In Re Philip Leslie Frazier et al

Filing 27

MEMORANDUM AND ORDER signed by Judge Morrison C. England, Jr., on 3/8/12 ORDERING that the Bankruptcy's decision is AFFIRMED. The Clerk of the Court is directed to close the file. CASE CLOSED (Kastilahn, A)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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In re

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Phillip Leslie Frazier and
Jennifer Jo Frazier

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No. 2:11-cv-00290-MCE
Debtors/Appellees,

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v.

MEMORANDUM AND ORDER

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Real Time Resolutions, Inc.,
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Creditor/Appellant.
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----oo0oo----

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Real Time Resolutions, Inc. (“Appellant”), appeals from the

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Bankruptcy Court’s order approving the removal of Appellant’s

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junior lien on debtors Phillip and Leslie Frazier’s (“Appellees”)

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primary residence and confirming Appellees’ Chapter 13 plan.

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The main issue presented by this appeal is one that has been

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addressed by multiple bankruptcy courts since the collapse of the

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housing market: whether a Chapter 13 debtor can “strip-off” a

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wholly unsecured secondary or junior lien on the debtor’s

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principal residence when the debtor is ineligible for discharge

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because of a prior Chapter 7 discharge pursuant to 11 U.S.C.

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§ 1328(f)(1).

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The Bankruptcy Court’s decision joins the growing split of
authority among bankruptcy courts across the country on this same

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issue.

For the reasons set forth below, the Bankruptcy Court’s

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decision is affirmed.1

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BACKGROUND

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On August 3, 2009, Appellees filed a voluntary Chapter 13

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bankruptcy petition.

On August 17, 2009, Appellees’ Chapter 13

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petition was converted into a Chapter 7 case.

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Appellees were not eligible to proceed under Chapter 13 because

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their scheduled, unsecured debts exceeded the debt limits imposed

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by 11 U.S.C. § 109(e).

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outstanding mortgage liens secured by their primary residence,

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located at 5610 Illinois Avenue, Fair Oaks, California, 95628

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(“subject property”).

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At that time,

Appellees indicated that there were two

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Because oral argument will not be of material assistance,
the Court deemed this matter suitable for decision without oral
argument. See E.D. Cal. Local Rule 230(g).
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Appellees received a Chapter 7 discharge on December 21,

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2009, which relieved them of in personam liability for those

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mortgage liens securing the subject property; however, the in rem

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liability on the subject property remained intact.

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the senior and junior lien holders’ state law lien rights in the

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subject property “rode through” the Chapter 7 discharge and the

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mortgage liens became non-recourse debts.

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Accordingly,

On December 30, 2009, Appellees filed a Chapter 13 petition
to address the outstanding liens secured by the subject property,

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arrears, priority tax debt and other unsecured claims.

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of Record (“ER”), ECF No. 19 at 9.)

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this type of situation as a “Chapter 20" case.2

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(Excerpt

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Courts colloquially refer to

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2
The Supreme Court has expressly held that the Bankruptcy
Code allows debtors to file Chapter 20 cases. Johnson v. Home
State Bank, 501 U.S. 78, 87, 111 S. Ct. 2150 (holding a debtor
could file a Chapter 13 after a Chapter 7 because the Bankruptcy
Code did not prohibit it and Congress specifically prohibited
other types of consecutive filings, therefore its choice not to
prohibit it meant that this type of filing was allowed).

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In Chapter 20 cases, the debtors file for Chapter 7 bankruptcy,

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receive a Chapter 7 discharge, and then file for Chapter 13

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bankruptcy.3

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filed the second Chapter 13 petition was to stay a foreclosure

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action commenced by senior lien holder, Bank of America (“BOA”),

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against the subject property. (Id. at 110-11.)

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Appellees admitted that one of the reasons they

Schedule D of Appellees’ Chapter 13 plan lists BOA as the

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senior lien holder of the First Deed of Trust for the amount of

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$275,681.00, secured by the subject property.

(Id. at 33.)

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Schedule D also lists BOA as the junior lien holder of the Second

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Deed of Trust for $47,400.00, again secured by the subject

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property.

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(Id.)

On January 6, 2010, Appellant filed a proof of claim for

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$53,591.82, representing the principal, interest, and late fees

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owed on the Second Deed of Trust (“junior lien”) on the subject

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property.

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loan servicer for BOA’s junior lien on the subject property.

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(Id.)

(Id. at 61-63.)

Appellant identified itself as the

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The Bankruptcy Court in this case aptly described the
strategy behind “Chapter 20" filings:

“[p]rior to the enactment of . . . [the Bankruptcy
Abuse Prevention and Consumer Protection Act]. . . a
Chapter 20 was a useful tool for a debtor who exceeded
the monetary limits for a Chapter 13 case. See
11 U.S.C. § 109(e). By filing the Chapter 7 case to
discharge unsecured indebtedness, debtors could reduce
their debts to be within the monetary limits for the
filing a subsequent Chapter 13 case. Then, through the
subsequent Chapter 13 plan, debtors could save their
residence from foreclosure by curing any arrearage
through the plan or establish a court enforced
repayment plan for nondischargeable debt, such as tax
obligations.”
In re Frazier, 448 B.R. 803, 807 (Bankr. E.D. Cal. 2011)
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The Chapter 13 plan proposed to pay BOA, the senior lien

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holder, as a class-one creditor holding a “secured claim”

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pursuant to 11 U.S.C. § 506(a)(1).

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plan proposed to treat Appellant as a class-two creditor holding

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an “unsecured claim” and to avoid Appellant’s junior lien on the

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subject property on the theory that there was not equity to which

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its lien could attach.

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(Id. at 115.)

Appellees’

(Id. at 56.)

In order to remove Appellant’s junior lien, Appellees filed
a Motion to Value Appellant’s claim against the value of the

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subject property pursuant to 11 U.S.C. § 506(a)(1).

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506(a)(1) classifies a creditor’s allowed claim as a “secured

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allowed claim” or “unsecured allowed claim.”

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§ 506(a)(1).

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can propose to modify the rights of certain holders of unsecured

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allowed claims pursuant to 11 U.S.C. § 1322(b)(2).

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Section

See 11 U.S.C.

