Eighth Circuit Joins Sister Courts on Lien Stripping in Chapter 13

Dealing with the issue it side-stepped in Fisette v. Keller (In re Fisette), 695 F.3d 803 (8th Cir. 2012), and joining all other circuit courts to address the issue, the Eighth Circuit held that a wholly unsecured lien may be stripped in chapter 13. Minn. Hous. Fin. Agency v. Schmidt (In re Schmidt), No. 13-2447 (8th Cir. Aug. 28, 2014).

The bankruptcy court, relying on In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011), confirmed the debtor’s plan that treated the third lien as unsecured and provided for avoidance upon discharge. The district court affirmed.

On appeal, the Eighth Circuit followed the path cleared by its sister courts on the issue. It considered the operation of two sections of the Bankruptcy Code:  506(a)(1) and 1322(b)(2). As other courts have found, Nobelman v. American Savings Bank, 508 U.S. 324 (1993) mandates that the first step in the analysis is to determine whether, under section 506(a)(1), the challenged lien has value. A valueless claim is deemed unsecured. Where, under Nobelman, a partially secured lien is subject to the antimodification provision of section 1322(b)(2), the same is not true of a wholly unsecured lien. The Nobelman Court’s reasoning was that strip-down of a partially secured lien would necessarily involve modification of a claim secured by the debtor’s residence. Where no part of the lien is secured, the antimodification provision of section 1322(b)(2) does not apply.

The creditor’s reliance on legislative history was unavailing. The court found that the congressional record was amenable to differing interpretations that could be used to support either side of the argument. Rather, the court concluded that “the text of the statutes and the textual analysis of Nobelman are sufficient to resolve this case in favor of the debtors, and the legislative history does not change that conclusion.” The fact that permitting lien stripping where there is no value to support the lien and not permitting it where there is as little as one dollar to support the lien, did not persuade the court that its decision would create “deleterious policy consequences.” Bright line rules are commonplace in law and the apparent arbitrariness they may cause is not a compelling reason to reject them.  The court also rejected the creditor’s argument that its decision could result in windfall to the debtor in the event that the value of the property increased after the lien was stripped. Again, the court found that this possibility was part of the uncertainty of life and that if it were deemed dispositive, no final decision could ever be reached in a lien stripping case. On the other hand, permitting the lien stripping in a case where there is no value in the lien gives effect to section 506(a)(1).