In re Scantling

• Decision Date: 24 February 2012
• Docket Number: No. 8:11–bk–00369–MGW.,8:11–bk–00369–MGW.
• Citation: 465 B.R. 671,23 Fla. L. Weekly Fed. B 252
• Parties: In re Tahisia L. SCANTLING, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

23 Fla. L. Weekly Fed. B 252

465 B.R. 671

In re Tahisia L. SCANTLING, Debtor.

No. 8:11–bk–00369–MGW.

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

Feb. 24, 2012.

David L. Schrader, David L. Schrader, Esquire, St. Petersburg, FL, for Debtor.

ORDER AND MEMORANDUM OPINION ON STRIP OFF IN CHAPTER 20 CASES

MICHAEL G. WILLIAMSON, Bankruptcy Judge.

The Debtor in this chapter 20 ¹ case seeks to strip off wholly unsecured junior mortgages encumbering her principal residence. The creditor objects because the Debtor previously received a discharge of her debts in a chapter 7 case filed within four years of her chapter 13 case, and therefore, she is not eligible for a discharge. For the reasons set forth below, the Court overrules this objection and concludes that eligibility for a discharge is not a requirement to strip off of a wholly unsecured junior mortgage in a chapter 20 case.

Factual and Procedural Background

The Debtor moved to determine the secured status of second and third mortgages on her homestead.² Those mortgages, currently held by Wells Fargo Bank, N.A., secure approximately $104,000 in debt. Wells Fargo also holds a first mortgage on the Debtor's homestead. That mortgage secures approximately $122,000 in debt. According to the Debtor's motion to determine secured status, the value of the her homestead is $118,000. That means Wells Fargo's second and third mortgages are wholly unsecured, and as a consequence, the Debtor seeks to strip off those mortgages.

Wells Fargo, however, claims that the Debtor cannot strip its second and third mortgages because she is not eligible to receive a discharge in this case. ³ Under Bankruptcy Code § 1328(f), a chapter 13 debtor is not eligible for a discharge if the debtor received a discharge in a chapter 7 case filed within four years of the chapter 13 case. Here, the Debtor filed a previous chapter 7 case on November 27, 2009—less than fourteen months before she filed this case. The Debtor received a discharge in that case. So she is not eligible for a discharge in this case.

At the preliminary hearing on the Debtor's motion to determine secured status, the Court decided to bifurcate the final hearing on the Debtor's motion so that it can first determine as a matter of law whether the Debtor can strip off Wells Fargo's second and third mortgages. The sole issue before the Court, then, is whether a debtor can strip off a wholly unsecured junior mortgage in a chapter 20 case.⁴ Courts are currently split on this issue. ⁵ And as of yet, the Eleventh Circuit has not addressed this specific issue.

Conclusions of Law

This Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (L).

In analyzing whether a chapter 20 debtor can strip off a wholly unsecured junior mortgage, the Court first looks to Supreme Court and circuit court cases that have addressed either chapter 20 cases or lien stripping since the early–1990's. Although none of those cases directly address the issue currently before the Court, they do provide certain principles to guide the Court's analysis. The Court must then consider the applicable Bankruptcy Code provisions in light of those guiding principles. Finally, the Court must also consider the reasoning underlying the opinions by courts ruling that strip offs in chapter 20 cases are not permitted under the Bankruptcy Code. Based on this analysis, the Court concludes that a debtor may strip off a wholly unsecured junior mortgage in a chapter 20 case even though the debtor is not eligible for a discharge.

Supreme Court and Circuit Court Precedent

Johnson v. Home State Bank

There are three Supreme Court cases that relate either to strip off or chapter 20 cases. The first case is Johnson v. Home State Bank.⁶ In Johnson, the Supreme Court considered whether a debtor can include a mortgage lien in a chapter 13 plan if the personal obligation secured by the mortgaged property had been discharged in a prior chapter 7 case. The Supreme Court concluded that such relief was available.

Johnson involved a mortgage on farm property owned by the debtor. When the debtor defaulted under a promissory note secured by the farm property, the bank sued to foreclose in state court. The debtor then filed for chapter 7, and his personal liability on the promissory note was ultimately discharged. As is typical, the bank obtained stay relief to continue with the state court foreclosure proceeding. The bank eventually obtained an in rem foreclosure judgment against the debtor, but before the foreclosure sale took place, the debtor filed for chapter 13. The debtor scheduled the bank's mortgage as a claim and proposed to pay the bank over the five-year term of the plan.

