FILED 1 ORDERED PUBLISHED JUL 09 2015 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. AZ-14-1483-KiPaJu ) 7 SERGE MICHEL BOUKATCH and ) Bk. No. 2:14-bk-04721-EPB LORI JEAN BOUKATCH, ) 8 ) Debtors. ) 9 ) ) 10 SERGE MICHEL BOUKATCH; LORI ) JEAN BOUKATCH, ) 11 ) Appellants, ) 12 ) v. ) O P I N I O N 13 ) MIDFIRST BANK; RUSSELL A. ) 14 BROWN, Chapter 13 Trustee, ) ) 15 Appellees. ) ______________________________) 16 17 Argued and Submitted on June 19, 2015 at Phoenix, Arizona 18 Filed - July 9, 2015 19 Appeal from the United States Bankruptcy Court 20 for the District of Arizona 21 Honorable Eddward P. Ballinger, Jr., Bankruptcy Judge, Presiding 22 23 Appearances: Lawrence D. Hirsch of Parker Schwartz, PLLC, argued for appellants; Craig Lawrence Friedrichs argued 24 for appellee Chapter 13 Trustee Russell A. Brown. 25 26 Before: KIRSCHER, PAPPAS and JURY, Bankruptcy Judges. 27 28 1 KIRSCHER, Bankruptcy Judge: 2 3 Chapter 131 debtors, Serge M. Boukatch and Lori J. Boukatch 4 (“Debtors”), appeal an order denying their motion to avoid a lien 5 on their principal residence.2 The bankruptcy court determined 6 that, as a matter of law, a “chapter 20”3 debtor is not entitled 7 to avoid a wholly unsecured junior lien under §§ 506(a) and 8 1322(b)(2) against the debtor’s principal residence when no 9 discharge will be entered in the pending chapter 13 case. On this 10 issue of first impression, we REVERSE and REMAND. 11 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 12 Debtors filed a chapter 13 bankruptcy case on February 8, 13 2011. They valued their residence located in Phoenix, Arizona at 14 $187,500. Debtors identified two liens against the residence: 15 Wells Fargo Bank NA (“Wells Fargo”) held a first lien, amounting 16 to $228,300; and MidFirst Bank (“MidFirst”) held a second lien, 17 amounting to $67,484.96. The bankruptcy court converted the case 18 to a chapter 7 case on November 21, 2012. The chapter 7 trustee 19 abandoned the residence, given it was burdensome and of 20 inconsequential value to the estate. Debtors received a chapter 7 21 discharge on March 25, 2013. 22 Debtors filed the instant chapter 13 bankruptcy case on 23 1 24 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 25 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 26 2 Appellee MidFirst Bank has not appeared in this appeal. 27 3 We understand the term “chapter 20” debtor is a chapter 13 debtor who has received a chapter 7 discharge within the four-year 28 time period set forth in § 1328(f) prohibiting further discharge.
-2- 1 April 2, 2014, less than four years after the filing of Debtors’ 2 case in which they received their chapter 7 discharge. Debtors 3 again valued their residence at $187,500. In addition to Wells 4 Fargo’s first lien for $228,300, Debtors identified MidFirst’s 5 second, wholly unsecured junior lien for $67,484, contending that 6 MidFirst held a lien only; their personal liability on this debt 7 had been discharged in the prior chapter 7 case. 8 Debtors filed an amended chapter 13 plan on June 27, 2014, 9 which provided the following regarding MidFirst’s junior lien: 10 LIEN STRIPPING: 11 SECOND LIEN: The claim of MidFirst Bank was discharged on 3/25/13 (dkt #89) in Debtors’ Chapter 7 case (2:11-bk- 12 03143 RJH) and this second place lien is totally unsecured. The property is encumbered by a first lien in 13 favor of Wells Fargo in the amount of $228,300 and the fair market value of the property is $187,500. Debtors’ 14 counsel shall file a separate motion to set aside the MidFirst Bank lien prior to confirmation of the plan 15 pursuant to 11 U.S.C. § 506(a) and the lien of creditor, MidFirst Bank shall be stripped from the property. No 16 payments shall be made to MidFirst Bank. 17 Am. Ch. 13 Plan, Dkt. no. 20 at 6. Debtors conceded they were 18 ineligible for a chapter 13 discharge under § 1328(f)(1). Id. 19 Appellee, Chapter 13 Trustee Russell A. Brown (“Trustee”), who 20 supports Debtors on appeal, filed a motion to deny entry of 21 discharge; the bankruptcy court granted that motion. 22 On July 7, 2014, Debtors filed a motion to determine the 23 value of the residence, seeking to avoid or “strip off” MidFirst’s 24 wholly unsecured junior lien under §§ 506(a) and 1322(b)(2) (the 25 “Lien Strip Motion”). MidFirst did not object to Debtors’ amended 26 chapter 13 plan or the Lien Strip Motion; Trustee did not object 27 to the “Lien Stripping” provision in Debtors’ amended plan. 28 On July 28, 2014, Debtors filed a Notice of No Objection as
