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Bankruptcy – Lien-Stripping Approved in Chapter 20 Cases

Branigan v. TD Bank NA (Lawyers Weekly No. 13-01-0477, 20 pp.) (Diaz, J.) No. 12-1184, May 10, 2013; USDC at Greenbelt, Md. (Messitte, J.) 4th Cir.

Holding: In a “Chapter 20” bankruptcy case – a Chapter 13 bankruptcy filed within four years of a Chapter 7 discharge – there is no per se rule barring lien-stripping, and the 4th Circuit affirms an order stripping off liens secured by collateral with no value to support them in this suit involving debtors’ residences.

The trustee argues that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) creates a per se rule barring lien-stripping in “Chapter 20” cases. The trustee and the holder of a third-priority lien against debtors’ home, TD Bank NA, appeal the decision of the district court that upheld the bankruptcy court.

In a case involving a different debtor, consolidated in this appeal, a trustee challenges the lower courts’ approval of a plan that contained a lien-stripping component in a separate Chapter 20 case.

We first consider the threshold question of whether a bankruptcy court may strip off a valueless lien in a typical Chapter 13 case. The answer, in the view of those circuits to have considered the question, is that a bankruptcy court may grant such relief. We too have affirmed, albeit in unpublished opinions, the stripping off of valueless liens against principal residences in Chapter 13 cases.

We realize the Supreme Court has interpreted 11 U.S.C. § 1322(b)(2) as precluding a “strip down” of a partially secured lien against a principal residence in Chapter 13, under Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993). Nobelman notwithstanding, however, courts have generally permitted a “strip off” of completely valueless liens in Chapter 13 cases because, unlike the lienholder in Nobelman, holders of such liens are not “holders of secured claims” and therefore are not entitled to the protection of § 1322(b)(2).

We see no reason to depart from the conclusions of our sister circuits, as well as our own unpublished dispositions, on this issue. We hold that the Bankruptcy Code permits stripping off of valueless liens in Chapter 13 proceedings.

Bankruptcy courts are split on whether a debtor may strip off liens in a Chapter 20 case.

Although the trustee’s arguments are not insubstantial, we conclude that the Bankruptcy Code permits the result advanced by debtors. In sum, although BAPCPA clearly tipped the bankruptcy scales back in the direction of creditors, we find nothing in the Act to suggest that Congress intended to bar lien-stripping of worthless liens in Chapter 20 proceedings. This, we conclude, is the most sensible reading of a complex statutory scheme that admittedly abounds with arbitrary distinctions.

Judgment affirmed.

Dissent

Keenan, J.: Under the majority’s holding, a creditor whose rights are secured by real property with no present value to support the lien is treated less favorably than a wholly unsecured creditor. I would conclude that this result is anomalous and is not permitted upon application of the BAPCPA amendments.

The majority’s position would equalize the status of secured and unsecured creditors by eliminating the secured creditors’ in rem claim. Such a result turn on its head the basic bankruptcy principle that secured creditors are treated more favorably than unsecured creditors, and undermines the Supreme Court’s repeated respect for the bargained-for rights of mortgagors and their mortgagees as set forth in security instruments.

I would reverse the district court judgment approving the Chapter 13 confirmation orders.

 

 


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