Judge Berger

08-20677 Picht (Doc. # 62)

In Re Picht, 08-20677 (Bankr. D. Kan. Sep. 26, 2008) Doc. # 62

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Case: 08-20677 Doc #: 62

The relief described hereinbelow is SO ORDERED.

Signed September 26, 2008.

United States Bankruptcy Judge


In re:

KEITH JOHN PICHT and Case No. 08-20677

Filed: 09/26/2008 Page 1 of 9

At a hearing on August 19, 2008, this Court confirmed the Debtors’ Chapter 13 plan over
the objections of creditor Bank of the Prairie (“Bank”) (Doc. No. 16). An order confirming the
Debtors’ Chapter 13 plan is reflected on the record (Doc. No. 48). The order confirming the
Debtors’ Chapter 13 plan is currently on appeal to the United States Bankruptcy Appellate Panel
of the Tenth Circuit.1 Although the appeal of an issue typically deprives this Court of
jurisdiction over the matter on appeal, this Court may enter orders “pertaining to the appeal
record in aid of the appeal process.”2

1 In re Picht, No. KS-08-076 (B.A.P. 10th Cir. Aug. 26, 2008).

2 In re Carlson, 255 B.R. 22, 23 (Bankr. N.D. Ill. 2000) (citing International Assoc. of Machinists and
Aerospace Workers AFL-CIO v. Eastern Air Lines, Inc., 847 F.2d 1014, 1017 (2d Cir.1988)).

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The issue is whether a business loan originally secured by both personal property and a
second mortgage on the Debtors’ home qualifies for §1322(b)(2)’s anti-modification protection.
As of the petition date, the Bank had liquidated the personal property, leaving only the second
mortgage on Debtors’ home as collateral. Section 1322(b)(2) prohibits debtors from modifying
loans secured only by a security interest in debtors’ principal residence. At the hearing, the
Court held §1322(b)(2) does not apply. This Memorandum Opinion supplements the order of
confirmation by more fully explaining the Court’s findings and conclusions as set forth on the
record in open court.

Factual Background

The following is the factual background provided to the Court through statements by

The Bank extended financing to Debtors for their small business, a bar and grill. The
SBA loan was secured by equipment, fixtures, inventory, accounts, instruments, chattel paper
and general intangibles, an assignment of lease, and life insurance policies. The Debtors
personally guaranteed the debt and provided a second mortgage on their residence. The business
failed. Debtors’ personal obligation to the Bank was discharged in Debtors’ prior Chapter 7
case. Prior to filing this case, the personal property pledged as security for the loan was
liquidated, leaving the second mortgage as the Bank’s only collateral as of the petition date.

Debtors filed for Chapter 13 relief on March 28, 2008.3 The Bank filed a proof of claim
for $127,000.00. The Bank’s second mortgage secures up to $126,000.00.4 Debtors value their
home at $300,000.00. The value of the first mortgage is $285,147.27. Thus, Debtors’ plan

3 Debtors are not entitled to a discharge in this pending Chapter 13 case under §1328(f) because their prior
Chapter 7 bankruptcy was filed on October 6, 2005, within four years of the date this case was filed.

4 The proof of claim includes $1,000.00 in attorney’s fees.

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proposes to strip down the Bank’s lien, pay the Bank $14,852.73 as the value for the second
mortgage, and leave the remaining unsecured portion of the Bank’s claim discharged by the prior

At the confirmation hearing, the Bank argued §1322(b)(2)’s restriction on modifying
loans secured only by a security interest in debtor’s principal residence applies because the
Bank’s sole remaining collateral is the second mortgage. In the alternative, the Bank argued
Debtors’ plan violates §1325(a)(5)(B)(i)(I)(aa) because Debtors propose to pay the Bank the
value of its lien rather than its debt.


A general rule in bankruptcy is a secured claim may be modified in the debtor’s plan.5 A
debtor’s plan may propose to pay a partially secured creditor the value of his collateral and treat
any remaining deficiency as unsecured.6 However, §1322(b)(2) creates an exception to the
general rule and prohibits bifurcating a “claim secured only by a security interest in real property
that is the debtor’s principal residence.” The section is meant to protect traditional home
mortgage lenders.7 It is not meant to protect the business lender who happens to take an
additional security interest in a principal’s residence or homestead.8 The creditor who takes a
security interest in other collateral in addition to a security interest in the debtor’s residence does
not qualify for §1322(b)(2)’s protection, even where the only collateral which is still available to

5 11 U.S.C. §1322(b)(2).