-3- 1 to the Lien Strip Motion. Despite the lack of any objection, the 2 bankruptcy court denied the Lien Strip Motion on October 1, 2014. 3 The bankruptcy court did not conduct a hearing. The court’s order 4 sets forth its limited findings and conclusions: 5 The question presented is whether a “chapter 20” debtor can invoke § 506 and § 1322 to permanently strip unsecured 6 liens, in the absence of a discharge. Under the analysis of Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012), 7 the answer is no. For this reason, the motion is denied. 8 Order, Dkt. no. 40. Debtors timely filed their notice of appeal 9 on October 7, 2014. 10 II. JURISDICTION 11 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 12 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C. § 158. 13 III. ISSUE 14 Is a “chapter 20” debtor entitled to avoid a wholly unsecured 15 junior lien against the debtor’s principal residence when no 16 discharge will be entered? 17 IV. STANDARD OF REVIEW 18 The bankruptcy court’s conclusions of law, including its 19 interpretation of the Bankruptcy Code, are reviewed de novo. 20 Zurich Am. Ins. Co. v. Int’l Fibercom, Inc. (In re Int’l Fibercom, 21 Inc.), 503 F.3d 933, 940 (9th Cir. 2007). 22 V. DISCUSSION 23 A. The Ninth Circuit Court of Appeals has a pending appeal that may address, in part, whether a lien may be stripped off a 24 principal residence in the absence of a discharge. 25 The question before us is whether a chapter 20 debtor can 26 avoid or “strip off” a wholly unsecured junior lien against the 27 debtor’s principal residence in the absence of a discharge. More 28 specifically, can a debtor, who has been discharged of personal
-4- 1 liability for a home mortgage debt by receiving a chapter 7 2 discharge, modify the in rem rights of the holder of the mortgage 3 debt by avoiding the lien through a chapter 13 plan, even though 4 the debtor is ineligible for discharge? The Ninth Circuit has not 5 yet addressed this issue; however, the Circuit may consider this 6 issue, among others, in the In re Blendheim appeal, No. 13-35354. 7 In an earlier order which is not on appeal to the Circuit, the 8 bankruptcy court in Blendheim held that a debtor need not be 9 eligible for a chapter 13 discharge to file a chapter 13 plan that 10 proposes to strip off a wholly unsecured lien from the debtor’s 11 principal residence. In re Blendheim,4 2011 WL 6779709, at *5 12 (Bankr. W.D. Wash. Dec. 27, 2011). Other facts and issues may 13 distinguish Blendheim from the appeal before us. The issue raised 14 in Blendheim involves a default order disallowing a secured 15 lender’s proof of claim and the subsequent process to avoid that 16 lender’s first lien. In Blendheim, the Circuit, after oral 17 argument, requested additional briefing on whether it “should 18 require, consistent with Dewsnup v. Timm, 502 U.S. 410 (1992), 19 that a bankruptcy court first determine that a lien is 20 substantively invalid before voiding that lien under [] § 506(d).” 21 Order, Ninth Circuit Court of Appeals No. 13-35354, Dkt. no. 49, 22 Dec. 22, 2014. The strip off of a junior wholly unsecured lien in 23 a chapter 13 case that we address in our present appeal is far 24 more common than the issues before the Ninth Circuit in Blendheim. 25 Two other Circuit Courts of Appeals and two Bankruptcy 26 27 4 Sometimes “Blendheim” is spelled with a “d” and sometimes without (“Blenheim,” as it is on Westlaw), but the correct 28 spelling is with a “d.”
