In re Chatman

98-127 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)
  • Opinion Date: June 2, 1998

MORTGAGES; BANKRUPTCY; LIENS—An entirely unsecured residential mortgage lien can be stripped from the debtor’s property in a Chapter 13 proceeding even if it had been wholly secured.

In this bankruptcy, the debtor filed a motion to strip off the unsecured claim of a third mortgage residential lender and to treat the entire unpaid balance of the claim as wholly unsecured under the debtor’s Chapter 13 plan. In a bankruptcy, a lien “strip off” occurs when an entirely unsecured lien is removed, whereas a lien “strip down” occurs when a partially secured lien is bifurcated and only the unsecured portion is removed. The appeal raised an issue concerning the proper scope of the protection afforded residential mortgagees under the anti-modification provision of the Bankruptcy Code. Under the Code, a creditor’s secured claim is limited to the value of its collateral. Since the amount of the first mortgage alone on the debtor’s property was greater than the value of the property, the third mortgage lender’s claim was wholly unsecured. There was a split of authority as to whether Nobelman v. American Savings Bank, 508 U.S. 324 (1993) (which holds that the Bankruptcy Code bars a Chapter 13 plan from modifying the rights of holders of claims secured only by the debtor’s principal residence) applies to holders of totally unsecured claims. Nobelman held that bifurcation of a home mortgage into secured and unsecured portions, and modification of the unsecured deficiency claim, is not permitted in a Chapter 13 case with respect to a mortgage secured only by the debtor’s principal residence. According to the District Court, a minority of courts have adopted an expansive reading of Nobelman (more protection for lenders), while the majority of courts have more narrowly construed the Supreme Court’s prohibition on lien stripping as outlined in Nobelman (less protection for lenders). In this case, the Court declined to follow the minority view and held that the lien stripping provision of the Bankruptcy Code does not protect holders of totally unsecured claims. If any part of a claim by the third mortgage lender had been secured in any amount, however slight, it could not be modified in any way if it is secured only by a security interest in real property that is the Chapter 13 debtor’s principal residence. In analyzing Nobelman, the District Court said that the holding in that case was limited to its facts and that the minority view which would prohibit a debtor from stripping off a totally unsecured second or subsequent mortgage claim is incorrect if extended to situations that go beyond the specific facts presented in Nobelman. Consequently, it was held that totally unsecured creditors are subject to having their liens stripped.