After a claim is classified by 506(a)(1), a debtor

In their Motion to Value, Appellees listed the value of the

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subject property as $240,000.00.4

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objected to Appellees’ Motion to Value and to the confirmation of

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Appellees’ Chapter 13 plan, arguing that Appellees could not

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strip Appellant’s junior lien because they were not eligible to

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receive a Chapter 13 discharge pursuant to 11 U.S.C. § 1328(f)(1).5

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(Id. at 64-68.)

(Id. at 60.)

Appellant

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No parties opposed Appellees’ valuation of the subject
property.
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Section 1328(f)(1) provides, in pertinent part, “the court
shall not grant a discharge of all debts provided for in the plan
or disallowed under section 502, if the debtor has received a
discharge . . .(1) in a case filed under Chapter 7, 11, or 12 of
this title during the 4-year period preceding the date of the
order for relief under this Chapter. . . .”
11 U.S.C.
§ 1328(f)(1).

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Section 1328(f)(1) renders debtors who have received a Chapter 7

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bankruptcy in the past four years ineligible to receive a Chapter

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13 discharge.

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briefing with the Bankruptcy Court concerning Appellant’s

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objections.

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Both Appellant and Appellees filed extensive

(See id. at 88-129.)

The Bankruptcy Court overruled Appellant’s objections and

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confirmed Appellees’ Chapter 13 Plan.

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The Bankruptcy Court found that BOA’s senior lien securing an

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obligation of $275,681.00 exhausted all of the value in the

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subject property.

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Court determined that Appellant’s junior lien was a wholly

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unsecured allowed claim under § 506(a)(1), and the value of its

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unsecured claims as $53,591.82.

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(Id. at 190.)

(Id. at 174, 194.)

Accordingly, the Bankruptcy

(Id.)

The Bankruptcy Court also rejected Appellant’s contention

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that the amendment to 11 U.S.C. § 1325(a)(5) mandates discharge

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to effectuate a lien strip, or instead, mandates payment of both

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the secured and unsecured portions of its claim.

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188-89.)

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American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124

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L. Ed. 2d 228 (1993) and Zimmer v. PSB Lending Corp. (In re

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Zimmer), 313 F.3d 1220 (9th Cir. 2002), the Bankruptcy Court held

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that a creditor attempting to assert rights under 11 U.S.C.

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§ 1325(a)(5) must be a holder of an allowed secured claim under

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§ 506(a)(1).

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secured claim under § 506(a)(1), it did not have a basis for

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asserting rights under § 1325(a)(5). (Id.)

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(Id. at

Relying on the Supreme Court’s decision in Nobelman v.

(ER at 189.)

Since Appellant did not hold a

The Bankruptcy Court rejected Appellant’s argument that a
lien may only be stripped upon discharge.
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(Id. at 187.)

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In an effort to explain how the case would end in light of the

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lack of discharge in Appellees’ Chapter 20 case, the Bankruptcy

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Court likened Appellees’ Chapter 13 plan to a contract between

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Appellees and the creditors.

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Bankruptcy Court stated, “[i]t is the Chapter 13 plan, by which

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the debtor commits him or herself to a plan, which becomes the

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new contract between debtors and creditors.”

(Id. [citing In re

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Than, 215 B.R. 430 (9th Cir. B.A.P. 1997)]).

The Bankruptcy

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Court explained that the debtor must pay the full amount of the

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§ 506(a) secured claim held by BOA through the Chapter 13 plan,

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resulting in there being no outstanding obligation secured by the

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lien.

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demands reconveyance of the deed of trust or release of the lien

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. . . .,” from BOA as senior lien holder and Appellant, as junior

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lien holder.

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Court noted, “[i]t is completion of the plan and performance

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under the new contract created under the Bankruptcy Code which

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results in the debtors having the right to demand and receive the

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release of the lien.

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not alter or remove the lien, and it not . . . [a] basis for the

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court to denying [sic] a motion to value a creditor’s secured

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claim.”

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(Id.)

(Id. at 187.)

Specifically, the

Then, upon completion of the plan, the debtor

(Id.)

As to the close of the case, the Bankruptcy

The granting or denying of discharge does

(Id.)

Finally, the Bankruptcy Court, on several grounds, overruled

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Appellant’s objection that Appellees’ Chapter 13 plan was not

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filed in good faith.

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Appellant’s objections based on § 1325(a)(5), as discussed above.

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First, the Bankruptcy Court overruled

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(Id. at 190.)

Second, the court overruled Appellant’s objection

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to Appellees’ projected monthly personal and business expenses

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outlined in the Chapter 13 plan.

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Bankruptcy Court overruled Appellant’s objections that because

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Appellees’ Chapter 13 plan was filed on the heels of their

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previous Chapter 7 discharge, Appellees’ Chapter 13 was filed in

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bad faith.

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addressed the purpose of Appellees’ Chapter 13 plan and conducted

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a good faith analysis of the Chapter 13 plan.

(Id. at 194.)

(Id. at 191.)

Third, the

To this end, the Bankruptcy Court

(Id. at 192-93.)

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In conclusion, the Bankruptcy Court found that Appellees’ Chapter

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13 plan had been proposed in good faith and was not forbidden by

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any law.

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found that Appellees’ Chapter 13 plan complies “with the

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provisions of 11 U.S.C. § 1322 for the contents of the plan and

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11 U.S.C. § 1325(a) and (b) for confirmation of the plan proposed

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in this case.”

(Id. at 194.)

Importantly, the Bankruptcy Court also

Id.

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On January 25, 2011, Appellant filed the Notice of Appeal

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with the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.

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(Id. at 196-197.)

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appeal to this Court pursuant to 28 U.S.C. § 158.

On January 31, 2011, Appellees transferred the
(Id. at 198.)

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STANDARD

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An appellant may petition the district court for review of a

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bankruptcy court’s decision.

Fed. R. Bankr. P. 8013.

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applicable standard of review is identical to that employed by

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circuit courts of appeal in reviewing district court decisions.

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The

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See Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441

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(9th Cir. 1997).

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de novo basis, and factual determinations are assessed pursuant

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to a “clearly erroneous” standard.

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Bammer), 131 F.3d 788, 792 (9th Cir. 1997) (en banc).

