Loan Modification, Lien Strip & Avoidance
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The following is for the exclusive use of attorneys. This firm does not make any representations as to the accuracy or current status of any case cited herein.
Some Arizona bankruptcy courts are reluctant to enter an order avoiding a judicial lien on an Arizona homestead citing Arizona law that specifically protects homesteads from a judicial lien attaching to the property (ARS §33-964 B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.) The challenge is that many title companies will require the debtor to pay the judgment despite the entry of discharge. In re CASEY D. O’SULLIVAN, Case No. 15-30173- a Missouri court addresses this issue:
CRP thus did not have a judgment lien against the Debtor under Missouri law when the Debtor filed his chapter 7 bankruptcy case. But that does not, however, end the inquiry. As the Eighth Circuit points out, the Bankruptcy Code in§ 101(36) defines a judicial lien as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
Likewise, the Bankruptcy Code defines what a “lien” is: “[t]he term ‘lien’ means charge against or interest in property to secure payment of a debt or performance of an obligation.” And with the filtering lens of these definitions, the court then looks to applicable state law to see if a particular judgment constitutes a “judgment lien” within the meaning of the Bankruptcy Code. There is no question that a judgment, even against entirely exempt TBE property, may constitute a “cloud” against title. The question is whether a “cloud” may constitute an “interest in property” under Missouri law such that the “cloud” may be considered a “lien” and thus avoided as a “judicial lien” for purposes of overriding bankruptcy law.
Although other states may treat “clouds” differently, under Missouri law, a judgment against TBE property is a cloud that gives rise to an “interest in property” such that it may be avoided under § 522(f)(1).
In re Watt, Case No. 14-31295-tmb13, (D. Or 10/15/14) Bankruptcy judge decided there were no prohibitions to allowing the Debtors to both surrender the Property and vest it in BONY Mellon. Nor is there any indication that Debtors plan was filed in bad faith. Accordingly, Court confirmed the Second Amended Plan over the objection of BONY Mellon. However, the Order Confirming Plan should amend the plan by interlineation to make clear that the Debtors are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property.
See also In re Rose, 512 B.R. 790 (Bankr. W.D. N.C.July 8, 2014) (case no. 4:12-bk-40743)Chapter 13—Treatment of secured claims— Transfer of collateral to creditor: No provision of the Bankruptcy Code permits a Chapter 13 debtor to force a secured creditor to accept a conveyance of the property serving as collateral for the debt. Nor does Florida law permit a debtor to compel a secured creditor to foreclose on the property or take title to the property. However, the court would permit the Chapter 13 debtors to tender a deed to the property to the first-priority lienholder for its consideration, and if the creditor did not accept or reject the deed within 60 days, the debtors would be permitted to record the quitclaim deed in the applicable Florida registry and thereby transfer the property to the creditor.
Corvello v. Wells Fargo Bank, No. 11-16234 (9th Cir, August 8, 2013) Dismissals of actions challenging defendant-bank’s decision not to offer permanent mortgage modification to plaintiff-borrowers is reversed and remanded, where: 1) under the Home Affordable Modification Program the bank was contractually required to offer the plaintiffs a permanent mortgage modification after they complied with the requirements of a trial period plan (TPP); and 2) the district court should not have dismissed the plaintiffs’ complaints when the record before it showed that the bank had accepted and retained the payments demanded by the TPP, but neither offered a permanent modification, nor notified plaintiffs they were not entitled to one, as required by the terms of the TPP.
In re Sagendorph, 14-bk-41675 (C.D. MA) using chapter 13 plan to vest property in secured lender’s name. Wells Fargo objected, court approved plan.
In re Burboa (Bankr. D. Ariz. September 29, 2014) Judge Ballinger. Debtor could not strip off valueless lien on home in “chapter 20” case. BAP overturned similar decision: In re Boukatch, 2:14-bk-04721-EPB, BAP AZ-14-1483 (July 9, 2015) We conclude that § 1328(f)(1) does not prevent Debtors’ ability to strip off MidFirst’s wholly unsecured junior lien in heir chapter 13 plan, because nothing in the Bankruptcy Code prevents chapter 20 debtors from stripping such liens off their principal residence under §§ 506(a)(1) and 1322(b)(2). We further conclude that plan completion is the appropriate end to Debtors’ chapter 20 case. Unlike a typical chapter 13 case, the lien avoidance will become permanent not upon a discharge, but rather upon completion of all payments as required under the plan. In re Davis, 716 F.3d at 338; In re Frazier, 469 B.R. at 900; In re Blendheim, 2011 WL 6779709, at *6; In re Okosisi, 451 B.R. at 99-100; In re Frazier, 448 B.R. at 810; In re Tran, 431 B.R. at 235.
