Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day

Posted by NCBRC - September 13, 2012

In a cranky opinion chastising “judicially careless attorneys” and remanding the case to the bankruptcy court on procedural grounds, the Eighth Circuit sidestepped the issues of whether a wholly unsecured mortgage can be stripped in chapter 13, and whether, if such stripping is allowed, availability of discharge is a necessary prerequisite to it. In re Fisette, No. 11-3119 (8th Cir. Sept. 12, 2012). The Bankruptcy court had refused to confirm debtor’s plan that proposed to strip off two wholly unsecured liens, and the BAP reversed and remanded, joining the six circuits that have found that such strip-offs are permitted. In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011). The BAP also rejected the trustee’s argument that, under section 1325(a)(5)(B)(i)(I), strip-offs are unavailable in so-called chapter 20 cases, where the debtor is ineligible for discharge. The BAP remanded with instructions that the debtor formulate a plan which treated the stripped mortgages as unsecured debts.

In remanding, the Eighth Circuit found that it lacked jurisdiction under section 158(d) because the BAP’s remand for further proceedings was an interlocutory order likely to result in a change to the legal complexion of the case.

The remand order was not without its ominous overtones. Continuing in its cantankerous tone, the court warned with respect to the chapter 20 ineligibility for discharge issue, that “[t]he bankruptcy court’s obvious concern when advised at the first confirmation hearing that the debtor proposed to strip off the junior mortgagees’ liens but pay them nothing under the plan suggests that good faith may be a serious issue.” The court also noted that the requirement that the debtor treat the stripped-off liens as unsecured debts in the plan could impact the “best interest of creditor’s test” and render the plan infeasible.

NCBRC assisted with the debtor’s brief in this case.

Fisette opinion

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