Opinion
NOT FOR PUBLICATION
ORDER ON TRUSTEE'S OBJECTION TO CONFIRMATION
PETER W. BOWIE, Chief Judge
This is another Chapter 2 0 case in which the debtors are not eligible for a discharge in this chapter 13 because they received one in 2 009 in a preceding Chapter 7.
Debtors' original Chapter 13 Plan called for payments to the trustee of $550 per month, $450 of which was to go to the senior lienholder on their residence to cure approximately $27,000 in arrears. The Plan provided for a 5% return to unsecured creditors, although none were listed on either Schedule E or F. Debtors also provided for exclusion of the lienholders on their real property in Oregon. Then, in paragraph 19 of the Plan, debtors provided:
By further motion or adversary, debtors elect to avoid the wholly unsecured second trust deed of Indymac Bank account [______], its heirs, successors and assigns. Said lien shall be voided and any claim amounts due under a note shall be treated as unsecured in this plan, and any balance unpaid shall be discharged upon completion of the terms of this plan. [Emphasis added.]
The Chapter 13 trustee objected to debtors' plan providing for a lien strip when debtors are not eligible for a discharge.
Debtors subsequently filed a modified plan, slightly modifying the amount of arrears to the senior lienholder, as well as the installment amount. They also moved the Oregon property from exclusion to reject and return in full satisfaction. Paragraph 19 remained unchanged, even though debtors are not eligible for a discharge. Subsequently, debtors' motion for lien strip was granted without any opposition. However, when debtors submitted a proposed order on the lien strip it was returned because it did not contain language stating it was "contingent upon the entry of discharge". Debtors filed an ex parte motion for reconsideration, which was not served on the trustee or the junior lien creditor. A judge of the court reviewed and granted debtors' ex parte motion, and signed the lien strip order. The signed order provided, in relevant part:
3) Upon entry of a confirmation order consistent with this order and successful completion of the Debtors' Chapter 13 plan and closing of the case, said lien, . will be deemed void pursuant to 11 U.S.C. Section 1322(b)(2). FIRST FEDERAL BANK OF CA AND/OR INDYMAC BANK, F.S.B., SERVICED BY ONEWEST BANK, F.S.B., any of its successors or assigns, shall take all steps necessary and appropriate to release its security-interest and remove its lien from the San Diego County Recorder's Office.
The trustee reiterated his objection to confirmation, focusing on whether debtors could properly use a lien strip mechanism when they are not eligible for a discharge in this case. At the hearing on the trustee's objection to confirmation, the Court invited further briefing from the parties. That briefing has been provided, and the matter was taken under submission.
Debtors' arguments were succinctly stated. They filed this sequential Chapter 13 to save their home from foreclosure by curing the arrears on the senior lien through the plan payments. While they don't mention it directly, avoiding the junior lien on the property would have been important to being able to keep their residence since they owed over $56,000 to the junior lienholder. They then argue that being eligible for a discharge is not a legal prerequisite to seeking a lien strip. And, finally, they urge that upon completion of the plan the case can be administratively closed without a discharge, without triggering a dismissal that would reinstate the lien pursuant to 11 U.S.C. § 349 (b)(1)(c).
The Chapter 13 trustee's arguments are similarly to the point. He argues this case was not filed in good faith where its only purpose is to cure arrears on the senior lien and strip off the junior lien. The trustee argues that a 5% distribution to the only unsecured creditor -- the junior lienholder, is de minimis and results in unreasonable delay to the lone unsecured creditor. The trustee also looks to the multi-factor good faith test set out in In re Warren, 89 B.R. 87 (9'''' Cir. BAP 1988), asserting that the Kelleys' plan here is a thinly veiled second Chapter 7, trying to do by Chapter 13 what they were prohibited from doing in Chapter 7 by Dewsnup v. Timm, 502 U.S. 410 (1992).
The immediate answer in this case is that debtors' plan, as presently framed, cannot be confirmed because paragraph 19 says any unpaid balance on the stripped off debt owed Indymac "shall be discharged . . .." But that cannot be, because 11 U.S.C. § 1328(f) prohibits a discharge in this case, and this Court has already entered an order on the trustee's unopposed motion holding that the debtors are not eligible for a discharge in this case. Until the proposed plan is amended to correctly state the applicable law, it cannot be confirmed.
The longer-range answers are set out in large part in this Court's opinion in In re Victorio, ___ B.R. ____, 2011 WL 2746054 (2011). While not addressing every argument raised in the Chapter 2 0 area, this Court disagrees with the argument that an administrative closing without discharge is an appropriate conclusion to a no-discharge Chapter 13, seeking to evade the restoration of the otherwise avoided lien that Congress intended, as set out in 11 U.S.C. §§ 348, 349. As noted in Victorio, this Court is not persuaded that at the same time that Congress enacted § 1328(f) to limit the previously unlimited availability of discharges in serially filed cases, the Congress also intended to grant a de facto discharge of junior lien liability when no discharge is available by statute.
For the foregoing reasons, the trustee's objection to confirmation is sustained, without prejudice. Debtors shall have twenty-eight (28) days to file and serve an amended plan. If debtors fail to timely do so, the trustee thereafter may lodge a proposed form of order denying confirmation and dismissing the instant case.
IT IS SO ORDERED.