Thus, legal conclusions are renewed on a

Murray v. Bammer (In re

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Findings of fact are “clearly erroneous” only if the

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reviewing fact is “left with the definite and firm conviction

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that a mistake has been committed.”

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942 F.2d 1462, 1466 (9th Cir. 1991) (quoting United States v.

In re Marquam Inv. Corp.,

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United States Gypsum Co., 333 U.S. 364, 395 (1948)).

Appellant

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has the burden of proving such error has been committed, and the

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reviewing court should not reverse simply because another

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decision could have been reached.

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459 F. Supp. 270, 275 (N.D. Tex. 1978).

In re Windsor Indus., Inc.,

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ANALYSIS

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Real Time’s appeal rests on two arguments: 1) the Bankruptcy

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Court erred in determining that Appellees could remove

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Appellant’s lien without obtaining a Chapter 13 discharge, and

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(2) the Bankruptcy Court erred in entering an order confirming

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Appellees’ Chapter 13 Plan when Appellant’s claim was not treated

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in the proposed Chapter 13 Plan.

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No. 17 at 8-9.)

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(Appellant’s Opening Brief, ECF

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A.

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Removal of Lien Without a Chapter 13 Discharge

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The central issue on appeal presents a question of law

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addressed by conflicting court decisions concerning the interplay

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between various provisions of the Bankruptcy Code affecting

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“Chapter 20" bankruptcy cases, including provisions modified by

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the Bankruptcy Abuse Prevention and Consumer Protection Act of

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2005 (“BAPCPA”).

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Put simply, the issue presented by cases of this nature is

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whether a Chapter 20 debtor may strip a wholly unsecured,

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inferior mortgage lien off the debtor’s primary residence in a

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Chapter 13 case filed less than four years after having received

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a Chapter 7 discharge.

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debtor, who has been discharged of in personam liability for a

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home mortgage debt by receiving a Chapter 7 discharge, may then

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modify the in rem rights of the holder of the mortgage debt by

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removing the lien through a Chapter 13 plan even though the

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debtors are ineligible for discharge, and if so, under what

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circumstances.

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More specifically, the issue is whether a

Accordingly, there is a growing split of authority among

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courts across the country regarding the permissibility and

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permanence of Chapter 20 lien stripping.

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divisive one in many jurisdictions, including California.

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This issue is a

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Compare In re Hill, 440 B.R. 176 (Bankr. S.D. Cal. 2010) and

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In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. 2010) (both finding

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that Chapter 20 lien stripping is permissible and permanent upon

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plan completion and a finding of good faith) with In re Victorio,

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454 B.R. 759, 2011 WL 2746054 (Bankr. S.D. Cal. July 8, 2011) and

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In re Winitzky, 2009 Bankr. LEXIS 2430 (Bankr. C.D. Cal. May 7,

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2009) (both finding that Chapter 20 lien stripping is

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impermissible in absence of discharge).

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can be grouped into three approaches.

The split of authority
See In re Jennings,

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454 B.R. 252, 256-57 (Bankr. N.D. Ga. 2011) (explaining the three

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approaches).

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Courts adopting the first approach “allow Chapter 20 lien

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stripping because nothing in the Bankruptcy Code prevents it.”6

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Id.

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is plan completion, and that Chapter 20 cases end in

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administrative closing——not discharge.

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These courts contend that the mechanism that voids the lien

Id.

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See In re Hill, 440 B.R. 176; In re Tran, 431 B.R. 230
(Bankr. N.D. Cal. 2010); In re Okosisi, 451 B.R. 90 (Bankr. D.
Nev. 2011); In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011);
In re Scotto-Diclemente, 2011 WL 5835653 (Bankr. D.N.J. Nov. 18,
2011); In re Miller, 2011 WL 6257450 (Bankr. E.D.N.Y. Dec. 15,
2011); In re Gloster, 459 B.R. 200 (Bankr. D.N.J. 2011); In re
Sadowski, 2011 WL 4572005 (Bankr. D. Conn. Sept. 30, 2011); In re
Jennings, 454 B.R. 252 (Bankr. N.D. Ga. 2011); In re Fair,
450 B.R. 853 (E.D. Wis. 2011); In re Waterman, 447 B.R. 324
(Bankr. D. Colo. 2011); In re Davis, 2011 WL 1237638
(Bankr. D. Md. Mar. 30, 2011).
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Courts that adopt the second approach allow Chapter 20 lien

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stripping; however, after plan consummation, without a discharge,

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the parties’ pre-bankruptcy rights are reinstated.7

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courts assert that a Chapter 13 discharge is required to void the

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lien, and that Chapter 20 plans end in dismissal because they are

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ineligible for discharge.

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Id.

These

Id.

Courts utilizing the third approach “hold that Chapter 20

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lien stripping is impermissible because it amounts to a de facto

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discharge,” which is prohibited by 11 U.S.C. § 1328(f)(1).8

Id.

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These courts rely on an interpretation of the Supreme Court case

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Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903

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(1992), and Congress’ inclusion of a discharge requirement in

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11 U.S.C. § 1325(a)(5).

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See In re Casey, 428 B.R. 519 (Bankr. S.D. Cal. 2010);
In re Trujillo, 2010 WL 4669095 (Bankr. M.D. Fla. Nov. 10, 2010);
In re Colbourne, 2010 WL 4485508 (Bankr. M.D. Fla. Nov. 8, 2010);
Hart v. San Diego Credit Union, 449 B.R. 783 (Bankr. S.D. Cal.
2010); In re Jazo, 2010 WL 3947303 (S.D. Cal. Sept. 28, 2010);
In re Davis, 447 B.R. 738 (Bankr. D. Md. 2011).
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See In re Victorio, 454 B.R. 759, 2011 WL 2746054 (Bankr.
S.D. Cal. July 8, 2011); In re Winitzky, 2009 Bankr. LEXIS 2430
(Bankr. C.D. Cal. May 7, 2009); In re Geradin, 447 B.R. 342
(Bankr. S.D. Fla. 2011) (holding that Chapter 20 debtor could not
avoid lien because of ineligibility for discharge); In re Fenn,
428 B.R. 494 (Bankr. N.D. Ill. 2010) (holding that by virtue of
Section 1325(a)(5) holder of secured claim retains the lien until
the underlying debt is paid in full or discharged); In re
Orkwis, 457 B.R. 243 (E.D.N.Y. 2011); In re Jarvis, 390 B.R. 600
(Bankr. C.D. Ill. 2008) (finding discharge a necessary
prerequisite to permanency of lien avoidance); In re Lilly,
378 B.R. 232, 236-37 (Bankr. C.D. Ill. 2007) (holding that by
virtue of Section 1325(a)(5) holder of secured claim retains the
lien until the underlying debt is paid in full); In re Lindskog,
451 B.R. 863 (Bankr. E.D. Wis. 2011); In re Erdmann, 446 B.R. 861
(Bankr. N.D. Ill. 2011); In re Mendoza, 2010 WL 736834
(Bankr. D. Colo. Jan. 21, 2010); In re Blosser, 2009 WL 1064455
(Bankr. E.D. Wis. Apr. 15, 2009).

