488 B.R. 537
Bankr. E.D.N.Y.2013Background
- Debtor Manuel Wong (a/k/a Manuel Baldeon) filed Chapter 13 after a Chapter 7 discharge in 2011; discharge occurred within four years before the current filing, rendering him ineligible for discharge under §1328(f).
- Property is the debtor’s principal residence, a two-family dwelling valued at $350,000, with monthly income of $1,700 from the property.
- Senior lienholder HSBC Mortgage Corp. USA holds first priority lien for $393,597; Green Tree Servicing, LLC holds a second priority lien for $198,511; Mortgage World Bankers, Inc. holds a junior lien for $25,082.
- Debtor seeks to avoid the junior liens under §506(a) and reclassify the underlying claims as unsecured, then treat them as unsecured in a Chapter 13 plan under §1322(b) and §1325(a)(5).
- Trustee moves to dismiss the adversary proceeding, arguing lien avoidance cannot be pursued where the debtor is ineligible for discharge and liens are secured; Debtor counters that wholly unsecured liens may be avoided under §506(a) with §1322(b) modification and that §1325(a)(5) does not apply to unsecured claims.
- Value of the property is less than the first-priority lien, rendering junior liens wholly unsecured under §506(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May a Chapter 13 debtor ineligible for discharge modify a wholly unsecured junior lien under §1322(b)(2)? | Debtor liability is wholly unsecured under §506(a); §1322(b)(2) permits modification of unsecured claims. | Trustee argues §1322(b)(2) antimodification applies to secured claims; liens by 506(a) remain secured until discharge. | Yes; the court permits modification of wholly unsecured junior liens under §1322(b)(2). |
| Are the Defendants’ liens secured under §506(a) given the property value and senior lien, making §1322(b)(2) inapplicable? | Lien values render the Defendants’ claims wholly unsecured under §506(a). | Liens are considered secured by an interest in the debtor’s residence despite value, triggering §1322(b)(2) antimodification. | No; under Pond, wholly unsecured after §506(a) valuation may be modified under §1322(b)(2). |
| Does §1325(a)(5) apply to plan treatment when the debtor is not dischargeable, i.e., can lien avoidance occur absent discharge? | If §506(a) makes liens unsecured, §1325(a)(5) should not apply to bar modification. | §1325(a)(5) requires lien retention until discharge or payment for secured claims; no discharge implies prohibitions. | No; §1325(a)(5) does not apply to wholly unsecured claims under §506(a) for plan confirmation of lien avoidance. |
| Is §506(d) an independent basis to avoid liens lacking value, or is lien avoidance governed by §1322(b)(2) in Chapter 13? | §506(d) should void liens that secure unsecured claims upon lack of value. | Dewsnup forbids using §506(d) to avoid liens that are otherwise allowed and secured; §1322(b)(2) suffices. | §506(d) is not an independent basis for lien avoidance in this context; §1322(b)(2) governs modification of unsecured claims. |
Key Cases Cited
- Nobelman v. American Sav. Bank, 508 U.S. 324 (Supreme Court 1993) (value-based scope of §1322(b)(2) antimodification)
- In re Pond, 252 F.3d 122 (2d Cir. 2001) (wholly unsecured liens may be modified; value dictates secured status under §506(a))
- Dewsnup v. Timm, 502 U.S. 417 (Supreme Court 1991) (liens pass through bankruptcy unaffected; §506(d) cannot void secured liens that are allowed)
- Johnson v. Home State Bank, 501 U.S. 78 (Supreme Court 1991) (discusses plan modification and discharge requirements under §1322(b))
- In re Okosisi, 451 B.R. 90 (Bankr. D. Nev. 2011) (wholly unsecured after §506(a) has no secured claim; §1325(a)(5) does not apply)
- In re Hill, 440 B.R. 183 (Bankr. S.D. Cal. 2010) (supports view that unsecured §506(a) claims are not secured for §1322/§1325 purposes)
- In re Orkwis, 457 B.R. 243 (Bankr. E.D.N.Y. 2011) (treats lien retention until discharge; §1325(a)(5) applicability debated)
- In re Gerardin, 447 B.R. 342 (Bankr. S.D. Fla. 2011) (warns against de facto discharge via lien strip without discharge)
- In re Miller, 462 B.R. 421 (Bankr. E.D.N.Y. 2011) (supports treating wholly unsecured liens under §506(a) for §1322/§1325)
- Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002) (unsecured claims may be modified under §1322(b)(2))
- Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir. 2002) (if lien has no value, claimant holds unsecured claim; modification allowed)