In re: Davis No. 12-1184

Decided: May 10, 2013

The Fourth Circuit Court of Appeals affirmed the bankruptcy court’s confirmation orders stripping off junior liens against debtors’ residences. The Chapter 13 bankruptcy trustee (the “Trustee”) challenged the confirmation orders. However, the court rejected the Trustee’s argument that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) creates a per se rule barring lien-stripping in so-called “Chapter 20” cases. The court agreed with the debtors that because BAPCPA left intact the operative lien-stripping provisions of the Code, Congress did not intend to alter the ability of bankruptcy courts to enter lien-stripping orders in Chapter 13 cases.

On June 7, 2008, Bryan Davis and Carla Bracey-Davis filed a Chapter 7 bankruptcy petition with the United States Bankruptcy Court for the District of Maryland. At the time they ran a large monthly deficit and Mrs. Davis was unemployed. Although Chapter 7 prohibits lien-stripping, the Davises nevertheless proceeded under Chapter 7 because they were ineligible to convert to a Chapter 13 case. On September 17, 2008, they received a Chapter 7 discharge. Later the Davises obtained gainful employment but still had no savings and a large mortgage in arrears. On September 4, 2009, they filed a Chapter 13 petition and on March 30, 2011, the bankruptcy judge stripped off all three liens on their property. Both the Trustee and the holder of the third-priority lien against the Davises’ home, TD Bank, N.A., appealed to the district court, which affirmed.

On February 1, 2010, Marquita Moore filed a Chapter 7 petition and received discharge on October 20, 2010. One week later she filed a Chapter 13 petition. On January 5, 2011 the bankruptcy court granted Moore’s motion to strip off the second lien on her home and the Trustee appealed the lien-stripping component of the confirmation order.

The issue in this case was whether the BAPCPA precludes the stripping off of valueless liens by Chapter 20 debtors ineligible for a discharge.  Before reaching the main issue, the court addressed the question of whether a bankruptcy court may strip off a valueless lien in a typical Chapter 13 proceeding. Citing sections 506 and 1322(b) of the Bankruptcy Code, the court found that a bankruptcy court may provide such relief. Under 506, the status of a creditor’s claim as secured or unsecured by a lien depends on the value of the collateral. Section 506(a) classifies valueless liens as unsecured claims. Under section 1322(b)(2), a Chapter 13 bankruptcy plan may modify the rights of secured claim holders other than principle residences, as well as the rights of unsecured claim holder. The court found that these two sections together permit a bankruptcy court, in a Chapter 13 case, to strip off a lien against a primary residence with no value. However, the court recognized this applies only to completely valueless liens and not partially secured liens.

The court then addressed the main issue of whether a debtor may strip off liens in a Chapter 20 case. The court cited to its holding in Bateman that a Chapter 13 debtor need not be eligible for a discharge in order to take advantage of the protections afforded by Chapter 13. According to that holding, the court concluded that if the Bankruptcy Code provides a mechanism for stripping off worthless liens absent a discharge, a debtor may avail himself of that relief. As previously discussed, the court found that sections 506(a) and 1322(b) provide such a mechanism.  However, because the sections work in tandem, the court must evaluate the claim under both sections and not under either section alone. The court noted that this mechanism permitting lien-stripping in Chapter 20 cases does not create an end-run around Dewsup’s bar to such relief in Chapter 7 cases. It also noted that the unavailability of a discharge in the Chapter 20 context is not determinative. While bankruptcy discharge alters in personam rights, lien-stripping orders at issue here alter in rem liability where the creditor’s lien has no value. Therefore, lien-stripping orders become permanent, even in the absence of a discharge.

The court concluded that although BAPCPA clearly tipped the bankruptcy scales back in the direction of creditors, it found nothing in the Act to suggest that Congress intended to bar lien-stripping of worthless liens in Chapter 20 proceedings. The judgment of the district court was affirmed.

Full Opinion

– Sarah Bishop

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