Lien Issues in Consumer Bankruptcy Shane J. McCall, Lentz Clark Deines PA

June 15, 2016

I. Chapter 13 Treatment of Liens and Lien Stripping

A. What is it?

In a chapter 13 case, property secured by a lien must either be surrendered or the

lien must be paid off. Generally, liens can be modified in chapter 13 case, but cannot be

modified in a chapter 7 case. However, there are exceptions to the power to modify liens

in chapter 13 that are so extensive they threaten to swallow the general rule that liens can

be modified. Nevertheless, lien stripping is one of the most powerful ways to modify

liens.

The goal of lien stripping is to remove a lien from property where the lien is

wholly unsupported by any value in the collateral owned by a debtor, in order to enhance

the fresh start of the debtor. This is commonly referred to as a “strip-off.” A strip-down

or cram-down is when the lien on a piece of property is reduced to the value of the

collateral and this lien amount becomes the allowed secured claim paid through a chapter

13 plan. The remaining part of the debt after a strip-down becomes unsecured debt that

must be paid through the plan.

Procedure: Lien stripping can be accomplished by motion or adversary

proceeding depending on the local rules of each court. In Kansas and the Western

District of Missouri, courts generally require an adversary proceeding to be filed against

the lienholders in order to strip a lien, and this is the best practice. Some courts may

allow lien stripping by motion practice as long as the motion is served in a manner

similar to the service of an adversary complaint as detailed in Federal Rule of Bankruptcy

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Procedure 7004.1 In either event, a debtor should not rely on language in the plan to strip

off a lien. When a bankruptcy court confirms a debtor's reorganization plan, the plan

binds the debtor and his creditors. 11 U.S.C. § 1327(a).2 A lien strip becomes effective

and permanently eliminates a lienholder's in rem rights against the collateral property

upon completion of a debtor's reorganization plan and entry of discharge. If no discharge

is entered (for instance if the case converts to chapter 7 or the case is dismissed), the lien

strip is not effective.

A strip-down can be accomplished through the plan. The debtor must include

language in the plan that sets forth the value of the debtor’s collateral and indicates that

the claim will only be secured up to the value of the collateral. If, after sufficient notice

to the creditor, the court confirms the plan, then the secured claim is only allowed up to

the value of the collateral as set forth in the Plan. For instance, the form plan for the

district of Kansas includes language for claims secured by personal property that are not

subject to one of the exceptions to lien modification that states: “Any creditor listed

below whose claim is secured by personal property (other than 910 car loan or one year

loan creditors) will be paid the value of its collateral or the amount of the claim,

whichever is less, unless otherwise specified . . . .”

Lien stripping is only possible in chapter 13 (not in chapter 7). The 11th Circuit

used to allow a lien to be stripped off in chapter 7 cases, but this result was overruled by

US Supreme Court in the 2015 Caulkett case, outlined below. Lien strip-down or cram-

down can only take place in a chapter 13 case (the use of this procedure in chapter 11 or

chapter 12 cases is beyond the scope of this outline, but it is possible in those chapters as

well). Lien stripping is allowed under § 1322(b)(2), which provides that the plan may

1 For example, Judge Karlin, in Centex Home Equity Co., LLC v. Woodling (In Re Woodling), Case No. 03-

40183, Adversary No. 03-7102, (Bankr. D. Kan. Oct. 14, 2004), allowed stripping of an unsecured second

lien by motion that was served in a manner similar to the service of an adversary complaint. 2 Note that, under United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S. Ct. 1367, 176 L. Ed. 2d

158 (2010), bankruptcy courts faced with a plan that seeks to take an action not sanctioned by the

Bankruptcy Code, which could include lien stripping without separate pleading, should deny such plan

even if creditor fails to object. In Espinosa, a debtor was allowed to discharge a portion of a student loan

debt through a plan where a creditor did not object and received due process through actual notice of the

plan’s contents.

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modify the rights of holders of secured claims, other than a claim secured only by

a security interest in real property that is the debtor's principal residence, or of

holders of unsecured claims, or leave unaffected the rights of holders of any class

of claims[.]

