Growing Consensus Permits Lien Strip in Chapter 20

Joining a “growing consensus” of courts, the BAP for the Ninth Circuit found that a chapter 20 debtor may strip off a wholly unsecured lien with the strip-off becoming effective upon completion of the plan. Boukatch v. MidFirst Bank (In re Boukatch), No. 14-1483 (July 9, 2015). In so holding, the BAP reversed the contrary finding by the bankruptcy court.

Beginning with a review of a typical chapter 13 case, the court noted that Nobelman v. Am. Sav. Bank (In re Nobelman), 508 U.S. 324, 328-29 (1993), established that the first step is valuation of the claim under section 506(a). Pursuant to that section a “claim is not a ‘secured claim’ to the extent that it exceeds the value of the property that secures it.” Once the claim has been valued, the next step is to determine whether the anti-modification provision of section 1322(b) applies. Courts of appeals have uniformly found that section 1322(b) does not preclude modification of a wholly unsecured residential lien, but courts are divided on the issue of whether the benefit of lien stripping extends to debtors who are ineligible for discharge.

In a thorough opinion, the panel discussed three approaches to chapter 20 lien-strip cases. Under the first approach courts have found that Dewsnup v. Timm, 502 U.S. 410 (1992) precludes lien stripping where the debtor is not eligible for discharge under section 1328(f)(1) because such stripping would amount to a “de facto” discharge (e.g. Lindskog v. M & I Bank FSB (In re Lindskog), 451 B.R. 863, 865-66 (Bankr. E.D. Wis. 2011)). The second approach reasons that a chapter 13 case must end in one of three ways, conversion, dismissal or discharge, and, therefore, while a lien may be temporarily stripped during the pendency of the chapter 20 case, it is reinstated once the case is over (e.g. In re Victorio, 454 B.R. 759, 781 (Bankr. S.D. Cal. 2011)). This was the approach adopted by the bankruptcy court in Boukatch.

Under the third approach courts have found that nothing in the Bankruptcy Code prevents lien stripping even where discharge is unavailable. Those courts hold that the mechanism triggering the lien-strip is completion of the plan rather than discharge. Because a successfully completed plan is neither converted nor dismissed, the provisions reinstating liens upon such action do not apply. A confirmed plan has a binding effect on the debtor and creditors and is res judicata unless revoked, converted or dismissed. Therefore, when a debtor completes his or her plan, the provisions of the plan, including lien stripping, become permanent.

The panel joined the courts adopting the third option. It found the approach consistent with Nobelman’s road map of valuation of the lien under section 506(a) and application of section 1322(b)(2), if appropriate. Full repayment of the debt secured by the lien is not required under section 1325(a)(5) because that section applies only to “allowed secured claims.” The court rejected the “de facto” discharge argument finding that discharge pertains to personal liability only, and does not impact in rem liability. The panel concluded that “the wholly unsecured status of MidFirst’s claim, rather than Debtors’ eligibility for a discharge, is determinative.”

The BAP thus agreed with the decisions in Wells Fargo Bank, N.A. v. Scantling (In re Scantling), 754 F.3d 1323, 1325 (11th Cir. 2014); In re Quiros-Amy, 456 B.R. 140 (Bankr. S.D. Fla. 2011); Branigan v. Davis (In re Davis),716 F.3d 331, 337-38 (4th Cir. 2013); In re Cain, 513 B.R. 316, 322 (B.A.P. 6th Cir. 2014); Fisette v. Keller (In re Fisette), 455 B.R. 177, 186-87 (B.A.P. 8th Cir. 2011), that a chapter 20 debtor may strip off a wholly unsecured lien and that the strip-off becomes effective upon completion of the plan.

Boukatch 9th BAP opinion