WENDELIN I. LIPP, Bankruptcy Judge.
Before the Court is the Debtors' Amended Motion to Avoid Lien (the "Motion"),
The Debtors, Bryan Davis and Carla Bracey-Davis, filed their Chapter 13 petition on September 4, 2009 (the "Petition Date"). The Debtors previously filed a petition under Chapter 7 of the Bankruptcy Code on June 7, 2008, and received a Chapter 7 discharge on September 17, 2008. Accordingly, the Debtors are ineligible to receive a discharge in this case pursuant to 11 U.S.C. § 1328(f)(1).
The Motion seeks to avoid TD Bank's wholly unsecured junior lien pursuant to 11 U.S.C. § 506. TD Bank raised the following issues in opposition to the Motion and/or in its objection to confirmation of the Amended Plan:
The Chapter 13 Trustee has also objected to confirmation of the Amended Plan. In his objection, the Trustee argues that Section 1325(a)(5)
The Court will summarily dispense with the standing issue before addressing the other issues presented. This Court finds that TD Bank has standing to challenge confirmation because it has a claim against property of the estate. Section 102(2) establishes, as a "rule of construction," that the phrase "claim against the debtor," as used in Section 506(d), includes a claim against property of the debtor. 11 U.S.C. § 102(2); see also Johnson v. Home State Bank, 501 U.S. 78, 85, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). "A fair reading of § 102(2) is that a creditor who, like the Bank in this case, has a claim enforceable only against the debtor's property nonetheless has a `claim against the debtor' for purposes of the Code." Id. Moreover, the Motion caused TD Bank to be a party to these proceedings.
The Court held combined hearings on the Motion and confirmation of the Amended Plan on January 26, 2010 and April 6, 2010. At the January 26, 2010 hearing, TD Bank and the Debtors proceeded on the issue of the Debtors' good faith in filing their Chapter 13 case and proposed plan. The sole witness to testify in support of confirmation was Carla Bracey-Davis, one of the Debtors in this case. Although the Motion was set for hearing for January 26, 2010, TD Bank filed a Memorandum of Law in support of its opposition to the Motion and to confirmation on January 25, 2010—one day before the hearing. Because the Debtors were
On April 2, 2010, four days before the continued hearing, the Chapter 13 Trustee filed a supplemental objection to confirmation addressing the lien avoidance issue. Although the Trustee filed an initial objection to confirmation prior to the January 26, 2010 hearing, his initial objection dealt with the Debtors' failure to provide him with proper documentation, failure to file amended schedules, and failure to dedicate all of their disposable income to their plan. The Trustee's supplemental objection raised, for the first time, whether Section 1325(a)(5) bars a debtor from confirming a plan that strips off a wholly unsecured lien where the debtor has received a discharge in a prior bankruptcy case within the proscribed period set forth in Section 1328(f). Although TD Bank had previously argued that the Debtors' ability to strip off its lien was contingent upon the entry of a discharge order, TD Bank did not rely on Section 1325(a)(5).
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157, and Local Rule 402 of the United States District Court for the District of Maryland. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K) and (L).
A so-called "Chapter 20" case involves a debtor who files a Chapter 7 case, receives a discharge, and thereafter files a Chapter 13 case. The Bankruptcy Code permits this type of serial filing as "Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief." Johnson v. Home State Bank, 501 U.S. 78, 87, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991); see also Branigan v. Bateman (In re Bateman), 515 F.3d 272 (4th Cir.2008) (holding that notwithstanding a debtor's inability to obtain a Chapter 13 discharge, a debtor is nonetheless eligible to file a Chapter 13 case). A debtor may not, however, receive a Chapter 13 discharge in a bankruptcy case filed within four years of filing an earlier Chapter 7 petition that resulted in a discharge. See 11 U.S.C. § 1328(f)(1).