Exceptions to Lien-Stripping: The practical use of cram-down or strip-down has

been limited by statutory provisions put in place by BAPCPA. One exception that affects

many debtors is that, by the statutory language of § 1322(b)(2), lien cram-down cannot be

used to cram down a claim secured “only by a security interest in real property that is the

debtor's principal residence.” In Nobelman v. American Savings Bank, 508 U.S. 324

(1993), the Supreme Court held that a Chapter 13 debtor who had a single mortgage with

an outstanding balance greater than the value of the debtor's residence could not divide

the mortgage, pursuant to 11 U.S.C. § 506(a), into secured and unsecured parts and treat

only the secured part as subject to the antimodification clause. Debt that is secured by

property other than the debtor’s principal residence can be crammed down.

Furthermore, car loans used to purchase a vehicle for personal use of the debtor

that was entered into within 910 days of the petition date cannot be crammed down, as set

forth in the hanging paragraph under § 1325(a). In addition, secured claims for certain

other collateral if the debt was incurred within one year before the petition date cannot be

crammed down under the same hanging paragraph. The hanging paragraph states:

For purposes of paragraph (5), section 506 shall not apply to a claim described in

that paragraph if the creditor has a purchase money security interest securing the

debt that is the subject of the claim, the debt was incurred within the 910-day

period preceding the date of the filing of the petition, and the collateral for that

debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired

for the personal use of the debtor, or if collateral for that debt consists of any

other thing of value, if the debt was incurred during the 1-year period preceding

that filing.

While these exceptions cover many common circumstances, secured claims not falling

within the statutory exceptions can be still be crammed down in the chapter 13 context.

It is important to check the time periods covered by these exceptions because, in some

circumstances, delaying a filing date could allow a chapter 13 debtor to cram down a lien

that would otherwise have to be paid in full.

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B. Recent Developments and Litigation Issues

Bank of America v. Caulkett, 135 S.Ct. 1995 (2015) was decided by the United

States Supreme Court on June 1, 2015 and ruled that a strip-off of a wholly

unsecured lien is not allowed in chapter 7 cases.

The question presented in these two consolidated appeals was whether a debtor in

a chapter 7 case can strip off a fully unsecured mortgage under § 506(a) and 506(d). The

relevant statutory language states as follows:

An allowed claim of a creditor secured by a lien on [estate] property … is a

secured claim to the extent of the value of such creditor’s interest in the estate’s

interest in such property … and is an unsecured claim to the extent that the value

of such creditor’s interest … is less than the amount of such allowed claim.

11 U.S.C. §506(a)(1).

Section 506(d) provides that, subject to two exceptions, “[t]o the extent that a lien

secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

11 U.S.C. §506(d).

In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court held that when

property securing a loan is worth less than the debt owing on the loan—that is, the loan is

“underwater”—the Bankruptcy Code does not permit a chapter 7 debtor to “strip down”

the lien to the current value of the property. Dewsnup dealt with a partially secured lien

and the Court in said it was limited to those circumstances: “Hypothetical applications

that come to mind and those advanced at oral argument illustrate the difficulty of

interpreting the statute in a single opinion that would apply to all possible fact situations.

We therefore focus upon the case before us and allow other facts to await their legal

resolution on another day.” Dewsnup, at 416.

The 11th Circuit has noted that its circuit precedent predating Dewsnup,

Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir.1989) (holding

that an allowed claim that was wholly unsecured was voidable under the plain language

of section 506(d)), was not abrogated by the reasoning of Dewsnup because Dewsnup

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dealt with different facts. In re McNeal, 735 F.3d 1263, 1266 (11th Cir. 2012). This

same reasoning was used by the 11th Circuit in the Caulkett case that was appealed to the

Supreme Court.

Note that the Tenth Circuit had already declared that Dewsnup prevents the strip-

off of a wholly-unsecured lien solely under the statutory language found in § 506(d) even

in chapter 13 cases, although strip-off is likely allowed under § 1322(b)(2). In re

Woolsey, 696 F.3d 1266, 1279 (10th Cir. 2012). In this case, the debtors declined to use

§ 1322(b)(2) as a vehicle for strip-off, “even though the bankruptcy court offered a

favorable discussion of lien stripping under § 1322(b)(2), uniform circuit precedent

endorses it, and an amicus brief in this case from the National Association of Consumer

Bankruptcy Attorneys ably argued the point.” Id. at 1279.

The Court held that, because Dewsnup interpreted the term “secured claim” in §

506(d) to include junior mortgages where the senior mortgage exceeds the value of the

collateral, because secured claim in this context includes “a claim supported by a security

interest in property, regardless of whether the value of that property would be sufficient

to cover the claim.”

