Boukatch v. MidFirst Bank (In re Boukatch)

533 B.R. 292

In re Serge Michel BOUKATCH and Lori Jean Boukatch, Debtors.

Serge Michel Boukatch; Lori Jean Boukatch, Appellants

v.MidFirst Bank; Russell A. Brown, Chapter 13 Trustee, Appellees.

BAP No. AZ–14–1483–KiPaJu.

Bankruptcy No. 2:14–bk–04721–EPB.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on June 19, 2015.

Filed July 9, 2015.

Lawrence D. Hirsch of Parker Schwartz, PLLC, Phoenix, AR, argued for appellants; Craig Lawrence Friedrichs argued for appellee Chapter 13 Trustee Russell A. Brown.

Before: KIRSCHER, PAPPAS and JURY, Bankruptcy Judges.

OPINION

KIRSCHER, Bankruptcy Judge.

Chapter 13¹ debtors, Serge M. Boukatch and Lori J. Boukatch (“Debtors”), appeal an order denying their motion to avoid a lien on their principal residence.² The bankruptcy court determined that, as a matter of law, a “chapter 20”³ debtor is not entitled to avoid a wholly unsecured junior lien under §§ 506(a) and 1322(b)(2) against the debtor's principal residence when no discharge will be entered in the pending chapter 13 case. On this issue of first impression, we REVERSE and REMAND.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Debtors filed a chapter 13 bankruptcy case on February 8, 2011. They valued their residence located in Phoenix, Arizona at $187,500. Debtors identified two liens against the residence: Wells Fargo Bank NA (“Wells Fargo”) held a first lien, amounting to $228,300; and MidFirst Bank (“MidFirst”) held a second lien, amounting to $67,484.96. The bankruptcy court converted the case to a chapter 7 case on November 21, 2012. The chapter 7 trustee abandoned the residence, given it was burdensome and of inconsequential value to the estate. Debtors received a chapter 7 discharge on March 25, 2013.

Debtors filed the instant chapter 13 bankruptcy case on April 2, 2014, less than four years after the filing of Debtors' case in which they received their chapter 7 discharge. Debtors again valued their residence at $187,500. In addition to Wells Fargo's first lien for $228,300, Debtors identified MidFirst's second, wholly unsecured junior lien for $67,484, contending that MidFirst held a lien only; their personal liability on this debt had been discharged in the prior chapter 7 case.

Debtors filed an amended chapter 13 plan on June 27, 2014, which provided the following regarding MidFirst's junior lien:

LIEN STRIPPING:

SECOND LIEN: The claim of MidFirst Bank was discharged on 3/25/13 (dkt # 89) in Debtors' Chapter 7 case (2:11–bk–03143 RJH) and this second place lien is totally unsecured. The property is encumbered by a first lien in favor of Wells Fargo in the amount of $228,300 and the fair market value of the property is $187,500. Debtors' counsel shall file a separate motion to set aside the MidFirst Bank lien prior to confirmation of the plan pursuant to 11 U.S.C. § 506(a) and the lien of creditor, MidFirst Bank shall be stripped from the property. No payments shall be made to MidFirst Bank.

Am. Ch. 13 Plan, Dkt. no. 20 at 6. Debtors conceded they were ineligible for a chapter 13 discharge under § 1328(f)(1). Id. Appellee, Chapter 13 Trustee Russell A. Brown (“Trustee”), who supports Debtors on appeal, filed a motion to deny entry of discharge; the bankruptcy court granted that motion.

On July 7, 2014, Debtors filed a motion to determine the value of the residence, seeking to avoid or “strip off” MidFirst's wholly unsecured junior lien under §§ 506(a) and 1322(b)(2) (the “Lien Strip Motion”). MidFirst did not object to Debtors' amended chapter 13 plan or the Lien Strip Motion; Trustee did not object to the “Lien Stripping” provision in Debtors' amended plan.

On July 28, 2014, Debtors filed a Notice of No Objection as to the Lien Strip Motion. Despite the lack of any objection, the bankruptcy court denied the Lien Strip Motion on October 1, 2014. The bankruptcy court did not conduct a hearing. The court's order sets forth its limited findings and conclusions:

The question presented is whether a “chapter 20” debtor can invoke § 506 and § 1322 to permanently strip unsecured liens, in the absence of a discharge. Under the analysis of Victorio v. Billingslea, 470 B.R. 545 (S.D.Cal.2012), the answer is no. For this reason, the motion is denied.

Order, Dkt. no. 40. Debtors timely filed their notice of appeal on October 7, 2014.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(K). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUE

Is a “chapter 20” debtor entitled to avoid a wholly unsecured junior lien against the debtor's principal residence when no discharge will be entered?

IV. STANDARD OF REVIEW

The bankruptcy court's conclusions of law, including its interpretation of the Bankruptcy Code, are reviewed de novo. Zurich Am. Ins. Co. v. Int'l Fibercom, Inc. (In re Int'l Fibercom, Inc.), 503 F.3d 933, 940 (9th Cir.2007).

