Wednesday, September 28, 2011

Eighth Circuit BAP Allows Strip Off of Wholly Unsecured Lien in Chapter 20

The Eighth Circuit BAP found that a chapter 13 debtor may strip off a wholly unsecured lien on his principal residence even where the debtor is not entitled to discharge. In re Fisette, 11-6012 (B.A.P. 8th Cir., August 29, 2011). In so holding the court joined the other Circuit and BAP courts that have held that the reasoning in Nobelman v. Am. Savings Bank, 508 U.S. 324 (1993) establishes the right to strip off wholly unsecured residential liens. Turning to the issue of whether ineligibility for discharge under section 1328(f)(1) precludes the otherwise permissible lien stripping, the court stated: “We hold that the strip off of a wholly unsecured lien on a debtor’s principal residence is effective upon completion of the debtor’s obligations under his plan, and it is not contingent on his receipt of a Chapter 13 discharge.” Unlike the courts that have found that section 1325(a)(5) precludes lien-stripping in a chapter 20, the Fisette court recognized that, pursuant to the statutory language, the requirements of section 1325(a)(5) were not applicable to a claim that was not an allowed secured claim. The court concluded its analysis with a finding that the creditors whose liens were stripped would be entitled to distribution of the estate along with the other unsecured creditors. 
The Trustee filed a notice of appeal to the Eighth Circuit on September 21st.

Tara Twomey of the Amicus Project assisted in writing debtor’s brief. 

The Fisette decision has since been used in supplemental briefing in several ongoing cases dealing with this issue including: In re Waterman, No. 11-139 (M.D. Fla.); Lindskog v. M&I Bank, No. 11-476 (E.D. Wisc.); In re Sadowski, No. 10-21894 (Bankr. D. Conn.)

Source: NACBA September 2011 Newletter

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