We conclude that the bankruptcy court erred when it denied the Lien Strip Motion on the basis that Debtors were not eligible for a chapter 13 discharge.
For the foregoing reasons, we REVERSE the decision of the bankruptcy court and REMAND for further proceedings consistent with this opinion.
Boukatch v. Midfirst (In re Boukatch) The Boukatch panel “join[ed] the growing consensus of courts” that follow the third approach. The panel held that nothing in the Bankruptcy Code prevented the debtors from stripping off a wholly underwater lien against their principal residence, notwithstanding that the debtors were not eligible for a discharge. The panel made a distinction between discharge—which would have enjoined the creditor from enforcing the debt against the debtor personally, but would not have released the lien from the debtor’s property—from avoiding the lien. The panel concluded that the Bankruptcy Code does not prevent individual debtors from stripping off a wholly underwater lien in their chapter 13 plan. The only way the lien would not be avoided would be if the debtors failed to complete all of the payments required under their chapter 13 plan and the case was subsequently converted or dismissed. Accordingly, the panel reversed the bankruptcy court’s decision to deny the lien stripping motion.
Branigan v. Davis, No. 12-1184 (4th Cir. 05/10/2013) Confirmation orders entered by the bankruptcy court stripping off junior liens against debtors’ residences in so-called “Chapter 20 cases”, is affirmed, where: 1) the Bankruptcy Abuse Prevention and Consumer Protection Act does not bar the orders entered by the bankruptcy court; and 2) the stripping off of valueless liens is otherwise consistent with the Bankruptcy Code. There is a dissent. Read more…
In re Hill, 440 BR 176 (2010, S.D.Cal) debtors’ ability to use plan in order to “strip off” wholly unsecured junior mortgage lien was not conditioned on their eligibility for discharge, but solely upon their obtaining confirmation of, and performing under, Chapter 13 plan that complied with requirements of the Code. 11 U.S.C.A. §§ 506, 1322, 1325, 1328(f).
§ 1322(b)(2) In re Rones, 2015 Bankr. LEXIS 1936 (Bankr. D.N.J. June 11, 2015) (Gravelle, B.J.). Unsecured balance of condominium association lien could be stripped off.
Bank of America, NA v. Caulkett, 135 S. Ct. 674 – 2014 – Supreme Court (5/2014) A debtor in a chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code. http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf
In Re: Lorraine McNeal, D. C. Docket Nos. 1:10-cv-01612-TCB; 09-BKC-78173-PWB (11th Cir US Ct App 5/11/12) – very limited decision, lien stripping in chapter 7. “But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured — just as GMAC’s claim is here — was voidable under the plain language of section 506(d).3 862 F.2d at 1538-39.” “Because Dewsnup disallowed only a “strip down” of a partially secured mortgage lien and did not address a “strip off” of a wholly unsecured lien, it is not “clearly on point” with the facts in Folendore or with the facts at issue in this appeal.”
In re Caliguri, (Bkrtcy.E.D.N.Y.) July 20, 2010: Avoidance – Chapter 7 debtor cannot avoid lien of wholly undersecured, consensual mortgage lien holder. A Chapter 7 debtor may not avoid or “strip off” the lien of a wholly undersecured, consensual mortgage lien holder, a New York bankruptcy court has held. In so ruling, the court adopted the analysis of the court in In re Pomilio, 425 B.R. 11 (Bankr.E.D.N.Y. 2010), which, in turn, relied on 506(a) and (d) of the Bankruptcy Code and the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). The bankruptcy court distinguished In re Lavelle, 2009 WL 4043089 (Bankr.E.D.N.Y. 2009.
