Fourth Circuit Reverses Bad Decision on Chapter 13 Lien Stripping

Posted by NCBRC - April 3, 2018

Finding that a wholly unsecured lien may be stripped in chapter 13 even where no proof of claim was filed the Fourth Circuit reversed the district court’s holding to the contrary. Burkhart v. Grigsby (In re Burkhart), No. 16-1971 (4th Cir. March 29, 2018).

Chapter 13 debtors, Edwin and Teresa Burkhart’s, home was subject to several liens, two of which were held by Community Bank of Tri-County and were wholly unsecured. Tri-County did not file a proof of claim in the Burkharts’ bankruptcy. The Burkharts filed an adversary complaint seeking to strip off the wholly unsecured liens under section 1322(b). Relying on section 506(d), the bankruptcy court held Tri-County’s liens could not be stripped because they had not filed proofs of claim. (The court stripped the wholly unsecured lien held by PNC because PNC had filed a timely proof of claim). The district court affirmed (blogged here).

On appeal, the Fourth Circuit, relying on Dewsnup v. Timm, 502 U.S. 410 (1992), and Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993) and their progeny, began by reaffirming that only sections 506(a) and 1322(b) are involved in a chapter 13 strip-off. Once a lien is valued under section 506(a), a chapter 13 court goes to section 1322(b) to determine whether that lien may be modified. In contrast, section 506(d) goes to claim allowance and is a mechanism for strip-off in chapter 7 upon a finding that a claim is not allowed. Thus, it was error for the lower courts to have applied section 506(d) in this case.

Having established the appropriate path for analysis, the circuit court turned to whether Tri-County’s liens were amenable to modification. The court noted that section 1322(b) has never been interpreted to apply only to allowed claims. Rather, that section looks to whether the lien is supported by “value.” The court pointed to the incongruity of PNC’s wholly unsecured lien being stripped because PNC filed a proof of claim and Tri-County’s equally valueless liens surviving bankruptcy merely because Tri-County chose not to participate in the process. Furthermore, the court found that forcing the Burkharts to file a proof of claim on behalf of Tri-County only to strip off the liens would serve no practical purpose and would have the adverse effect of driving up litigation costs. The court concluded that the filing of a proof of claim was unnecessary to strip-off under section 1322(b).

The court reversed the decision of the district court.

Burkhart 4th Cir opinion March 2018


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