In re Stephen C. Okosisi And Susan O. Nwogbe

• Decision Date: 16 May 2011
• Docket Number: No. BK–S–09–27113–BAM.,BK–S–09–27113–BAM.
• Citation: 451 B.R. 90
• Parties: In re Stephen C. OKOSISI and Susan O. Nwogbe, Debtors.
• Court: U.S. Bankruptcy Court — District of Nevada

451 B.R. 90

In re Stephen C. OKOSISI and Susan O. Nwogbe, Debtors.

No. BK–S–09–27113–BAM.

United States Bankruptcy Court, D. Nevada.

May 16, 2011.

Corey B. Beck, Las Vegas, NV, for Debtor.

OPINION

BRUCE A. MARKELL, Bankruptcy Judge.

I. Introduction

Stephen C. Okosisi and Susan O. Nwogbe (the “ Debtors ”) filed for chapter 13 bankruptcy after having previously received a discharge in chapter 7.¹ The Debtors admit they are not eligible for a discharge in this chapter 13 case; however, they are still seeking to reorganize through bankruptcy. Earlier in the case, the court granted the Debtors' motion to avoid the second priority, and wholly unsecured, lien on their primary residence. They now seek to confirm a plan which incorporates this avoidance. The chapter 13 bankruptcy trustee opposes confirmation.

The court here determines: (1) that the Debtors, on these specific facts and so long as the order confirming their plan is effective, are permitted by the Bankruptcy Code to permanently avoid the junior lien on their primary residence; and (2) the instant chapter 13 case was commenced in good faith. Therefore, the court will confirm the Debtors' chapter 13 plan.

II. Background

The Debtors filed for bankruptcy under chapter 13 on September 14, 2009. According to the court's ECF System, sixteen other chapter 13 cases were filed in this district on that day, and over 500 chapter 13 bankruptcies were filed in this district during September 2009. What makes the Debtors' case different than the majority of other chapter 13 cases is that the Debtors received a discharge under chapter 7 less than two years prior to filing.² Other than this wrinkle, nothing about this case appears to be anything other than typical.

The Debtors addressed a substantial amount of unsecured debt through their previous chapter 7 case, almost all of which was associated with a failed restaurant. The Debtors' purpose for seeking relief in this chapter 13 case was to address the arrearages and outstanding liens on their primary residence and to pay priority tax claims over time. According to the schedules filed with their petition, their primary residence had an estimated value of $342,000 at the time of filing. This property was encumbered by a first priority mortgage in favor of Citimortgage for $383,000 and a second priority mortgage in favor of Nevada State Bank for $302,125. Citimortgage's claim was thus undersecured, and Nevada State Bank's claim was wholly unsecured.

The Debtors filed a motion to avoid the lien attributable to Nevada State Bank's second priority mortgage on November 25, 2009. This motion was unopposed and was granted on February 4, 2010. The current version of the Debtors' chapter 13 plan was filed on June 23, 2010. Although the chapter 13 trustee opposed the plan, Nevada State Bank did not. As no facts are in dispute, the court took the matter under submission to decide the legal issues.

III. Lien Avoidance and the Primary Residence in Chapter 13

The Bankruptcy Code provides for different treatment of claims depending on whether the particular claim is secured or unsecured. When the collateral securing the claim is worth less than the amount of debt, a debtor is able to split an otherwise secured claim into a secured and an unsecured claim. See 11 U.S.C. § 506(a)(1) (“An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.”). After this bifurcation, the creditor has a secured claim to the extent of the value of its collateral and an unsecured claim as to that portion of the debt which exceeds the collateral's value. Id.

“Secured claim” is a term of art within the Bankruptcy Code, and means something different than it does for a creditor to have a security interest or lien outside of bankruptcy. Furthermore, the defined term “claim” means something different than does the term of art “secured claim.” Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330–31, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (finding that a claim, whether secured or unsecured, is defined by Section 101(5), while the subset of claims defined as secured claims are “determined by application of [Section] 506(a)”). Outside of bankruptcy, if a creditor has a valid security interest, regardless of the collateral's value, it may be thought of as a secured creditor. However, in bankruptcy, a creditor is only a secured creditor if its claim is so classified. If the claim is not so classified, the once-secured creditor will have an unsecured claim and will thus be an unsecured creditor for purposes of the bankruptcy case.

