In re Cain

513 B.R. 316

In re Andrea M. CAIN, Debtor.

BAP No. 13–8045.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Submitted: May 13, 2014.

Decided and Filed: July 14, 2014.

ON BRIEF: Charles J. Van Ness, Mayfield Heights, OH, for Appellant.

Before: HARRISON, HUMPHREY and PRESTON, Bankruptcy Appellate Panel Judges.

OPINION

MARIAN F. HARRISON, Bankruptcy Judge.

Debtor Andrea M. Cain (the “Debtor”) appeals the August 9, 2013 order of the United States Bankruptcy Court for the Northern District of Ohio (the “Bankruptcy Court”) denying the Debtor's unopposed Motion to Avoid the Mortgage Lien of Amerifirst Home Improvement Financial Company (“Amerifirst”). For the reasons that follow, the Panel REVERSES the Bankruptcy Court's denial of the Debtor's Motion to Avoid the Mortgage Lien of Amerifirst.

I. ISSUES ON APPEAL

The Debtor raises two issues in this appeal. The central and determinative issue is whether a debtor may strip off a wholly unsecured, inferior mortgage lien on the debtor's primary residence in a Chapter 13 case filed less than four years after having received a Chapter 7 discharge. The second issue is whether a bankruptcy court is bound by the terms of a confirmed plan.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit Court (“BAP”) has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the Panel, and no party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (quotation marks and citations omitted). “[T]he concept of finality applied to appeals in bankruptcy is broader and more flexible than the concept applied in ordinary civil litigation.” Millers Cove Energy Co., Inc. v. Moore (In re Millers Cove Energy Co., Inc.), 128 F.3d 449, 451 (6th Cir.1997) (citations omitted). “This finality requirement is considered in a more pragmatic and less technical way in bankruptcy cases than in other situations.... In bankruptcy cases, a functional and practical application [of Section 158] is to be the rule.” Lindsey v. O'Brien, Tanski, Tanzer & Young Health Care Providers of Connecticut (In re Dow Corning Corp.), 86 F.3d 482, 488 (6th Cir.1996) (quotation marks and citation omitted). In bankruptcy cases, an order that finally disposes of discrete disputes within a larger case may be appealed immediately. Id. It appears that the Bankruptcy Court's order denying the Debtor's motion to avoid Amerifirst's mortgage lien is a final order because it was entered after the completion of the Debtor's confirmed plan and the closing of her case without a discharge. No other issues remain in the Bankruptcy Court.

There are no factual disputes, and the Bankruptcy Court denied the Debtor's motion based on conclusions of law. Conclusions of law are reviewed de novo. Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (6th Cir. BAP 1997). “Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (6th Cir. BAP 2007) (citation omitted). Essentially, the reviewing court decides the issue “as if it had not been heard before.” Mktg. & Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In re Mktg. & Creative Solutions, Inc.), 338 B.R. 300, 302 (6th Cir. BAP 2006) (citation omitted). “No deference is given to the trial court's conclusions of law.” Id.

III. FACTS

The Debtor first filed a Chapter 7 petition and received a discharge on February 1, 2008. On July 3, 2008, the Debtor filed the present Chapter 13 case to pay an outstanding auto loan and tax obligations, to cure the default on her first mortgage, and to avoid a wholly unsecured second mortgage on her residence. The Debtor's Amended Chapter 13 Plan, dated August 21, 2008, was confirmed on September 18, 2008. The confirmed Chapter 13 plan included the following provision:

Debtors will avoid the mortgage and/or judgment liens of Amerifirst Home Improvement Finance, Squires Construction Company, & Ohio Department of Taxation, which [are] wholly unsecured pursuant to 11 U.S.C. §§ 506(a), 1322(b)(2) & 1325(a)(5)(B), and which wholly impairs Debtors' exemption in their residence home pursuant to 11 U.S.C. § 522(f). Any unsecured claim filed by said creditor(s) shall be disallowed as discharged in Debtors' Chapter 7 Bankruptcy Case No. 08–10687 filed February 1, 2008 unless otherwise allowed by a separate order of the Court.

