Chapter 20 Debtor Could Not Strip Down Under-secured Priority Mortgage Lien on Investment Property

Chapter 20 Debtor Could Not Strip Down Under-secured Priority Mortgage Lien on Investment Property

Debtor filed a Chapter 13 petition within 4 years of filing a Chapter 7 case in which he received a Discharge.  Accordingly, he was not eligible to receive  discharge in the Chapter 13 case, pursuant to 11 U.S.C. § 1328(f)(1).  The Debtor filed the Chapter case in order to strip down the lien on an under-secured investment home which he owned. However, the  mortgage was not wholly unsecured.

The threshold legal issue before the Court is whether Debtor can strip down the Creditor’s claim even though he is not eligible for a discharge in this Chapter 13 case. In In re Scantling, 465 B.R. 671, 673 (Bankr. M.D. Fla. 2012), Judge Williamson addressed the issue of whether a Chapter 13 debtor who received a Chapter 7 discharge less than four years prior to the commencement of her Chapter 13 case and was therefore not eligible to receive a discharge, could strip off a wholly unsecured junior mortgage lien on her homestead. The court concluded that she could. The court noted that the right to strip off a lien arises out of the interplay between § 506(a), which determines whether a claim is secured, and § 1322(b)(2), which permits a debtor to modify the rights of a secured claim holder as long as the claim is not secured by the debtor’s principal residence. Id. at 677-678. Because, under § 506(a), a wholly unsecured junior mortgage is not a claim secured by the debtor’s principal residence, a debtor can modify the rights of a wholly unsecured junior mortgagee in a Chapter 13 case. Id. at 678. The court noted that cases which have held that a Chapter 20 debtor may not strip off a wholly unsecured junior mortgage rely on § 1325, which requires that a secured creditor retain its lien until the earlier of the payment of the underlying debt under non-bankruptcy law (i.e. the payment of the debt in full) or a Chapter 13 discharge. Id. at 678. Those cases reason that because a Chapter 20 debtor is not eligible for a discharge, a Chapter 20 debtor is unable to obtain confirmation of a plan that strips off a wholly unsecured junior mortgage. Id. Judge Williamson rejected the reasoning set forth in those cases. The court noted that § 1325(a)(5) applies only to allowed secured claims, and the holder of a wholly unsecured junior mortgage does not have a secured claim.

The decision was appealed directly to the Eleventh Circuit Court of Appeals. Noting that the bankruptcy court’s opinion was thorough and well-reasoned, the Eleventh Circuit affirmed the decision by stating:

We agree with the other circuits who have considered this issue that a debtor, in a Chapter 13 setting, may strip off an unsecured mortgage on the debtor’s principal residence. This strip off is accomplished through the § 506 valuation procedure that determines that the creditor does not hold a secured claim. Once this determination has been made, pursuant to § 1322(b)(2), the creditor’s “rights” are modified by avoiding the lien to which the creditor would otherwise be entitled under nonbankruptcy law. Under such analysis, § 1325(a)(5) is not involved, and the debtor’s ineligibility for a discharge is irrelevant to a strip off in a Chapter 20 case. The BAPCPA did not amend §§ 506 or 1322(b), so the analysis permitting strip offs in Chapter 20 cases is no different than that in any other Chapter 13 case.  Wells Fargo Bank v. Scantling (In re Scantling), 754 F.3d 1323, 1330-1331 (11th Cir. 2014).

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