Opinion ID: 3006507
Heading Depth: 3
Heading Rank: 2

Heading: Chapter 20 Debtors May Permanently Void Liens

Text: Voiding a lien under § 506(d) might simply end the story in a different case, but not so here. As we discussed at Part III above, the Bankruptcy Code contains several provisions that reinstate a previously voided lien at the conclusion of a Chapter 13 proceeding, effectively bringing that lien back to life. HSBC argues that the only way for a debtor to avert these lien-reinstating provisions is to obtain a discharge. If correct, this would create an insurmountable obstacle for “Chapter 20” debtors, like the Blendheims, who are statutorily ineligible to obtain a discharge, having filed for Chapter 13 reorganization within four years of obtaining a IN THE MATTER OF: BLENDHEIM 27 discharge under Chapter 7. See 11 U.S.C. § 1328(f). Accordingly, HSBC argues, liens will come back to life, and lien voidance cannot be made “permanent” after the completion of a Chapter 13 plan, in circumstances where, as here, the debtors are ineligible for a discharge. The question whether discharge-ineligible Chapter 20 debtors may obtain the permanent release of lien obligations has divided lower courts within our circuit. Compare Frazier v. Real Time Resolutions, Inc., 469 B.R. 889, 895–901 (E.D. Cal. 2012) (holding that liens may be permanently voided in a Chapter 20 case), In re Okosisi, 451 B.R. 90, 99–100 (Bankr. D. Nev. 2011) (same), In re Hill, 440 B.R. 176, 181–82 (Bankr. S.D. Cal. 2010) (same), and In re Tran, 431 B.R. 230, 237 (Bankr. N.D. Cal. 2010) (same), aff’d, 814 F. Supp. 2d 946 (N.D. Cal. 2011), with In re Victorio, 454 B.R. 759, 779–80 (Bankr. S.D. Cal. 2011) (holding that liens cannot be permanently voided in a Chapter 20 case), aff’d sub nom. Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012), In re Casey, 428 B.R. 519, 523 (Bankr. S.D. Cal. 2010) (same), and In re Winitzky, 2009 Bankr. LEXIS 2430, at  (Bankr. C.D. Cal. May 7, 2009) (same).4 Two other courts of appeals and bankruptcy appellate panels from three circuits, including our own, have also addressed the question, all concluding that Chapter 20 debtors may void liens irrespective of their eligibility for a discharge. See In re Scantling, 754 F.3d 1323, 1329–30 (11th Cir. 2014); In re Davis, 716 F.3d 331, 338 (4th Cir. 2013); In re Boukatch, 533 B.R. 292, 300–01 (B.A.P. 9th Cir. 2015); In re Cain, 513 4 In re Okosisi, authored by Bankruptcy Judge Bruce Markell, and In re Victorio, authored by Chief Bankruptcy Judge Peter Bowie, offer strong articulations of the respective sides of the debate and so we draw from these opinions in our discussion below. 28 IN THE MATTER OF: BLENDHEIM B.R. 316, 322 (B.A.P. 6th Cir. 2014); In re Fisette, 455 B.R. 177, 185 (B.A.P. 8th Cir. 2011).5 We will omit the citations here, but we note that bankruptcy and district courts in other circuits have also divided over this question. And so we turn to the next question before us: whether the Bankruptcy Code permits discharge-ineligible Chapter 20 debtors, like the Blendheims, to permanently void a lien upon the completion of a Chapter 13 plan. 5 We note that all of the cases in the split over the permanent lienvoidance question involve attempts by a debtor to declare a totally valueless—or “underwater”—lien “unsecured” pursuant to § 506(a). That section states that an “allowed claim of a creditor secured by a lien on property . . . is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.” See, e.g., Davis, 716 F.3d at 335. Once declared unsecured, the majority of courts hold that a debtor may void such a lien using § 1322(b)(2), which expressly authorizes the modification of the rights of unsecured creditors. See id. “The end result is that section 506(a), which classifies valueless liens as unsecured claims, operates with section 1322(b)(2) to permit a bankruptcy court, in a Chapter 13 case, to strip off a lien against a primary residence with no value.” Id.; see also Zimmer, 313 F.3d at 1226–27 (joining the majority of courts in holding that § 1322(b)(2) allows a Chapter 13 debtor to void wholly unsecured liens). We are not concerned here with the propriety of this form of lienstripping. Here, the bankruptcy court voided HSBC’s secured claim under § 506(d) because it was disallowed, not because the claim was unsecured as defined under § 506(a). For our present purposes, the particular statutory section under which the lien is originally modified or voided is neither here nor there; we cite the foregoing cases not for their analysis of § 506(a) and § 1322(b)(2), but rather with respect to their discussion of the permanent lien-voidance question. Whether a lien is voided under § 506(d), as here, or under § 1322(b)(2), as in the mine-run of cases, the essential question remains the same: can a lien voided during a Chapter 13 proceeding remain permanently voided in a case where the debtor is barred from receiving a discharge? IN THE MATTER OF: BLENDHEIM 29 1. A discharge is not necessary to close a Chapter 