Although Chapter 20 cases are permitted, TD Bank and the Trustee encourage this Court to adopt a per se rule making lien stripping in a Chapter 20 case contingent upon the entry of a Chapter 13 discharge. A general review of lien stripping is instructive. "In a `strip off' the entire lien is removed, whereas in a `strip down' a lien is bifurcated into secured and unsecured claims with only the unsecured claim component being removed.'" Johnson v. Asset Management Group, LLC, 226 B.R. 364, 365 n. 3 (D.Md.1998) (citing In re Lam, 211 B.R. 36, 37 n. 2 (9th Cir. BAP 1997)). It is well established that a debtor is precluded from lien stripping in Chapter 7 cases. See Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (holding that Section 506(d) does not permit the strip down of a partially secured lien); see also Ryan v. Homecomings Financial Network, 253 F.3d 778, 781-83 (4th Cir.2001) (holding that an allowed, wholly unsecured consensual junior lien may not be stripped off in a Chapter 7 case). However, there is no prohibition
11 U.S.C. § 506(a). Section 506(d) provides:
11 U.S.C. § 506(d). 11 U.S.C. § 1322(b)(2) provides:
11 U.S.C. § 1322(b)(2). Despite the anti-modification provision of Section 1322(b)(2), courts in this District permit Chapter 13 debtors to strip off a wholly unsecured junior mortgage lien against their principal residence. See Johnson v. Asset Management Group, LLC, 226 B.R. 364. This issue was revisited recently in First Mariner Bank v. Johnson, 411 B.R. 221 (D.Md.2009), aff'd, 2011 WL 52358 (4th Cir. Jan.06, 2011). In a decision that was affirmed by the United States Court of Appeals for the Fourth Circuit, the United States District Court for the District of Maryland confirmed that the United States Supreme Court's holding in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), did not prohibit the strip off of a wholly unsecured junior lien on a debtor's principal residence in a Chapter 13 case. Id.
In this case, as of the Petition Date, TD Bank had in in rem claim against the Debtors' bankruptcy estate in the form of a lien against the Debtors' real property. TD Bank's in rem claim has been valued at $0.00 because there is no value in the Debtors' real property to which it could attach in light of the existing liens with higher priority. Accordingly, TD Bank's in rem claim is wholly unsecured in the Debtors' Chapter 13 case pursuant to Section 506(a) and can be avoided pursuant to Section 506(d).
The Court acknowledges but declines to follow the weight of authority that favors TD Bank's argument that lien stripping pursuant to Section 506 is contingent on a debtor's eligibility to receive a Chapter 13 discharge. See Prairie v. Picht (In re Picht), 428 B.R. 885 (10th Cir. BAP 2010); In re Fenn, 428 B.R. 494 (Bankr. N.D.Ill.2010); In re Jarvis, 390 B.R. 600 (Bankr.C.D.Ill.2008); 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). This Court finds these cases distinguishable, as detailed below, and agrees with the current minority
The case of Branigan v. Bateman (In re Bateman), 515 F.3d 272 (4th Cir. 2008), binding precedent on this Court, gives some guidance on why a debtor might need Chapter 13 protection notwithstanding the debtor's inability to obtain a discharge. In Bateman, the Fourth Circuit opined, "a Chapter 13 debtor ineligible for a discharge may `file a Chapter 13 case and utilize the tools in chapter 13 to cure a mortgage, deal with other secured debts, or simply pay debts under a plan with the protection of the automatic stay.'" Bateman, 515 F.3d at 283 (citing 8 Collier P 1328.06[2]). The Bateman Court recognized that in many Chapter 13 cases, "it is the ability to reorganize one's financial life and pay off debts, not the ability to receive a discharge, that is the debtor's `holy grail.'" Id. Other courts have found that Chapter 13 debtors who are ineligible for discharge under Section 1328(f) may still "enjoy all of the rights of a chapter 13 debtor, including the right to strip off liens." In re Tran, 431 B.R. at 237. Those courts have held that lien stripping in a Chapter 20 case is to be dealt with at confirmation. Id. This Court agrees.
