In re Pierre, 6:10–bk–21663–KSJ.

• Decision Date: 16 March 2012
• Docket Number: No. 6:10–bk–21663–KSJ.,6:10–bk–21663–KSJ.
• Parties: In re Senayda PIERRE, Debtor[s].
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

23 Fla. L. Weekly Fed. B 261

468 B.R. 419

In re Senayda PIERRE, Debtor[s].

No. 6:10–bk–21663–KSJ.

United States Bankruptcy Court, M.D. Florida,Orlando Division.

March 16, 2012.

Andrew C. Baron, Orlando, FL, for Debtor.

MEMORANDUM OPINION DENYING DEBTOR'S MOTION TO VALUE LIEN OF CITIMORTGAGE

KAREN S. JENNEMANN, Chief Judge.

Debtor, Senayda Pierre, and her non-filing spouse, Maurince Pierre, jointly own as tenants-by-the-entireties investment real estate. The investment property ¹ (the “Property”) is located in Orlando, Florida, and is encumbered by a first mortgage payable to CitiMortgage. Debtor has filed a motion seeking to value (or strip down) CitiMortgage's lien.² Because Mr. Pierre, the co-owner of the Property, is not a joint debtor in this bankruptcy case, and also because he recently received a discharge in a separate Chapter 7 bankruptcy case, CitiMortgage objects to debtor's request. ³ The issue is whether the Court can strip down a partially unsecured mortgage in a Chapter 13 case when the collateral is jointly owned by husband and wife as tenants by the entireties and only one spouse is a debtor. The Court holds that a prerequisite to stripping down a secured lien under § 1322(b)(2) of the Bankruptcy Code ⁴ is that both co-owner spouses must be debtors in the same Chapter 13 case and that each joint debtor also must qualify for a Chapter 13 discharge.

CitiMortgage holds a partially unsecured lien on the Property. Although the parties do not agree as to the exact value of the real property at issue, debtor contends the value of the Property subject to CitiMortgage's lien is $77,000. CitiMortgage argues the value is higher but likely not to exceed the amount of the outstanding indebtedness of $148,962.⁵

Strip Off and Strip Down

A Chapter 13 debtor normally can bifurcate an under-secured mortgage claim encumbering non-homestead property into a secured portion and an unsecured portion pursuant to § 506(a).⁶ “Section 506(a) defines the secured and unsecured components of debts according to the value of the underlying collateral.” ⁷ Sections 506(a) and 1322(b)(2) work in tandem for claims valuation.⁸ Section 1322(b)(2) allows a debtor to “modify the rights of holders of secured claims,” but not where the underlying collateral is the debtor's principal residence.⁹

The valuation of an under-secured mortgage claim is commonly referred to as a “strip down” or “cram down.” Where the valuation of property indicates that a claim is partially secured, the secured portion of the claim is paid through the debtor's plan as an allowed secured claim, and the unsecured portion is “stripped down” to an allowed unsecured claim. The unsecured claim generally is paid on a pro rata basis along with all other general unsecured claims. If a mortgage claim is completely unsecured, a Chapter 13 debtor can eliminate or “strip off” the entire secured claim, leaving the creditor with only one claim, an unsecured claim, pursuant to § 506(d).¹⁰ A wholly unsecured lien claim is void pursuant to § 506(d).

The same is not true in a Chapter 7 case. A Chapter 7 debtor cannot strip off a totally unsecured lien because no Chapter 7 counterpart to § 1322(b)(2) exists.¹¹ Neither lien strip off nor lien cram down is available in Chapter 7. The issue is how these restrictions on modifying secured claims work in this particular case, where debtor seeks to strip down a partially unsecured claim on the Property, a remedy unavailable to her non-filing husband who owns the Property as a tenant by the entirety.

With the recent economic recession and the drastic devaluation of real property values, Mrs. Pierre and her husband stopped making payments to CitiMortgage and other lenders for the debt owed on their multiple investment properties. CitiMortgage and the other lenders instituted foreclosure actions to recover their collateral. On June 14, 2010, debtor and her husband jointly filed a Chapter 7 bankruptcy case to stop these foreclosures.¹² The debtors indicated they intended to surrender their interest in their jointly owned properties, including the Property subject to this dispute.¹³ The Chapter 7 trustee submitted a report of no distribution declaring the case a no-asset case and abandoning all property.¹⁴ Both debtors in the joint Chapter 7 case received a discharge pursuant to § 727(a) on October 5, 2010.¹⁵

Shortly thereafter, on December 6, 2010, only Mrs. Pierre filed this Chapter 13 case. Contrary to the Statement of Intentions she and her husband filed in their joint Chapter 7 case, Mrs. Pierre now states that she wants to retain (not surrender) her jointly owned real property, including CitiMortgage's collateral. Because she wants to strip down or strip off various secured liens encumbering the investment properties she now seeks to retain, Mrs. Pierre sought, and was granted, a revocation of her Chapter 7 discharge.¹⁶ Given the recent line of cases decided by Bankruptcy Judge Arthur B. Briskman, the revocation of Ms. Pierre's discharge was inadvertent and would not be granted today.¹⁷ However, what was done was done, and this Court allowed Mrs. Pierre to revoke her discharge. Her husband, however, is still receiving the benefits of his Chapter 7 discharge.

