InfoBytes, September 2, 2011 - A Weekly In-depth review of news & developments in the financial services industry


Topics In This Issue

• Federal Issues

• Courts

• Miscellany

• Firm News

• Firm Publications

• Mortgages

• Securities

• Litigation

• Privacy/Data Security

Excerpt from "Courts"

Bankruptcy Panel Holds Unsecured Junior Lien Strip-offs Permissible. On August 29, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit held that a borrower ineligible for a Chapter 13 discharge may nevertheless strip off junior liens on his mortgage where the junior liens are wholly unsecured. Fisette v. Keller, No. 11-6012 (B.A.P. 8th Cir. Aug. 29, 2011). In this case, the appellate court considered whether a debtor was prevented by the anti-modification provisions of the Bankruptcy Code from modifying the rights of junior lienholders on a principal residence, if the value of the residence was insufficient to satisfy the amount owed to the first lienholder. The lower court had ruled that a debtor could not strip off a junior lien, either partially secured or completely unsecured, without violating Section 1322(b). On appeal, the appellate bankruptcy panel reversed and adopted the view of all other circuit courts that have addressed the issue that where a junior lien on a principal residence is completely unsecured, the anti-modification provision in 1322(b)(2) is inapplicable. Once a claim is classified under Section 506(a) as an unsecured claim, the debtor may modify the rights of the unsecured claim consistent with 1322(b)(2). The court further held that the debtor is still able to avoid the wholly unsecured junior liens even where he is not eligible for a Chapter 13 discharge under Section 1328(f) of the Bankruptcy Code (here, because the borrower had a recent Chapter 7 discharge). The court found that the ability to strip-off the unsecured lien was not contingent on receipt of a Chapter 13 discharge, and would instead be effective upon completion of the debtor's obligations under the bankruptcy plan.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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