by Following closely on the heels of the Eleventh Circuit decision in In re Scantling, the BAP for the Sixth Circuit held that chapter 20 debtors may strip liens despite the unavailability of discharge. In re Cain, No. 13-8045 (July 14, 2014).
The bankruptcy court denied the debtor’s Motion to Avoid Lien finding that lien stripping is precluded where discharge is unavailable under section 1328(f).
On appeal, the BAP noted that although the Sixth Circuit has not decided the issue, two other Circuit courts and one BAP have found that lien stripping is permissible in chapter 20. Wells Fargo Bank N.A. v. Scantling (In re Scantling), ___ F.3d ___, 2014 WL 2750349 (11th Cir. June 18, 2014); Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir. 2013); Fisette v. Keller (In re Fisette), 455 B.R. 177 (B.A.P. 8th Cir. 2011).
Reviewing background principles, the court noted that Lane v. W. Interstate Bancrop (In re Lane), 280 F.3d 663 (6th Cir. 2002), established that, under the reasoning of Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993), wholly unsecured liens may be stripped off in chapter 13. Additionally, it is well-established that a chapter 20 debtor may avail himself of all the relief, except discharge, otherwise available to a chapter 13 debtor. In re McGhee, 342 B.R. 256 (Bankr. W.D. Ky. 2006).
The question, therefore, was whether the ability to strip a lien is linked to the availability of discharge. In finding that it is not, the BAP walked through three views and the cases that propound them. The first view relies on Dewsnup v. Timm, 502 U.S. 410 (1992), for the finding that lien stripping is precluded in chapter 20 because the contrary conclusion would be tantamount to permitting a de facto discharge in contravention of section 1328(f). The second view holds that while the debtor may receive the benefit of a lien strip during the course of the chapter 13 plan, the lien is reinstated upon completion of the plan. The third view, which the court found was favored by a growing consensus, is that nothing in the Code prohibits lien stripping in chapter 20 and that the strip becomes permanent upon plan completion without regard to discharge.
The court found that the third view follows the road map established by Nobelman and Lane, under which the starting point is section 506(a) which bifurcates a lien into secured and unsecured portions. Where a lien like the one in Cain has no value it is unsecured under that section and, as an unsecured claim, is not subject to the protection of sections 1322(b)(2) or 1325(a)(5). Thus, because a debtor in chapter 20 has all the benefits of a chapter 13 debtor, and nothing in the Code makes lien stripping contingent upon the availability of discharge, the BAP for the Sixth Circuit found that “the wholly unsecured nature of Ameritrust’s claim, rather than Debtor’s eligibility for discharge, is determinative,” and reversed the bankruptcy court’s denial of the avoidance motion.