Burkhart v. Grigsby

A contrary result would have obviated the judicially recognized right to strip off underwater subordinate liens in chapter 13.

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Case Type:
Case Status:
16-1971 (4th Circuit, Mar 29,2018) Published
A chapter 13 debtor may strip down a creditor’s undersecured (or fully underwater) lien whether or not that creditor filed a proof claim, and this power arises under § 1322(b), and not § 506(d).
Procedural context:
Chapter 13 debtors commenced an adversary proceeding against three banks holding four liens against the debtors’ homestead. The value of the homestead was such that the senior lien was only partially secured, and the remaining three liens were wholly underwater. None of the three banks answered the complaint, but two of the three banks filed proofs of claim. The bankruptcy court entered default judgments against the two banks that filed proofs of claim, holding that § 506(d)(2) prohibited lien avoidance where no proof of claim has been filed. The Debtors appealed to the district court, which affirmed. The Debtors appealed to the Fourth Circuit, which reversed.
This case represents an important addition to the evolving body of case law to consider a debtor’s ability to strip down liens. Drawing heavily from the Supreme Court’s rulings in Dewsnup v. Timm and Nobelman v. American Savings Bank, the circuit court emphasized that the lienstripping question in chapter 13 cases is distinguished by the application of § 1322(b), which does not apply in chapter 7 cases. In the court’s view, the lower courts confused the claim allowance process, guided by § 506, with the lien avoidance process, which § 1322(b) permits by allowing a chapter 13 plan to “modify the rights of holders of secured claims.” In addition, the circuit noted the inequity that resulted from the lower courts’ conclusion that the liens of a creditor that filed a proof of claim were stripped, while the liens of a creditor that did nothing saw its liens survive.
King, Diaz, and Shedd

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