Lien Stripping

The Fourth Circuit is the first circuit court to find that a debtor may strip a wholly unsecured lien in chapter 13 where no discharge is available. In re Davis, No. 12-1184 (May 10, 2013). [Read more…] about Fourth Circuit Allows Chapter 20 Lien Strip

The Ninth Circuit is poised to be the first circuit court to address the issue of whether a lien may be stripped in a “chapter 20” case where discharge is unavailable. The Western District of Washington recently found that lien stripping was not contingent upon the availability of discharge. Litton Loan v. Blendheim, No. 11-2004 (W.D. Wash. March 29, 2013). Litton Loan filed a notice of appeal on April 26, 2013.

In upholding the bankruptcy court’s finding in favor of the debtors, the district court noted “an emerging trend” in the Ninth Circuit permitting such lien stripping. See In re Tran, 321 B.R. 230, 235 (Bankr. N.D. Cal. 2010); In re Hill, 440 B.R. 176, 182 (Bankr. S.D. Cal. 2010); In re Okosisi, 451 B.R. 90, 100 (Bankr. D. Nev. 2011), and found that those cases were correctly decided. It reasoned that the Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991), explicitly sanctioned chapter 20 cases, and nothing in the later amendments to the Bankruptcy Code imposed a discharge requirement upon the ability to strip a lien that is otherwise amenable to stripping. The court concluded that the lien would be stripped upon completion of plan payments.

The Eighth Circuit recently avoided the issue in the case of In re Fisette, 695 F.3d 803 (8th Cir. 2012), by concluding that the BAP’s order that liens may be stripped in chapter 20 was an interlocutory order not subject to appeal.

Blendheim opinion

The Bankruptcy Appellant Panel for the Eighth Circuit has taken it upon itself to redraft section 506(d) of the Bankruptcy Code to reflect what it believes Congress meant despite the fact that it is contrary to what Congress said. In re Shelton, 477 B.R. 749 (B.A.P. 8th Cir. Sept. 24, 2012). Section 506(d) provides that a lien that is not an allowed secured claim is void unless the claim was disallowed only under section 502(b)(5) or 502(e). Notably, the exceptions listed in section 506(d) do not include section 502(b)(9) which provides that a claim that is not timely filed shall not be allowed. Nonetheless, the Shelton court went beyond the plain language of the statute and found that a claim that is disallowed as untimely is not void under section 506(d). [Read more…] about Claim Disallowed as Untimely Not Void under Section 506(d)

(Borrowing from Stephen Jay Gould’s, “What, If Anything, Is a Zebra?” Hen’s Teeth and Horse’s Toes (W.W. Norton & Co. 1980)).

Where, in his essay, Gould discusses the evolution of striped members of the genus equus, cautioning that appearances do not necessarily dictate classifications, bankruptcy practitioners likewise have had to look beyond appearances (or plain language) to determine meaning. This could not be more manifest than in the Supreme Court interpretation of section 506(d) which provides: “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void . . .” A simple reading of this clause in conjunction with section 506(a) which provides that a lien is “a secured claim to the extent of the value of the creditor’s interest,” would suggest that when a lien has no value, it is unsecured and therefore void under the operation of section 506(d). But a recent case out of the Eastern District of New York has joined the majority of courts in deciding otherwise. Wachovia Mortgage v. Smoot, No. 11-6379 (E.D. N.Y. Sept. 20, 2012). [Read more…] about What, if Anything, is Section 506(d)?

The Tenth Circuit has declared what will surprise few: that a lien may not be stripped under section 506(d) in a chapter 13 case. Woolsey v. Citibank, No. 11-4014 (10th Cir. Sept. 4, 2012). [Read more…] about No Lien Stripping under Section 506(d)

The Eleventh Circuit has come through for consumer debtors on the issue of stripping off wholly unsecured liens in chapter 7. In In re McNeal, No. 11-11352, (11th Cir., May 11, 2012), the court found that once a lien is determined to be wholly unsecured under section 506(a) it may be stripped off under section 506(d), which provides “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” [Read more…] about Circuit Court Permits Strip-off in Chapter 7

The Colorado District Court found that a chapter 13 debtor may strip a lien even though he is ineligible for discharge due to a prior chapter 7 discharge within the preceding four years. In re Waterman, No. 11-929 (D. Colo. March 13, 2012). The court rejected the trustee’s argument that section 1325(a)(5) prohibits strip-off, finding that that section applies only to “allowed secured” claims and that where there is no value in the collateral, the claim is not secured. The court further noted that strip-off was not prohibited by the plain language of section 1328(f) and that, where discharge only applies to personal liability, allowance of the strip-off did not constitute a de facto discharge. See also, In re Frazier, No. 11-290 (E.D. Cal. March 9, 2012) (reaching the same holding). But see, Victorio v. Billingslea, No. 11-1825 (S.D. Cal. Feb. 24, 2012) (relying on pre-BAPCPA decisions to find that a chapter 13 case may end in one of only three ways: discharge, dismissal, conversion, and that a lien strip becomes permanent only upon discharge).

Waterman opinion