6 11 U.S.C. §506(a)(1).

7 Nobleman v. Am. Sav. Bank, 508 U.S. 324, 331 (1993) (Stevens, J., concurring); In re Johns, 37 F.3d
1021, 1024 (3rd Cir. 1994); In re Hammond, 27 F.3d 52, 56-57 (3rd Cir. 1994); In re Ferandos, 402 F.3d 147, 151
(3rd Cir. 2005).

8 In re Larios, 259 B.R. 675, 679 (Bankr. N.D. Ill. 2001); In re Howard, 220 B.R. 716, 718 (Bankr. S.D.
Ga. 1998).

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be levied against as of the petition date is the debtor’s principal residence.9 Because the Bank
objects to confirmation based on §1322(b)(2)’s exception, the Bank has the burden of proof to
show its claim falls within the protections afforded by the statute.10

The determinative factor is the language granting the security interests in the underlying
loan documents, regardless whether additional collateral in fact exists.11 If the loan documents
provide for security in addition to the debtor’s principal residence, then the creditor is not
entitled to the benefits of §1322(b)(2). This holding follows the plain language of the statute,
which by its express terms limits its application to claims “secured only by a security interest in
real property that is the debtor’s principal residence.”12

The Bank concedes its loan was a business loan secured by personal property in addition
to the second mortgage. Thus, the Bank does not qualify for the anti-modification exception.
To be afforded the advantages of §1322(b)(2), the Bank needed to forego the grant of additional
security at the time it entered the transaction.13

In the alternative to §1322(b)(2) protection, the Bank argues it must be entitled to retain
its lien under §1325(a)(5)(B)(i)(I)(aa) until Debtors pay the entire underlying debt because the
Debtors are not entitled to discharge in this Chapter 13 case by virtue of §1328(f). The Bank’s
argument ignores a significant portion of this statute. Sections 1325(a)(5)(B)(i)(I)(aa), (bb), and

(II) read:
Except as provided in subsection (b), the court shall confirm a plan if – with
respect to each allowed secured claim provided for by the plan – the plan provides
that – the holder of such claim retain the lien securing such claim until the earlier
of – the payment of the underlying debt determined under nonbankruptcy law; or

9 Id. at 719; Hammond, 27 F.3d at 55-56; In re Libby, 200 B.R. 562, 567 (Bankr. D.N.J. 1996).

10 Larios, 259 B.R. at 678 (citing In re Petrella, 230 B.R. 829, 832 (Bankr. N.D. Ohio 1999)).

11 Larios, 259 B.R. at 678; Howard, 220 B.R. at 718.

12 Emphasis added.

13 Hammond, 27 F.3d at 57; see also Johns, 37 F.3d at 1021.

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discharge under §1328; and if the case under this chapter is dismissed or

converted without completion of the plan, such lien shall also be retained by such

holder to the extent recognized by applicable nonbankruptcy law.14

This language (“Amendment”) was added under the provisions of BAPCPA.15 It is common for

a secured claim to be paid in full prior to discharge in a Chapter 13 bankruptcy. Pre-BAPCPA,

there existed ample case law that upon full payment of the secured portion of a creditor’s claim,

but prior to the conclusion of the bankruptcy plan, the secured creditor could be compelled to

release its lien in that creditor’s collateral.16 The Amendment provides that the lien release is not

compelled until the underlying debt owed to the secured creditor is paid, or the secured claim is

paid and the bankruptcy case discharged.17

Johnson v. Home State Bank18 is valuable to this Court’s analysis. In Johnson, as in the

Picht case, the debtor had previously filed a Chapter 7 bankruptcy and discharged his personal

liability to a bank that held a mortgage in real estate and then subsequently filed a Chapter 13

14 Emphasis added.

15 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005).

