Debtor has fully performed under the Plan and been granted a discharge pursuant to 11 U.S.C. § 1328. The facts being largely undisputed, the Court took Plaistow's arguments, as stated in its pleadings, under advisement.

II. DISCUSSION

A. Section 506(d)

The availability of lienstripping as a debtor's tool to reduce a secured claim to the value of its underlying collateral has been the subject of considerable controversy. The fairness of the procedure being much in the eyes of the beholder, the Courts have struggled to find the statutory basis for either the allowance or prohibition of lienstripping. Those efforts have resulted in opinions so limited to their facts or so limited in scope as to only spawn more creative argument under alternative circumstances. See e.g., Nobelman, ___ U.S. ___, 113 S.Ct. 2106 (11 U.S.C. § 1322(b)(2)'s limited exception protects claims secured solely by debtor's principal residence); Ford Motor Credit Co. v. Lee (In re Lee), 162 B.R. 217 (D.Minn.1993) (Chapter 13 debtors were permitted to "strip down" a lien on their vehicle to its value on the date of the filing of the petition); Dever v. Internal Revenue Serv. (In re Dever), 164 B.R. 132 (Bankr.C.D.Cal.1994) (Chapter 11 consumer debtors were permitted to "strip down" tax liens on their residence); Hirsch v. Citicorp Mortgage Corp. (In re Hirsch), 155 B.R. 688 (Bankr.E.D.Pa.1993) (Chapter 13 debtor was permitted to use § 506(a) to "strip down" mortgagee's lien that was secured not only by debtor's principal residence but also by rents, profits and fixtures).

The Supreme Court first attempted to grapple with lienstripping in the Dewsnup decision. The Dewsnup case was limited to lienstripping in the Chapter 7 context. ___ U.S. at ___ n. 3, 112 S.Ct. at 778 n. 3. Justice Blackmun, writing for the majority, declined to read §§ 506(a) and 506(d)² as complimentary and held that § 506(d) does not authorize lienstripping in Chapter 7 cases. Id. at ___, 112 S.Ct. at 778. The Court reasoned that the language of § 506(d) did not overrule the pre-Code convention that liens on real property survive bankruptcy unaffected, and § 506(a), in defining an "allowed secured claim", provided little or no guidance as to any Congressional intent to change that pre-Code practice. Id. Given the absence of clear legislative history and the ambiguities present within the statutory text of § 506, the Dewsnup Court declined to depart from the pre-Code practice. Id. at ___, 112 S.Ct. at 779. However, notwithstanding its willingness to proscribe lienstripping in Chapter 7 cases, the Court dramatically limited its holding, noting, "hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations." Id. at ___, 112 S.Ct. at 778. Left unresolved was the applicability of Dewsnup in Chapter 11, 12 and 13 cases. See Id. at ___ n. 3, 112 S.Ct. at 778 n. 3.

The Nobelman decision only indirectly casts light upon the applicability of Dewsnup under Chapter 13. In Nobelman, the Supreme Court held that § 1322(b)(2), which prohibits modification of a claim secured only by the debtor's principal residence, bars bifurcation of such a claim into secured and unsecured claims under § 506(a). ___ U.S. at ___, 113 S.Ct. 2106. Left unsaid was the contrary implication that such bifurcation and the attendant avoidance under § 506(d) would have been permissible, absent § 1322(b)(2)'s exclusion.

Notwithstanding the failure of the Supreme Court to make a clear statement to date on the applicability of lienstripping in reorganization cases, it is clear that such lien reduction is at the very foundation of reorganization under each of these chapters. In re Dever, 164 B.R. at 143 (". . . to bar lienstripping in reorganization cases under Chapters 11, 12, or 13, would in essence, gut the sum and substance of the reorganization and rehabilitation of debt concept under the Bankruptcy Code."); In re Leverett, 145 B.R. 709, 713 (Bankr.W.D.Okla.1992) ("The survival of all liens would preclude the finality necessary to the success of such rehabilitative efforts, and would render § 506(a) virtually meaningless in Chapter 12 and 13 cases.").

Furthermore, the language of the Dewsnup decision itself distinguishes its applicability in reorganization cases from Chapter 7 cases. ___ U.S. at ___, 112 S.Ct. at 779. The Dewsnup Court, dealing strictly with lienstripping in the Chapter 7 context, was hard-pressed to find any Congressional intent to vary from the pre-Code practice in liquidation cases of allowing liens to pass through bankruptcy unaffected. Id. As Justice Blackmun noted:

apart from reorganization proceedings, see 11 U.S.C. §§ 616(1) and (10) (1976 ed.), no provision of the pre-Code statute permitted involuntary reduction of the amount of a creditor\'s lien for any reason other than payment on the debt. . . . Furthermore this Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in the pre-Code practice that is not the subject of at least some discussion in the legislative history.

Id. (emphasis supplied). The concerns raised by the Court in Dewsnup are not applicable in the Chapter 13 context. Section 1322(b)(2)³ explicitly gives Chapter 13 debtors the right to modify the rights of secured creditors, except where specifically excluded. Furthermore, 11 U.S.C. § 1325(a)(5)⁴ permits the Court to confirm a plan over a secured creditor's objection where the secured creditor retains its lien and the debtor distributes property of a value, as of the effective date of the plan, not less than the allowed amount of such secured claim. The legislative intent relative to § 1325 could not be clearer.

With respect to secured claims provided for by the plan, the holder of the claim must have accepted the plan, or the debtor must either distribute under the plan the value, as of the effective date of the plan, to the holder of the claim, property of a value that is not less than the allowed amount of the secured claim, as determined under proposed 11 U.S.C. § 506(a), or the debtor must surrender the property securing the claim to the holder of the claim.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 430 (1977); U.S.Code Cong. & Admin.News 1978, pp. 5787, 6385 (emphasis supplied). The legislative history, therefore, approves bifurcation.

In §§ 1322(b) and 1325, this Court finds a specific legislative intent to vary from any pre-Code practice allowing liens to pass through bankruptcy unaffected. More importantly, in the above mentioned legislative history, this Court finds in Chapter 13 cases the crucial nexus between the modification of secured claims and § 506(a)'s definition of "allowed secured claim", which nexus the Dewsnup Court could not find in the Chapter 7 context. See Dewsnup, ___ U.S. at ___ n. 3, 112 S.Ct. at 778 n. 3.

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