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For the reasons that follow, the Court agrees with those

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courts adopting the first approach, which hold that a wholly

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unsecured junior lien on the debtor’s principal residence may be

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removed in Chapter 20 action despite the operation of

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§ 1328(f)(1).

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Court’s decision.

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Therefore, the Court affirms the Bankruptcy

The determination of whether Appellees’ Chapter 13 plan may

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remove Appellant’s junior lien necessitates analysis of the

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interplay between §§ 506(a)(1), 1322(b)(2) and 1328(f)(1) of the

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Bankruptcy Code.

Thus, the Court’s analysis beings with a

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discussion of those provisions of the Bankruptcy Code.

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1.

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Secured and Unsecured Claims Under 11 U.S.C. §
506(a)(1)

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Whether Appellees’ Chapter 13 plan may remove Appellant’s

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lien dependent on its § 506(a)(1) classification.

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506(a)(1) classifies the holder of an allowed claim as a holder

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of an “allowed secured claim” or an “allowed unsecured claim.”

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11 U.S.C. § 506(a)(1) (emphasis added).

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latter renders stripping of the lien impermissible.

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506(a)(1) classification is based on the value of the underlying

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collateral:

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Section

Classification as the
The

“An allowed claim of a creditor secured by a lien on
property . . . is a secured claim to the extent of the
value of such creditor’s interest in the estate’s
interest in such property . . . and is an unsecured
claim to the extent that the value of such creditor’s
interest . . . is less than the amount of such allowed
claim.”

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Id.

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claim into two parts: a secured claim to the extent of the value

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of the collateral and an unsecured claim for the balance of the

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claim.

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added).

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Section 506(a) also bifurcates an undersecured creditor’s

In re Fair, 450 B.R. 853, 855 (E.D. Wis. 2011)(emphasis

Holding an allowed secured claim under the Bankruptcy Code

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is not necessarily synonymous with holding a security interest

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outside of bankruptcy.

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“Secured claim” is a term of art within the Bankruptcy Code and

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means something different than it does for a creditor to have a

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security interest or lien outside of bankruptcy.

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Okosisi, 451 B.R. 90, 93 (Bankr. D. Nev. 2011).

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bankruptcy, if a creditor has a valid security interest,

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regardless of the collateral’s value, it may be thought of as a

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secured creditor.

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only a secured creditor if its claim is classified under

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§ 506(a)(1).

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the once-secured creditor will have an unsecured claim for

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purposes of the bankruptcy proceedings.

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counterintuitive possibility that in bankruptcy, a creditor

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holding a wholly unsecured allowed claim is classified as a

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holder of an “allowed unsecured claim” in the Chapter 13 plan,

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but also has “rights” of a secured creditor outside of

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bankruptcy.

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Id.

Id.

See In re Zimmer, 313 F.3d at 1223.

Id.; In re
Outside of

Conversely, in bankruptcy, a creditor is

If the claim is not a “allowed secured claim,”

Id.

This leads to the

Id.

In this case, BOA’s senior lien for $275,681.00 exhausted

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all the $240,000.00 of value in the subject property.

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Thus, there is zero value in the subject property for Appellant’s

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junior lien to attach, rendering Appellant’s claim a wholly

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unsecured allowed claim pursuant to § 506(a)(1).

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2.

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Lien Stripping and Chapter 13

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7

The status of Appellant’s unsecured allowed claim dictates

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whether or not Appellees’ Chapter 13 plan can remove Appellant’s

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junior lien.

Section 1322(b)(2) of the Bankruptcy Code allows

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Chapter 13 debtors to modify the rights of creditors holding both

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secured and unsecured claims.

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that a Chapter 13 plan may “modify the rights of holders of

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secured claims . . . or of holders of unsecured claims).

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Thus, in limited scenarios, § 1322 can be used to effectuate a

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lien strip of both unsecured and secured claims in a Chapter 13

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plan.

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See 11 U.S.C. § 1322 (directing

Id.

Congress has placed certain restrictions on the ability of

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consumer debtors to impact the rights of holders of mortgage

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liens under § 1322(b)(2), which prohibits a Chapter 13 debtor

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from modifying the rights of a holder of a secured mortgage debt

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if the mortgage debt is secured by a lien against the debtor’s

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principle residence.

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E.D.N.Y. 2011).

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“antimodification provision,” and has given rise to substantial

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litigation over the extent to which § 1322(b)(2) applies.

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See In re Miller, 462 B.R. 421, 426 (Bankr.

This prohibition has come to be known as the

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Id.

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In Nobelman v. American Savings Bank, the Supreme Court

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addressed the issue of “whether § 1322(b)(2) prohibits a

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[C]hapter 13 debtor from relying on § 506(a) to reduce an

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undersecured homestead mortgage to fair market value of the

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mortgage residence.”

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There, the debtors——the Nobelmans——executed an adjustable rate

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note for $68,250.00 to purchase their primary residence.

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326.

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Nobelmans filed Chapter 13 after falling behind on mortgage

508 U.S. at 325-26 (emphasis added).

The note was secured by a deed of trust.

The

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payments.

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of claim for $71,335.00 in principal, interest, and fees owed on

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the note.

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primary residence at a mere $23,500 and proposed to bifurcate the

14

bank’s claim into two parts, pursuant to § 506(a)(1): a secured

15

claim for $23,500.00 and an unsecured claim for the remaining

16

amount on the note.