The debtor’s brief in Caulkett argued that the plain language of § 506(d) states

that a second mortgage or other junior lien is void if there is no value in the property left

over to secure this junior mortgage. As a policy argument, the debtors argued that

wholly unsecured junior liens should be stripped off under § 506(d) because, as in a

foreclosure the junior liens would be wiped out. This aids the first mortgagee who can

more easily work out a loan modification or short sale without the second lienholder

fouling it up by demanding some payment. Six members of the Court, in a footnote that

was not joined by the unanimous majority, noted the large amount of criticism faulting

the Dewsnup Court’s statutory interpretation, and noted that “[d]espite this criticism, the

debtors have repeatedly insisted that they are not asking us to overrule Dewsnup.” 135

S.Ct. 1995 n.†.

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2014).

Minn. Hous. Fin. Agency v. Schmidt (In re Schmidt), 765 F.3d 877 (8th Cir.

The 8th Circuit has recently held that a wholly unsecured lien may be stripped in

chapter 13. In this case, the debtors had a primary residence with an appraised value of

$140,000 secured by 3 mortgages in the amounts of $154,578.20, $39,451.99, and

$26,469.31. The debtors filed a “motion to value,” asking the court to determine the 3rd

mortgage had no equity in their home to attach to, and the court granted the motion.

In re Alvarez, 733 F.3d 136 (4th Cir. 2013) cert. denied sub nom. Alvarez v.

HSBC Bank USA, N.A., 134 S. Ct. 2309, 189 L. Ed. 2d 190 (2014)

“The question before us is whether a bankruptcy court, in a Chapter 13 case filed

by only one spouse, can strip off a valueless lien on property that the debtor and his non-

debtor spouse own as tenants by the entireties.” Id. at 140. The 4th Circuit concluded

that “the bankruptcy court is without authority to modify a lienholder's rights with respect

to a non-debtor's interest in a property held in a tenancy by the entirety”, reasoning that

the filing of the bankruptcy by one debtor did not bring the nonfiling spouse’s interest

into the bankruptcy and the bankruptcy court has no power to bind a nondebtor. Id. at

142.

In re Cain, 513 B.R. 316 (B.A.P. 6th Cir. 2014)

The 6th Circuit BAP upheld the so-called chapter 20 practice, where a debtor

receives a discharge or personal liability in a chapter 7 case, and then turns around and

files a chapter 13 case to strip off a wholly unsecured junior mortgage on a residence.

The BAP noted that although the Sixth Circuit has not decided the chapter 20 issue, there

is a “growing consensus” allowing the procedure. Accord Wells Fargo Bank N.A. v.

Scantling (In re Scantling), 754 F.3d 1323, (11th Cir. 2014); Branigan v. Davis (In re

Davis), 716 F.3d 331 (4th Cir. 2013); Fisette v. Keller (In re Fisette), 455 B.R. 177

(B.A.P. 8th Cir. 2011); HSBC Bank USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d

477, 493 (9th Cir. 2015) (“Fundamentally, a discharge is neither effective nor necessary

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to void a lien or otherwise impair a creditor's state law right of foreclosure.”).

In re Rosa, 521 B.R. 337, 339 (Bankr. N.D. Cal. 2014)

A Northern District of California bankruptcy court recently held that a wholly

unsecured lien holder has neither a secured claim nor an unsecured claim in a chapter 20

case. In this case, the debtor had filed and received a discharge in a chapter 7 case. In

the subsequent chapter 13 case, the debtor filed a valuation motion and had the junior

lienholder on her home rendered an unsecured claimholder. Because the debtor

discharged her personal liability on the second mortgage debt in her prior chapter 7 case,

Bankruptcy Code § 524(a)(1) discharge injunction would bar the creditor from asserting a

claim in the subsequent chapter 13 case, rendering any such claim invalid.

II. Chapter 7 Treatment of Liens: Lien redemption

A. What is it?

Goal: The redemption of a lien allows a debtor to pay the value of collateral,

rather than the total amount of the debt owed in connection with that collateral, and then

retain the property free from that lien.

