November 17, 2011

by Linda J. St. Pierre
Hunt Leibert – USFN Member (Connecticut)

The U.S. Bankruptcy Court for the District of Connecticut recently rendered a decision in the case of In re Sadowski, which held that a borrower cannot strip off a wholly unsecured junior lien in a “chapter 20” case as such does not satisfy the lien retention requirements of Bankruptcy Code § 1325(a)(5)(B)(i).

This decision stems from an order that entered on the debtors’ “Motion to Determine Secured Status” filed pursuant to Bankruptcy Code § 506(a) on June 8, 2010 in their chapter 13 case (No. 10-21894). The order deemed a junior lien in favor of Wachovia Bank wholly unsecured. In response to that order, the chapter 13 trustee filed an objection to plan confirmation, asserting, in part, that the debtors’ attempt to avoid Wachovia’s mortgage lien without being eligible for a discharge violated the lien retention requirements of § 1325(a)(5)(B)(i)(1) and Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992).

Neither party disputed that the debtors’ in personam liability to Wachovia was discharged in the debtors’ prior chapter 7 case, that the mortgage lien passed through the chapter 7 case unaffected, or that, following the chapter 7 discharge, Wachovia continued to hold an in rem claim against the property. The court noted that “the essence of the present controversy is the question of whether Wachovia’s claim falls within the purview of the term ‘allowed secured claim,’ as the term is used in § 1325(a)(5)” and, further, went on to look at the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and the amendments to §§ 1325(a)(5)(B)(i) and 1328(f). The court determined that those amendments provided an objective test to prevent debtors from using chapter 13 as a way to circumvent Dewsnup’s prohibition against lien stripping in chapter 7 cases.

In its analysis, the court determined that “allowed secured claim” as used in § 1325(a)(5) refers to any claim allowed under § 502 of which the creditor holds a lien to secure payment, regardless of whether the claim is recourse or nonrecourse, collectible or uncollectible. With that determination, the court held that the debtors, who were ineligible for a discharge, could not confirm their chapter 13 plan, absent full payment on Wachovia’s claim, as the proposed plan did not satisfy the lien retention requirements under § 1325(a)(5).

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