13 case or permanently void a lien HSBC argues that a discharge is necessary to obtain the benefits of lien voidance because, apart from conversion or dismissal, discharge is the only mechanism available to bring a Chapter 13 case to close in a manner that makes lien voidance “permanent.” As authority for that proposition, HSBC points to our decision in In re Leavitt, 171 F.3d 1219 (9th Cir. 1999). There, we considered the “appropriate standard of bad faith as ‘cause’ to dismiss a Chapter 13 bankruptcy petition with prejudice.” Id. at 1220 (footnote omitted). In the course of affirming the Bankruptcy Appellate Panel’s dismissal of an action with prejudice upon findings of bad faith concealment of assets and inflation of expenses, we stated, “[a] Chapter 13 case concludes in one of three ways: discharge pursuant to § 1328, conversion to a Chapter 7 case pursuant to § 1307(c) or dismissal of a Chapter 13 case ‘for cause’ under § 1307(c).” Id. at 1223 (footnote omitted). As we explained above, dismissal and conversion reinstate a previously voided lien. See 11 U.S.C. §§ 348, 349. Lower courts have therefore interpreted this language in Leavitt as making clear the “legal fact” that “the only way to make a lien strip ‘permanent’ is by discharge because conversion or dismissal reinstates the avoided lien.” Victorio, 454 B.R. at 778; see also Casey, 428 B.R. at 522 (“In the case of a ‘Chapter 20,’ there can be no discharge, and conversion is not an option. Dismissal is the necessary result, without discharge, when a debtor performs a plan that leaves one or more debts wholly or partially unpaid.”). HSBC characterizes this as the “Leavitt rule” and argues that the only way for a Chapter 20 debtor to permanently void a creditor’s lien is through a discharge. Under HSBC’s theory, the Blendheims’ ineligibility for a discharge means that their 30 IN THE MATTER OF: BLENDHEIM Chapter 13 case must end in conversion or dismissal, either of which would restore the lien previously voided under § 506(d). HSBC’s theory rests upon a fatal flaw: our decision in Leavitt imposed no “rule” that a Chapter 13 case must end in conversion, dismissal, or discharge, and the Bankruptcy Code is devoid of any such requirement. In Leavitt, we were not tasked with deciding all the ways in which a Chapter 13 case can end. Rather, we were called upon to determine whether the bankruptcy court below had properly dismissed a bad faith Chapter 13 petition with prejudice. Our statement that a Chapter 13 case “concludes in one of three ways” was not necessary to our holding, and is therefore dictum. That much should be clear from the context in which the statement was made; in fact, we made clear in the sentence immediately following that “[h]ere, we are only concerned with dismissal.” Leavitt, 171 F.3d at 1223. Our statement in Leavitt should not be read to describe an exhaustive list of ways in which a Chapter 13 case may conclude. Nor has HSBC cited any provision in the Bankruptcy Code stating that a Chapter 13 plan may end only in conversion, dismissal, or discharge. Indeed, contrary to the so-called “Leavitt rule,” the Code contemplates closure of a case pursuant to § 350(a), which provides that “[a]fter an estate is fully administered and the court has discharged the trustee, the court shall close the case.” With closure, no conversion, dismissal, or discharge is necessary. See Davis, 716 F.3d at 337–38 (adopting the debtor’s argument that “[i]n a successful Chapter 20 case . . . the plan is completed, and the case is closed administratively without dismissal or conversion”); see also Scantling, 754 F.3d at 1330 (concluding that because the creditor’s claim is not secured, IN THE MATTER OF: BLENDHEIM 31 thus making § 1325(a)(5) inapplicable, “the debtor’s ineligibility for a discharge is irrelevant to a strip off in a Chapter 20 case”); see also Okosisi, 451 B.R. at 99 (“The court finds that in this situation the proper result is for the court to close the case without discharge. 11 U.S.C. § 350(a).”). Fundamentally, a discharge is neither effective nor necessary to void a lien or otherwise impair a creditor’s statelaw right of foreclosure. As defined under the Bankruptcy Code, a “discharge” operates as an injunction against a creditor’s ability to proceed against a debtor personally. See 11 U.S.C. § 524(a)(2) (a discharge “operates as an injunction against . . . an action . . . to collect, recover or offset any such debt as a personal liability of the debtor” (emphasis added)). Discharges leave unimpaired a creditor’s right to proceed in rem against the debtor’s property. See Johnson, 501 U.S. at 84 (“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.”); 4 Collier on Bankruptcy ¶ 524.02 (“[T]he provisions [of § 524] apply only to the personal liability of the debtor, so they do not affect an otherwise valid prepetition lien on property.”). It follows logically that there is no reason to make the Bankruptcy Code’s in rem modification or voidance provisions contingent upon a debtor’s