Because the Debtor had received a Chapter 7 discharge within the preceding four years, the Debtor was not eligible for a discharge in her Chapter 13 case. See11 U.S.C. § 1328(f)(1). Accordingly, upon completion of the Debtor's payments under the plan, the Chapter 13 Trustee filed his Motion for Order Releasing Wages and Closing Case Without a Discharge. The Chapter 13 Trustee's motion was granted on May 6, 2013. On May 17, 2013, the Debtor filed a Motion to Avoid Mortgage Lien on Real Estate against Amerifirst in order to effectuate the provisions of her confirmed Chapter 13 Plan and to avoid Amerifirst's second mortgage lien on her residence. At the time of the Chapter 13 filing, the Debtor's residence was valued at not more than $100,800. The residence was encumbered by Everhome Mortgage Company's first mortgage in the amount of $106,306.38 and by Amerifirst's second mortgage in the amount of $9,415.28.

No party-in-interest objected to the Debtor's Motion to Avoid Mortgage Lien on Real Estate, however, the Bankruptcy Court denied the motion by order, dated August 9, 2013. The Bankruptcy Court held:

The lien stripping power of 11 U.S.C. § 506 is unavailable to Debtor. She received a Chapter 7 discharge within four years of filing this case and is therefore ineligible for a Chapter 13 discharge. 11 U.S.C. § 1328(f)(1). Pursuant to § 1325(a)(5), the lien stays in place until discharge or payment of the underlying debt. Because the Debtor is ineligible for a discharge, the mortgage lien will stay in place until payment of the underlying debt.

IV. DISCUSSION

The determinative issue in this appeal concerns the interplay between various provisions of the Bankruptcy Code affecting “Chapter 20” debtors.¹ Specifically, the issue is whether a debtor may strip off a wholly unsecured, inferior mortgage lien on the debtor's primary residence in a Chapter 13 case filed less than four years after having received a Chapter 7 discharge.

This question has not been addressed by the Sixth Circuit. Two Circuit Courts and one Bankruptcy Appellate Panel have considered it, finding that a valueless lien can be stripped, regardless of discharge eligibility. Wells Fargo Bank, N.A. v. Scantling (In re Scantling), 754 F.3d 1323, 2014 WL 2750349, at *5 (11th Cir. June 18, 2014); Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir.2013); Fisette v. Keller (In re Fisette), 455 B.R. 177, 185 (8th Cir. BAP 2011). Bankruptcy courts, however, are split on the question and on their approach.

A. Lien Stripping in Chapter 13 Cases

Under 11 U.S.C. § 1322(b)(2) a debtor may not modify the rights of “holders of secured claims” who hold a security interest in real property that is the debtor's principal residence. In Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), the United States Supreme Court considered whether a debtor could bifurcate a partially secured claim on the debtor's principal residence. The Nobelman Court first determined the proper classification of a claim as “secured” or “unsecured.” Id. at 328, 113 S.Ct. 2106. Finding that a claim should be classified as “secured” if any portion of the claim is secured regardless of whether the amount of the claim exceeds the value of the security interest in the debtor's principal residence, the Nobelman Court held that the creditor's rights were fully protected under the anti-modification clause in 11 U.S.C. § 1322(b)(2). Id.

In Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir.2002), the Sixth Circuit addressed “whether the implications of Nobelman would bar modification of the rights of a creditor who, although the holder of a lien on the Chapter 13 debtor's homestead, has solely an ‘unsecured claim’ under § 506(a).” Id. at 664. Like the Court in Nobelman, the Lane Court began its analysis by determining the proper classification of the claim as “secured” or “unsecured.” Id. at 669. Because the second mortgage on the debtor's principal residence in Lane had no value at all due to the amount of prior liens having exceeded the value of the property, the Court determined that the claimant held an unsecured claim under 11 U.S.C. § 506(a), and therefore, 11 U.S.C. § 1322(b)(2) did not prohibit the stripping off of the lien. Id.

B. Lien Stripping in Chapter 20 Cases

1. Ineligibility to Receive a Discharge in a Chapter 20 Case

Pursuant to 11 U.S.C. § 1328(f), a debtor who received a discharge in a Chapter 7, 11, or 12 case filed within four years of the debtor filing a subsequent Chapter 13 petition is ineligible to receive a discharge in the subsequent Chapter 13 case. A plain reading of 11 U.S.C. § 1328(f) only prevents a discharge. It does not prevent an otherwise eligible debtor from seeking and receiving Chapter 13 relief. In re McGhee, 342 B.R. 256, 258 (Bankr.W.D.Ky.2006) (citation omitted). This reading is consistent with 11 U.S.C. § 109, which does not preclude Chapter 13 relief to a debtor that has recently received a discharge in Chapter 7 and is ineligible for a discharge in Chapter 13. In re Tran, 431...