In a resounding victory for Chapter 13 consumer debtors, the U.S. Court of Appeals for the Ninth Circuit affirmed that a debtor may bifurcate and “cram down” a junior mortgage claim—even when the loan is secured solely by the debtor’s principal residence—so long as the loan matures during the plan term. The opinion in Mission Hen, LLC v. Lee reinforces the flexibility and protective power of Chapter 13 and clarifies an important exception to the Bankruptcy Code’s anti-modification provision.
[Read more…] about Ninth Circuit Confirms Right to Cramdown Short-Term Mortgages in Major Win for Chapter 13 DebtorsNinth Circuit To Determine Whether Section 1322(c)(2) Allows Birfurcation of Residential Mortgage Claims
In Mission Hen LLC v Lee, Case No. 23-4220 (9th Cir. 2023), the Ninth Circuit is considering whether the Ninth Circuit B.A.P. erred by concluding that a chapter 13 plan may modify and bifurcate an undersecured lien secured by the debtor’s principal residence pursuant to 11 U.S.C. § 1322(c)(2).
Mission Hen argues that the plan violates the anti-modification provision of § 1322(b)(2). It argues that a chapter 13 plan may not modify a lien secured only by a debtor’s principal residence, including a claim that is undersecured. While § 1322(c)(2) allows a modification of a “payment of the claim” if the final payment falls within the plan term, Mission Hen argues that the statute allows for modification of only the payment term, not the claim itself. Mission Hen also asserts that the reasoning of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), prohibits the bankruptcy court from modifying anything other than the repayment terms of its claim. In Nobelman, the bankruptcy court denied confirmation of a chapter 13 plan that would have allowed the debtors to bifurcate the secured creditor’s lien on their real property into unsecured and secured claims and to make payments on only the secured portion.
The Ninth Circuit B.A.P. held “Mission Hen’s argument based on Nobelman fails. The Court’s decision was founded on statutory interpretation. About a year after the Nobelman decision, Congress amended the statute by enacting current § 1322(c)(2). Congress undoubtedly has the power to overcome the Supreme Court’s interpretation of a statute by amending the statute. Nobelman does not help us construe the amended statute. See In re Collier-Abbott, 616 B.R. 117, 122 (Bankr. E.D. Cal. 2020) (“When the Supreme Court issued its ruling in Nobelman, there was not, and there could not have been, consideration of the then yet to be enacted exception to 11 U.S.C. § 1322(b)(2) residence secured claim valuation limitation.”). …Although the Ninth Circuit has not squarely addressed whether § 1322(c)(2) permits the bifurcation and stripdown of an undersecured, soon-to-mature claim, the Fourth Circuit, Eleventh Circuit, and other courts have answered in the affirmative. … Therefore, because Mission Hen’s secured claim matures during the plan term, the plain language of § 1322(c)(2) allows the Debtors to bifurcate and cram down the Mission Hen claim. The bankruptcy court did not err in holding that Mission Hen’s claim was not protected by the anti-modification provision.”
The case will likely be scheduled for oral argument in October or November of 2024.
NCBRC and NACBA filed an amicus brief supporting the Debtor and urging the court to affirm the B.A.P.
Mission Hen v Lee Appellants Brief
Statutory vs. Judicial Lien
Where the state workers’ compensation procedure involves quasi-judicial steps including the right to notice, an opportunity to be heard, and the right to appeal an unfavorable decision, a lien arising out of that process is “judicial” rather than “statutory.” In re Shippy, No. 22-40706 (Bankr. W.D. Wash. Oct. 24, 2022). [Read more…] about Statutory vs. Judicial Lien
Exemptions for Joint Tenancy and Separate Living
The debtors were entitled to exempt only their one-half interest in one of the two residences where they owned both properties jointly but the husband lived in one residence and the wife lived in the other. They could avoid the creditor’s judgment lien to the extent the lien impaired those exemptions. In re Snyder, No. 21-31521 (Bankr. N.D. Ohio Sept. 23, 2022). [Read more…] about Exemptions for Joint Tenancy and Separate Living
Mortgage May Be Bifurcated Under Section 1322(c)
The Bankruptcy Court for the Eastern District of Wisconsin joined the majority of courts in finding that section 1322(c)(2) “authorizes modification of a principal residence loan through bifurcation, when the last payment on the original payment schedule is due before the final plan payment is due.” In re Harris, No. 21-26280 (Bankr. E.D. Wisc. March 16, 2022).
The debtor filed her chapter 13 petition shortly after the final balloon payment was due on her home mortgage. At the time of her petition, she owed $78,009.00 on the mortgage and she valued the residence at $45,000.00. In her plan, she proposed to bifurcate the claim and pay the entire secured portion and none of the unsecured portion. The mortgage creditor objected to confirmation on three grounds only one of which was addressed in this order. That issue was whether section 1322(b)(2) precluded the debtor from modifying the treatment of the mortgage beyond altering the terms of the repayment schedule. [Read more…] about Mortgage May Be Bifurcated Under Section 1322(c)
Debtor May Reopen Case 8 Years after Closing to Seek to Avoid Liens
There was “cause” to permit the debtor to reopen his chapter 7 bankruptcy eight years after closure to allow him to move to amend his schedules, claim a homestead exemption, and avoid judicial liens, where there was no evidence that reopening would cause undue prejudice to any party, and the debtor’s quest was not clearly futile. In re Paduch, No. 12-32101 (Bankr. D. Conn. Feb. 14, 2022).