17

“strip-down” the bank’s undersecured claim to the fair market

18

value of the home——$23,500.

19

proposed to only pay the bank $23,500 and remove the residual,

20

unsecured portion of the lien.

21

Id.

Id.

Id. at

Id.

The bank holding the deed of trust filed a proof

The Nobelmans’ Chapter 13 plan valued their

Id.

In other words, the debtors proposed to

Id.

Accordingly, the Nobelmans

Id.

After reviewing the statutory language and applicable case

22

law, the Court held that a Chapter 13 debtor cannot strip-down a

23

partially unsecured residential mortgage lien secured by the

24

debtor’s principal residence.

25

confirmed that the appropriate starting point to determine

26

whether a lien strip-down or strip-off is appropriate is through

27

application of § 506(a)(1).

28

///

Id. at 332.

16

The Supreme Court

1

Id. at 328 (finding specifically that “[p]etitioners were correct

2

in looking to § 506(a) for a judicial valuation of the collateral

3

to determine the status of the bank’s secured claim.”)(internal

4

citations omitted).

5

secured only by a security interest in real property” to refer

6

“to the lienholder’s entire claim, including both the secured and

7

unsecured components of the claim.”

8

§ 1322(b)(2) to prohibit a residential mortgage lien from being

9

stripped down to the value of the collateral).

The Supreme Court read the language “a claim

Id. at 331 (interpreting

The Court held

10

that as long as there is some value in the collateral to which

11

the lien could attach, the entire lien was protected under

12

§ 1322(b)(2).

13

In 1997, the Ninth Circuit Bankruptcy Appellate Panel

14

addressed a corollary question not at issue in Nobelman: whether

15

the holder of a mortgage against a Chapter 13 debtor’s residence

16

which is wholly unsecured is entitled to the protections of the

17

antimodification provisions of § 1322(b)(2), or whether the

18

rights of such a mortgage holder can be modified by treating the

19

claim as an unsecured claim in the debtor’s plan.

20

211 B.R. 36, 40 (B.A.P. 9th Cir. 1997).

21

value of the Chapter 13 debtors’ primary residence was

22

$300,000.00.

23

mortgage liens totaling $803,239.00.

24

13 plan proposed to strip-off the fourth deed of trust for

25

$17,193.00 on the theory that the lien was a wholly underwater,

26

unsecured claim under § 506(a)(1).

27

///

28

///

Id. at 38.

In re Lam,

In Lam, the undipsuted

The residence was encumbered by four

17

Id.

Id.

The debtors’ Chapter

1

The Lam panel held the antimodification provision protecting a

2

loan secured by an interest in a debtor’s principal residence, as

3

set out in § 1322(b)(2), does not apply if there is no value to

4

which the security interest could attach because the principal

5

residence was already fully subsumed by the security interest of

6

the senior lien holder.

7

followed Lam in In re Zimmer, 313 F.3d 1220.

8

held that the antimodification protection of §1322(b)(2) only

9

operates to benefit creditors who may be classified as allowed

Id. at 40.

In 2002, the Ninth Circuit
The Zimmer court

10

secured claim holders after operation of § 506(a)(1).

11

Id. at

1226.

12

Thus, In re Lam and In re Zimmer instruct that the

13

antimodification provision does not protect a creditor whose

14

junior lien on a debtor’s primary residence has been classified

15

as an “unsecured claim” by § 506(a)(1).

16

by the Supreme Court’s decision in Nobelman,” and has been

17

embraced by all six circuit courts that have considered the

18

question.

19

Zimmer, 313 F.3d at 1227).9

20

///

21

///

22

///

This logic is “compelled

See In re Okosisi, 451 B.R. at 94 (citing In re

23
24
25
26
27
28

9

See In re Lane, 280 F.3d 663, 667-69 (6th Cir. 2002);
Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122, 126
(2d Cir. 2001); In re Tanner, 217 F.3d 1357, 1359-60 (11th Cir.
2000); In re Bartee, 212 F.3d 277, 288, 295 (5th Cir. 2000);
In re McDonald, 205 F.3d 606, 611 (3d Cir. 2000). Bankruptcy
Appellate Panels have also reached this same result. See
In re Griffey, 335 B.R. 166, 167-68 (10th Cir. B.A.P. 2005); See
In re Mann, 249 B.R. 831, 836 (1st Cir. B.A.P. 2000)).
18

1

Other courts addressing whether lien stripping is allowed in

2

a Chapter 13 case also have considered 11 U.S.C. § 506(d) as a

3

lien stripping mechanism; however, reliance on § 506(d) is

4

misplaced.

5

lien secured a claim against a debtor that is not an allowed

6

secured claim, such a lien is void.”

7

Dewsnup v. Timm, 502 U.S. 410, 417 (1992), the Supreme Court held

8

that Section 506(d) only avoids a lien to the extent that the

9

underlying claim was disallowed pursuant to 11 U.S.C. § 502.”

Section 506(d) provides that “[t]o the extent that a

11 U.S.C. § 506(d).

“In

10

In re Fair, 450 B.R. at 856.

11

stripping of Chapter 7 allowed claims.

12

Section 506(d) is not the proper tool for lien stripping of

13

allowed claims in Chapter 13.

14

at 181; In re Fenn, 428 B.R. at 500; In re Geradin, 447 B.R. at

15

346)).

16

expressly and broadly permitted in the context of rehabilitative

17

bankruptcy proceedings under Chapters 11, 12 and 13.

18

In re Bartee, 212 F.3d 277, 291 n.1 (5th Cir. 2000)).

19

Thus, Dewsnup prohibited lien
In light of Dewsnup,

Id. (citing In re Hill, 440 B.R.

Regardless of 506(d)’s inapplicability, lien stripping is

Id. (citing

Accordingly, § 1322(b)(2) authorizes the removal of

20

Appellant’s wholly unsecured junior lien on the subject property

21

in Appellees’ Chapter 13 plan.

22

as an unsecured allowed claim after operation of § 506(a)(1),

23

thus, it does not qualify for the antimodification protection of

24

§ 1322(b)(2).

25

///

26

///

27

///

28

///

Appellant’s claim was classified

19

3.