-5- 1 Appellate Panels have considered the issue before us, each holding 2 that such liens may be stripped, regardless of the debtor’s 3 eligibility for a discharge. See Wells Fargo Bank, N.A. v. 4 Scantling (In re Scantling), 754 F.3d 1323, 1325 (11th Cir. 2014), 5 abrogating In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011) 6 (holding that chapter 20 debtors could not permanently strip off 7 wholly unsecured junior liens) and In re Quiros-Amy, 456 B.R. 140 8 (Bankr. S.D. Fla. 2011) (same)); Branigan v. Davis (In re Davis), 9 716 F.3d 331, 337-38 (4th Cir. 2013); In re Cain, 513 B.R. 316, 10 322 (6th Cir. BAP 2014); Fisette v. Keller (In re Fisette), 455 11 B.R. 177, 186-87 (8th Cir. BAP 2011). As we explain below, we 12 agree that a chapter 20 debtor can strip off a wholly unsecured 13 junior lien against the debtor’s principal residence in the 14 absence of a discharge. 15 B. Lien stripping in a typical chapter 13 case. 16 In a chapter 13 case in which the debtor is eligible for 17 discharge, §§ 506(a) and 1322(b) enable the debtor to strip off a 18 wholly unsecured lien against the debtor’s principal residence. 19 Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th 20 Cir. 2002). The lien strip procedure in a chapter 13 case is a 21 two-step process. Id. at 1226-27 (following Nobelman v. Am. Sav. 22 Bank (In re Nobelman), 508 U.S. 324, 328-29 (1993) (court must 23 first engage in the § 506(a) valuation process before determining 24 the claim’s status for purposes of § 1322(b)(2))). Section 25 506(a),5 which is applied first, provides a valuation procedure 26 5 27 Section 506(a)(1) provides, in relevant part, that an allowed claim of a creditor secured by a lien on property in which 28 (continued...)
-6- 1 and bifurcates creditors’ claims into “secured claims” and 2 “unsecured claims.” Id. at 1222-23. “‘Secured claim’ is a term 3 of art within the Bankruptcy Code, and means something different 4 than it does for a creditor to have a security interest or lien 5 outside of bankruptcy.” In re Okosisi, 451 B.R. 90, 93 (Bankr. D. 6 Nev. 2011). Whether a creditor who has a security interest in the 7 debtor’s property is considered a “secured” creditor under the 8 Bankruptcy Code depends upon the valuation of the property. In re 9 Zimmer, 313 F.3d at 1223 (citing § 506(a)). A claim is not a 10 “secured claim” to the extent that it exceeds the value of the 11 property that secures it. Id. 12 Section 1322(b)(2)6 allows chapter 13 debtors to modify the 13 rights of creditors holding both secured and unsecured claims. 14 See § 1322(b)(2) (directing that a chapter 13 plan may “modify the 15 rights of holders of secured claims . . . or of holders of 16 unsecured claims”). But, a chapter 13 debtor may not modify the 17 rights of “holders of secured claims” who only hold a security 18 interest in real property that is the debtor’s principal 19 residence. Id. This subsection is commonly known as the 20 “antimodification” provision. “However, the antimodification 21 5 22 (...continued) the estate has an interest is a secured claim to the extent of the 23 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 24 of such creditor’s interest is less than the amount of such allowed claim. 25 6 Section 1322(b)(2) provides that a chapter 13 plan may 26 “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is 27 the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of 28 claims.”
