#2531 signed 7-19-00
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
|
In re: DEBTORS. |
CASE NO. 00-40223-13 |
ORDER SUSTAINING OBJECTION TO PLAN PROVISION REQUIRING SECURED CREDITOR TO RELEASE LIEN BEFORE COMPLETION OF CHAPTER 13 PLAN
This matter is before the Court for resolution of an issue affecting many chapter 13 cases filed
here. Debtors Jerry Lynn McGinley and Cynthia Sue McGinley appear by counsel Fred W. Schwinn.
Ford Motor Credit Company (“FMCC”) is the opposing creditor, and appears by counsel Charles R.
Hay and Carol R. Bonebrake. The Court has reviewed the relevant pleadings and is now ready to rule.
FACTS
The McGinleys filed a chapter 13 plan in February 2000 that calls for FMCC to retain its lien
on their pickup truck and be paid the truck's value through the plan. However, the plan also contains
the following provision:
Upon the satisfaction or other discharge of a security interest in a motor vehicle . . . , or
in any other property of this estate in bankruptcy for which ownership is evidenced by a certificate of title, the secured party shall within 10 days after demand and, in any event, within 30 days, execute a release of its security interest on the said title or certificate, in the space provided therefore on the certificate or as the division of motor vehicles prescribes, and mail or deliver the certificate and release to the debtor(s) or the attorney for the debtor(s).
Confirmation of this plan shall impose an affirmative and direct duty on each such secured party to comply with this provision and upon failure to so comply such a party will be liable for liquidated and fixed damages of no less than $2,000.00 plus reasonable legal fees and, in appropriate cases, for special damages and punitive damages. This provision shall be enforced in a proceeding filed before the bankruptcy court and each such creditor consents to such jurisdiction by failure to file any timely objection [to] this plan. Such an enforcement proceeding may be filed by the debtor(s) in this case either before or after the entry of the discharge order and either before or after the closing of this case.
FMCC objected to this provision, among others. The parties agree that the provision would require
FMCC to release its lien on the debtors' vehicle as soon as the debtors have paid the value of the
vehicle as established by agreement or court order, even though the debtors might not yet have
completed all the payments called for by their plan.
At a hearing on May 22, 2000, the Court announced that FMCC could not be required to
release its lien on the McGinleys' vehicle until they had completed all the payments under their plan and
received a discharge. Since the McGinleys' counsel indicated they may want to appeal the decision,
the Court is issuing this order to fully explain its reasoning.
DISCUSSION AND CONCLUSIONS
The debtors rely on 11 U.S.C.A. §§506(a), 1322(b), and 1325(a) and case law to support
paragraph F of their plan. Section 506(a) provides in pertinent part:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.
Section 1322(b) provides in pertinent part that a chapter 13 plan “may— . . . (2) modify the rights of
holders of secured claims.” Section 1325(a)(5) provides that a plan can be confirmed over a secured
creditor's objection if:
with respect to [the creditor's] allowed secured claim provided for by the plan—
. . .
(i) the plan provides that the holder of such claim retain the lien securing such claim; and
the value, as of the effective date of the plan, of property to be distributed
under the plan on account of such claim is not less than the allowed amount of such claim.
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Once all the payments required under §1325(B)(ii) to satisfy an allowed secured claim have been
made, the debtors contend, the creditor must release the lien retained under §1325(B)(i). A number of
cases have agreed with this assertion. See, e.g., In re Johnson, 213 B.R. 552 (Bankr. N.D. Ill. 1997);
In re Nicewonger, 192 B.R. 886 (Bankr. N.D. Ohio 1996); In re Flowers, 175 B.R. 698 (Bankr.
N.D. Ill. 1994); In re Murry-Hudson, 147 B.R. 960 (Bankr. N.D. Cal. 1992).
The Court would find the debtors' argument more persuasive if they could rely on §506(d).
