In re Scheierl

• Decision Date: 06 January 1995
• Docket Number: Bankruptcy No. 3-93-3500.
• Citation: 176 BR 498
• Parties: In re Kenneth George SCHEIERL and Susan Lynn Scheierl aka Susan Lynn Benson, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

176 B.R. 498 (1995)

In re Kenneth George SCHEIERL and Susan Lynn Scheierl aka Susan Lynn Benson, Debtors.

Bankruptcy No. 3-93-3500.

United States Bankruptcy Court, D. Minnesota, Third Division.

January 6, 1995.

Curtis K. Walker, Minneapolis, MN, for debtors.

Bradley J. Halberstadt, Mackall, Crounse & Moore, P.L.C., Minneapolis, MN, for Gen. Motors Acceptance Corp.

MEMORANDUM TO ORDER DENYING CONFIRMATION OF PLAN

GREGORY F. KISHEL, Bankruptcy Judge.

This is a Chapter 13 case. On September 30, 1994, the Court entered an order that denied confirmation of the Debtors' plan of debt adjustment, sustaining the objection of General Motors Acceptance Corporation ("GMAC") thereto. This memorandum contains the findings of fact and conclusions of law on which that order was based, pursuant to FED.R.CIV.P. 52(a), as incorporated by FED.R.BANKR.P. 7052 and 9014.

The Debtors filed a voluntary petition for relief under Chapter 13 on July 19, 1993. GMAC is a scheduled secured creditor of theirs. It holds a security interest in a 1990 Pontiac LeMans automobile, as a term of the financing it provided to the Debtors for the purchase of that vehicle. As of the commencement of this case, the fair market value of the vehicle was approximately $4,850.00, and the "net payoff" balance of the debt chargeable against it was approximately $6,520.00.¹ Under the terms of 11 U.S.C. § 506(a),² then, GMAC holds two claims for the purposes of this case and the administration of the Chapter 13 plan and estate: a secured claim in the amount of $4,850.00, and a general unsecured claim for the balance of its debt (approximately $1,700.00).

The Debtors proposed their plan on the standard local form promulgated by this Court some years ago, and that was in force until June 1, 1994. The form of the plan contained generic language that established a framework under which secured creditors' specific expectations of repayment were to be fixed and finalized at the meeting of creditors. At the meeting, the value of the secured portion of creditors' undersecured claims was determined by a process of negotiation, over which the Trustee presided. The Trustee then determined the amortizations of the various claims and their priority in the timing of the draw on the payment stream out of the Chapter 13 estate.³

In that regard, the Debtors' plan has two operative provisions. The first is contained in its second paragraph, entitled "Classes":

Each secured claim is designated as a separate class, shall be determined under 11 U.S.C. § 506 and shall be paid the amount allowed as of the effective date of the plan . . . and each holder thereof shall retain the lien securing such claim until the claim is paid.

The second term is contained the fourth paragraph, entitled "General Provisions":

Upon completion of payment of the secured portion of any claim, the property securing said claim shall vest in the debtor free and clear of any lien, claim or interest of the secured creditor.

As the Debtors' counsel acknowledges, he and his clients intend the latter provision to have a very specific and pointed import for GMAC: once the Trustee has made distributions to GMAC that have a total present value of $4,850.00,⁴ the Debtors will be entitled to demand that GMAC return the Certificate of Title to the vehicle to them, with the endorsement or separate document that the Minnesota Department of Motor Vehicles currently requires to evidence a full release of GMAC's lien. GMAC strenuously objects to the confirmation of any plan that would compel it to release its lien of record before the Debtors complete all payments to the Trustee under their plan, on account of both secured and unsecured claims. The factual scenario and legal issues are virtually the same as those presented in In re Lee, 156 B.R. 628 (Bankr.D.Minn.1993) (O'Brien, J.), aff'd, 162 B.R. 217 (D.Minn.1993).

Before engaging in any discussion, it is important to identify just what is at issue here, and what is not.

What is not at issue is the Debtors' legal right to use the so-called "Chapter 13 cramdown" against GMAC as a secured creditor — that is, to use the procedure of debt adjustment to reduce the amount of the debt obligation that is chargeable against the automobile as security, down to the value of the underlying collateral, and to reamortize the reduced amount of the secured claim. Sapos v. Provident Instit. of Savings, 967 F.2d 918, 921 (3d Cir.1992); Landmark Financial Services v. Hall, 918 F.2d 1150, 1153-54 (4th Cir.1990). See also In re Green, 151 B.R. 501, 506 (Bankr.D.Minn.1993). Nor is the Debtors' basic right to "lien-strip" GMAC's security interest from the automobile, at some point during the effectuation of the cramdown remedy.⁵ GMAC tacitly conceded both of these points to the Debtors.⁶ This case, then, does not pose the threshold issue treated in such published decisions as In re Jones, 152 B.R. 155 (Bankr.E.D.Mich.1993)⁷ and In re Hernandez, 162 B.R. 160 (Bankr. N.D.Ill.1993).⁸

Concomitantly, GMAC does not deny that the Debtors will have the right to demand that GMAC formally release its lien of record, at some future time after they pay the full amount of GMAC's allowed secured claim. GMAC is well-put in not denying this either, as it is a necessary corollary to the first concessions. It also follows from basic principles of the law of contract and of secured transactions.

