“Lien stripping” often takes two forms. A debtor’s attempt to void the unsecured portion of a lien when there is some but not enough equity in collateral to fully cover a lienholder’s entire debt is commonly referred to as a “strip down.” A debtor’s attempt to void an entire lien when there is no equity in the collateral available to secure a debt owed to a lienholder is commonly referred to as “stripping off.” In In re Ramiz Saric & Sahiza Saric, 2013 WL 6536752 (Bankr. N.D.N.Y. 2013), the debtors sought in their Chapter 7 case to “strip off” the lien of Beneficial Finance Company (“Beneficial”), a junior mortgagee, on the basis that there was no equity in the collateral to secure Beneficial’s claim. The bankruptcy court denied the debtors’ motion to strip off the lien.
The facts of the Saric case are straightforward. There were two consensual liens on the debtors’ property. The first mortgagee held a first mortgage lien with a balance of $42,083.65, and Beneficial held a junior mortgage lien with a balance of $19,369.29. The debtors valued their property at $40,000. The bankruptcy court rejected the arguments that the debtors put forth in support of their request to strip off Beneficial’s lien.
In holding that the Chapter 7 debtors may not strip down a valid consensual mortgage lien solely under sections 506(a) and (d), the bankruptcy court relied on the United States Supreme Court decision, Dewsnup v. Timm, 502 U.S. 410, 413 (1992) and the Sixth Circuit Court of Appeals decision in Talbert Mortgage Services (In re Talbert), 344 F.3d 555, 559 (6th Cir. 2003). In Dewsnup, the United States Supreme Court held that the debtor could not use section 506(d) in a Chapter 7 case to strip down a lien to the fair market value of the property on the basis that the creditor was partially secured and couldn’t be stripped down to its interest in the collateral based on the collateral’s value.The court reasoned that the creditor would still have an “allowed secured claim” as the term is used in section 502(d) because the claim was generally “secured by a lien with recourse to the underlying collateral.” The Talbert court considered the same issue presented in the Saric case, and in relying on Dewsnup and its analytical underpinnings, ruled that a Chapter 7 debtor may not strip off a valid consensual mortgage lien solely under sections 506(a) and (d) Talbert, 344 F.3d at 559. In light of Dewsnup and Talbert, the Saric court reasoned that there was no basis to strip Beneficial’s lien pursuant to sections 506(b) and (d). It should be noted that the Eleventh Circuit Court of Appeals in McNeal v. GMAC Mortg., L.L.C. (In re McNeal), 477 F. App’x 562, 563 (11th Cir. 2012) followed pre-Dewsnup Eleventh Circuit authority and permitted a strip off in Chapter 7 reasoning that Dewsnup addressed strip down and not strip off, and as such, McNeal couldn’t depart from the pre-Dewsnup authority.
The debtors next argued that Beneficial does not hold an allowed claim under sections 502(a) and 502(b)(9). In reading these two sections together, a claim, proof of which is filed, is deemed allowed unless a party in interest objects in which case the court shall determine the amount of such claim except to the extent that the proof of claim is not timely filed. However, the court found that because Beneficial did not file any proof of claim in this case, the debtors could not object to Beneficial’s claim as late filed under section 502(b)(9).
The court also rejected the debtors’ final argument that the holding fin Pond v. Farm Specialist Reality (In re Pond), 252 F. 3d 122, 126 (2d Cir. 2001), a Chapter 13 case, applies to this case. In Pond, the Second Circuit held that only “a wholly unsecured claim, as defined under section 506(a), is not protected under the anti-modification exception of section 1322(b)(2)” and could be stripped off in Chapter 13 under section 1322(b)(2). In re Pond, 252 F. 3d at 126. The bankruptcy court declined to extend Pond’s holding to the instant case stating that if Congress intended to permit Chapter 7 debtors to strip liens when a claim is wholly unsecured or undersecured, it would have provided a statutory scheme to enable the practice in that chapter of the Code.