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CT: Appellate Decision addresses “Chapter 20” Lien Stripping

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013


by Linda J. St. Pierre
Hunt Leibert – USFN Member (Connecticut)

Editor’s Note: For additional background on the Rogers and Sadowski cases discussed in this article, see the author’s two prior articles, which appeared in the USFN Report (Summer 2012 ed.), here, as well as the USFN e-Update ( Nov/Dec. 2011 ed.) here.

The U.S. District Court of Connecticut has recently said, in dicta, that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) does not prohibit application of Bankruptcy Code section 1322(b)(2) in a no-discharge Chapter 13 case. The district court’s analysis is presented in its determination of an appeal from a bankruptcy court’s decision (New Haven Division). [In re Rogers; Rogers v. Eastern Savings Bank, No. 3:12 CV 818 (JCH) (D. Conn. Mar. 28, 2013)].

In the Rogers case, the bankruptcy court, relying on In re Sadowski, held that a debtor could not strip off an unsecured lien in a “Chapter 20” case (a reference often used where the Chapter 13 debtor is discharge-ineligible because of a recent Chapter 7 discharge). In its analysis, the bankruptcy court took judicial notice of a previous decision entered in the Division of Hartford in In re Sadowski (appeal pending), 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 section 1325(a)(5)(B)(i). While the district court upheld the bankruptcy court’s decision in Rogers on other grounds, the district court did take the time to present an analysis of the Sadowski decision and, ultimately, concluded that Sadowski was incorrectly decided.

In Sadowski, the bankruptcy court held that debtors in a no-discharge Chapter 13 case could not avail themselves of section 1322(b)(2) because their ineligibility for a discharge renders their Chapter 13 petition and plan as, per se, lacking “good faith.” In the appeal of Rogers, the district court disagreed with that conclusion, stating that “[t]he plain language of the applicable Bankruptcy Code sections, even where amended by BAPCPA, does not categorically prohibit the filing of a Chapter 13 petition and plan simply because the debtor has obtained a Chapter 7 discharge within the preceding four years and is discharge-ineligible in the later Chapter 13. Moreover, such later, no-discharge Chapter 13 cases are neither successive nor do they circumvent relevant case law in a way that per se violates the good faith requirements of Chapter 13.” The district court also declared that there was “no support for the conclusion that BAPCPA implicitly prohibits application of section 1322(b)(2) in a no-discharge Chapter 13 case as a consequence of preventing successive Chapter 13 debtors from circumventing Dewsnup’s supposed lien-stripping prohibition in Chapter 7” [referring to Dewsnup v. Timm, 502 U.S. 410 (1992)].

The district court continues: “Consequently, modification of an in rem lien pursuant to section 1322(b)(2) in a later, no-discharge Chapter 13 case does not per se amount to a “second bite at the apple” (a successive petition that per se lacks “good faith”) because the later Chapter 13 case is directed at modifying a separate obligation; i.e., the in rem lien on the property, that was not and could not have been part of the prior Chapter 7 case, which only dealt with the debtor’s in personam liability.” The district court said that doing such does not amount to the kind of “abusive and manipulative practices” that Congress sought to address under BAPCPA.

In its final remarks, the district court stated that “the prohibition on lien stripping that Sadowski attempts to evoke from Dewsnup is irrelevant to the issue of whether section 1322(b)(2) may be applied in the case of a no-discharge Chapter 13 petition.”

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