V. DISCUSSION

A. The Ninth Circuit Court of Appeals has a pending appeal that may address, in part, whether a lien may be stripped off a principal residence in the absence of a discharge.

The question before us is whether a chapter 20 debtor can avoid or “strip off” a wholly unsecured junior lien against the debtor's principal residence in the absence of a discharge. More specifically, can a debtor, who has been discharged of personal liability for a home mortgage debt by receiving a chapter 7 discharge, modify the in rem rights of the holder of the mortgage debt by avoiding the lien through a chapter 13 plan, even though the debtor is ineligible for discharge? The Ninth Circuit has not yet addressed this issue; however, the Circuit may consider this issue, among others, in the In re Blendheim appeal, No. 13–35354. In an earlier order which is not on appeal to the Circuit, the bankruptcy court in Blendheim held that a debtor need not be eligible for a chapter 13 discharge to file a chapter 13 plan that proposes to strip off a wholly unsecured lien from the debtor's principal residence. In re Blendheim,⁴ 2011 WL 6779709, at *5 (Bankr.W.D.Wash. Dec. 27, 2011). Other facts and issues may distinguish Blendheim from the appeal before us. The issue raised in Blendheim involves a default order disallowing a secured lender's proof of claim and the subsequent process to avoid that lender's first lien. In Blendheim, the Circuit, after oral argument, requested additional briefing on whether it “should require, consistent with Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), that a bankruptcy court first determine that a lien is substantively invalid before voiding that lien under [ ] § 506(d).” Order, Ninth Circuit Court of Appeals No. 13–35354, Dkt. no. 49, Dec. 22, 2014. The strip off of a junior wholly unsecured lien in a chapter 13 case that we address in our present appeal is far more common than the issues before the Ninth Circuit in Blendheim.

Two other Circuit Courts of Appeals and two Bankruptcy Appellate Panels have considered the issue before us, each holding that such liens may be stripped, regardless of the debtor's eligibility for a discharge. See Wells Fargo Bank, N.A. v. Scantling (In re Scantling), 754 F.3d 1323, 1325 (11th Cir.2014), abrogating In re Gerardin, 447 B.R. 342 (Bankr.S.D.Fla.2011) (holding that chapter 20 debtors could not permanently strip off wholly unsecured junior liens) and In re Quiros–Amy, 456 B.R. 140 (Bankr.S.D.Fla.2011) (same); Branigan v. Davis (In re Davis), 716 F.3d 331, 337–38 (4th Cir.2013) ; In re Cain, 513 B.R. 316, 322 (6th Cir. BAP 2014) ; Fisette v. Keller (In re Fisette), 455 B.R. 177, 186–87 (8th Cir. BAP 2011). As we explain below, we agree that a chapter 20 debtor can strip off a wholly unsecured junior lien against the debtor's principal residence in the absence of a discharge.

B. Lien stripping in a typical chapter 13 case.

In a chapter 13 case in which the debtor is eligible for discharge, §§ 506(a) and 1322(b) enable the debtor to strip off a wholly unsecured lien against the debtor's principal residence. Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir.2002). The lien strip procedure in a chapter 13 case is a two-step process. Id. at 1226–27 (following Nobelman v. Am. Sav. Bank (In re Nobelman), 508 U.S. 324, 328–29, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (court must first engage in the § 506(a) valuation process before determining the claim's status for purposes of § 1322(b)(2) )). Section 506(a),⁵ which is applied first, provides a valuation procedure and bifurcates creditors' claims into “secured claims” and “unsecured claims.” Id. at 1222–23. “ ‘Secured claim’ is a term of art within the Bankruptcy Code, and means something different than it does for a creditor to have a security interest or lien outside of bankruptcy.” In re Okosisi, 451 B.R. 90, 93 (Bankr.D.Nev.2011). Whether a creditor who has a security interest in the debtor's property is considered a “secured” creditor under the Bankruptcy Code depends upon the valuation of the property. In re Zimmer, 313 F.3d at 1223 (citing § 506(a) ). A claim is not a “secured claim” to the extent that it exceeds the value of the property that secures it. Id.

Section 1322(b)(2)⁶ allows chapter 13 debtors to modify the rights of creditors holding both secured and unsecured claims. See § 1322(b)(2) (directing that a chapter 13 plan may “modify the rights of holders of secured claims ... or of holders of unsecured claims”). But, a chapter 13 debtor may not modify the rights of “holders of secured claims” who only hold a security interest in real property that is the debtor's principal residence. Id. This subsection is commonly known as the “antimodification” provision. “However, the antimodification protection of [§ ]1322(b)(2) only operates to benefit creditors who may be classified as secured creditors after operation of [§ ]506(a).” In re Okosisi, 451 B.R. at 93 (citing In re Zimmer, 313 F.3d at 1226 ) (emphasis in original); Frazier v. Real Time Resolutions, Inc. (In re Frazier), 469 B.R. 889, 898 (E.D.Cal.2012) (ci...