However, a chapter 13 creditor enjoys additional protection if the collateral securing its claim is the debtor's primary residence. 11 U.S.C. § 1322(b)(2) (A chapter 13 plan may “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 ...”). Because Section 1322(b) prohibits the modification of the “rights” of the secured creditor, as distinguished from the modification of the secured creditor's “claim,” the chapter 13 debtor cannot avail themselves of Section 506(a) to reduce the undersecured claim to the primary residence's fair market value. See Nobelman, 508 U.S. at 329–32, 113 S.Ct. 2106. However, the antimodification protection of Section 1322(b)(2) only operates to benefit creditors who may be classified as secured creditors after operation of Section 506(a). See Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1226 (9th Cir.2002).

In order to determine whether a secured creditor qualifies for the antimodification protection of Section 1322(b)(2), courts first determine whether a creditor has a secured claim under Section 506(a). Id. (citing Nobelman, 508 U.S. at 328, 113 S.Ct. 2106). If the creditor is the holder of a secured claim in bankruptcy, as determined by application of Section 506(a), then “the rights of such a creditor [are] protected,” and “in order to protect such rights,” the antimodification clause applies to the entire claim of the creditor. Id. (citing Nobelman, 508 U.S. at 328, 113 S.Ct. 2106).

If, however, after applying Section 506(a) to determine the status of the claim, the claim is determined to be wholly unsecured, the rights of the “creditor holding only an unsecured claim may be modified under [Section] 1322(b)(2),” and the creditor's lien may be avoided, notwithstanding the antimodification protection provided for in Section 1322(b)(2). Id., at 1227. This logic is “compelled by the Supreme Court's decision in Nobelman,” and has been embraced by each of the six circuit courts that have considered this question. Zimmer, 313 F.3d at 1227; In re Lane, 280 F.3d 663, 667–69 (6th Cir.2002); Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122, 126 (2nd Cir.2001); Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357, 1359–60 (11th Cir.2000); In re Bartee, 212 F.3d 277, 288, 295 (5th Cir.2000); McDonald v. Master Fin. Inc. (In re McDonald), 205 F.3d 606, 611 (3rd Cir.2000). Bankruptcy Appellate Panels have also reached this same result. Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 167–68 (10th Cir. BAP 2005); In re Mann, 249 B.R. 831, 836 (1st Cir. BAP 2000).

Applied to the Debtors' case, the Debtors' unopposed motion to avoid, supported by an appraisal, stated that the first priority lien on their principal residence exceeded the value of the property. This court agreed and entered an order preliminarily avoiding the lien. Thus, applying Section 506(a) as interpreted by Nobelman and Zimmer to Nevada State Bank's claim, the claim was wholly unsecured and should be so classified in the Debtors' plan. Following further the rationale of Nobelman and Zimmer, Nevada State Bank's claim did not qualify for the antimodification protection of 1322(b)(2). This potential lien avoidance, initially at least, is not affected by the no-discharge nature of the Debtors' case. The issue, then, is determining what affect this lien avoidance has on the chapter 13 plan given the no-discharge nature of the case and the lasting effect, if any, of the lien avoidance at plan completion.³

IV. Lien Avoidance and the No-discharge Chapter 13

A. In a Typical Chapter 13 Case, Lien Avoidance Is Permanent upon Discharge

The typical chapter 13 debtor is granted a discharge at the end of their payment plan. 11 U.S.C. § 1328 (granting discharge “as soon as practicable after completion by the debtor of all payments under the plan”). Unlike the chapter 7 discharge, which is typically granted relatively quickly, the chapter 13 debtor must, in most situations, successfully complete all plan payments before they may be granted a discharge. Compare 11 U.S.C. § 727 with 11 U.S.C. § 1328. The requirement to make all plan payments can represent a serious burden to the chapter 13 debtor.⁴

For those debtors who successfully confirm and complete a chapter 13 plan, the chapter 13 discharge operates as a permanent injunction against the collection of debts to the extent of the debtor's personal liability on the debt. 11 U.S.C. § 524. It is important to note, however, that just because a debtor receives a discharge in bankruptcy, the debt does not simply vanish. The debt remains, but personal liability on the debt has been removed. Id. Liens on property of the chapter 13 bankruptcy estate, if not properly addressed through the chapter 13 plan, remain on the encumbered property, and once the automatic stay is lifted by entry of the discharge, the creditor is free to exercise any nonbankruptcy collection remedies attributable to its valid security interest in the property. In the normal chapter 13 case, when the debtor avoids the lien through a...