16 See, e.g., In re Murry-Hudson, 147 B.R. 960 (Bankr. N.D. Calif. 1992) (even if debtor had not provided
for the release of bifurcated claims upon payment, the auto lender would still be compelled to release its lien upon
payment of its allowed secured claim); In re Townsend, 256 B.R. 881 (Bankr. N.D. Ill. 2001) (undersecured auto
lender’s objection to confirmation of plan that provided for release of vehicle lien upon payment of the secured
portion of the bifurcated claim was overruled); In re Gray, 285 B.R. 379 (Bankr. N.D. Tex. 2002) (same); In re
Castro, 285 B.R. 703 (Bankr. D. Ariz. 2002) (same); IRS v. Campbell, 180 B.R. 686 (M.D. Fla. 1995) (same, as to
perfected Internal Revenue Service tax lien). See also In re James, 285 B.R. 114 (Bankr. W.D.N.Y. 2002) (During
the Chapter 13 bankruptcy, the debtor paid in full the allowed secured claim of creditor but prior to discharge
converted to a Chapter 7 bankruptcy. The court held that after debtor received a Chapter 7 discharge, the seizure of
his collateral violated the discharge injunction because the only claim the creditor still had was an unsecured claim,
which had been discharged and the lien had been satisfied.). All of these cases involve a circumstance in which the
creditor’s claim was bifurcated via the “strip down” provision of §1325(a)(5)(B).

17 Of course, in this Debtors’ case, a discharge will not ensue upon the Debtors’ successful completion of
the plan. However, in all other respects, Debtors’ bankruptcy proceedings remain unchanged. For instance, the
Debtors and property of the bankruptcy estate remain under the protective umbrella of the automatic stay. If a plan
has not already been confirmed in the case, then it is solely within the province of the Debtors to file and seek
confirmation of a plan that is binding on their creditors. The Debtors may successfully complete such plan that
provides for the treatment of their creditors and to have their case closed thereafter. Even absent discharge in the
Chapter 13 proceedings, the Debtors previously received a discharge in their Chapter 7 case and the Amendment
does not foreclose the Debtors’ right to pay the amount of the allowed secured claim and, upon conclusion of the
Debtors’ plan, receive a lien release by the holder of the secured claim.

18 501 U.S. 78 (1991).

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bankruptcy plan to treat the bank’s mortgage with payments over time. The bank objected that
the debtor was no longer entitled to treat the bank’s claim in a Chapter 13 plan because the
debtor’s personal liability had been discharged in the prior Chapter 7 proceeding. The Supreme
Court rejected the bank’s argument and ultimately found that the bankruptcy court properly
confirmed the debtor’s plan.19 A mortgage lien is a claim against the debtor’s real property that
secures repayment of a debt. The general rule is that a lien is not affected by a Chapter 7
bankruptcy, absent an affirmative act typically undertaken by a Chapter 7 trustee or, less
frequently, the debtor.

In the Pichts’ case, the Bank’s lien passed through the prior Chapter 7 bankruptcy case
unaffected. However, the Pichts’ liability on the debt to the Bank was discharged in the prior
Chapter 7 bankruptcy. Prior to the Chapter 7 bankruptcy, the Bank enjoyed two legal
mechanisms upon which to collect its debt. One was the Pichts’ personal liability and the other
was enforcement of its mortgage lien against the Pichts’ homestead. The former was discharged
in the prior Chapter 7 bankruptcy so the Bank was left with only its mortgage lien, i.e., its in rem
claim for payment. The in rem claim constitutes a right to payment from the proceeds of the
homestead or the right to foreclose the creditor’s lien in the homestead.20

The prior bankruptcy discharge extinguished the personal liability of the Debtors with
respect to the debt owed the creditor.21 However, “a bankruptcy discharge extinguishes only one
mode of enforcing a claim--namely, an action against the debtor in personam--while leaving
intact another--namely, an action against the debtor in rem.”22 Thus, the creditor has an


Id. at 80-81.


Id. at 84.


Id. at 84 n.5.


Id. at 84.

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enforceable in rem claim against the Debtors and such is a claim against the bankruptcy estate.23

In other words, the Court must allow the claim if it is enforceable against either the
Debtors or their property. “Thus, § 502(b)(1) contemplates circumstances in which a ‘claim,’
like the mortgage lien that passes through a Chapter 7 proceeding, may consist of nothing more
than an obligation enforceable against the debtor’s property.”24 This Court also considers it
significant that the Supreme Court in Johnson v. Home State Bank stated with regard to plan
confirmation in a Chapter 13 bankruptcy: “In addition, the bankruptcy court retains its broad
equitable power to ‘issue any order, process, or judgment that is necessary or appropriate to
carry out the provisions of [the Code.]’§105(a).”25 It is noteworthy that the Amendment itself
states that “if the case under this chapter is dismissed or converted without completion of the
plan, such lien shall also be retained by such holder to the extent recognized by applicable non-
bankruptcy law.” (Emphasis added.) The Amendment itself contemplates completion of the plan
by the debtor as a trigger to satisfaction of a creditor’s lien; discharge is obviously not the only