In re Winitzky 1-80-bk-19337 Motion to strip fully unsecured lien on residence (Central District of CA, June 9, 2009) at issue in this case is whether the Bankruptcy Code allows Chapter 13 debtors who previously received chapter 7 discharges within the last 4 years could strip a completely unsecured consensual lien off their primary residence. This Court concluded that the Code does not allow this because a discharge is required to lien strip in a Chapter 13 case.
In Re: Mansaray-Ruffin, No. 05-4790 (U.S. 3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure. Read more…
CHAPTER 20: In re Trevor M. Jarvis, Debtor. No. 07-72281 2008 WL 2682514— B.R. —-, 2008 WL 2682514 (Bankr.C.D.Ill.) United States Bankruptcy Court, C.D. Illinois. July 9, 2008.
Holdings: The Bankruptcy Court, Mary P. Gorman, J., held that: (1) debtor who, due to his receipt of discharge in prior Chapter 7 case, was ineligible to receive Chapter 13 discharge even if he successfully completed his payments under plan could not use his successive Chapter 13 filing to “strip off” a wholly unsecured junior mortgage lien; and (2) even assuming that debtor’s earlier Chapter 7 discharge, shortly prior to commencement of his current Chapter 13 case, had not rendered him ineligible for discharge in Chapter 13, plan proposed by debtor could not be confirmed. Cases such as King which helped to develop the theory of lien stripping of fully unsecured claims involved debtors who had previously received a Chapter 7 discharge and did not need the Chapter 13 discharge to extinguish personal liability. Rather, those cases hold that the use of Chapter 13 to modify rights not discharged in the prior case requires a second discharge to be fully effective. Courts have consistently held that, because a portion–the in rem portion–of a creditor’s claim against a debtor remains after the Chapter 7 discharge, the permanent modification of that claim can only be effected by completing the terms of the Chapter 13 and receiving a discharge notwithstanding the discharge of personal liability in the prior case. King, 290 B.R. at 651; In re Akram, 259 B.R. 371, 378-79 (Bankr.C.D.Cal.2001). Nothing in the limited legislative history of BAPCPA suggests that Congress intended to change that result. Confirmation denied.
Subject: [NACBA-BK] Re: Bankr CD ILL: Strip-off plan could not be confirmed in no-discharge Chapter 13 case commenced by repeat filer.
David: Dan, you’re half right. The mortgage debt was discharged in the chapter 7 case, but the mortgage lien was NOT discharged. See Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)). A debtor can’t eliminate or “strip down” the mortgage lien in a chapter 7 case, Dewsnup v. Timm 502 US 410 (SCOTUS, 1992), but you can do that in a chapter 13 case if you follow Max’s mantra: “notice, notice and more notice” and make it clear in the plan that you’re doing that. This is the technique I used in In re Curtis, 322 BR 470 (Bkrtcy.D.Mass. 2005). That was a chapter 20 in which the 2nd mortgage was stripped off and no payments made because the debt was discharged in the 7. When the 2nd mortgagee violated the discharge injunction after my client completed her plan, we had a lovely Adversary Proceeding in which the 2nd mortgagee wound up paying my client $53,220, including my fee, its lien having been voided by the discharge order in the chapter 13 case. David Baker (Boston)
Dan: No, I’m confident that I’m 100% right. Unless the 2nd mortgagee SUED on the debt (or otherwise attempted to collect it as a personal liability), it was not the DISCHARGE injunction that was violated. It was the order avoiding the lien. That’s still a judicial order, and it’s still enforceable, and it can be recorded in land records to remove the 2nd from the chain of title. We don’t do this through the plan – an AP or motion is necessary, and no discharge in the 13 should be necessary for that order to be effective. Dan Press, Chung & Press, P.C. firstname.lastname@example.org
In re Goswami (9th Cir. BAP 2003) NO DEADLINE FOR AMENDED EXEMPTIONS OR JUDICIAL LIEN AVOIDANCE A debtor’s ability to amend his or her claim of exemptions does not terminate upon case closure. A debtor’s standing to move to avoid a judicial lien is based on the circumstances in existence at the time the lien attached, and not when the debtor moves to avoid it (debtor moved to avoid a judicial lien on his residence five years after case was closed; debtor was unaware of lien at time he filed bankruptcy).