Procedure: In a chapter 7 case, an individual debtor may redeem any “tangible

personal property intended primarily for personal, family, or household use, from a lien

securing a dischargeable consumer debt . . . by paying the holder of such lien the amount

of the allowed secured claim of such holder that is secured by such lien in full at the time

of the redemption.” § 722. The property to be redeemed must be either exempt or

abandoned by the trustee. Id. The process normally occurs by filing of a motion in the

absence of agreement between debtor and creditor.

Section 506(a)(2) provides that the method for valuing personal property in

chapter 7 redemption cases is the

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replacement value of such property as of the date of the filing of the

petition without deduction for costs of sale or marketing. With respect to

property acquired for personal, family, or household purposes,

replacement value shall mean the price a retail merchant would charge for

property of that kind considering the age and condition of the property at

the time value is determined.

A common creditor in the redemption context is Nebraska Furniture Mart

(“NFM”). NFM will offer redemption of collateral by having the debtor sign a one-page

letter agreement and paying the lump-sum value of the collateral in one payment within

30 days of signing the agreement. In the case of agreement between creditor and debtor,

no motion is required.

The process occurs only in chapter 7 cases. To retain collateral in a chapter 13

case, the debtor pays the allowed secured claim on collateral through the plan. The

redemption amount must be paid in a lump-sum unless the creditor agrees otherwise.

Eaton v. First American Bank of Virginia, E.D.Va.1991, 134 B.R. 178. Since the

limitations on cram-down with respect to 910 car loans and one-year loans are found in

the hanging paragraph under § 1325(a), they do not apply to redemptions in a chapter 7

case.

B. Lien Redemption - Recent Developments and Litigation Issues

In re Martinez, No. 7-10-11101 JA, 2015 Bankr. LEXIS 1990, at *18-19 (U.S.

Bankr. D.N.M. June 18, 2015).

“Upon conversion of a case from Chapter 13 to Chapter 7, 11 U.S.C. §

348(f)(1)(B) places the parties in the same position regarding the valuation of property

pledged to a creditor as if the debtor initially filed a Chapter 7 case in which no valuation

had yet occurred. Among other things, this provision gives parties the freedom to

negotiate valuations in Chapter 13 cases to which they would not have agreed in a

Chapter 7 case. For example, a debtor may stipulate to a higher value for personal

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property in a Chapter 13 case, where payment can be made over a period of years, than in

Chapter 7 under the redemption provision found in 11 U.S.C. § 722 where payment in

full is required at the time of redemption. Likewise, a creditor may stipulate to a higher

value in Chapter 13 in exchange for greater periodic payments than for purposes of

prosecuting a stay relief motion in Chapter 7. To satisfy the waiver standard in

connection with a value negotiated while the case was pending in Chapter 13 — i.e. the

intentional relinquishment of a known right — a party must establish that the parties

intended to waive the right to a fresh valuation in a converted Chapter 7 case.”

In re Nance, 2013 WL 2897527 (Bankr. M.D.N.C. June 12, 2013) (Aron, B.J.)

Debtor is required to pay 90 percent of the NADA retail value as of the petition

date in order to redeem vehicle without reduction for preconversion plan payments. In

the debtors' confirmed chapter 13 plan, the creditor that held a lien on the vehicle was

allowed a secured claim of $33,396.95 payable at $747.76 per month at 9.5 percent

interest. At the time the debtors converted to chapter 7, the creditor had been paid

$33,224.28. The court noted that a chapter 7 debtor that sought to redeem a vehicle under

11 U.S.C.S. § 722was required to utilize 90 percent of the NADA retail value as the

creditor's allowed secured claim unless the debtor offered evidence of a different value.

The same analysis applied when the debtors had converted from chapter 13. The court

found that 90 percent of the NADA retail value as of the petition date was $20,992.40.

Although the debtors had already paid an amount in excess of that amount, 11 U.S.C.S. §

348(f) mandated that the allowed secured claim would not be reduced pursuant to

payments made in the chapter 13 case. Pursuant to 11 U.S.C.S. § 722, the debtor had to

pay the creditor the lesser of $20,992.50 or the amount remaining due to the creditor

under the contract pursuant to applicable nonbankruptcy law, which was $4,509.64.

In re Miles, 524 B.R. 915, 920 (Bankr. N.D. Ga. 2015).

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The value for redemption would be based on the clean retail value using one of

the common valuation services, less a reduction for “the condition of the vehicle and cost

of repair.”

In re Airhart, 473 B.R. 178, 183 (Bankr. S.D. Tex. 2012).

