by NACBA has moved for leave to file an amicus brief in the Third Circuit case of In re Scotto DiClemente, No. 12-3336. That case involves the question of how underwater mortgages are counted toward the debt limits when the chapter 13 debtor’s personal liability on the mortgages was discharged in a previous chapter 7 bankruptcy. Six months after obtaining his chapter 7 discharge the debtor filed a chapter 13 petition seeking to cure the arrearage on his first mortgage, strip the underwater mortgages, and save his residence from foreclosure. The bank filed a motion to dismiss on the basis that a debtor who is ineligible for discharge (i.e. a “chapter 20” debtor) is not entitled to strip liens in the chapter 13 bankruptcy. The bankruptcy court disagreed, finding that a debtor may strip liens in chapter 20 without regard to the unavailability of discharge. Nonetheless, the court dismissed the case finding that the debtor’s unsecured debts based on the underwater mortgages exceeded section 109(e)’s debt limits. In re Scotto‐DiClemente, 463 B.R. 308, 314 (Bank. N.J. 2012) (decision on debtor’s motion for reconsideration). The district court affirmed.
NACBA’s brief makes the argument that the courts below improperly conflated a “debt” and “claim.” Under the text of the Code and the reasoning in Johnson v. Home State Bank, 501 U.S. 78 (1991), the chapter 7 discharge left the bank with an in rem “claim” against the property securing the liens, while eliminating the debtor’s in personam liability. Therefore, while the “claim” remained, the “debt” was removed and could not be used in the section 109(e) unsecured debt calculation.
Section 101(5) defines a “claim” as a “right to payment,” and the Court in Johnson found that even though the debtor no longer had any personal liability on the mortgage, the mortgagee had a “claim” that could be provided for in a chapter 13 plan thereby allowing the debtor to save his residence. Citing Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 557-58 (1990) (discussing relationship between Code’s definitions of “claim” and “debt”), amicus explains that a “debt,” defined in section 101(12) as “liability on a claim,” does not encompass as unsecured debts claims for which there is no personal liability. Thus, the existence of a claim does not equate to the existence of debt for purposes of section 109(e). Without a personal legal obligation to pay—that is, liability—there is no “debt” of the discharged debtor within the meaning of § 109(e) to stop him from invoking Chapter 13. Additionally, stripping off wholly unsecured liens in chapter 13 does not convert those liens to unsecured debt where the debtor’s personal liability has already been discharged in a previous chapter 7.
In further support of NACBA’s position, the amicus brief points out that in the context of chapter 11, Congress did exactly what the lower court decisions in this case do. Section 1111(b) provides that in most cases a nonrecourse claim secured by a lien against property is to be treated, when it is to be stripped in a Chapter 11 plan, as if there were personal recourse. There is no comparable provision in chapter 13. Therefore, it is reasonable to conclude that Congress did not intend to conflate “debt” and “claim” for purposes of calculating unsecured debt under section 109(e).
Thanks to Peter Goldberger for authoring NACBA’s brief.