-7- 1 protection of [§] 1322(b)(2) only operates to benefit creditors 2 who may be classified as secured creditors after operation of 3 [§] 506(a).” In re Okosisi, 451 B.R. at 93 (citing In re Zimmer, 4 313 F.3d at 1226) (emphasis in original); Frazier v. Real Time 5 Resolutions, Inc. (In re Frazier), 469 B.R. 889, 898 (E.D. Cal. 6 2012) (citing In re Zimmer) aff’g 448 B.R. 803 (Bankr. E.D. Cal. 7 2011). 8 If, after applying § 506(a), the creditor’s claim is 9 determined to be “secured,” which includes partially secured 10 claims (i.e., undersecured claims), the creditor is still the 11 “holder of a secured claim” and the debtor is unable to reduce or 12 “strip down” the undersecured claim to the principal residence’s 13 fair market value. See In re Nobelman, 508 U.S. at 329-332; In re 14 Okosisi, 451 B.R. at 93. However, if “the claim is determined to 15 be wholly unsecured, the rights of the ‘creditor holding only an 16 unsecured claim may be modified under § 1322(b)(2),’ and the 17 creditor’s lien may be avoided, notwithstanding the 18 antimodification protection provided for in [§] 1322(b)(2).” 19 In re Okosisi, 451 B.R. at 93-94 (quoting In re Zimmer, 313 F.3d 20 at 1227); Lam v. Investors Thrift (In re Lam), 211 B.R. 36, 40 21 (9th Cir. BAP 1997) (antimodification provision protecting a loan 22 secured by an interest in debtor’s principal residence does not 23 apply if no value exists to which the security interest can 24 attach). 25 The question, therefore, becomes whether a chapter 20 debtor 26 is entitled to strip off such liens when no chapter 13 discharge 27 will be entered. Courts across the nation are split on the issue. 28 ////
-8- 1 C. Split of authority on lien stripping in chapter 20 cases. 2 The Bankruptcy Code allows debtors to file chapter 20 cases. 3 Johnson v. Home State Bank, 501 U.S. 78, 87 (1991). The Supreme 4 Court held in Johnson that nothing in the Code forecloses the 5 benefit of chapter 13 reorganization to a debtor who previously 6 has filed for chapter 7 relief. Id. Before BAPCPA, chapter 20 7 debtors could obtain a chapter 13 discharge after having received 8 a discharge in chapter 7 without restriction. The Bankruptcy 9 Abuse Prevention and Consumer Protection Act (“BAPCPA”) enacted in 10 2005 imposed a restriction by adding § 1328(f), which states that 11 a court cannot grant debtors a discharge in a chapter 13 case 12 filed within four years of the filing of a case wherein a 13 discharge was granted in chapter 7. § 1328(f)(1). 14 As stated earlier, the two Circuit Courts and two Bankruptcy 15 Appellate Panels that have addressed this issue have held that a 16 chapter 20 debtor may strip a wholly unsecured junior lien in the 17 absence of a discharge. This is one of three approaches courts 18 have adopted. See In re Jennings, 454 B.R. 252, 256-57 (Bankr. 19 N.D. Ga. 2011). 20 1. The first approach 21 Courts utilizing the first approach hold that stripping off 22 wholly unsecured liens in chapter 20 cases is not permissible 23 because it amounts to a “de facto discharge,” which is prohibited 24 by § 1328(f). Lindskog v. M & I Bank FSB (In re Lindskog), 451 25 B.R. 863, 865-66 (Bankr. E.D. Wis. 2011) (permitting chapter 20 26 debtor to strip off lien would create an “end run” around 27 § 1328(f)), aff’d, 480 B.R. 916 (E.D. Wis. 2012); In re Fenn, 428 28 B.R. 494, 500 (Bankr. N.D. Ill. 2010) (allowing permanent strip
-9- 1 off of junior mortgage lien after chapter 20 debtor completes plan 2 “results in a de facto discharge”); In re Mendoza, 2010 WL 736834, 3 at *4 (Bankr. D. Colo. Jan. 21, 2010) (allowing avoidance of 4 second mortgage lien through subsequent chapter 13 filing would be 5 tantamount to granting debtor a discharge as to that debt and 6 would render § 1328(f) inoperable), abrogated by Zeman v. Waterman 7 (In re Waterman), 469 B.R. 334 (D. Colo. 2012); In re Winitzky, 8 2009 WL 9139891, at *3 (Bankr. C.D. Cal. May 7, 2009) (“a lien 9 strip would allow a debtor to simply do indirectly what the 10 Supreme Court has ruled he may not do directly”); Blosser v. KLC 11 Fin., Inc. (In re Blosser), 2009 WL 1064455, at *1 (Bankr. E.D. 12 Wis. Apr. 15, 2009) (“[A]llowing a debtor to file Chapter 7, 13 discharge all dischargeable debts and then immediately file 14 Chapter 13 to strip off a second mortgage lien would not be much 15 different than simply avoiding the mortgage lien in the Chapter 7 16 itself. But Chapter 7 debtors are not allowed to use § 506 to 17 avoid liens.”). 18 To support their position that the Code prohibits lien 19 stripping in chapter 20 cases, these courts rely on an 20 interpretation of Dewsnup v. Timm, 502 U.S. 410, 417 (1992),7 21 which ended the practice of stripping undersecured consensual 22 liens in chapter 7 cases using § 506(d), and on the discharge 23 7 On June 1, 2015, the Supreme Court extended Dewsnup in 24 chapter 7 cases to wholly unsecured junior liens in Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995 (2015). Nobelman 25 “addressed the interaction between the meaning of the term ‘secured claim’ in § 506(a) and an entirely separate provision, 26 § 1322(b). Nobelman offers no guidance on the question presented in these [chapter 7] cases because the Court in Dewsnup already 27 declined to apply the definition in § 506(a) to the phrase ‘secured claim’ in § 506(d).” Caulkett, 135 S. Ct. at 2000 28 (citation omitted).