In concluding that such relief was available to the debtor, the Supreme Court held that, “[s]o long as a debtor meets the eligibility requirements for relief under Chapter 13 ... he may submit for the bankruptcy court's confirmation a plan that ‘modif[ies] the rights of holders of secured claims ... or ... unsecured claims,’ ... and that ‘provide[s] for the payment of all or any part of any [allowed] claim.’ ” ⁷ Because the debtor's personal liability under the note was extinguished in the prior chapter 7, what remained intact was whatever in rem rights continued to exist against the debtor's property. It was these in rem rights that were subject to administration in the subsequent chapter 13 case.

The Johnson Court also dealt with the serial filing aspects of a chapter 20 case. The bank contended in Johnson that allowing successive filings would “evade the limits that Congress intended to place on these remedies.” ⁸ In considering this argument, the Court noted that Congress expressly prohibited various forms of serial filings. For instance, Bankruptcy Code § 109(g) prohibits filings within 180 days of dismissal, and § 727 limits the right to a discharge in successive filings.⁹ “The absence of a like prohibition on serial filings of Chapter 7 and Chapter 13 petitions, combined with the evident care with which Congress fashioned these express prohibitions, convinces us that Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief.” ¹⁰ So Johnson recognized a debtor's right to file a chapter 20 case.

Dewsnup v. Timm

The second case is Dewsnup v. Timm.¹¹ In Dewsnup, a chapter 7 debtor sought to strip down a creditor's lien on real property to the value of the collateral. The debtor argued that this could be accomplished by valuing the collateral under § 506(a) and then voiding the lien under § 506(d). Bankruptcy Code § 506(d) provides that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Section 506(a), of course, provides that a claim is secured only to the extent of the value of the collateral.

The Supreme Court rejected this approach because it was based solely on § 506(d). According to the Court, § 506(d), when read “term-by-term,” refers to any claim that is first “allowed” and second “secured.” Since there was no question that the claim in Dewsnup was allowed under § 502 and was secured by a lien on the underlying collateral, it did not come within the scope of § 506, which only voids liens securing claims that have “ not been allowed.” ¹²

Viewed in context, it appears that the debtor in Dewsnup was attempting to reorganize her secured debt in a chapter 7 case without the benefit of the reorganization provisions in chapters 11, 12, or 13.¹³ If the debtor were able to strip down a lien in a chapter 7 case to the value of the collateral without the ability to reorganize the remaining secured claim, the debtor would then either have to pay off the full amount of the claim or lose the collateral to the secured creditor in foreclosure. While not discussed in Dewsnup, this is, in effect, a similar result to that already provided for in Bankruptcy Code § 722, which allows a debtor to redeem tangible personal property. This provision—the only provision in chapter 7 that allows a debtor to retain collateral by simply paying the amount of the secured claim—is limited by its terms to personal property. Thus, Dewsnup recognized that § 506(d), by itself, is insufficient to strip a lien on a debtor's homestead. Section 506(d) must operate in tandem with another Bankruptcy Code provision to strip a lien.

Nobelman v. American Savings Bank

The third case is Nobelman v. American Savings Bank.¹⁴ The question before the Supreme Court in that case was whether § 1322(b)(2) prohibits a chapter 13 debtor from relying on § 506(a) to reduce an undersecured homestead mortgage to the fair market value of the mortgaged residence. Bankruptcy Code § 1322(b)(2) provides that a chapter 13 plan may not modify the “rights of holders of secured claims ... secured only by a security interest in ... the debtor's principal residence.” The debtor in Nobelman argued that § 1322(b)(2)'s anti-modification provision applies only to the extent the mortgagee holds a “secured claim” in the debtor's residence. Under this argument, the court would first look to § 506(a) to determine the value of the mortgagee's “secured claim.” The secured claim would then be stripped down to the value of the collateral.

The Supreme Court rejected this interpretation because it failed to take into account § 1322(b)(2)'s focus on “rights.” ¹⁵ Simply put, a mortgage holder's rights, which are protected by § 1322(b)(2), are not limited by the value of its secured claim. Rather, the creditor's rights, including the right to retain the lien until the debt is paid off, are derived from the creditor's mortgage instruments. It is these rights, bargained for by the mortgagor and the mortgagee, that are protected from modification by § 1322(b)(2). ¹⁶ And these rights are contained in a “unitary note” that applies to the...