Finally, the dispute at bar does not really raise the issue of where the legal title to the vehicle, or the claim to the "equity" in it, will repose during the pendency of the case. While the Debtors do purport to alter the sequence by which the equity accrued post-petition would "vest" in them, it is beside the point whether they will nominally hold this value while the case remains under Chapter 13, or the bankruptcy estate will.

What is really at issue is whether GMAC's security interest will continue to have some nexus to the vehicle, or whether the Debtors can get it severed after they pay off the secured component of GMAC's claim but before they finish their plan in its entirety. Of all of the published Chapter 13 decisions dealing with lien-stripping as to loans secured by personal property collateral, only three — Lee, Jones, and In re Murry-Hudson, 147 B.R. 960 (Bankr.N.D.Cal.1992) — have arguably framed the issue in this way.

As might have been expected, one party in this case loudly extolled the reasoning of Lee and the other roundly criticized it. In his decision, Judge O'Brien held that plan language identical to that in question here operated to the result that is urged by the Debtors. He rejected the argument of the secured creditor that the rationale of Dewsnup v. Timm extended to prohibit the use of 11 U.S.C. § 506(d)⁹ to strip down personal property liens in Chapter 13 cases. In doing so, he held:

The disputed language in the Lees\' Plan does not purport or operate to "void" or "avoid" a lien under 11 U.S.C. § 506(d). It simply provides that when the secured claim, determined through application of 11 U.S.C. §§ 506(a) and 1322(b), has been paid in full pursuant to 11 U.S.C. § 1325(a)(5)(B), the lien will have been satisfied as contemplated by the Code, and the property will vest in the Lees free and clear of the secured party\'s lien as allowed and provided for by 11 U.S.C. § 1327(b) and (c).

156 B.R. at 630-631.

On appeal, the District Court (MacLaughlin, J.) summarized the then-extant caselaw at length. Judge MacLaughlin noted that the secured creditor

appeared to concede that the plain language of section 1322(b) indicates that the debtors may strip down the secured party\'s lien to the value of the collateral,

162 B.R. at 222; he then held that, in any event, the relevant statutes made lien-stripping available to a Chapter 13 debtor, for claims secured by personal property collateral, 162 B.R. at 223.

Judge MacLaughlin then addressed the second issue posed by the secured creditor's appeal: whether the debtors could obtain confirmation of a plan that provided that the collateral securing a claim would "vest in the debtor free and clear of any lien, claim or interest of the secured creditor," once the debtor had completed payment on account of the secured portion of the creditor's claim. Citing the permissive provision of 11 U.S.C. § 1322(b)(9) that

the plan may . . . provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor,

and opining that the secured party had no sustainable objection to the treatment of its secured claim as long as the plan provided that it would receive the present value of the amount of that claim, he went on without further authority or analysis to conclude that

the bankruptcy court properly approved sic the plan despite the fact that the collateral will vest with the Lees prior to completion of the plan.

162 B.R. at 225. In closing, he dismissed the "policy considerations" that the secured party had advanced to urge that a divestment of liens on the public record be deferred until Chapter 13 debtors fully perform all of their obligations under confirmed plans; he first "agreed with the bankruptcy court's conclusion that such policy considerations are best left to Congress," 162 B.R. at 225, and then dismissed the secured party's concern that debtors might unfairly manipulate the lien-stripping remedy as "more illusory than real," id.

Other Bankruptcy Courts have reached the same result in several different procedural contexts, on much the same reasoning. E.g., In re Cooke, 169 B.R. 662, 667-68 (Bankr.W.D.Mo.1994); In re Schultz, 153 B.R. 170, 173 (Bankr.S.D.Miss.1993); In re Pickett, 151 B.R. 471, 473-74 (Bankr. M.D.Tenn.1992); In re Murry-Hudson, 147 B.R. at 962; In re Hargis, 103 B.R. 912, 915-16 (Bankr.E.D.Tenn.1989). The unspoken predicate of all of these decisions is that the Code mandates that debtors be allowed to use the lien-stripping remedy as soon as they have completed debt service...