In Re Fair
2011 U.S. Dist. LEXIS 43025
| E.D. Wis. | 2011Background
- Debtor Sandra Lee Fair filed a Chapter 13 petition on April 29, 2010 after receiving a Chapter 7 discharge on March 29, 2010.
- Property at 3166 N. 50th Street, Milwaukee, WI, has a market value of $48,000; first mortgage balance is $56,800 and second mortgage balance is $48,000, both held by GMAC Mortgage.
- GMAC's second mortgage is wholly unsecured because the senior lien exceeds the property's value; the court values the second lien at the remaining value of the property.
- GMAC did not participate in the adversary proceeding or file a claim for the second mortgage and is not a party to this appeal.
- Fair sought to treat GMAC's second mortgage as unsecured and to strip off the lien pursuant to Chapter 13, despite the impending § 1328(f)(1) discharge prohibition.
- The bankruptcy court denied the strip-off, leading to an appeal where the district court ultimately held that lien stripping can occur in a no-discharge Chapter 13 case and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §1328(f)(1) disallows lien stripping in a no-discharge Chapter 13 | Fair: lien stripping is independent of discharge and allowed under §1322(b)(2). | GMAC: §1328(f)(1) bars discharge, which precludes the strip-off mechanism. | Lien stripping permitted in no-discharge Chapter 13. |
| Whether wholly unsecured junior liens may be stripped in Chapter 13 when the residence is undersecured | Unsecured junior lien can be stripped under §506(a) and §1322(b)(2). | Lien stripping is improper if it effectively functions as a discharge. | Wholly unsecured junior lien can be stripped in Chapter 13. |
| Relation of 506(a)/(d) to lien stripping in Chapter 13 | Valuation under §506(a) supports recharacterizing the lien as unsecured for stripping. | Stripping authority is limited by discharge provisions and 506(d) concerns. | 506(a) valuation supports stripping; 506(d) not the controlling authority in Chapter 13. |
| Whether the antimodification clause of §1322(b)(2) protects the lien if the residence remains partially secured | Antimodification does not apply to wholly unsecured liens; stripping is allowed. | Antimodification may limit modifications if there is any partial security. | Antimodification does not preclude stripping when the lien is wholly unsecured. |
| whether bad faith or insufficient good faith may defeat lien stripping in a no-discharge Chapter 13 | No dispositive bad-faith finding is necessary to deny stripping; proper framework supports stripping. | Good faith considerations govern the appropriateness of using Chapter 13 for lien avoidance. | Court notes good faith review is needed on remand; not dispositive at this stage. |
Key Cases Cited
- In re Jarvis, 390 B.R. 600 (Bankr.C.D. Ill. 2008) (no-strip of a no-discharge Chapter 13 case; lien modification requires discharge or traditional discharge-like effects)
- In re Fenn, 428 B.R. 494 (Bankr.N.D. Ill. 2010) (no-strip-off under §1328(f) in no-discharge Chapter 13)
- In re Gerardin, 447 B.R. 342 (Bankr.S.D. Fla. 2011) (rejects strip-off in no-discharge Chapter 13)
- In re Tran, 431 B.R. 230 (Bankr.N.D. Cal. 2010) (§1328(f) does not preclude strip-off; charting split among circuits)
- In re Hill, 440 B.R. 176 (Bankr.S.D. Cal. 2010) (supports lien stripping in Chapter 13 absent discharge constraint)
- In re Casey, 428 B.R. 519 (Bankr.S.D. Cal. 2010) (supports stripping in Chapter 13 where appropriate)
- In re Bartee, 212 F.3d 277 (5th Cir. 2000) (recognizes lien stripping in rehabilitative chapters)
- In re Zimmer, 313 F.3d 1220 (9th Cir. 2002) (emphasizes §506(a) valuation control over security status)
- Dewsnup v. Timm, 502 U.S. 410 (U.S. Supreme Court 1992) (limits §506(d) as to lien avoidance in disallowed claims)
- Nobelman v. American Savings Bank, 508 U.S. 324 (U.S. Supreme Court 1993) (defines treatment of liens under §1322(b)(2) for secured claims on residence)
- Johnson v. Home State Bank, 501 U.S. 78 (Supreme Court 1991) (distinguishes in rem vs in personam effects of bankruptcy discharge)