1

2005 BAPCPA Amendments to the Bankruptcy Code

2
3

The prior discussion brings us to § 1328(f)(1), the crucial

4

issue presented by this appeal.10

5

Bankruptcy Court erred in confirming Appellees’ Chapter 13 plan’s

6

removal of Appellant’s junior lien because Appellees received a

7

prior Chapter 7 discharge, and thus, they are ineligible to

8

receive a Chapter 13 discharge.

9

Opening Brief, ECF No. 17 at 12, 14-15, 18-22.)

Appellants argue the

(See generally Appellant’s
As such,

10

Appellants contend Appellees’ Chapter 13 plan cannot remove their

11

junior lien from the subject property because in the context of a

12

Chapter 13 plan, discharge is required to effectuate a lien

13

strip.

14

The 2005 amendments to the Bankruptcy Code affected changes

15

to § 1328(f)(1) that has now caused courts to question whether

16

the removal of an valueless junior lien in a Chapter 20 case

17

remains possible.

18

(Bankr. D.N.J. Oct. 13, 2011).

19

prohibits a Chapter 13 discharge if the debtor received a

20

discharge in a Chapter 7, 11 or 12 cases in the four years

21

preceding the date of the order for relief in the Chapter 13

22

case.

See In re Gloster, 2011 WL 5114833, at *9-10
As previously noted, § 1328(f)(1)

See 11 U.S.C. § 1328(f)(1).

23
10

24
25
26
27
28

During the bankruptcy proceedings, Appellants argued that
Appellees’ Chapter 13 plan could not remove Appellant’s junior
lien because under 11 U.S.C. § 1325(a)(5), discharge is required
to effectuate a lien-strip. Appellant has not raised this
argument on appeal. In any event, the Court agrees with the
Bankruptcy Court’s decision finding § 1325(a)(5) is inapplicable
to Appellant’s allowed unsecured claim. Section 1325(a)(5) has
no applicability to unsecured allowed claims, which are
separately governed by the confirmation requirements of
§ 1325(a)(4).
20

1

This change allows debtors the benefit of a Chapter 13 automatic

2

stay and a chance to work out a repayment plan with creditors but

3

denies them the benefit of a Chapter 13 discharge.

4

Still, even with the inclusion of 11 U.S.C. §1328(f)(1) with

5

the BAPCPA, Congress was deliberate in only prohibiting discharge

6

in a Chapter 20 case.

7

prohibit stripping off unsecured mortgage liens for a debtor who

8

is ineligible to receive a discharge, even though such language

9

could easily have been added.

The Bankruptcy Code does not specifically

See In re Gloster, 2011 WL

10

5114833, at *4 (“Given the wide-ranging changes effected by

11

BAPCPA, and its emphasis on ensuring that abusive use of

12

bankruptcy protections not be permitted, it is significant that

13

no changes were made to the Bankruptcy Code to disallow the

14

strip-off of liens in Chapter 20 cases.”).

15

in In re Jennings, “nothing in sections 506, 1322, 1325, 1327, or

16

any other section of the Bankruptcy Code limits a Chapter 20

17

debtor’s ability to take advantage of the protections Chapter 13

18

provides.

19

toolbox.

20

conditioned on discharge eligibility.”

21

In re Hill, 440 B.R. at 182; In re Tran, 431 B.R. at 235).

22

As noted by the court

Lien-stripping is one of the tools in the Chapter 13
And use of the Chapter 13 lien stripping tool is not
454 B.R. at 258 (citing

Further, the court in In re Hill argued that “to judicially

23

impose a discharge requirement on the debtor’s ability to strip a

24

lien when none is required by statute cannot be reconciled with

25

the Supreme Court’s holding in Johnson v. Home State Bank,

26

501 U.S. 78, 87.”

27

///

28

///

440 B.R. at 181-82.

21

1

Specifically, “[i]n Johnson, the Court held ‘Congress did not

2

intend to categorically foreclose the benefit of Chapter 13 lien

3

reorganization to a debtor who previously filed for Chapter 7

4

relief.’”

5

terms, § 1328(f) does not require another discharge when a later

6

case is filed; it simply denies an untimely discharge in a later

7

case.”

8

489 U.S. 235, 240-41 (1989); In re Silverman, 616 F.3d 1001, 1006

9

(9th Cir. 2010) (explaining that statutory plain language must be

10

Id. (internal citations omitted).

“By its plain

Id. (citing United States v. Ron Pair Enterprises, Inc.,

respected)).

11

Put more simply, “denying certain [C]hapter 13 debtors the

12

right to a discharge did nothing to change the fact that lien

13

stripping is generally allowed under Chapter 13.”

14

450 B.R. at 857.

15

reorganize one’s financial life and pay off debts, not the

16

ability to receive a discharge, that is the debtor’s holy grail.”

17

Id. (citing In re Bateman, 515 F.3d 272, 283 (4th Cir. 2008)).

18

Accordingly, Congress did not intend to prevent lien stripping

19

through 1328(f)(1) and no discharge is required to effectuate a

20

strip of a junior lien of a debtor’s primary residence.

In re Fair,

In many Chapter 13 cases, “it is the ability to

21

Applied here, § 1328(f)(1) does not affect Appellees’

22

ability to strip Appellant’s wholly junior lien in their Chapter

23

13 plan because nothing in the Bankruptcy Code prevents Chapter

24

20 debtors from stripping junior liens off their primary

25

residence pursuant to §§ 506(a)(1) and 1322(b)(2).

26

1328(f)(1) only prohibits discharge, not lien stripping.

27

///

28

///
22

Section

1

Instead of discharge, the Court agrees with the underlying

2

Bankruptcy Court and finds plan completion is the appropriate end

3

to Appellees’ Chapter 20 case.

4

permanent not upon a discharge, as would happen in a typical

5

Chapter 13 case, but upon completion of all payments as required

6

by the plan.

7

Wash. Dec. 27, 2011).

8

(Bankr. N.D. Cal. 2010), is persuasive:

9
10
11
12

The lien strip will become

See In re Blenheim, 2011 WL 6779709 (Bankr. W.D.
The reasoning set forth in In re Tran,

[T]he Bankruptcy Code does not condition a chapter 13
debtor's right to strip off a wholly unsecured junior
lien on the debtor's eligibility for a discharge.
Rather, such right is conditioned on the debtor's
obtaining confirmation of, and performing under, a
chapter 13 plan that meets all of the statutory
requirements.