The court used a “commercially reasonable disposition approach [which] allows

courts to determine the value of personal property by considering the property itself, and

the property's existing physical condition and age.” In valuing a vehicle for purposes of

redemption, the court gave substantial weight to a CarMax appraisal because it was based

on the actual inspection of the vehicle. In addition, in a case converted from chapter 13

to chapter 7, valuations made in the chapter 13 do not apply in the chapter 7 case.

III. Chapter 7 Treatment of Liens - Lien Avoidance

A. What is it?

Goal: Lien avoidance describes the removal, or voiding, of a lien under a couple

of different procedures. Section 544, the so-called strong-arm provision, allows a trustee

to avoid an unperfected lien if that lien could have been avoided by either a hypothetical

judicial lien holder or a levying creditor (in the case of personal property) or a

hypothetical bona fide purchaser of real property (in the case of real property). Section

547 allows the avoidance by a trustee of certain security interests granted in the 90 days

before filing, or in the 1 year before filing, in the case of an insider. Section 522(f), in

turn, allows the debtor to avoid judicial liens against exempt property.

Procedure: Lien avoidance under § 522(f) can proceed by motion with service on

the affected creditor in both the Kansas bankruptcy courts and the Western District of

Missouri. Lien avoidance undertaken by the trustee under §§ 544 or 547 must occur by

adversary proceeding. Certain courts may allow a chapter 13 debtor to bring an

avoidance action under § 544. See, e.g., In re Hansen, 332 B.R. 8, 11 (B.A.P. 10th Cir.

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2005) (holding that a chapter 13 debtor cannot bring an avoidance action, but noting that

“[b]ankruptcy courts within the Tenth Circuit, like bankruptcy courts in other

jurisdictions, are split on the issue. (citations omitted)”). Creditors must be aware that

their unperfected liens could be avoided and should be willing to defend lien perfection

upon filing of a chapter 7 (and in some situations a chapter 13) case.

Tip: Debtors counsel should always be aware of potential avoidance actions by a

chapter 7 trustee, and this may be a reason to delay filing or file a chapter 13 rather than a

chapter 7, because the chapter 13 trustee is unlikely to file an avoidance action.

B. Recent Developments and Litigation Issues

In re Childers, No. CV 11-03985-HB, 2015 WL 757616 (Bankr. D.S.C. Feb.

19, 2015)

After a chapter 7 trustee avoided the lien of a mortgagee, the trustee was allowed

to sell the homestead of a debtor to the creditor whose lien was avoided. The lack of

equity in the home did not prevent the trustee from selling the home. The bankruptcy

court reasoned that (1) § 541 gives the bankruptcy estate rights in property of the estate;

(2) unsecured creditors will benefit because there are no secured creditors in the

homestead because the formerly secured creditor had its lien avoided; (3) the homestead

exemption of the debtors (limited to $50,000 of the debtor’s “aggregate interest” in a

residence under S.C. Code Ann. § 15–41–30(A)(1)), was zero because at the time of the

bankruptcy petition there was no equity in the homestead after deducting the value of

consensual liens. The court noted that “South Carolina's homestead exemption is limited

to the debtors' aggregate interest in the real property up to a certain amount, rather than

the real property itself.” Id. at *5. The Childers court rejected or found inapplicable the

reasoning of the Traverse case, summarized below.

Law v. Siegel, 134 S.Ct. 1188, 1196-97, 188 L. Ed. 2d 146 (2014).

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The Bankruptcy Code, in general, and § 522, in particular, does not give a

bankruptcy court discretion to deny an exemption on a ground not specified in the Code.

Bad faith conduct, including conduct sufficient to deny a discharge, is not a ground

Congress elected to specify in the Code. Therefore, a court cannot impair an exemption

on the basis of § 105, it can only look to exceptions found in the law creating the

exemption or specific exceptions in the Bankruptcy Code, including (1) § 522(c), which

makes exempt property liable for certain kinds of prepetition debts, including debts

arising from tax fraud, fraud in connection with student loans, and other specified types

of wrongdoing, and (2) § 522(o), which prevents a debtor from claiming a homestead

exemption to the extent he acquired the homestead with nonexempt property in the

previous 10 years “with the intent to hinder, delay, or defraud a creditor.

In re Traverse, 753 F.3d 19, 26 (1st Cir.) cert. denied sub nom. DeGiacomo v.

