By: J. Ellsworth Summers and Scott St. Amand
When the Fourth Circuit handed down its opinion in the case of In re Davis , [1] which permitted lien stripping in “Chapter 20” proceedings, the stage was set for the Eleventh Circuit to expand debtor’s ability to escape from underwater junior mortgages. Before the June 18 th opinion in In re Scantling , [2] bankruptcy courts within the Eleventh Circuit were decisively split regarding a debtor’s ability to strip a wholly unsecured lien when the debtor was ineligible to receive a Chapter 13 discharge based upon the proximity of a previous Chapter 7 discharge. In a brief opinion, however, the Eleventh Circuit authorized lien stripping in “Chapter 20” proceedings, even without the prospect of the debtor’s discharge in the Chapter 13 proceeding.
As we posted previously, “Chapter 20” is the colloquial term that courts and practitioners have applied to a Chapter 13 bankruptcy that is filed on the heels of a Chapter 7 bankruptcy. [3] At the center of the Chapter 20 debate is whether a debtor may, in good faith, use a Chapter 13 proceeding to strip off a wholly unsecured junior mortgage which survived the discharge of the debtor’s in personam liability in the preceding Chapter 7 case even though the debtor is not eligible for a Chapter 13 discharge.
Prior to Scantling , bankruptcy courts were split on whether a debtor may strip liens in a Chapter 20 case. An en banc panel of judges in the Southern District of Florida in In re Gerardin , [4] held that Chapter 20 debtors may not permanently strip off wholly unsecured liens because they were ineligible for a Chapter 13 discharge. However, in In re Dang , [5] Judge Paul M. Glenn concluded that discharge was not necessary for a debtor to strip off wholly unsecured liens, so long as the debtor filed the subsequent Chapter 13 petition in good faith.
Opponents of lien stripping in Chapter 20 cases generally contend that lien avoidance is contingent on a debtor’s ability to receive a Chapter 13 discharge. In support of this position, the trustee in Davis urged the court to consider § 1325(a)(5)(B)(i)(I), which provides that a holder of a secured lien retains the lien until either the underlying debt is paid or there is a discharge. Because theDavises were not eligible for a discharge under § 1328(f)(1), the trustee argued that the liens must survive until paid in full. The Fourth Circuit was not persuaded and found in favor of the debtor.