-10- 1 requirement in § 1325(a)(5). In re Cain, 513 B.R. at 320; In re 2 Frazier, 469 B.R. at 895. The argument continues that 3 § 1325(a)(5)(B)(i)8 requires a chapter 13 plan to provide that the 4 holder of a secured claim retain the lien securing the claim until 5 either the underlying debt is paid or a discharge is entered 6 pursuant to § 1328. In re Fenn, 428 B.R. at 500. See also In re 7 Jarvis, 390 B.R. 600, 605-06 (Bankr. C.D. Ill. 2008). If the 8 debtor is not eligible for a chapter 13 discharge due to a 9 previous chapter 7 discharge, the lien strip cannot occur, because 10 the “strip off/avoidance occurs at discharge.” In re Fenn, 428 11 B.R. at 500; accord In re Jarvis, 390 B.R. at 607. In other 12 words, these courts hold that a chapter 20 lien strip is not 13 allowed because a chapter 13 discharge is required to strip the 14 lien. 15 2. The second approach 16 Courts adopting the second approach allow chapter 20 lien 17 8 Section 1325(a)(5) provides in part that 18 with respect to each allowed secured claim provided 19 for by the plan — 20 (A) the holder of such claim has accepted the plan; [or] 21 (B) (i) the plan provides that — 22 (I) the holder of such claim retain the lien securing such claim until the earlier of — 23 (aa) the payment of the underlying debt 24 determined under nonbankruptcy law; or 25 (bb) discharge under section 1328; and 26 (II) if the case under this chapter is dismissed or converted without completion of 27 the plan, such lien shall also be retained by such holder to the extent recognized by 28 applicable nonbankruptcy law[.]
-11- 1 stripping but hold that the parties’ prebankruptcy rights are 2 reinstated by operation of law after the plan has been consummated 3 absent discharge or payment in full; therefore, the lien avoidance 4 can never be permanent. In re Victorio, 454 B.R. 759, 781 (Bankr. 5 S.D. Cal. 2011) (chapter 20 debtor cannot permanently avoid a 6 wholly unsecured junior lien without discharge or paying it in 7 full during the course of chapter 13 plan), aff’d sub nom. 8 Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012); Grandstaff 9 v. Casey (In re Casey), 428 B.R. 519 (Bankr. S.D. Cal. 2010) 10 (same); In re Jarvis, 390 B.R. at 605-06 (discharge is a necessary 11 prerequisite to permanency of lien avoidance); In re Trujillo, 12 2010 WL 4669095, at *2 (Bankr. M.D. Fla. Nov. 10, 2010) (absent a 13 discharge any modifications to creditor’s rights are not permanent 14 and have no binding effect once plan ends), aff’d sub nom. 15 Trujillo v. BAC Home Loan Servicing, L.P. (In re Trujillo), 2012 16 WL 8883694 (M.D. Fla. Aug. 10, 2012), abrogated by In re 17 Scantling, supra; In re Lilly, 378 B.R. 232, 236 (Bankr. C.D. Ill. 18 2007) (“Where a debtor does not receive a discharge, however, any 19 modifications to a creditor’s rights imposed in the plan are not 20 permanent and have no binding effect once the term of the plan 21 ends.”). In this bankruptcy case, the bankruptcy court adopted 22 this approach, relying on Victorio. 23 These courts posit that chapter 13 cases can end in only one 24 of three ways: conversion, dismissal or discharge. This is true 25 whether it be pre- or post-BAPCPA. See In re Victorio, 454 B.R. 26 at 775, 778 (citing Leavitt v. Soto (In re Leavitt), 171 F.3d 27 1219, 1223 (9th Cir. 1999)); In re Casey, 428 B.R. at 522-23. 28 They further point out that actions taken to avoid a lien are
-12- 1 undone if the case is dismissed or converted prior to the 2 successful completion of all plan payments. The argument 3 continues that because the debtor is ineligible for a chapter 13 4 discharge, the only way to make the lien avoidance “permanent” is 5 by paying the debt in full during the course of the chapter 13 6 plan. See § 1325(a)(5)(B)(i)(I)(aa), (bb). Thus, without 7 discharge, the only way to conclude the case is dismissal or 8 conversion, either of which reinstates the avoided lien. See 9 §§ 1325(a)(5)(B)(i)(II), 348(f)(1)(C)(I). 10 The bankruptcy court in In re Victorio rejected the notion 11 that § 1328(f), added by BAPCPA, created what courts have referred 12 to as the “fourth option” for permanency of lien avoidance: the 13 completion of all plan payments and closing the case without 14 discharge. 