With certain exceptions not relevant here, §506(d) provides that a lien is void “[t]o the extent that [it]
secures a claim against the debtor that is not an allowed secured claim.” In conjunction with §506(a),
this provision might be read to wipe out an undersecured creditor's lien to the extent the creditor's
claim exceeds the value of the creditor's collateral. Nothing else in the Bankruptcy Code appears to
apply so directly to liens securing undersecured claims. However, in Dewsnup v. Timm, 502 U.S.
410, 415-20 (1992), the Supreme Court ruled that §506(d) enables a debtor to void only a lien
securing a disallowed claim, not the unsecured portion of a lien securing an undersecured claim. The
Court refused to read the phrase “allowed secured claim” in §506(d) as having been defined in
§506(a), but instead applied the words “allowed” and “secured” separately so that no lien is voided
unless the claim it secures is disallowed. While the Court suggested its interpretation of those words
would not necessarily apply to all possible fact situations or in other Bankruptcy Code provisions, 502
U.S. at 416-17 & n. 3, and some lower courts have relied on this dictum to support a conclusion that
Dewsnup does not apply to reorganization cases, this view cannot be reconciled with §103(a), which
provides that chapter 5 of the Bankruptcy Code applies to all cases under chapter 7, 11, 12, and 13
(except chapter 11 railroad cases). Section 506 is part of chapter 5, so the Dewsnup Court's
construction of §506(d) itself, at least, must apply in chapter 13 cases. Any doubts on this point should
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have been dispelled by the Supreme Court's later decision in Nobelman v. American Savings Bank,
508 U.S. 324, 330-32 (1993), where the Court ruled that although §1322(b)(2), a chapter 13
provision, could be read as a matter of grammar to use “secured claim” to refer only to a secured claim
as defined in §506(a), it should instead be read to extend its prohibition against modifying a homestead
lien to both the secured and unsecured portions of such a lien that is undersecured. Thus, the Supreme
Court has twice indicated its reluctance to interpret a provision in the Bankruptcy Code to sever
security interest rights from the “unsecured” portions of undersecured claims when another
interpretation is possible.
The Court believes none of the provisions relied on by the debtors or otherwise found in
chapter 13 directly resolves the question whether a debtor may require a secured creditor to release its
lien upon payment of its allowed secured claim or only when the debtor receives a discharge. Many of
the courts deciding this question have relied on the general bankruptcy policy of providing the debtor a
“fresh start” to support their conclusion that the earlier time is permissible. See, e.g., Johnson, 213
B.R. at 557; Murry-Hudson, 147 B.R. at 962-64. In this Court's view, however, the entry of a
discharge is the event that marks the debtor's right to a fresh start. Any earlier relief providing a partial
step toward the fresh start should be limited to relief explicitly available before the discharge is granted,
for example, the ability to sell property free and clear of liens under §363(f). For chapter 13 cases,
Congress fixed the time when the debtor is entitled to the full fresh start as, ordinarily, the time when the
debtor completes his or her plan, see §1328(a), in contrast to chapter 11 cases, where the discharge
occurs when the plan is confirmed, see §1141(d). Since Congress so clearly and expressly postponed
the main marker of the debtor's fresh start until the completion of the plan, the Court finds it
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incongruous to conclude Congress nevertheless chose to grant an earlier, partial fresh start implicitly
through provisions that do not specify when the relief they authorize must take effect.
Courts reaching the conclusion that release of the lien securing a fully-paid allowed secured
claim must await the debtor's completion of the plan and receipt of a discharge have generally
supported that result by pointing to the debtor's virtually unfettered right under §1307(a) to dismiss his
or her bankruptcy case and the effect of dismissal as fixed by §349. See, e.g., In re Thompson, 224
B.R. 360, 365-67 (Bankr. N.D. Tex. 1998); In re Scheierl, 176 B.R. 498, 504-05 (Bankr. D. Minn.
1995). Section 349 provides in pertinent part:
(b) Unless the court, for cause, orders otherwise, a dismissal of a case . . . —
(1) reinstates—
. . .