Culver, L.L.C. v. Chiu, No. 01-56578 (9th Cir. September 18, 2002) The lien-avoidance provision of the Bankruptcy Code, 11 U.S.C. section 522(f)(1), allows that a debtor need not have an interest in property to avoid a judicial lien on that property. http://caselaw.lp.findlaw.com/data2/circs/9th/0156578p.pdf
In re Laskin, 222 B.R. 872 (9th Cir. BAP 1998). no lien stripping in chapter 7 case (2nd DOT totally unsecured by FMV. Cannot strip liens by motion, must use reorganizations in order to use 506(d) to strip. Rule 4003(d) only applies to lien avoidance actions under 522(f). Debtors argued Dewsnup v. Timm did not apply in that this was not an attempt to strip a lien in a chapter 7 where the lien is PARTIALLY secured, but was completed unsecured. (Dewsnup would not permitting the stripping of a partially secured lien in chapter 7).
Motions to Value Undersecured Claims, By: Louis J. Esbin email@example.com (1/2009)
A simple, but common fact scenario: Home purchased on January 1, 2003, at a price of $450,000, with a 80/10/10 loan; i.e., a first of $360,000, a second of $45,000, and $45,000 down. On August 31, 2007, a refinance takes place, with an appraised value of $700,000, and the advancing of a first of $500,000, and HELOC of $200,000. Chapter 13 Bankruptcy case is filed on December 31, 2008, with $55,000 in auto leases, and $210,000 in credit card and other unsecured debt, including a corporate guaranty of $50,000.
The issues are as follows: Does the debtor qualify under Chapter 13 if the HELOC is determined be a wholly undersecured claim? Is it a motion to value, a motion to avoid liens, an adversary, or some combination of all three?
There are three steps in the analysis: (1) First, a motion (not an adversary proceeding) is filed under Section 506 so that the bankruptcy obligation to make adequate protection payments is relieved, citing as authority In re Timbers of Inwood, 484 U.S. 365 (1988). Evidence includes a preliminary title report to establish priority of liens and the original amount of the debt secured, filed claims or loan documents, and an appraisal, each supported by admissible attestations; (2) Second, under state law, California Civil Code Section 2909, provides in summary that once the underlying trust purpose is extinguished, the deed of trust is extinguished (See, Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 1235 (1995); Trowbridge v. Love, 58 Cal.App.2d 746, 751 (1943)); i.e., once the underlying debt has been discharged through a chapter 13 or 11, as a matter of law, the deed of trust must be avoided by the trustee or beneficiary. Until such time as the trust purpose is extinguished the trust (deed of trust) must remain secured by the real property. Therefore, the lien remaining and the interest of the creditor is as either a partially undersecured or wholly undersecured creditor. But, the holder of a lien secured by a deed of trust is at all times secured. The terminology “undersecured” is important because it defines the creditor as having a lien against real property, but whose underlying trust purpose is not secured entirely by equity in the real property. The creditor is not unsecured, because the lien remains enforceable against the real property until the trust purpose is extinguished. Remember that if the Chapter 13 plan is not finished and a discharge entered, the lien is enforceable, confirming the application of state law as to the relationship between the Trustor (debtor) and trustee-beneficiary (lender); and (3) Third, and accordingly, contrary to the split of authority in our district, there is no need for an adversary proceeding to avoid a lien in a Chapter 13 or Chapter 11 situation until the underlying trust purpose is extinguished, and only if the trustee (of the deed of trust) does not voluntarily remove the lien. And, as a practical note, if the lien is avoided before the trust obligation is discharged (or extinguished), at the time of the filing, the now adjudged unsecured obligation (because the lien is removed) would be added to the amount of the general unsecured claims at the time of the filing, thereby resulting in the jurisdiction of the court for chapter 13 to be exceeded. Section 109(e) would thereby be violated, not as a matter of law, but because of a misinterpretation and misapplication of the law and procedure.
The case of In re Scovis, 249 F.3d 975 (9th Cir. 2001), is quite disturbing and potentially could render hundreds, if not thousands of Chapter 13 debtors ineligible for filing under Chapter 13, forcing them into more complicated and expensive Chapter 11 cases. Scovis speaks to the issue of good faith determined at the time of the filing, based upon the filed schedules. Citing, Scovis, the BAP in In re Guastella, 341 B.R. 908 (9th BAP 2006) broadened the analysis of a totality of circumstances, allowing the court to look beyond the schedules to determine the debtors good faith intent where the tentative decision of a state court had found liability and the amount of liability. Importantly for our analysis, Scovis was a judicial lien that impaired a statutory homestead exemption. The HELOC is a consensual lien, a deed of trust that is not subject to the homestead exemption; a critical factual distinction when it comes to the timing of whether or when a lien is deemed undersecured versus unsecured.
