Nearly a year ago to the day, we published a post regarding the uncertainty that bankruptcy practitioners and lenders faced when a Chapter 7 debtor received a discharge, and subsequently filed a Chapter 13 petition to strip wholly unsecured liens (The Threat of Lien Stripping in “Chapter 20? Bankruptcy). So-called “Chapter 20” filings had firmly divided courts throughout the nation and throughout Florida. A recent decision from the Eleventh Circuit, In re Colbourne, goes a long way towards clearing up any confusion on the matter, and the results are favorable for lenders.
In Colbourne, the debtor received a Chapter 7 discharge in December, 2009 and immediately filed a Chapter 13 petition in January, 2010. In his schedules, the debtor listed two liens which were significantly undersecured by the parcels of property secured thereby. As a result, the debtor moved to cramdown the two liens to the appraised price of the properties.
You may recall that much of the frustration arising from Chapter 20 filings centered on the ability of a Chapter 13 debtor to strip a wholly unsecured lien, which, prior to McNeal, the same debtor could not achieve in a Chapter 7 case. Even though the debtor in Colbourne sought only a cramdown, not a complete strip, this remedy is unavailable under Chapter 7 of the Bankruptcy Code.
Judge Briskman of the Bankruptcy Court for the Middle District of Florida denied the debtor’s motion to cramdown the liens because the debtor was ineligible for discharge under § 1328(f)(1) of the Bankruptcy Code, which prohibits a subsequent Chapter 13 discharge within four years of the previous Chapter 7 discharge. Judge Briskman’s holding is hardly surprising. Two years previously in the case of In re Efrain Gomez, he held that although “Chapter 13 allows for the modification of secured claims…a Chapter 13 discharge is required to be able to permanently modify such claims.”
Colbourne’s decision at the appellate level is important, as it is the only Eleventh Circuit case to address Chapter 20 filings. Furthermore, the decision is sure to inform the court when they hear oral arguments in the appeal of In re Scantling, a Chapter 20 lien-stripping case, later this year. In Scantling, Judge Williamson of the Bankruptcy Court for the Middle District of Florida permitted the debtor to strip wholly unsecured liens, even though she would be unable to receive a discharge under § 1328(f).
Though an unpublished decision, Colbourne is exciting for bankruptcy practitioners – especially in light of the wave of lien stripping in Chapter 7 proceedings after McNeal. By holding that, absent a discharge, “any modifications to a creditor’s rights imposed in the plan are not permanent and have no binding effect once the term of the plan ends,” the court has broadly circumscribed the Chapter 20 practice. It is difficult to imagine that the court would decide Scantling differently. As illustrated by the McNeal decision, however, anything is possible in the Eleventh Circuit.