“Such Lien is Void” – Stripping Liens from Co-Owned Property in Chapter 13 (Lopez v. SLS)

” Lien Stripping” is something we’ve discussed here in previous blog posts.  The idea is simple: In a Chapter 13 case, if there is more than one lien on your property, and if the value of the property is less than the amount owed on the first lien, the security interest is “stripped” from all junior liens, and the amounts owed under those junior liens becomes unsecured debt (i.e. subject to discharge).

One issue that often comes up with lien stripping is: What if the property is co-owned with someone else?  Of course, spouses usually co-own the family home, so the problem is easily resolved by having both spouses file a joint case.  However, if you co-own property with someone who is not your spouse, you can’t file a joint case with that person.  There is the option of both co-owners filing separate cases in which both parties strip the lien as it attaches to their half of the property, but in my practice I’ve found that co-owners rarely want to do this, and understandably so.

In October 2019, in the case of Lopez v. Specialized Loan Servicing LLC, Judge Huennekens of the Bankruptcy Court for the Eastern District of Virginia (Case 19-03046) looked at the plan language of the statute  to cut through a decade of assumptions and found that separate cases are not needed.

Blas Lopez and his brother co-owned a house in Henrico, Virginia.  The house was worth $154,000, there was a first mortgage held by U.S. Bank with an amount owed of $158,000, and a second mortgage held by SLS with an amount owed of $36,000.  Lopez initiated an adversary proceeding to determine this very question, of whether a Chapter 13 debtor may strip an unsecured lien where the property is titled jointly and where the joint tenant is not a debtor.

SLS asked the Court to follow the Middle District of Pennsylvania which, under similar facts in In re Harris, 494 B.R. 215 (Bankr. M.D. Pa. 2013), relied on the Third Circuit’s decision in Miller v. Sul (299 F.3d 183 (3d Cir. 2002) to hold that the stripped amount is limited to the debtor’s one-half interest in the property.

Judge Huennekens opined differently, finding that Harris’s reliance on Miller was misapplied.  § 506 is the section of the Bankruptcy Code that governs the stripping of unsecured liens in Chapter 13 case.  Miller was a case about § 522(f), which covers the stripping of judgment liens where there is equity in the property.  The Miller Court wanted to avoid a result that would be a windfall for the co-owners: One could file a case, wipe out the judgment lien in its entirety, then both could enjoy the remaining equity.

In § 506 actions, there is by definition no equity in the property, and therefore there is no such concern about the debtor or her co-owner receiving a windfall.  As such, there is no reason to deviate from the plain language of § 506, which says that a claim is secured only to the extent of the value of the property, that the remainder is unsecured, and that to the extent a lien is not an allowed secured claim, such lien is void.

There is no mention in the statute that only the portion secured by the debtor’s one-half interest is void.  The LIEN is void. 

This all is in keeping with something I heard Judge Carlson say from the bench in San Francisco years ago when presented with a similar situation, namely: “The lien is the lien!”  Surprising that so many of us Chapter 13 Debtors’ attorneys have taken it as gospel that two cases are required.  Long-held assumptions need to be questioned from time to time.