eligibility for a discharge, when discharges do not affect in rem rights. See Fisette, 455 B.R. at 186–87 & n.9 (explaining that the strip off of a lien “is not the equivalent of receiving a discharge” because “a discharge releases a debtor’s in personam liability, but it does not affect the lien”); Hill, 440 B.R. at 182 (“Since the . . . debt was already discharged, or changed to non-recourse status in the Chapter 32 IN THE MATTER OF: BLENDHEIM 7 case, a second discharge for the Debtors in this Chapter 13 case would be redundant.”). We acknowledge that there has been considerable confusion on this point. In Victorio, the bankruptcy court rejected the notion that closure pursuant to § 350(a) constituted a “fourth option” for ending a Chapter 13 case, reasoning in part that “prior to BAPCPA, the only way a lien strip became permanent in any Chapter 13 case was through discharge.” 454 B.R. at 775. The court observed that “the Bankruptcy Code should not be read to abandon past bankruptcy practice absent a clear indication that Congress intended to do so,” id. at 776 (quoting In re Bonner Mall P’ship, 2 F.3d 899, 912 (9th Cir. 1993)), and therefore found that discharge was a necessary predicate for lien voidance. However, because bankruptcy discharge, by definition, affects only in personam liability, it has never served as the historical means for ensuring that the Bankruptcy Code’s various mechanisms for modifying or voiding a creditor’s in rem rights remained in place at the conclusion of a plan. See, e.g., 11 U.S.C. § 506(d) (discussed above); id. § 1322(b)(2) (permitting modification of the rights of holders of certain secured claims and holders of unsecured claims); id. § 522(f) (permitting debtors to void liens impairing exemptions on certain assets). No discharge is, or ever has been, necessary to accomplish the outcome that the Blendheims seek.6 6 Several lower court decisions have articulated the following view: “Under the Bankruptcy Code, there are two ways to make an enforceable debt go away permanently. One is to pay it, in full. The other is to obtain a discharge of any remaining obligation.” Victorio, 454 B.R. at 777 (quoting Casey, 428 B.R. at 522). Section 1325 of the Bankruptcy Code, which sets forth requirements for confirming a Chapter 13 plan, requires that holders of “allowed secured claims” “retain the lien securing such claim” under a proposed plan “until the earlier of the payment of the IN THE MATTER OF: BLENDHEIM 33 Victorio cited various cases for the proposition that modifications to creditors’ rights are effective only to the extent that they can be “discharged,” Victorio, 454 B.R. at 777–78, but this conclusion does not follow from the cases. Each of the cited cases concerns certain non-dischargeable debts for which the debtor remains personally liable after the completion of his Chapter 13 plan. See, e.g., Bruning v. United States, 376 U.S. 358 (1964) (nondischargeable postpetition interest on unpaid tax debt remains a personal liability of the debtor); In re Foster, 319 F.3d 495 (9th Cir. 2003) (non-dischargeable post-petition interest on child support obligation may be collected personally against the debtor); In re Ransom, 336 B.R. 790 (B.A.P. 9th Cir. 2005) (non-dischargeable student loan interest is recoverable by creditor), rev’d on other grounds sub nom. Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193 (9th Cir. 2008); In re Pardee, 218 B.R. 916 (B.A.P. 9th Cir. 1998) (non- dischargeable pre-petition interest on student loan debt remains personal liability of the debtor). These cases stand for nothing more than the uncontroversial proposition that the Bankruptcy Code renders certain debts non-dischargeable; if the debt is non-dischargeable, then a debtor remains personally liable for that debt. To conclude based on these cases that “the only way to make a lien strip ‘permanent’ is by discharge,” is to ignore the Bankruptcy Code’s unequivocal distinction between in personam and in rem liability. See 11 U.S.C. § 524 (defining a “discharge” as an underlying debt determined under nonbankruptcy law; or discharge under section 1328.” 11 U.S.C. § 1325(a)(5)(B)(i). It is significant that § 1325 applies only to “allowed secured claims”; the provision is silent with respect to secured claims that were not filed or liens securing disallowed claims, like the one at issue here. This case does not involve an allowed but wholly unsecured claim. 34 IN THE MATTER OF: BLENDHEIM injunction against actions to recover debt “as a personal liability of the debtor” (emphasis added)). These cases cannot be read for the proposition that a discharge is necessary to permanently eliminate in rem liability. 2. Lien voidance does not subvert Congress’s intent in enacting BAPCPA HSBC contends that even if discharge is not the sole route to permanent lien-voidance, permitting Chapter 20 debtors to achieve permanent lien-voidance circumvents Congress’s purpose in enacting § 1328(f)’s limitation on successive discharges. The bankruptcy court in Victorio reasoned that permitting debtors to achieve “de facto discharge of liability” through the closure mechanism effects an “end run” around BAPCPA’s “clear mandate.” 