Mr. Pierre, who is not a debtor in this case, would not be entitled to receive a Chapter 13 discharge within four years of the petition date of his previous Chapter 7 case under § 1328(f)(1). Section 1328(f) was added to the Bankruptcy Code in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), and prevents courts from issuing two discharges to a single debtor in rapid succession in so-called “Chapter 20” situations. ¹⁸ (A “Chapter 20” occurs where a debtor files a Chapter 13 case shortly after obtaining a Chapter 7 discharge). Therefore, even if he were to file a Chapter 13 case, Mr. Pierre still could not cram down CitiMortgage's claim because he cannot receive a discharge in the later Chapter 13 case. The vast majority of courts, including this one, uniformly have held that any modifications to secured creditors' rights through cram down or strip off are not effective unless and until the debtor receives a Chapter 13 discharge. ¹⁹ Mr. Pierre will never receive such a discharge. This Court similarly has held that a lien valued at zero pursuant to § 506(d) is not void again unless and until the debtor receives a discharge.²⁰ The bright-line rule for extinguishment of a lien, as set forth in In re Sadala, was created to protect the creditor's interest in the event a debtor defaults prior to conclusion of his Chapter 13 case.²¹

Looking to the plain language of § 1328(f)(1), the confirmation requirements of § 1325(a)(5), and Congress' intent in enacting BAPCPA, the vast majority of courts have determined cram down and strip off are impermissible where a debtor is prohibited from receiving a discharge pursuant to § 1328(f).²² Allowing cram down or a strip off of a lien without a discharge or payment of the debt would result in a “ ‘de facto discharge, a benefit to which [debtors who are prohibited from receiving a discharge pursuant to Section 1328(f) ] are not entitled.’ ” ²³ Put another way, allowing a debtor to discharge his debts in a Chapter 7 and then immediately filing a Chapter 13 to strip off or cram down a mortgage claim would be equivalent to modifying the mortgage in the Chapter 7, which a debtor cannot do.

A minority of courts have allowed the cram down of mortgage claims in Chapter 20 situations, arguing the purpose of Chapter 13 is to protect debtors' homes.²⁴ Such contention contradicts Congress' clearly articulated intent in creating Chapter 13.²⁵ Senate Report 95–989 (Bankruptcy Reform Act of 1978) sets forth:

The new Chapter 13 undertakes to solve these problems insofar as bankruptcy law can provide a simple yet precise and effective system for individuals to pay debts under bankruptcy court protection and supervision. The new chapter 13 will permit almost any individual with regular income to propose and have approved a reasonable plan for debt repayment based on that individual's exact circumstances.²⁶

The House of Representatives Report 95–595 sets forth:

The purpose of Chapter 13 is to enable an individual, under court supervision and protection, to develop and perform under a plan for the repayment of his debts over an extended period. In some cases, the plan will call for full repayment. In others, it may offer creditors a percentage of their claims in full settlement.²⁷

Chapter 13, as the legislative history sets forth, was created to protect overextended individual wage earners desiring to voluntarily repay their debts through the automatic stay and provide financial relief through a fresh start. To view Chapter 13 as an instrument for protecting real property, or as a panacea for the real estate recession, misconstrues Congress' intended purpose of Chapter 13. Although debtors indeed may use Chapter 13 to save their homes, the legislative purpose of Chapter 13 is to maximize recovery to creditors by allowing debtors to cure arrears and make payments over a period of up to 60 months.

The legislative history of BAPCPA also indicates Congress was much more interested in having debtors repay their debts than in saving their homes. The 2005 amendments, as established by the legislation's title “Bankruptcy Abuse Prevention and Consumer Protection Act,” were intended to curb what was perceived to be abusive bankruptcy practices, and to ensure that debtors with the ability to repay their debts do so.²⁸ Sections 1328(f) and 1325(a)(5) were enacted as part of the 2005 overhaul to prohibit debtors from receiving two discharges within a four year period and to increase repayment obligations by debtors. BAPCPA certainly was not enacted to “save homes.” These two new provisions, particularly when read in conjunction with Section 348(f), which is also a BAPCPA addition to the Bankruptcy Code, clearly posit that a...