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Eighth Circuit Joins Majority of Circuits in Lien-Strip Ruling

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Orin J. Kipp
Wilford, Geske & Cook, P.A. – USFN Member (Michigan)

While many circuits have previously ruled on the ability of a Chapter 13 debtor to strip the lien of a wholly unsecured junior creditor, the Eighth Circuit had yet to officially join the majority. It had come close, in In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011), when the Minnesota trustee appealed a BAP ruling allowing such treatment. However, the Eighth Circuit did not rule on the lien-strip issue in Fisette due to procedural deficiencies in the matter. As such, the Circuit remained in limbo regarding this hot topic because of the non-binding nature of the BAP decision in Fisette. More recently, the issue has been adjudicated with finality, as In re Schmidt was decided in late August (No. 13-2447).

Case Background: In 2012, the Schmidts filed a Chapter 13 bankruptcy petition. In November 2012, they filed a motion to value seeking: (1) a determination that there was no equity in their home to support a third priority mortgage; (2) that the mortgagee’s lien be reclassified as a non-priority unsecured claim; and (3) that the lien be avoided upon successful completion of their Chapter 13 plan. The bankruptcy court, relying on Fisette, ruled in favor of the debtors. The mortgagee appealed to the District Court, which affirmed. An appeal to the Eighth Circuit followed.

The Eighth Circuit focused on the interplay between 11 U.S.C. 506(a)(1) and 11 U.S.C. 1322(b)(2), ruling that under Bankruptcy Code section 506(a)(1), a creditor’s under-secured claim is treated as a secured claim up to the value of the creditor’s interest in the collateral. The excess debt is treated as an unsecured claim. Moving then to section 1322(b)(2), the court opined that the dividing line drawn by this section runs between the lienholder whose security interest in the homestead property has some “value,” and the lienholder whose security interest is valueless. The Circuit distinguished the Supreme Court’s decision in Nobleman v. American Savings Bank, 508 U.S. 324 (1993), in that the creditor’s claim in Nobleman was partially secured, and the focus was based on whether section 1322 allows bifurcation of a partially secured claim and stripping the lien from the unsecured portion of that claim. In Schmidt, however, the creditor’s claim was wholly unsecured. As such, the Eighth Circuit held that, based upon the wholly unsecured nature of the creditor’s claim, the anti-modification language contained in section 1322 did not apply and the lien could be stripped upon successful completion of the Chapter 13 plan.

While this decision is not entirely a surprise, as each circuit that has addressed the issue has reached the same conclusion, it nonetheless provides yet another hurdle for lenders and servicers to overcome in bankruptcy proceedings. It is important for lienholders to vigilantly monitor bankruptcy cases in order to be prepared to timely oppose such a motion if there is a question as to the value of the property and the amount of equity, if any. (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

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