TD Bank asks this Court to follow the ruling in In re Jarvis, 390 B.R. 600 (Bankr.C.D.Ill.2008). In Jarvis, the United States Bankruptcy Court for Central District of Illinois, followed Illinois precedent in holding that when a Chapter 13 debtor is ineligible for discharge pursuant to 1328(f), the plan cannot strip off or void a wholly unsecured second mortgage lien. In Jarvis, the debtor's Chapter 13 plan provided for the strip off of the creditor's lien. Thus, the lien avoidance issue was dealt with in the context of confirmation of the debtor's plan. The Jarvis Court relied heavily on the earlier decision of In re Lilly, 378 B.R. 232 (Bankr.C.D.Ill.2007), in which the Bankruptcy Court "[f]ound that, although a debtor could obtain confirmation of a no-discharge Chapter 13 plan which modified a creditor's interest rate from the contact rate for purposes of calculating plan payments, such modification was not permanent and, in the absence of a discharge, the collateral securing the debt would still be encumbered by the balance due on the debt calculated at the contract rate." In re Jarvis, 390 B.R. at 605 (citing In re Lilly, 378 B.R. at 237). The Jarvis Court distinguished Lilly because in Lilly, the Court focused its analysis on 1325(a)(5)(B) and determined that the creditor had an "allowed secured claim." In re Jarvis, 390 B.R. at 605. In contrast, the Jarvis Court determined that the creditor's claim was not an "allowed secured claim" because the second mortgage was not secured by any value. Id. The Jarvis Court found that the debtor could only accomplish the temporary treatment of the mortgage as unsecured during the life of the plan. In re Jarvis, 390 B.R. at 605-06. The Court concluded:
In re Jarvis, 390 B.R. at 605-06. This Court declines to follow Jarvis. Although the Jarvis Court recognized that a wholly unsecured claim is not an allowed secured claim under Section 1325, it ignored the consequence of that determination. Once it is determined that the claim is not an allowed secured claim pursuant to Section 506(a), by its terms, Section 1325(a)(5)(B) is inapplicable.
In In re Mendoza, 2010 WL 736834, the United States Bankruptcy Court for the District of Colorado relied on Jarvis in finding that a Chapter 13 debtor who was ineligible for a discharge under 1328(f) could not strip off a wholly unsecured mortgage. In so holding, the Mendoza Court disregarded the Tenth Circuit Bankruptcy Appellate Panel case of Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166 (10th Cir. BAP 2005), which held that Section 1322(b)(2) does not prohibit the modification of a wholly unsecured claim. In an unreported decision, the Mendoza Court found that the creditor's second lien "appears to be void under § 506(d), because it secures a claim that, at the time of petition, is not an allowed secured claim." In re Mendoza, 2010 WL 736834 at *2. The Mendoza Court also noted that Section 1325(a)(5) was "inapplicable to this case because it relates solely to allowed secured claims under a Chapter 13 plan." In re Mendoza, 2010 WL 736834 at *2 n. 1. However, the Court favorably cited Jarvis and Blosser and found that "[a]llowing a debtor to file Chapter 7, discharge all dischargeable debts, and then immediately file Chapter 13 to strip off a second mortgage lien would not be much different than simply avoiding the mortgage lien in the Chapter 7 itself." Id. at *3 (quoting In re Blosser, 2009 WL 1064455 at * 1) (internal quotations omitted). The Mendoza Court held that allowing the debtors to avoid a wholly unsecured second mortgage lien in a Chapter 20 case would be akin to granting the debtors a discharge of that debt, rendering the bar set forth in Section 1328(f) inoperable. In re Mendoza, 2010 WL 736834 at *4.
Similarly, in this case, TD Bank asserts that the holdings in Dewsnup and Ryan prevent the Debtors from filing the instant Chapter 13 case for the sole purpose of stripping off its lien. TD Bank argues that because a debtor cannot lien strip in a Chapter 7 case, a debtor cannot obtain the benefit of a Chapter 7 discharge and then file a Chapter 13 case to accomplish what they were unable to do in Chapter 7. This Court disagrees. The debt owed to TD Bank was discharged in the Debtors' Chapter 7 case. As such, the Debtors' personal liability to TD Bank was eliminated and TD Bank would have no right to collect in state court from the Debtors. Further, if the Debtors' sole purpose in filing the instant case was to strip off TD Bank's lien, then the Debtors would have to overcome any allegations of bad faith at the plan confirmation stage pursuant to Section 1322(b). In re Tran, 431 B.R. at 237-38.
Another case adopting the majority view is In re Fenn, 428 B.R. 494 (Bankr.N.D.Ill. 2010). In Fenn, the United States Bankruptcy Court for the Northern District of Illinois determined that "[w]hether a lien can be avoided under § 506(d) should turn on whether its underlying claim has been disallowed." In re Fenn, 428 B.R. at 498. The distinction between valuation under Section 506(a) and disallowance of a claim is critical to Fenn's analysis. The Fenn Court agreed with the debtors that the junior lien could be valued at zero for confirmation purposes, but the lien could not be avoided until completion of the plan and entry of a Chapter 13 discharge order.