454 B.R. at 780; see also Cain, 513 B.R. at 320–21 (collecting cases subscribing to the “de facto discharge” argument). The Victorio court also suggested that Congress did not intend to allow dischargeineligible debtors to void liens upon case closure, while similarly situated, discharge-eligible debtors must complete all the requirements of a Chapter 13 plan in order to permanently void a lien. 454 B.R. at 780. Thus, HSBC argues, allowing the Blendheims to permanently avoid liability on the lien subverts Congress’s purpose in enacting BAPCPA and should not be permitted irrespective of whether there are alternative routes besides a discharge for closing a Chapter 13 case. We disagree that permitting the Blendheims to void HSBC’s lien subverts Congress’s intent in prohibiting successive discharges. We take Congress at its word when it said in § 1328(f) that Chapter 20 debtors are ineligible for a discharge, and only a discharge. Had Congress wished to IN THE MATTER OF: BLENDHEIM 35 prevent Chapter 7 debtors from having a second bite at the bankruptcy apple, then it could have prohibited Chapter 7 debtors from filing for Chapter 13 bankruptcy entirely. See, e.g., 11 U.S.C. § 109(g) (“[N]o individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days . . . .”); see also Johnson, 501 U.S. at 87 (citing express prohibitions on serial filings and explaining that “[t]he absence of a like prohibition on serial filings of Chapter 7 and Chapter 13 petitions . . . convinces us that Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief”). Nothing in the Code conditions Chapter 13’s other benefits or remedies on discharge eligibility. See Cain, 513 B.R. at 322 (“Lien-stripping is an important tool in the Chapter 13 toolbox, and it is not conditioned on being eligible for a discharge.”); Fisette, 455 B.R. at 186 (“We see no merit in the argument . . . that allowing a strip off in a ‘no discharge’ Chapter 20 case amounts to allowing the debtor a ‘de facto’ discharge.”). And, for the reasons we have discussed, we think that if Congress had meant to prohibit Chapter 20 debtors from voiding or modifying creditors’ in rem rights, it would not have done so by restricting the availability of a mechanism that by definition only affects in personam liability. Our interpretation gives full effect to Congress’s intent to prevent abusive serial filings and successive discharges through BAPCPA. Prohibiting successive discharges helps curb abuse of the bankruptcy system by ensuring that a debtor once granted a discharge of debt is not granted yet a second discharge just a few years later. A debtor who has racked up significant credit card debt and received a Chapter 7 discharge, for example, will not obtain a second clean slate 36 IN THE MATTER OF: BLENDHEIM upon the filing of a Chapter 13 petition. Further, we agree with the district court that reaching the contrary conclusion would create “an extremely harsh result” that is inconsistent with the Bankruptcy Code’s text and purpose. Congress created the Chapter 13 mechanism to permit eligible debtors, who are capable of diligently meeting their obligations under plans, to reorganize their financial affairs and pay a greater amount on debts than they would have otherwise done under a Chapter 7 liquidation. Section 1328(f) does not purport to interfere with the important lien-stripping “tool in the Chapter 13 toolbox.” Cain, 513 B.R. at 322; see Davis, 716 F.3d at 338 (positing 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”). Interpreting the Bankruptcy Code to permit lien modification through case closure does not, as Victorio warned, place discharge-ineligible debtors like the Blendheims in a better position than discharge-eligible debtors. Victorio posited that discharge-eligible debtors who fail to complete their plans will see their previously voided liens reinstated under § 349’s dismissal provision, whereas discharge-ineligible Chapter 20 debtors “can just have the case closed and thereby make the lien []voidance ‘permanent.’” 454 B.R. at 780. We respectfully disagree. Nothing in the Code compels a bankruptcy court to close, rather than dismiss, a Chapter 13 case when a debtor fails to complete his plan. In addition, the availability of case closure does not eliminate a bankruptcy court’s duty to ensure that a debtor complies with the Bankruptcy Code’s “best interests of creditors” test, 11 U.S.C. § 1325(a)(4), and the good faith requirement for confirming a Chapter 13 plan, id. § 1325(a)(3). Rather, the bankruptcy court here properly IN THE MATTER OF: BLENDHEIM 37 conditioned permanent lien-voidance upon the successful completion of the Chapter 13 plan payments. If the debtor fails to complete the plan as promised, the bankruptcy court should either dismiss the case or, to the extent permitted under the Code, allow the debtor to convert to another chapter.