August 2, 2012
by Linda J. St. Pierre
USFN Member (Connecticut)
The U.S. Bankruptcy Court for the District of Connecticut once again has ruled that a debtor cannot strip off an unsecured lien in a “Chapter 20” case. The latest decision came out of the Division of New Haven, and this time the claim involved an undersecured first mortgage.
This decision stems from a contested motion to determine secured status filed pursuant to Bankruptcy Code § 506(a) on March 2, 2012 by the debtor in her chapter 13 case (In re Rogers, BK Case No. 11-32961). The motion proposed to deem the first mortgage held by Eastern Savings Bank (ESB) as partially secured and partially unsecured with the unsecured balance being paid nothing in the debtor’s plan and, therefore, deemed voided upon an “implied” discharge. In response to this motion, ESB filed an objection in which it asserted that the debtor could not void the unsecured balance of its claim since the debtor was not eligible for a discharge in her case due to having received a discharge within four years in a previous chapter 7 case.
The bankruptcy court took judicial notice of a previous decision entered in the Division of Hartford in In re Sadowski, which held that a borrower cannot strip off a wholly unsecured junior lien in a chapter 20 case as such does not satisfy the lien retention requirements of Bankruptcy Code § 1325(a)(5)(B)(i). In its decision, the court in Rogers stated that after review of the Sadowski decision, along with other relevant authority and the record of the case, it agreed and would adopt the rationale of Sadowski in relevant part. The court continued on to state “the Debtor in this Chapter 20 case, while not precluded from filing a Chapter 13 petition and plan after receiving a Chapter 7 discharge [even if not eligible for a Chapter 13 discharge in this case], may not avoid an undersecured … lien in doing so.” The court went on to deny confirmation due to the fact that the plan could not be confirmed because it did not comply with the lien retention requirements of § 1325(a)(5)(B)(i).
The Rogers decision leaves one division in Connecticut (Bridgeport) silent on the issue of Chapter 20 lien avoidance. It is anticipated that division will soon rule on this issue. (Note that Rogers is currently under appeal, as is Sadowski.)
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Summer 2012 USFN Report