This Court does not find the reasoning in Fenn persuasive. It is unclear from Fenn's analysis how the unsecured lienholder can establish an "allowed secured claim" to trigger the application of Section 1325(a)(5) where there is no value to support its lien. Retaining an in rem claim following a Chapter 7 discharge does not produce an allowed secured claim for purposes of Section 1325(a)(5) where there is no value to support the lien. It is also important to note that the Seventh Circuit has not ruled on whether Section 1322(b)(2) prohibits the avoidance of wholly unsecured liens. In re Fenn, 428 B.R. at 502. The conclusion in Fenn that lien avoidance under Section 506(d) turns on whether the underlying claim has been disallowed is also inconsistent with the holding of Johnson v. Asset Management and those cases following Johnson as previously discussed. See supra note 8. The Fenn Court addressed this issue noting that the decisions that followed Johnson were issued before the specific lien retention provisions of §§ 1325(a)(5)(B)(i)(I)(aa) and (bb) were added to the Code by the BAPCPA. However, the analysis in Johnson permitting lien avoidance under Section 506(d) was recently upheld by the Fourth Circuit Court of Appeals in two post-BAPCPA decisions. See, e.g., Suntrust Bank v. Millard (In re Millard), 414 B.R. 73 (D.Md.2009), aff'd, 2010 WL 5158561 (4th Cir. Dec.15, 2010); First Mariner Bank v. Johnson, 411 B.R. 221 (D.Md.2009), aff'd, 2011 WL 52358 (4th Cir. Jan.06, 2011).
Although this Court rejects TD Bank and the Trustee's position that lien avoidance in a Chapter 20 case is contingent upon a debtor's eligibility to receive a discharge, TD Bank is still afforded some protection by another provision of the Bankruptcy Code.
For these reasons, the Court finds that TD Bank's claim is not an allowed secured claim. Consequently, Section 1325(a)(5) does not apply to its claim and the Debtors' eligibility for discharge is not required to confirm their plan. TD Bank is protected in the event the Debtors' plan is not confirmed or if their case is dismissed prior to plan completion because the lien will revert back to its original status under Section 349(b)(1)(C). The same is true upon conversion to Chapter 7 because the lien avoidance does not occur until plan completion and Dewsnup and Ryan prevent lien stripping in Chapter 7.
It does not automatically follow from the foregoing analysis that the Amended Plan should be confirmed. Section 1325(a)(3) provides: "... the court shall confirm a plan if—the plan has been proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1325(a)(3). Courts consider "the totality of circumstances on a case by case basis" when determining whether a Chapter 13 plan meets the good faith requirement of Section 1325(a)(3). Deans v. O'Donnell, 692 F.2d 968 (4th Cir.1982). The Deans Court set forth a suggested and non-inclusive list of factors to be considered when examining the totality of circumstances, including:
Deans, 692 F.2d at 972. "These factors were supplemented in Neufeld v. Freeman, 794 F.2d 149 (4th Cir.1986), to add an inquiry into whether a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of those claims; and whether, despite even the most egregious pre-filing conduct, the plan nevertheless represents a good faith effort by the debtor
Cushman, 217 B.R. at 477.
This Court has considered the totality of circumstances in its good faith analysis. With respect to the factors enunciated in Deans, the Court finds that the balance of these factors favors a finding of good faith. Mrs. Bracey-Davis testified on the issue of good faith at the January 26, 2010 hearing. Her testimony was uncontroverted and the Court found her to be a credible witness. Mrs. Bracey-Davis testified that their Chapter 7 case was filed to (i) discharge unsecured debt, (ii) strip down or cram down liens from their primary residence and rental property, and (iii) obtain a loan modification to address the mortgage arrears that had accrued prior to filing.