13

431 B.R. at 235; accord In re Hill, 440 B.R. 176, 182 (Bankr.

14

S.D. Cal. 2010) (“[L]ien strips are permitted in Chapter 20 cases

15

even without a discharge.”); In re Okosisi, 451 B.R. at 100

16

(“[C]hapter 20 bankruptcy is permissible under the Code, and

17

[debtors] may take advantage of all available chapter 13

18

restructuring tools,” including lien stripping.); In re Fisette,

19

455 B.R. 177, 185 (8th Cir. B.A.P. 2011) (“We hold that the strip

20

off of a wholly unsecured lien on a debtor's principal residence

21

... is not contingent on his receipt of a Chapter 13 discharge”).

22

Further, as noted by the court in In Re Okosisi,

23
24
25
26
27
28

“[a]t the successful completion of all payments in a
no-discharge chapter 13 case, no order discharging the
debtor will be entered because the debtor is not
eligible for a discharge. . . [I]n this situation, the
proper result is for the court to close the case
without discharge. . . . Because the no-discharge case
is closed without discharge, rather than dismissed, the
code sections that reverse any lien avoidance actions
contained within a chapter 13 plan upon conversion or
dismissal are not implicated, and, thus, do not act to
prevent the permanence of the lien avoidance . . . .
23

1

Once a debtor successfully complete all plan payments
required by a chapter 13 plan, the provisions of the
plan become permanent, and the lien avoidance is,
similarly permanent.”

2
3
4

451 B.R. at 99–100 (noting that although, per In re Leavitt,

5

171 F.3d 1219, 1223 (9th Cir. 1999), a Chapter 13 case can only

6

end in one of three ways: conversion, dismissal, or discharge.

7

BAPCPA's addition of § 1328(f) “opened up the possibility of a

8

fourth option, the completion of all plan payments without a

9

discharge”); contra In re Victorio, 454 B.R. 759, 761 (Bankr.

10

S.D. Cal. 2011) (“[D]ebtors in a Chapter 20 case cannot obtain a

11

‘permanent’ avoidance of a wholly unsecured junior lien on their

12

principal residence unless they pay the claim amount in full, or

13

obtain a discharge.”).

14

Conversely, if a Chapter 13 case is dismissed or converted

15

to a Chapter 7 prior to the successful completion of all plan

16

payments, actions taken to avoid a lien are undone, and a junior

17

lien holder’s in rem rights would remain intact.

18

Importantly, in order for a Chapter 13 plan to be confirmed

19

in this scenario, the plan must otherwise comply with all other

20

requirements for plan confirmation set forth in the Code. See

21

e.g. In re Tran, 431 B.R. at 235 (permitting Chapter 20 lien

22

stripping but requiring plan that otherwise “meets all of the

23

statutory requirements”); In re Hill, 440 B.R. at 182 (permitting

24

Chapter 20 lien stripping but requiring plan that “otherwise

25

complies with the requirements of the Code”).

26

so avoided, the unsecured claim that is represented by this

27

nonrecourse debt becomes an unsecured claim in the bankruptcy.”

28

///
24

“Once the lien is

1

In re Okosisi, 451 B.R. at 96.

2

claim, the creditor whose lien was stripped “need only be paid

3

its pro-rata share of Debtors' disposable income calculated under

4

707(b) and its pro-rata share of any equity in Debtors' assets.”

5

In re Hill, 440 B.R. at 183.

6

As the holder of an unsecured

In Appellees’ case, Appellant’s lien will be permanently

7

stripped upon plan completion and the case will end in

8

administrative closing.

9

Chapter 13 plan, Appellant will receive a pro-rata distribution

Assuming Appellees complete their

10

of Appellees’ disposable income——which here, is zero——and a

11

pro rata distribution of any assets remaining after competition

12

of payments to creditors holding allowed secured claims and

13

priority unsecured creditors.

14

make all required Chapter 13 plan payments, Appellees’ Chapter 13

15

plan would be converted to a Chapter 7 or dismissed.

16

would then have the option to exercise its remaining in rem

17

rights against the subject property recognized by state law.

18

In the event that Appellees do not

Appellant

Based on the foregoing, the Court affirms the Bankruptcy

19

Court’s holding that Appellees could remove Appellant’s lien

20

without obtaining a Chapter 13 discharge.

21
B.

22

Treatment of Appellant’s Claim Under the Chapter 13
Plan

23
24

Appellant’s second argument on appeal is that the Bankruptcy

25

Court erred in confirming Appellees’ Chapter 13 plan because

26

Appellant’s claim was not “treated” in the proposed Chapter 13

27

plan.

28

///

(Appellant’s Opening Brief, ECF No. 17 at 21.)

25

1

Appellant’s argument is not the model of clarity.

2

Appellant argues that the Bankruptcy Court erred in confirming

3

Appellees’ Chapter 13 plan because new consideration was not

4

provided as part of the contract which arises out of Appellees’

5

Chapter 13 plan.

6

To paraphrase,

Specifically, Appellant challenges the Bankruptcy Court’s

7

confirmation of Appellees’ Chapter 13 plan arguing that Appellees

8

did not provide “new consideration” to them as an unsecured

9

creditor. (Appellant’s Opening Brief, ECF No. 17 at 21, 23.)

The

10

Bankruptcy Court likened Appellees’ Chapter 13 plan to a contract

11

between Appellees and creditors, thus, Appellant is now demanding

12

“new consideration” to support this “contract.”

13

First, Appellant cites to no authority requiring new

14

consideration to be provided to an unsecured creditor in order

15

for a bankruptcy court to confirm a debtor’s proposed Chapter 13

16

plan.

17

Bankruptcy Code, which does not require the concept of “new

18

consideration” in order for a bankruptcy court to approve

19

Appellees’ Chapter 13 plan.

20

California statute requiring consideration for a contract to be

21

valid is misplaced.

22

confirmation of Appellees’ Chapter 13 plan, not California

23

statutory or common law governing contracts.

24

Bankruptcy Court found that Appellees’ Chapter 13 plan was

25

proposed in good faith and that the contents of the Chapter 13

26

plan complied with § 1322.