Traverse, 135 S. Ct. 459, 190 L. Ed. 2d 332 (2014).

In this case, the Chapter 7 trustee avoided an unrecorded mortgage and preserved

the lien pursuant to §§ 544 and 551 and then sought to sell the property (the debtor’s

homestead) for the benefit of the bankruptcy estate. The appellate court, reversing the

bankruptcy court, denied the trustee's request, reasoning that the preserved mortgage did

not create equity for the bankruptcy estate to justify a sale of the property and “[i]t is this

equity for unsecured creditors that authorizes a trustee to liquidate the property in the first

place, as the trustee should not exercise his § 363 powers for the benefit of secured

creditors alone.” Id. at 29. The court noted that the avoided mortgage

carries neither a right of immediate ownership of Traverse's property, nor a right

of immediate payment of the secured loan's outstanding value, but only a right to

foreclose on Traverse's property in the event that she defaults on her loan or to

receive payment in full when the home is sold through other means.

Id. at 29.

[J]ust because the preserved mortgage promises the bankruptcy estate a benefit

from the sale of Traverse's home does not mean that the preserved mortgage

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creates “equity” for the estate. Bankruptcy courts have defined the equity that

justifies a sale of property, consistently and explicitly, in one way: the value

remaining for unsecured creditors above any secured claims and the debtor's

exemption.”

Id. In other words, because the estate has the avoided lien, there is a still a lien against

the property and therefore the property cannot be sold because there is no equity.

2012).

In re Carmichael, No. 06-10952, 2012 WL 4845605 (Bankr. D. Kan. Oct. 10,

Where a Chapter 7 Trustee avoids an unperfected lien in exempt property, the

trustee is left with three options: “First, the Trustee could sell the estate's lien interest to a

third party, such as Lender or another entity. Second, the Trustee could enter into an

agreement with Debtor for release of the lien upon receipt of a lump sum or periodic

payments. Third, the Trustee could await foreclosure by Lender, during which process

the estate would receive the value of its interest.” Id. at *2. In this case, the chapter 7

trustee avoided an unperfected lien in a mobile home that the debtor and a nondebtor

claimed as their homestead. The trustee sought to require the debtor to make adequate

protection payments to the trustee on account of the avoided lien being automatically

preserved for the estate under § 551. The court noted that the trustee could not get

adequate protection payments because the underlying lien originally held by the creditor

was unperfected so not worthy of adequate protection payments. Therefore, the trustee is

only the holder of an unperfected lien and has no right to adequate protection barring

extraordinary circumstances. Id. at *3.

In re Aiwohi, 13-90038 (Bankr. Haw. Jan. 31, 2014).

A chapter 13 debtor may exercise the trustee’s avoidance powers under section

544 if doing so will benefit the bankruptcy estate. Note that the Tenth Circuit BAP has

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held that a debtor may not exercise this power. Hansen v. Green Tree Servicing, LLC (In

re Hansen), 332 B.R. 8 (10th Cir. BAP 2005).

IV. Lien Perfection and Attachment Issues

State and federal law lien attachment and perfection issues commonly arise in the

bankruptcy context in the context of a lien avoidance action by the trustee or in other

contexts.

A. Recent Developments and Litigation Issues

In re Motors Liquidation Co., 777 F.3d 100 (2d Cir. 2015).

In 2001, General Motors entered into a lease financing transaction, obtaining

$300 million in financing from lenders led by JPMorgan Chase Bank, secured by liens on

twelve pieces of real estate. Five years later GM entered into a separate loan agreement

with $1.5 billion in financing from lenders led by JPMorgan. This latter loan was

secured by many of GM’s assets. JPMorgan, as administrative agent for the other

lenders, filed a UCC-1 financing statement in Delaware that covered all of GM’s

equipment and fixtures in 42 GM facilities.

In 2008, GM told its counsel it would pay of the smaller, 2001 loan and asked its

counsel to prepare the lien release documents. GM’s counsel did a search of all the

UCC-1 financing statements filed in Delaware, finding three separate statements. Two of

the UCC-1 statements related to the $300 million loan, while 1 of them related to the $1.5

billion. GM’s counsel then mistakenly prepared UCC-3 termination statements for all

three UCC-1 statements, including the one related to the $1.5 billion loan. No one at

GM’s or its law firm or JPMorgan or its law firm noticed the mistake, and all three

UCC-3 statements were filed, which had the effect of releasing all security interests

supporting the $1.5 billion loan.