With respect to the Amended Plan, the Debtors propose to pay the Trustee $1,110.00 per month for months 1-5, and $1,550.00 per month for months 6-60. Their total plan funding is $90,800.00 to be paid over 60 months. Debtors' bankruptcy schedules reflect that all of the Debtors' disposable income is being paid into their plan. Additionally, the proposed five-year plan term is the maximum period proscribed by the Bankruptcy Code. Both of these factors support a finding of good faith. As for distributions under the Amended Plan, a significant portion of the Debtors' plan payments will be applied to their prepetition mortgage arrears and approximately $10,000.00 will be distributed to those creditors who filed unsecured claims. This is not a case where the Debtors are attempting to strip off liens and not pay anything to unsecured creditors.
In considering the Debtors' past bankruptcy filings, the Debtors are not "serial filers" in the abusive sense of the term. This is only the Debtors' second case, the first of which was filed 15 months earlier and resulted in a Chapter 7 discharge. The Court also finds the Debtors' situation to be exceptional. When they filed for Chapter 7, they were in need of the protections afforded by the Bankruptcy Code. Mrs. Bracey-Davis testified that after the Debtors obtained their discharge, their mortgage modification was denied and additional mortgage arrears accrued. The Debtors also incurred new consumer debt to cover their living expenses. The Debtors filed their Chapter 13 case to deal with their mortgage arrears and other new debt, and to take advantage of the Chapter 13 lien stripping provisions. Although lien stripping after a Chapter 7 discharge in and of itself may be an indication of bad faith, when considered with other factors, it may be a legitimate reason to seek bankruptcy protection. See In re Bateman, 515 F.3d at 283 ("The availability of a discharge is only one factor relevant in considering whether a plan was proposed in bad faith, and that factor standing alone is insufficient to support a finding of bad faith."). Moreover, because the Debtors are ineligible for discharge, the additional inquiry required by Neufeld is inapplicable. The Court notes, however, that there was no pre-petition fraud or other wrongful conduct by the Debtors and their plan represents a good faith effort to satisfy creditors' claims.
In applying the four factors specific to Chapter 20 cases, the Court finds that this case was filed in good faith. As discussed above, the fifteen-month period that elapsed between the Debtors' Chapter 7 and Chapter 13 filings does not indicate a lack of good faith. During that time, the Debtors found new employment and also incurred new consumer debt and mortgage arrears. These changed circumstances justify a second filing and the Debtors' increased income indicates that the Debtors will be able to comply with the terms of the Amended Plan. Lastly, as previously stated, although the Debtors are seeking to strip off TD Bank's lien in their current case, which they could not do in their prior case, that element, standing alone, is not enough to find a lack of good faith under the circumstances of this case.
The fourth Cushman element is similar to the requirement of Section 1325(a)(7) that a debtor's petition be filed in good faith (as opposed to the requirement of Section 1325(a)(3) that a debtor's plan be proposed in good faith). Here, as already detailed, the Debtors have legitimate claims to be paid through their Chapter 13 plan, including significant mortgage arrears and student loan debt. The Debtors' inability to fund a 100% plan weighs against them but not enough to find bad faith under the facts of this case. See, e.g., In re Hill, 440 B.R. 176, 185 (Bankr. S.D.Cal.2010) (the Bankruptcy Court found no evidence of bad faith where the debtors had no equity in their non-exempt assets and were devoting a sum greater than their disposable income to their plan to provide for a minimal dividend to their unsecured creditors). There is no evidence that the Debtors are attempting to manipulate the bankruptcy system or abuse the purpose and spirit of the Code. This is not a case where the Debtors were capable of funding a plan, but chose to take advantage of the benefits of Chapter
In sum, after considering the totality of circumstances, the Court finds that the Amended Plan was proposed in good faith and the Debtors' petition was filed in good faith, as required by Sections 1325(a)(3) and (a)(7).
For the above-stated reasons, the Motion is granted and the Amended Plan is confirmed. Separate orders shall issue.
11 U.S.C. § 1325(a)(5).
Id. at 236-37 (footnote omitted). This analysis, however, is not dependent on section 1325(a)(5)(B)(i)(II) as the protections afforded under section 349(b)(1)(C) automatically arise upon dismissal. The Tran court further found, as this Court has, that nothing in section 1325 conditions confirmation of a debtor's plan on the eligibility of the debtor for a discharge. Id. at 235 ("Moreover, nothing in § 506, § 1322, or any other section of the Bankruptcy Code provides that a chapter 13 debtor's right to modify or strip off liens is conditioned on the debtor being eligible for a discharge.").