454 B.R. at 775-76, 778-80 (discussing In re Okosisi 15 and the “court-invented ‘fourth option’”); Victorio, 470 B.R. at 16 555-56 (district court rejecting the fourth option as a 17 “fallacy”). 18 3. The third approach 19 Courts adopting the third approach allow chapter 20 lien 20 stripping “because nothing in the Bankruptcy Code prevents it.” 21 In re Jennings, 454 B.R. at 257. These courts contend the 22 mechanism that voids the lien is plan completion and that chapter 23 20 cases end in administrative closing rather than dismissal. 24 Section 350(a) provides: “After an estate is fully administered 25 and the court has discharged the trustee, the court shall close 26 the case.” Rule 5009(a) provides: “If in a . . . chapter 13 case 27 the trustee has filed a final report and final account and has 28 certified that the estate has been fully administered, . . . ,
-13- 1 there shall be a presumption that the estate has been fully 2 administered.” As discharge is not available in a chapter 20 case 3 pursuant to § 1328(f), after the debtor completes all payments and 4 complies with the terms of the confirmed plan, the bankruptcy case 5 will be closed without entry of a discharge. See In re Okosisi, 6 451 B.R. at 99. Given closure and not dismissal after plan 7 completion, “the code sections that reverse any lien avoidance 8 actions contained within a chapter 13 plan upon conversion or 9 dismissal are not implicated, and, thus, do not act to prevent the 10 permanence of the lien avoidance. Once a debtor successfully 11 completes all plan payments . . . , the provisions of the plan 12 become permanent, and the lien avoidance is, similarly, 13 permanent.” Id. at 100 (citations omitted). 14 A confirmed plan is binding on the debtor and the creditor 15 and vests all property of the estate in the debtor “free and clear 16 of any claim or interest of any creditor provided for by the 17 plan.” § 1327(c). Provided the confirmed plan remains in effect, 18 avoided liens remain avoided, as the plan is binding and through 19 “res judicata precludes a creditor from bringing a collateral 20 attack of that order.” In re Okosisi, 451 B.R. at 100. Only 21 revocation of the confirmed plan or case conversion or dismissal 22 can undo the res judicata effect of a confirmed plan. Id. If all 23 confirmed plan payments are made and plan terms are satisfied, 24 confirmation of the plan will not be revoked and the case will not 25 be converted or dismissed; the case will be closed leaving the res 26 judicata effect of the order confirming the plan in place. Id. 27 In other words, under this approach, the propriety of a lien 28 strip is not dependent upon discharge. See, e.g., In re
-14- 1 Scantling, 754 F.3d at 1329-30 (chapter 20 debtors can permanently 2 strip off wholly unsecured junior liens; ineligibility for a 3 discharge is “irrelevant”); In re Davis, 716 F.3d at 337-38 (Code 4 allows chapter 20 debtors to strip off wholly unsecured junior 5 liens; eligibility for discharge is “not determinative”); In re 6 Cain, 513 B.R. at 322 (holding same and reasoning that the wholly 7 unsecured status of the creditor’s claim, rather that the debtor’s 8 eligibility for a discharge, is determinative); In re Waterman, 9 469 B.R. at 339-40 (same); In re Frazier, 469 B.R. at 895-96 10 (same); In re Fisette, 455 B.R. at 186-87 (same); In re Fair, 450 11 B.R. 853, 857-58 (E.D. Wis. 2011) (nothing in the Code ties the 12 modification of an unsecured lien to obtaining a discharge under 13 chapter 13); In re Blendheim, 2011 WL 6779709, at *5 (same); In re 14 Jennings, 454 B.R. at 257; In re Okosisi, 451 B.R. at 103 (holding 15 same and reasoning that lien avoidance under In re Zimmer is 16 independent of the granting of a discharge, and the permanence of 17 such avoidance is assured by § 1327); In re Hill, 440 B.R. 176, 18 181-82 (Bankr. S.D. Cal. 2010) (chapter 20 lien strips are 19 permitted absent discharge so long as plan otherwise complies with 20 Code requirements); In re Tran, 431 B.R. 230, 235 (Bankr. N.D. 21 Cal. 2010), aff’d, 814 F. Supp. 2d 946 (N.D. Cal. 2011). 22 D. The bankruptcy court erred in denying the Lien Strip Motion on the basis that Debtors were not eligible for a chapter 13 23 discharge. 24 We join the “growing consensus of courts” that have followed 25 the third approach and hold that nothing in the Code prevents 26 chapter 20 debtors from stripping a wholly unsecured junior lien 27 against the debtor’s principal residence, notwithstanding their 28 lack of eligibility for a chapter 13 discharge. This approach is
