Palomar v. First American Bank

Summarized by John Eggum , Foran Glennon Palandech Ponzi & Rudloff
12 years 7 months ago

Citation:

(7th Cir., No. 12-3492)

Tag(s):

Ruling:

Chapter 7 debtor cannot strip-off a wholly-unsecured mortgage. The Seventh Circuit distinguished the ability to strip-off wholly-unsecured mortgages in Chapter 13 because "[t]he strip-off right in Chapter 13 is a partial offset to the advantages that Chapter 13, relative to Chapter 7, grants creditors, such as access to a larger pool of assets [created by the commitment of the debtor's disposable income]." Additionally, the strip-off right in Chapter 13 is an aspect of the Chapter 13 Plan, as indicated by Section 1322. Nothing in Section 506 compelled a different result; Chapter 7 debtors cannot rely upon Section 506 to import a strip-off power into Chapter 7. Here, the creditor had not filed a proof of claim (it was a no-asset case), and the Court stated that even if it had filed a proof of claim, based on the Supreme Court's Dewsnup v. Timm case (502 U.S. 410), the Court was not compelled to construe the words "allowed secured claim" in Section 506(d) the same as in Section 506(a). Ultimately, there is simply no provision of the Code, and there is no public policy (fresh start or otherwise), that permits a chapter 7 debtor to strip a wholly-unsecured mortgage lien.

Procedural context:

Appeal from the United States District Court for the Northern District of Illinois, following that court's decision to affirm the bankruptcy court's decision to deny reopening of a no-asset chapter 7 bankruptcy case for the debtors to seek to strip-off a second mortgage.

Facts:

Individual debtors filed a no-asset chapter 7 case. Based on Debtors' appraisal, value of their principal residence was $78,000 less than the balance of the first mortgage on the property. No proof of claim was filed by the second mortgage holder, First American Bank. Debtors filed an adversary proceeding to strip-off First American's second mortgage on the day before the Trustee filed his no asset report. The case closed as a result of the no asset report prior to the time that a decision was rendered in the adversary, and the bankruptcy court declined to reopen the case to afford relief to the Debtors in connection with the adversary proceeding.

Judge(s):

Posner, Manion, and Rovner

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