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In GM’s chapter 11 case, the unsecured creditor’s committee sued to avoid GM’s

lien. JPMorgan argued that the mistaken UCC-3 was “was unauthorized and therefore

ineffective because no one at JPMorgan, General Motors, or their law firms had intended

that the Term Loan security interest be terminated.” Id. at 102-03. The bankruptcy court

agreed with this argument and held the security interest related to the $1.5 billion loan

was not terminated.

The 2nd Circuit pinpointed the issue as what a secured lender must do to

“authorize[] the filing” of the UCC–3 to make it effective under UCC § 9–509(d)(1):

“for a UCC–3 termination statement to effectively extinguish the perfected nature of a

UCC–1 financing statement, is it enough that the secured lender review and knowingly

approve for filing a UCC–3 purporting to extinguish the perfected security interest, or

must the secured lender intend to terminate the particular security interest that is listed on

the UCC–3?” Id. at 103. The 2nd Circuit authorized this question to the Delaware

Supreme Court, which answered that “if the secured party of record authorizes the filing

of a UCC–3 termination statement, then that filing is effective regardless of whether the

secured party subjectively intends or understands the effect of that filing.” Id. at 103-04.

JPMorgan argued on appeal that it never authorized its counsel to file the

mistaken UCC-3 statement. The appeals court noted that the mistaken UCC-3 statement

and an escrow agreement listing the mistaken UCC-3 agreement were reviewed and

agreed to by a JPMorgan executive and JPMorgan’s counsel. Therefore, the 2nd Circuit

held that the mistaken UCC-3 statement’s filing was authorized, and therefore valid, and

the $1.5 billion loan became unsecured.

In re Okrepka, No. 13-21559, 2015 WL 1014906, at *5 (Bankr. D. Kan. Mar.

4, 2015)

A judgment lien granted as part of divorce equalization scheme must be

accounted for in a chapter 13 plan as a secured claim and is not avoidable. “In Kansas,

courts have recognized the ability of the Divorce Court to impose a lien on a homestead

and allow the sale of the homestead to enforce the lien.”

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In re Cunningham, 489 B.R. 602, 608 (Bankr. D. Kan. 2013) (J. Berger)

Debtors bought consumer electronics from Best Buy on a Capital One credit card

and sought an order that no security interest attached to the goods they had bought. Part

of the credit card agreement granted a security interest to Best Buy in the goods

purchased with the credit card. “Property ‘type descriptions of collateral are not

sufficient for consumer goods” under K.S.A. 84–9–108(e). Because the Capital One

receipts “do not contain a reference to a purchase money security interest or any other

security interest,” the court found that no security interest in the goods purchased was

created. This decision is at odds with that of Judge Somers in the Murphy case,

summarized below.

2013)

In re Murphy, No. 12-20434, 2013 WL 1856337, at *2 (Bankr. D. Kan. May 2,

Murphy involved identical language found on Best Buy Capital One receipts as

those examined in Cunningham. However, Judge Somers ruled that the description of

collateral as “‘goods purchased on your Account” adequately defines the collateral

between the Debtor and the holder of the account” under K.S.A. 84–9–108(e)(2). Id. at

*2. “The ‘description by type’ not permitted for consumer goods is the ‘types’ of

collateral defined in the UCC, such as accounts, chattel paper, consumer goods, deposit

accounts equipment, general intangibles, and so forth.” Id.

C. Tax Liens

A federal tax lien attaches to all property and rights to property of a taxpayer

existing at the time the lien comes into existence and the lien amount includes the unpaid

taxes and any interest, penalty, or costs associated with the unpaid tax. 26 U.S.C. § 6321.

Section 6321 provision provides:

17

If any person liable to pay any tax neglects or refuses to pay the same after

demand, the amount (including any interest, additional amount, addition to

tax, or assessable penalty, together with any costs that may accrue in

addition thereto) shall be a lien in favor of the United States upon all

property and rights to property, whether real or personal, belonging to

such person.

The lien continues until the amount is satisfied or the lien is unenforceable by lapse of

time. 26 U.S.C. § 6322. The IRS lien even attaches to property that is exempt under

federal or state law.