27

///

28

///

Further, the Chapter 13 plan is authorized by the

Thus, Appellant’s reliance on a

The Bankruptcy Code governs the contents and

26

Further, the

1

Appellant argues that Appellees’ Chapter 13 plan should not

2

have been confirmed because it does not meet one the requirements

3

for plan confirmation——§ 1325(a)(4).

4

consideration required to support the contract can be found in

5

11 U.S.C. § 1325(a)(4) and that the court improperly found that

6

Appellees’ plan complied with § 1325(a)(4).

7

Appellant argues that the

Section 1325 of the Bankruptcy Code sets out requirements a

8

debtor must meet before the Bankruptcy Court can confirm a

9

debtor’s Chapter 13 plan.

10

At issue here is § 1325(a)(4), which

provides:

11

(a) Except as provided in subsection (b), the court
shall confirm a plan if ...

12
(4) the value, as of the effective date of the plan, of
property to be distributed under the plan on account of
each allowed unsecured claim is not less than the
amount that would be paid on such claim if the estate
of the debtor were liquidated under chapter 7 of this
title on such date.

13
14
15
16

11 U.S.C. § 1325(a)(4).

This provision, known as the “best

17

interest of creditors test,” ensures that a Chapter 13 plan

18

provides unsecured creditors with at least as much return as they

19

would receive in a Chapter 7 liquidation.

20

“best interests test” rests with the discretion of the Bankruptcy

21

Court.

22

at 1325-17 (internal citations omitted).

23

whether a debtor’s plan complies with § 1325(a)(4) is a factual

24

finding, the Court reviews the Bankruptcy Court’s determination

25

under the clearly erroneous standard.

26

792)(factual determinations are assessed pursuant to a “clearly

27

erroneous” standard).

28

///

The application of the

8 Collier on Bankruptcy, (15th Ed. Revised), ¶ 1325.05,

27

As the determination of

See Murray, 131 F.3d at

1

Appellant contends that Appellees’ Chapter 13 plan fails

2

under the liquidation analysis provided by § 1325(a)(4), and

3

thus, does not provide “consideration” to support the new

4

contract proposed by Appellees’ Chapter 13 plan.

5

Opening Brief, ECF No. 17 at 23-24.)

6

contends that in the event of a Chapter 7 liquidation at this

7

juncture, Appellee would owe Appellant the full amount of

8

Appellant’s outstanding claim of $53,591.82.

9

Appellant contends Appellees’ plan fails to meet § 1325(a)(4)

(Appellant’s

Specifically, Appellant

Accordingly,

10

because the Chapter 13 plan anticipates a 0.00% payment to

11

unsecured creditors like Appellants.

12

(Id.)

To the contrary, the Bankruptcy Court specifically found

13

that Appellees’ Chapter 13 plan complied with the plan

14

confirmation requirements set forth in § 1325(a) and (b).

15

194 (emphasis added).)

16

Court’s finding that Appellees’ Chapter 13 plan met the

17

§ 1325(a)(4) requirement.

18

Chapter 7 liquidation, BOA and Appellant would retain their

19

in rem rights against the subject property which would allow them

20

to foreclose on Appellant’s property.

21

$275,681.00 would fully exhaust the value of the subject

22

property.

23

Appellant’s junior lien and in rem rights is $0.00.

24

Accordingly, the Court finds the Bankruptcy Court’s finding that

25

§ 1325(a)(4) was not clearly erroneous.

26

///

27

///

28

///

(ER at

The Court agrees with the Bankruptcy

Specifically, if Appellees filed for

BOA’s senior lien for

Thus, in a hypothetical liquidation, the value of

28

1

As to Appellant’s claim that it is not treated at all in

2

Appellees’ Chapter 13 plan, that argument is disingenuous.

3

Appellant holds an unsecured allowed claim and its claim is

4

subject to modification of its rights under § 1322(b)(2).

5

holder of an unsecured claim under § 1325(b)(4), Appellant need

6

only be paid its pro rata share of Appellees’ disposable income

7

calculated under § 707(b), along with its pro rata share of any

8

equity in Appellees’ assets.

9

claims within the same class be treated in the same manner,

As the

Since § 1322(a)(3) requires that

10

Appellant is “entitled to be paid whatever [is paid generally to

11

unsecured creditors], the prior chapter 7 discharge

12

notwithstanding.”

13

Cal. 2001).

In re Gounder, 266 B.R. 879, 881 (Bankr. E.D.

14

Thus, to the extent that Appellant argues that its claim is

15

not “treated” in Appellees’ Chapter 13 plan, the Court finds its

16

position untenable.

17

Appellant’s claim and treats Appellant as a creditor holding an

18

allowed unsecured claim.

19

Bankruptcy Court’s decision to confirm Appellees’ Chapter 13

20

Plan.

Appellees’ Chapter 13 plan provides for

Accordingly, the Court affirms the

21
CONCLUSION

22
23
24

The Bankruptcy Court did not err in confirming Appellees’

25

Chapter 13 plan and approving the removal of Appellant’s junior

26

lien, despite the fact Appellees were ineligible for discharge

27

pursuant to § 1328(f)(1).

28

///
29

1

Section 1328(f)(1) only prohibits a Chapter 20 debtor from

2

obtaining a discharge, not from removing a wholly unsecured,

3

junior lien from a debtor’s primary residence.

4

Bankruptcy Court did not err in confirming Appellees’ Chapter 13

5

plan despite Appellant’s treatment as an unsecured creditor.

6

previously noted, Appellant was classified as holder of an

7

unsecured allowed claim pursuant to § 506(a)(1) and will receive

8

a pro rata distribution of Appellees’ available disposable income

9

and in any remaining equity in Appellees’ available assets at the

Last, the

10

end of Appellees’ plan.

11

Bankruptcy Court that Appellees’ Chapter 13 case with end upon

12

plan completion.

13

affirmed.

As

14
15

The Court also agrees with the

Accordingly, the Bankruptcy Court’s decision is

The Clerk of the Court is directed to close the file.

IT IS SO ORDERED.
Dated: March 8, 2012

16
17
18

_____________________________
MORRISON C. ENGLAND, JR.
UNITED STATES DISTRICT JUDGE

19
20
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22
23
24
25
26
27
28
30