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9th Circuit BAP Disallows Unsecured Claim of Stripped Lien holder in Chapter 20

August 28, 2019

In In Re Washington, the chapter 13 Debtor had previously obtained a chapter 7 discharge 5 years prior to filing the chapter 13, and had discharged her in personum liability on a junior deed of trust on real property.  The Debtor filed a motion to avoid the junior lien in the subsequent chapter 13 case.  The Central District's form motion and order provided for the stripped creditor's claim to to allowed as a non priority general unsecured claim.    The Debtor then objected to allowance of the unsecured claim because the Debtor's personal liability was previously discharged.   The bankruptcy court overruled the Debtor's objection and allowed the claim as a general unsecured claim.

 

The BAP reversed the bankruptcy court and weighed in on the implications of the Supreme Court's decision in Johnson v. Home State Bank, 501 U.S. 78 (1991), which held that the chapter 7 discharge does not eliminate a secured creditor’s in rem rights against real property in a subsequent chapter 13 case, and the in rem remedy

 constitutes a claim against the property in that chapter 13 case.    Courts have split on whether the in rem claim gives a creditor an unsecured claim after the lien is stripped.  

 

The BAP found that nothing in the Code or Johnson mandates that a creditor have an allowed unsecured claim; section 502(b) requires the bankruptcy court determine the amount of the claim an allow it unless it is unenforceable against the debtor and property of the debtor.  There is no statutory basis for resurrecting a debtor's personal liability for for treating the claim as a claim against the estate.  

 

 

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