(C) any lien voided under section 506(d) of this title;
. . . and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
As indicated above, after the Supreme Court's decision in Dewsnup, the unsecured portion of an
undersecured lien is not voided by §506(d), so §349(b)(1)(C) is not relevant to the issue before the
Court. Courts allowing compulsory early release of a secured creditor's perfected lien have usually
recognized that if the case is dismissed after the collateral's value has been paid but before the plan has
been completed and a discharge has been granted, then §349(b)(3) seeks to reverse the vesting of
property in the debtor that confirmation generally effects under §1327(b), and that the perfection of the
lien will be gone if the creditor is forced to release the lien on payment of its allowed secured claim.
E.g., Johnson, 213 B.R. at 557-58; Nicewonger, 192 B.R. at 890; Murry-Hudson, 147 B.R at 962-
Despite this, they have ruled that the provisions of chapter 13 explicitly call for this interim relief
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and that the debtor's right to a fresh start outweighs the potential harm to the creditor. For two main
reasons, this Court cannot agree.
First, other than the partial fresh start (which this Court views as premature), the courts have
not indicated what appropriate, practical benefit the debtor receives as a result of the early release of
the lien. At the hearing where the Court announced its view that the early release cannot be required,
the attorney for the McGinleys stated, “[T]he benefit would be the ability to trade the car, to sell it. It's
exempt property.” A number of other attorneys who frequently represent debtors were also present
and offered their views on that point, adding only that by the time a debtor has paid the amount of the
allowed secured claim, the vehicle is often worth only a few hundred dollars but the creditor
nevertheless refuses to release the lien so the debtor can sell the vehicle. Of course, even assuming that
is often the case, this circumstance can hardly justify a blanket rule that would also apply when the
vehicle's value is not minimal.
Second, while requiring the creditor to release the lien would allow the debtor to sell the vehicle
without the creditor's permission, under this Court's confirmation orders, debtors are not free to sell
their vehicles without seeking the Court's permission because the vehicles do not vest in the debtors
until they complete their plans. Consequently, requiring creditors to release their liens would give
debtors apparently clear titles, making it easier for them to violate the confirmation orders by selling or
encumbering their vehicles without seeking permission. Although the vehicles may typically not be
worth much by the time the debtors have paid their value as called for by the plan, the Court believes
the creditors are nevertheless entitled to have the liens that revest in them under §349(b) in the event of
dismissal remain perfected as they would have been outside of bankruptcy. Given the Supreme
Court's refusal to read §506(d) to void the unsecured portion of an undersecured lien, this Court
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believes no provision in the Bankruptcy Code is explicit enough to require an objecting creditor to
release its lien before the debtor receives a discharge of the portion of the creditor's claim that is
considered under §506(a) to be unsecured.
Some courts allowing forcible early lien release have suggested that without the release, if the
case were converted to chapter 7, the debtor could keep the vehicle only by reaffirming the debt to the
creditor or paying the unsecured portion of the creditor's claim to redeem the vehicle. E.g., Johnson,
213 B.R. at 557-58. For nearly all chapter 13 debtors before this Court, however, their vehicles are
exempt property held for personal or family use. Section 722 allows a chapter 7 debtor to redeem
such property by paying only the amount of the creditor's allowed secured claim, and in the
hypothetical situation now being considered, the debtor will already have done that before conversion.
Section 348(f)(1)(B) provides that the valuation of the vehicle during the chapter 13 phase of the case
will apply following conversion, and the creditor's allowed secured claim will be reduced to the extent
the debtor paid it through the chapter 13 plan. A debtor who has paid the full allowed secured claim
before conversion will therefore be entitled to a declaration that he or she has effectively redeemed the
vehicle pursuant to §722. Conversion of the case to chapter 7, then, will have no adverse impact on
the debtor.
For these reasons, the Court concludes the debtors' plan cannot be confirmed over FMCC's
objection because paragraph F is not authorized by any provision of the Bankruptcy Code. FMCC's
objection to that paragraph is hereby sustained.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of July, 2000.
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__________________________________
JAMES A. PUSATERI CHIEF BANKRUPTCY JUDGE
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