4th Circuit: Branigan v. Davis (In re Davis)- Strip-off of Unsecured Mortgages and Chapter 20

Summary: As an initial matter, the 4th Circuit affirmed, in a published opinion, that pursuant to 11 U.S.C. §§ 506(a) and 1322(b)(2), a junior lien against real estate that serves as the debtor’s principal residence can be stripped-off if there is no equity above the senior lien(s). The Court of Appeals next proceeded to the question of whether a Debtor, who had recently obtained and Chapter 7 discharge and was thus ineligible for a Chapter 13 discharge, could similarly strip-off a junior lien. The Chapter 13 Trustee argued that lien-stripping was contingent on receipt of a dsicahrge, as 11 U.S.C. § 132(a)(5)(B)(i)(I) provides that a lien is retained until either the underlying debt is paid or a discharge is granted. The majority opinion, however, rejected this argument finding that 11 U.S.C. § 1325(a) only applied to an “allowed secured claim.” This first requires application of 11 U.S.C. § 506(a) to determine whether a claim is, in fact, secured. Having no equity in the property, it is not a secured claim. The Trustee was not left without options, as the majority opined that he could object to the filing of a Chapter 20 in bad faith. The dissent, however, would have found that 11 U.S.C. § 506(a) “provides a method for the judicial valuation of an allowed secured claim, without altering the secured status of a creditor.” In affect, the dissent would place § 1325(a)(5) before § 506(a), where the majority analyses the case in the opposite order. Commentary: Despite finally clarifying that Chapter 13 bankruptcy did allow the strip-off of wholly unsecured junior liens against real property, the 4th Circuit has left standing the question of whether such a strip-off can be accomplished through the confirmation, whether as separate motion for valuation is needed or if an Adversary Proceeding is required. While in the Davis case, the second lienholder, TD Bank, did resist the strip-off (perhaps at the prompting of the Trustee), it appears from both this opinion and from the bankruptcy court docket, that the Chapter 13 Trustee was the only objecting party in the companion case of Marquita Moore. It is not clear why a Chapter 13 Trustee found it necessary to represent a putatively secured creditor. It may be that the Chapter 13 Trustee, who in the Bateman case, also unsuccessfully sought to bar debtors from even filing Chapter 13 if they were ineligible for a discharge, just really dislikes Chapter 20. Perhaps after losing at the Court of Appeals twice, this position will moderate. The broad reading of 11 U.S.C. § 506 should also support the argument that § 506(d) does actually void liens that are not afforded status as “an allowed secured claim”. And while it could raise good faith arguments,  this case also could allow a Debtor to file a Chapter 7,  obtain a discharge and then file Chapter 13 to strip-off a mortgage.  Absent non-dischargeable debts from the Chapter 7 or other debts incurred in the time between filings,  the Debtor would have no general unsecured claims.  This would allow the Debtor to propose a 100% plan (since 100% of $0.00 is $0.00) and complete the Chapter 13 plan almost immediately. For a copy of the opinion, please see: Branigan v. Davis (In re Davis)- Strip-off of Unsecured Mortgages and Chapter 20.pdf