-15- 1 consistent with Nobelman and Zimmer, because it starts by 2 determining the status of the claim under § 506(a). See In re 3 Scantling, 754 F.3d at 1326-27, 1329 (citing Nobelman and Tanner 4 v. FirstPlus Fin., Inc, (In re Tanner), 217 F.3d 1357 (11th Cir. 5 2000), the Eleventh Circuit’s equivalent to Zimmer); In re Davis, 6 716 F.3d at 338 (citing Nobelman to hold that § 506(a) valuation 7 must be done first to determine claim’s status before analyzing 8 whether § 1322(b)(2) bars its modification); In re Cain, 513 B.R. 9 at 322 (citing Nobelman and Lane v. W. Interstate Bancorp (In re 10 Lane), 280 F.3d 663, 669 (6th Cir. 2002), the Sixth Circuit’s 11 equivalent to Zimmer, to hold that by failing to first determine 12 the proper classification of the creditor’s claim under § 506(a), 13 the bankruptcy court disregarded the “road map” set forth in 14 Nobelman and Lane). 15 No one disputes that under § 506(a) MidFirst’s lien has no 16 value because the senior lien held by Wells Fargo exceeds the 17 value of the property by approximately $40,000. Consequently, 18 Nobelman and Zimmer dictate that MidFirst’s claim is “unsecured” 19 under § 506(a). See In re Zimmer, 313 F.3d at 1223 (for creditor 20 to have a “secured claim” there must be value for the creditor’s 21 interest in the collateral). Therefore, MidFirst holds only an 22 “unsecured claim” for purposes of § 1322(b)(2); the claim is not 23 subject to its antimodification protections. See § 1322(b)(2) 24 (protecting holders of “secured claims” secured only by a security 25 in a debtor’s principal residence). 26 Contrary to those courts adopting the second approach, 27 because MidFirst’s claim is unsecured, we determine § 1325(a)(5) 28 (protecting the holder of a secured claim until the debt is paid
-16- 1 or the debtor is discharged) does not apply. This is because 2 wholly unsecured liens are not “allowed secured claims” as the 3 opening language to that section specifies. See In re Scantling, 4 754 F.3d at 1329-30 (§ 1325(a)(5) does not involve unsecured 5 claims and debtor’s ineligibility for a discharge is “irrelevant” 6 for lien strip in chapter 20 case); In re Davis, 716 F.3d at 338 7 (“Because the liens in these cases have no value, they are wholly 8 unsecured claims, which leaves no role in the analysis for section 9 1325(a)(5).”); In re Cain, 513 B.R. at 322 (same); In re Frazier, 10 469 B.R. at 898 n.10 (“Section 1325(a)(5) has no applicability to 11 unsecured allowed claims, which are separately governed by the 12 confirmation requirements of § 1325(a)(4).”); In re Fisette, 455 13 B.R. at 186 (the requirements of § 1325(a)(5) apply only to an 14 “allowed secured claim,” not a claim which has been classified 15 unsecured via § 506(a)) (emphasis in original); In re Okosisi, 451 16 B.R. at 97 (for § 1325(a)(5) to apply, the claim would first have 17 to be classified as “an allowed secured claim” within the meaning 18 of § 1325(a)(5)); In re Hill, 440 B.R. at 183. 19 To remain true to the holding of In re Zimmer, MidFirst’s 20 unsecured claim cannot logically be treated differently under 21 § 1325 than it is treated under § 1322. In re Hill, 440 B.R. at 22 183 (citing United States v. Snyder, 343 F.3d 1171, 1179 (9th Cir. 23 2003) which held that a creditor who did not hold a secured claim 24 under § 506(a) had no right to other benefits of “secured status 25 in the bankruptcy proceeding”). Under In re Zimmer, the wholly 26 unsecured status of MidFirst’s claim, rather than Debtors’ 27 eligibility for a discharge, is determinative. BAPCPA did not 28 change this outcome. In re Okosisi, 451 B.R. at 103.
