by The Fourth Circuit is the first circuit court to find that a debtor may strip a wholly unsecured lien in chapter 13 where no discharge is available. In re Davis, No. 12-1184 (May 10, 2013).
The majority of courts have found that, in a typical chapter 13 bankruptcy, where a lien is deemed valueless under section 506, it may be stripped through the mechanism provided by section 1322(b). See Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002); Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir. 2002); Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir. 2001); Tanner v. FirstPlus Fin. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000); Bartee v. Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277 (5th Cir. 2000); McDonald v. Master Fin. (In re McDonald), 205 F.3d 606 (3d Cir. 2000). The question in a chapter 20 case is whether that strip-off is contingent upon the debtor being able to receive a discharge. Both the bankruptcy and district courts held that it is not.
The Fourth Circuit agreed. The court reasoned that a chapter 20 debtor is entitled to all the protections otherwise offered a chapter 13 debtor, Branigan v. Bateman (In re Bateman), 515 F.3d 272, 283 (4th Cir. 2008), and there is nothing in the language of sections 506(a) and 1322(b) that limits a debtor’s ability to strip off a wholly unsecured lien. Courts finding otherwise have relied on the language in section 1325(a)(5)(B)(i)(1), which provides that a lien survives until it is either paid in full or the debtor is discharged. See, e.g., In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011). But the opening language to that section specifies that it applies to “allowed secured claims.” Because wholly unsecured liens cannot be “allowed secured claims,” section 1325(a)(5) does not apply.
The court found that because the chapter 20 case does not end in discharge a strip-off becomes permanent upon completion of the plan.
One judge dissented on the grounds that a section 506(a) valuation does not determine whether a claim is an “allowed secured claim” under section 1325(a)(5). The dissent mistakenly applied the reasoning in Dewsnup v. Timm, 502 U.S. 410 (1992), which held that a section 506(a) valuation does not determine whether a claim is an “allowed secured claim” under section 506(d). Instead, the Dewsnup Court found, section 506(d) uses the term “secured” in its broadest sense, that of being tied to underlying property, without regard to the value of that lien. However, courts interpreting Nobelman v. American Savings Bank, 508 U.S. 324 (1993) to permit strip-offs of wholly unsecured liens, have not adopted the Dewsnup reasoning, but have found that a court must look to the entire “claim” to see whether any portion of it is secured. If the claim is unsecured for purposes of section 1322(b) then it would also be unsecured for purposes of section 1325(a)(5).
The dissent also argued that allowing strip-off in chapter 20 treats the secured creditor less favorably than unsecured creditors. However, as noted by the majority, the difference in treatment between secured and unsecured creditors is a function of the different treatment of in rem and in personam claims in bankruptcy and is, therefore, incidental to the question of lien stripping in chapter 20.
This issue of chapter 20 lien stripping is currently under consideration in the Ninth Circuit, Litton Loan v. Blendheim, No. 13-35354, and the Eleventh Circuit, Wells Fargo v. Scantling, No. 13-10558, where the lower courts each found that the lien strip was not contingent on the availability of discharge. NACBA has been involved in this issue at the lower court levels raising the arguments largely relied on by the Fourth Circuit in this case. See, e.g., In re Fair, No. 10-1128 (E.D. Wisc. April 19, 2011).