BAPCPA Allows The Stripping Off Of Valueless Liens By Chapter 20 Debtors

The debtors in _In re Davis_, 12-1184 (4th Cir. May 2013) filed a Chapter 7 Bankruptcy to discharge the personal liability on their unsecured debt but left their secured mortgage debt intact. A year later, they filed a Chapter 13 Bankruptcy to reorganize their debts, repay mortgage arrearages and consumer debt and to ”strip off” junior liens against their residence and a rental property. At the time of filing, their residence was worth $20 with a first lien of over $275,000 and second and third liens of approximately $2000. In this so-called ”Chapter 20” bankruptcy, (where a debtor files a Chapter 13 bankruptcy within four years of a Chapter 7 discharge), the Bankruptcy Court confirmed the plan and granted the debtors’ motion seeking to strip off the second and third liens finding that the debtors acted in good faith and that the Bankruptcy Abuse Prevention and Consumer Protection Act (”BAPCPA”) did not create a ”per se” rule against lien-stripping in the Chapter 20 context. The bankruptcy trustee appealed to the district court and then to The Fourth Circuit which affirmed the Bankruptcy court’s rulings. Proceeding from the premise that a bankruptcy court may strip off a valueless lien in a Chapter 13 proceeding, the Court addressed the key question of whether BAPCPA precludes the stripping off of valueless liens by Chapter 20 debtors. The Court concluded that it did not. It rejected the Trustee’s argument that lien-stripping depends on a debtors’ ability to receive a Chapter 13 discharge, and that the liens survived until they were paid because debtors were not eligible for a discharge. Notwithstanding BAPCPA’s prohibition on debtors obtaining discharges in a Chapter 13 bankruptcy for four years following a Chapter 7 filing, the Court observed that debtors may still take advantage of other protections under Chapter 13 that do not involve a discharge. The Bankruptcy Code provides a mechanism for stripping off worthless liens absent a discharge and a debtor may avail himself of that relief. Because BAPCPA did not amend sections 506 or 1322(b), permitting lien-stripping in Chapter 20 cases is no different than that in any other Chapter 13 case. The Court was sympathetic to, but ultimately not persuaded by, the Trustee’s argument that such relief allows debtors to make an end run on the prohibition on lien-stripping in Chapter 7 cases pronounced in Dewsnup v. Timm, 502 U.S. 4 (1992). [T]he Trustee’s premise ignores the equally reasonable view that Congress intended to leave intact the normal Chapter 13 lien-stripping regime where a debtor could otherwise satisfy the requirements for filing a Chapter 20 case. In that regard, the law already provides a mechanism for preventing abuse of the bankruptcy process without the creation of a per se rule against lien-stripping, as bankruptcy courts are bound to carefully scrutinize filings for good faith and dismiss cases where the debtor attempts to use a Chapter 20 procedure solely to strip off a lien. Likewise, creditors are also protected by section 349(b)(1)(C), which provides that a lien springs back if the case is dismissed.

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