A tax lien survives bankruptcy against any property that the lien attaches to, even

if the debt underlying that lien is discharged as to the debtor. United States v. Toler, 666

F. Supp. 2d 872, 882 (S.D. Ohio 2009). For the IRS tax lien to be perfected, the IRS

must file a notice of federal tax lien. Even if the IRS lien secures dischargeable taxes, the

IRS is not required to release the lien until the underlying debt is paid. The priority rules

for federal tax liens versus other interests in property are imposed by 26 U.S.C. § 6323.

Under § 6323(a), only “purchasers, holders of security interests, mechanic’s lienors, and

judgment lien creditors,” who met the federal requirements for one of the four categories

of federal law may claim superiority over a federal tax lien for which a notice is filed.

D. Tax Liens - Recent Developments and Litigation Issues

In re Blackburn, 525 B.R. 153 (Bankr. N.D. Fla. Feb. 3, 2015).

An IRS tax lien attaches to all of debtor’s property, both personal and real,

therefore, so long as there is some equity to which it can attach it may not be stripped off,

nor may it be stripped down in a chapter 7 case. In a chapter 13 case with secured tax

debt, it is important to closely examine the value of all property because the IRS tax lien

attaches to property regardless of state exemptions. The court noted that the IRS tax lien

is not divisible into different tranches of property. Rather, the IRS has one tax lien that

18

covers all property of the debtor, so if there is equity in any property, the IRS lien is still

secured and may not be stripped off.

In re Gonzon, No. 14-19002-BKC-RAM, 2015 WL 535482, at *1 (Bankr. S.D.

Fla. Feb. 5, 2015)

“Simply stated, the fact that the IRS Lien attaches to both personal property and

the Home does not mean that the IRS is ‘partially secured’ on the Home. Instead, because

the IRS Lien is wholly unsecured on the Home, the lien on the Home may be stripped

off.” (citing In re McNeal, 735 F.3d 1263 (11th Cir.2012)). Note that this is in direct

opposition to the Blackburn case, cited above.

In re Reitberger, 456 B.R. 406 (Bankr. D. Minn., Sept. 20, 2011) (case no.

3:11-bk-30633)

Federal tax liens are not subject to the surrender provisions of Code §

1325(a)(5)(C).

19

Identifying Lien Avoidance of Lien Stripping Opportunities and Strategies Between

Chapter 7 and Chapter 13

Issue Description Chapter 7 Chapter 13

Lien Strip-off Removing Lien From

Property

X

Lien Strip-Down Partial Removal of Lien

from Property

X

Cure Lien Payment Pay back arrearages on lien

and avoid default

X

§ 522 Lien

Avoidance

Removal of Judicial Lien

from Exempt Property by

Debtor

X X

§ 544 Lien

Avoidance

Removal of Unperfected

Lien from Property by

Trustee

X

Redemption Paying off Value of

Collateral to Remove Lien

X

Surrender Giving Back Property X X

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

KANSAS CITY DIVISION

)

APPLICATION TO AVOID JUDICIAL LIEN

COME NOW the Debtors, and pursuant to 11 U.S.C. § 522(f)(1), apply to the Court for an Order

avoiding the judicial liens outlined below. In support hereof, the Debtor states to the Court:

1. Debtors, , are a party in the following cases:

a. [List pending lawsuit and caption], Johnson County District Court.

b. .

2. These creditors may have judgments which could give rise to a judicial lien or may cloud the

homestead title which would impair Debtor’s exemption pursuant to K.S.A. 60-2301 on Debtors’ homestead,

legally described as:

[legal description]

And commonly know as: [address].

WHEREFORE, the Debtors pray that, after notice with an opportunity for hearing, the Court enter an

Order avoiding any judicial liens which the above-referenced creditors may have on Debtors’ homestead; and

such other and further relief as the court deems just and equitable.

Dated this day of , 2016.

LENTZ CLARK DEINES PA

s/ Shane J. McCall

Shane J. McCall, KS #24564 9260 Glenwood

Overland Park, KS 66212

(913) 648-0600 (913) 648-0664 Telecopier

IN RE:

and

)

) ) Case No.

, )

Debtors. )

smccall@lcdlaw.com

Attorney for Debtors

CERTIFICATE OF SERVICE

I hereby certify that on this , a true and correct copy of the above and foregoing was

electronically filed with the Court using the CM/ECF system, which sent notification to all parties of

interest participating in the CM/ECF system.

s/ Shane J. McCall

Shane J. McCall