In Scovis, the Ninth Circuit discussed the form over substance issue. In Scovis, however, California mortgage and deed of trust law was not considered. But, California law must be considered in determining the reality of the substance of the rights impaired with regards to, in our example, the HELOC. In the above scenario, as in most, the creditor is deemed “wholly undersecured,” and therefore, no adequate protection payments are made under Timbers. The term undersecured claim, rather than unsecured claim is an essential distinction, because if the case is converted, the lien “rides through,” and the creditor retains all remedies of a secured creditor, rather than losing the right to exercise nonjudicial remedies, as if an unsecured creditor, and as with the creditor in Scovis. Application of 11 U.S.C. § 506(a) results in a bifurcation of previously secured claims, but 11 U.S.C. § 506(d) does not allow the “stripping off” of the wholly undersecured lien in a Chapter 7 case. In re Dewsnup, 908 F.2d 588, 593 (10th Cir. 1990), aff’d, 502 U.S. 410 (1992); see also H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 5, reprinted in 1978 U.S. Code Cong. & Admin.News 5963, 6312.
Under In re Zimmer, 313 F.3d 1220 (9th Cir. 2002), and In re Lam, 211 B.R. 36 (9th Cir.BAP 1997), only through a Chapter 13 (or Chapter 11) can the lien ultimately be avoided upon entry of discharge, as the purpose is to further the effectuation of a plan in prospect. The 9th Circuit BAP adopted the reasoning in Dewsnup. Therefore, it is essential to apply Bankruptcy and California law together. Not until the discharge is entered will the underlying trust purpose be extinguished or discharged, and therefore, only at that time, will the deed of trust will be subject to avoidance. This is so as a matter of law without the need for an adversary proceeding, unless the trustee of the deed of trust fails to avoid the deed of trust whose trust purpose has been discharged.
Scovis is just wrongly applied in the above fact scenario, both under California law, as well as under Zimmer and Lam. Moreover, the creditor is scheduled at the time of filing in Schedule D as a secured creditor, and not in Schedule F as an unsecured creditor, and therefore, at the time the case is filed the creditor is “undersecured,” and not unsecured. As to the issue of good faith in filing as a Chapter 13, rather than a Chapter 11, again, the application of Bankruptcy law in concert with California law will lead to the correct result.
The recent iteration of the proposed Amendments also supports the above analysis, providing in pertinent part that Section 109 of title 11, United States Code, is amended—
“(1) by adding at the end of subsection (e) the following: ‘’For purposes of this subsection, the computation of debts shall not include the secured or unsecured portions of—
‘(1) debts secured by the debtor’s principal residence if the current value of that residence is less than the secured debt limit; or . . . ‘”
It is evident that Congress intends to deal with the interpretation of Scovis and the application of Zimmer. The proposed Amendment seems to address the wrong application of Scovis and the issue arising there from issue where the wholly undersecured creditor’s claim would cause the secured portion of the Chapter 13 jurisdiction to be exceeded. Therefore, it seems that the proposed Amendment would provide the treble benefit of: (1) reducing the secured portion only to that amount of the secured claims that are actually secured by the value in the residence; (2) not adding to the unsecured portion that portion of the secured claims that are either partially undersecured, or wholly undersecured (see discussion below on the definition of undersecured); and (3) raising the secured jurisdiction of Chapter 13 to the extent of the value of the residence, regardless of the face amount of the underlying debt secured by the undersecured liens.
As the largest district in the country, we must recognize the use of the terminology wholly undersecured versus wholly unsecured when speaking of deeds of trust to the extent to which their security interest is determined through a “Motion to Value,” rather than a “Motion to Avoid Lien,” and, further, only requiring an adversary proceeding following entry of a discharge, if necessary. However, such a Motion to Value must be supported by competent and admissible evidence of priority of liens, amount of original and outstanding debt secured.