-17- 1 Moreover, we also disagree with the view that a lien strip in 2 a “no discharge” chapter 20 case amounts to a “de facto” 3 discharge. In rejecting this view, one court stated: 4 Simply put, stripping off a lien is not the same thing as being discharged from personal liability for the debt 5 underlying that lien. As the Supreme Court has explained, a bankruptcy discharge “extinguishes only one mode of 6 enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an 7 action against the debtor in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84 (1991). Thus, a discharge releases 8 a debtor from in personam liability, whereas a strip off affects a creditor’s ability to proceed against the debtor 9 in rem. Fisette, 455 B.R. at 187 n.9. 10 In re Waterman, 469 B.R. at 340. By seeking to strip off a wholly 11 unsecured junior lien, Debtors seek to do just that: avoid the 12 lien. They do not seek a discharge. In re Fisette, 455 B.R. at 13 186-87. See In re Fair, 450 B.R. at 857 (“Congress did not intend 14 to prevent lien stripping through § 1328(f)(1), and it is 15 inaccurate to characterize lien stripping as a de facto discharge 16 under the bankruptcy code.”); In re Okosisi, 451 B.R. at 101 17 (§ 1328(f) only prohibits discharge and court would not read any 18 further restrictions into the Code); In re Hill, 440 B.R. at 182 19 (“Since the [creditor’s] debt was already discharged, or changed 20 to non-recourse status in the Chapter 7 case, a second discharge 21 for the Debtors in this Chapter 13 case would be redundant.”). 22 The discharge imposes a statutory injunction preventing the 23 creditor from enforcing the discharged debt against the debtor 24 personally or against specified assets; it does not release the 25 lien from the debtor’s property. In re Frazier, 448 B.R. at 809 26 (citing Johnson, 501 U.S. 78). 27 We conclude that § 1328(f)(1) does not prevent Debtors’ 28 ability to strip off MidFirst’s wholly unsecured junior lien in
-18- 1 their chapter 13 plan, because nothing in the Bankruptcy Code 2 prevents chapter 20 debtors from stripping such liens off their 3 principal residence under §§ 506(a)(1) and 1322(b)(2). We further 4 conclude that plan completion is the appropriate end to Debtors’ 5 chapter 20 case. Unlike a typical chapter 13 case, the lien 6 avoidance will become permanent not upon a discharge, but rather 7 upon completion of all payments as required under the plan. In re 8 Davis, 716 F.3d at 338; In re Frazier, 469 B.R. at 900; In re 9 Blendheim, 2011 WL 6779709, at *6; In re Okosisi, 451 B.R. at 99- 10 100; In re Frazier, 448 B.R. at 810; In re Tran, 431 B.R. at 235. 11 We conclude that the bankruptcy court erred when it denied 12 the Lien Strip Motion on the basis that Debtors were not eligible 13 for a chapter 13 discharge. 14 VI. CONCLUSION 15 For the foregoing reasons, we REVERSE the decision of the 16 bankruptcy court and REMAND for further proceedings consistent 17 with this opinion. 18 19 20 21 22 23 24 25 26 27 28
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