More than eight years after his Chapter 7 bankruptcy case was closed, the debtor sought to reopen to claim his homestead exemption in an amount greater than $0 and to list two judicial liens on his schedules as secured debts. In his motion to reopen, the debtor acknowledged that his ultimate goal was to avoid the judicial liens as impairing his homestead exemption. The trustee opposed the motion to reopen based on the doctrine of laches, arguing that the debtor could have claimed the exemption and sought to avoid the liens before the conclusion of his bankruptcy case. The trustee further argued that the debtor did not meet the standards for post-closure amendment of bankruptcy schedules. [Read more…] about Debtor May Reopen Case 8 Years after Closing to Seek to Avoid Liens
Debtor May Avoid Transfer under § 522(h) when § 522(f) Not Available
A debtor may avoid a judgment lien impairing her homestead exemption under section 522(h) even though she did not meet the requirements for lien avoidance under section 522(f). In re Garbo, No. 21-11053 (Bankr. W.D. N.Y. Jan. 27, 2022).
Before filing for Chapter 7 bankruptcy, the debtor and her husband divorced. Their divorce settlement stipulated that the husband would quit-claim to the debtor his half-interest in their marital residence. Before he executed the quitclaim deed, however, Discover Bank obtained a judgment lien against him for $3,310.63. He then quitclaimed the property to the debtor. When the debtor filed for bankruptcy, the value of the home was $170,000 and was security for a first mortgage of $90,640. The debtor claimed her New York homestead exemption for $89,975, leaving no equity to cover Discover Bank’s lien. She sought to avoid Discover Bank’s lien as a lien against her homestead exemption under section 522(f)(1). [Read more…] about Debtor May Avoid Transfer under § 522(h) when § 522(f) Not Available
Lien for Incarceration Costs Is Avoidable Judicial Lien
The State Treasurer’s lien based on a statute authorizing the state to seek reimbursement from a prisoner for the costs of his incarceration was not a statutory lien but a judicial lien which the debtor could avoid as impairing his exemptions. State Treasurer v. Wigger, No. 19-732 (W.D. Mich. Nov. 16, 2020).
The debtor was a prisoner in the Central Michigan Correctional Facility. The Michigan State Treasurer sought to recover some of the costs of his incarceration under the State Correctional Facility Reimbursement Act (SCFRA). After a bench trial, the state court found the State Treasurer was entitled to reimbursement from the debtor’s IRA funds and from proceeds from a judgment the debtor had against his son. The debtor initiated a chapter 7 bankruptcy and filed an adversary proceeding seeking to have the state’s lien voided as a judicial lien impairing his exemptions under section 522(f)(1). The bankruptcy court granted the debtor’s lien avoidance motion finding that the lien impaired his exemption for retirement funds under section 522(d)(12), and his exemption for property valued up to $13,100 under section 522(d)(5). [Read more…] about Lien for Incarceration Costs Is Avoidable Judicial Lien
Challenge to Dewsnup Moving Up
When the debtors filed for Chapter 7 bankruptcy, they had two outstanding mortgages on their residence. The first was partially secured, and the second was fully underwater. The debtors filed an adversary complaint seeking to strip down the partially secured senior lien. The bankruptcy court, compelled by Dewsnup v.Timm, 502 U.S. 410 (1992) and Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), granted the creditor’s motion to dismiss. In re Vasquez, No. 19-1841, Adv. Proc. No. 19-100 (Bankr. E.D. N.C. March 25, 2020). Agreeing with the bankruptcy court’s “thorough analysis and conclusions,” the district court affirmed. In re Vasquez, No. 20-62 (E.D. N.C. Aug. 2020). [Read more…] about Challenge to Dewsnup Moving Up
No Sovereign Immunity in Strip of State Tax Lien
An action to strip off a wholly unsecured State tax lien is an in rem proceeding that does not implicate the State’s Eleventh Amendment immunity. Commonwealth of Pa. v. Berger, No. 19-417 (W.D. Pa. Oct. 21, 2019).
The debtors entered Chapter 13 bankruptcy with outstanding State tax liens on their real property. Because the property was subject to mortgage liens amounting to more than its value, the debtors filed an adversary proceeding seeking to strip off the State’s tax lien as wholly unsecured. The bankruptcy court rejected the State’s Eleventh Amendment argument and denied its motion to dismiss. The State immediately appealed the denial to the district court as authorized by Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147 (1993). [Read more…] about No Sovereign Immunity in Strip of State Tax Lien