“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.

In re Crocker: Fifth Circuit Holds Private “Bar Study” Loans Dischargeable

On October 21, 2019, the Fifth Circuit Court of Appeals entered an opinion in In Re Crocker.  In 2015, Evan Crocker filed a Chapter 7 Bankruptcy case and received a discharge.  In his Schedules, he had listed a $15,000 claim held by Navient that was originally incurred in 2009 as a “bar study loan.” (Bar study loans are loans incurred by law school graduates/would-be attorneys after graduation to cover the costs of taking bar preparation courses and living expenses while awaiting exam results.)  After the conclusion of the case, Navient continued to try to collect from Crocker, so he filed an adversary proceeding in the Southern District of Texas, asking for a finding that the loan had been discharged and a contempt finding against Navient.

Crocker then added as a co-plaintiff Michael Shahbazi (who had filed Chapter 7 in Virginia in 2011 with a loan related to his attendance at a technical school in 2002), and sought certification as a national class action.  Navient moved for summary judgment, claiming the District Court lacked jurisdiction to enforce a discharge entered in another District. 

The District Court certified both the dischargability and jurisdiction question to the Circuit Court.  The Fifth Circuit, in a major holding outside the scope of this blog post, held that only the Court that issued a discharge order has the power to hear an action for violation of that order.

As to the dischargeability question, the Circuit Court held that the § 523(a)(8) student loan exception to dischargeability did not apply to the bar study loan, and that it was indeed dischargeable.   This is a position that this office has long held, and successfully represented clients with respect to

§ 523(a)(8) says that absent “undue hardship,” the bankruptcy discharge does not apply to: “qualified educational loans” (§ 523(a)(8)(B)), education debts made, insured, or guaranteed by the government (§ 523(a)(8)(A)(i)), and obligations “to repay funds received as an educational benefit, scholarship, or stipend” (§ 523(a)(8)(A)(ii)).

With respect to bar study loans, such borrowers have already graduated from law school at the time of borrowing, and bar prep classes are not Title IV institutions, so such loans can’t be qualified educational loans under § 523(a)(8)(B).  Moreover, since bar prep schools are not qualified to participate in Title IV programs, therefore all such loans are private (i.e. not governmental).  That takes care of § 523(a)(8)(A)(i).  Nor are the funds received as a scholarship or stipend.  So that leaves you, as will all bar study loan cases, with the definition of “educational benefit.”

After looking at the legislative history and doing linguistic analysis, the Court concluded: “[E]ducational benefit” is limited to conditional payments with similarities to scholarships and stipends. The loans at issue here, though obtained in order to pay expenses of education, do not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because their repayment was unconditional.”

This is a good decision that does not fall into the trap that has snared other courts of confusing an “educational benefit” with “the benefit of an education.”  Debtor’s lawyers should take note.