The Johnson opinion allowed the debtor to provide for the in rem claim in his plan.
Upon confirmation, the plan is binding upon the debtor and each creditor.26 The in rem claim
only exists to the extent that there is value in the debtor’s property in which the creditor holds a
lien to secure the claim under §506(a). It is this unique species of in rem claim with which the
Debtors must deal in the current bankruptcy case. As to these Debtors, any liability above the
allowed secured claim does not exist, so all that remains for these Debtors is to pay the allowed
secured claim, in other words, the in rem claim the Bank holds against the Debtors and the

23 See § 102(2) wherein it states: “‘claim against the debtor’ includes claim against property of the debtor.”


Id. at 85.


Id. at 88.
26 See §1327(a) and In re Mersmann, 505 F.3d 1033 (10th Cir. 2007).
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Estate. In this sense, the underlying debt, which can only constitute the in rem claim under non-
bankruptcy law, is satisfied upon payment of the allowed secured claim. This interpretation is in
concert with the purpose and intent of the Amendment. The plain language of the Amendment
readily supports this result, and at least one learned treatise recognizes the function of the

This amendment is apparently an attempt to overrule the results of cases
under the prior language that, as discussed above, required elimination of the
creditor’s lien when the allowed secured claim had been paid.27

Under the Amendment, in the first instance, the words “underlying debt” are modified by
“determined under nonbankruptcy law.” In the second instance, should the case not reach
discharge, the lien is retained to “the extent recognized by applicable nonbankruptcy law.” The
statute read as a whole states the secured creditor should receive in bankruptcy what he would
receive outside bankruptcy. Under nonbankruptcy law, the Bank’s lien is worth the value of its
in rem claim, i.e., the value of the homestead less the value of the first mortgage. Thus, in
bankruptcy, the Bank’s in rem claim has this approximate value under §506(a). If Debtors had
not filed for bankruptcy, the Bank could have foreclosed its interest, but the Bank could only
recover the home’s value to the extent it exceeded the value of the first mortgage. Any
deficiency is not collectible against Debtors personally. The Bank should not obtain a more
favorable equitable result in bankruptcy than it would be able to obtain outside bankruptcy.28

The Bank does not have an underlying debt in this bankruptcy exceeding the value of its
in rem claim under nonbankruptcy law. The Bank’s in rem claim equals the value of the Bank’s

27 8 COLLIER ON BANKRUPTCY ¶1325.06[3][a][ii] at 1325-33 (Alan N. Resnick & Henry J. Sommer, eds., 15th
ed. rev. 2007) (footnote omitted).

28 Larios, 259 B.R. at 679 (citing Matter of Wheaton Oaks Office Partners Ltd. Partnership, 27 F.3d
1234, 1241 (7th Cir. 1994) (goal is to ensure creditor is afforded in bankruptcy the same protection he would have
under state law) (citing Butner, 440 U.S. 48, 56 (1979))).

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lien. Debtors’ plan proposes to pay the Bank the value of its lien. Accordingly, Debtors’ plan
conforms with §1325(a)(5). This result is in conformity with Johnson v. Home State Bank
wherein the Supreme Court specified that what remained for the creditor is an in rem claim
against the debtor, which in rem claim was defined as the creditor’s right to payment in the
proceeds from the liquidation of the collateral or its right to foreclose its lien in the collateral. It
is exactly this value that the debtor pays under his plan. There is not a requirement in Johnson
that in order to accomplish this goal the debtor must receive a discharge in his bankruptcy
proceeding and the Amendment does not require that discharge is the only endpoint to effect the
stripdown of a lien. Section 1328(f) was not enacted to prohibit the stripdown of secured claims
in which the underlying debt had been previously discharged in a prior Chapter 7 proceeding
and, as explained above, the Amendment does not require such conclusion. As reflected in
Johnson, this Court may employ §105 with regard to plan confirmation.29 Although not
necessary to reconcile the pertinent Code provisions, this Court may employ such broad
equitable powers to reach a logical ruling in concert with various Code provisions.


For the foregoing reasons and the reasons set forth more fully at the confirmation
hearing, Debtors’ Chapter 13 plan was confirmed. This Memorandum Opinion is to serve as
Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Federal Rules of
Bankruptcy Procedure.




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