Lien Stripping in Chapter 13 cases.

            What methods to be used for lien stripping??  There are four methods to be  used by debtors to strip off liens: 1) through plan provisions; 2) through an adversary proceeding; 3) through a claim objection; and 4) through motion practice.

Stripping off is the focus and not stripping down, as we are concerned about removing the entire lien.

Here for now we shall focus on Lien stripping through a motion practice.

Do we need an adversary to lien strip in a chapter 13 case?  Or is it ok to accomplish the same by a motion?  There are split decisions n the same. The better reasoning is that the lien stripping is not a fight with the creditor,  there is no contest about the issues here  and hence it is more appropriate for a motion way.

In the case of Robert, 313 B.R. 545 the issue was phrased in an interesting fashion whether strip off was part and parcel of the secured claim determination and valuation process under 11 U.S.C.S. § 506(a) (to be determined under  Fed. R. Bankr. P. 3012 by  a motion), or  it has to go through the standard route of adversary proceeding under Rule 7001 proceeding i.e.  a proceeding to determine the validity, priority, or extent of a lien.   

The court held that  “a Chapter 13 debtor may proceed by motion to strip off a creditor's wholly unsecured lien through the valuation process under Code § 506 and Rules 3012 and 9014. An adversary proceeding is not required by Rule 7001 (2) unless the debtor otherwise contests the validity, extent, or priority of the mortgagee's lien.”  The court reached this conclusion by considering strip off as a part of  secured claim determination and valuation process under Code § 506(a) and found the same to be addressable by  motion under Rule 3012.  By this process if the lien is found to be exceeding the value of the property then that is void—this conclusion is reached on sheer basis of valuation, without  any other consideration.  The court here was little concerned  and clearly cautioned the debtor indicating that the debtor must “explicitly state within the motion that the validity, extent, or priority of the lien are not at issue.”  There was a little whimper from the Creditor about due process however that does not deserve any reference in this note.

Let us look at it.   The second lien has to be peeled off.  On a substantive level there is no problem, the debtors have the right to unload a barren lien. The Second Circuit has held that a Chapter 13 debtor may modify the rights of a wholly unsecured mortgagee under Code § 1322(b)(2), notwithstanding antimodification exceptions.   See In re Pond, 252 F.3d at 126.

Keep one thing in mind that section 506 is nimble enough not only for the purpose of valuation it provides a declarative provision about the inefficacy of what is unsecured.  Pursuant to a valuation under section 506, the lien is automatically declared void if unsecured.  If the result is achieved by a simpler valuation method why does one need to embark on an adversarial method of an independent full fledged proceeding.  Advesrary would make sense if there are issues with the substantive relief itself i.e. if the lender disagrees with the proposition that the  homeowner can remove the second lien based on unsecure status.   If one looks at the language of the Rule 7001 dealing with adversary proceedings--a proceeding to determine the validity, priority, or extent of a lien," FED. R. BANR. P. 7001(2).  7001 is  an all inclusive section, only those enumerated actions within that section could be espoused under it.  There is a catch all provision for the left overs i.e. Rule 9014 (contested matters). 

If a provision makes it, the lien,  statutorily void, then there is not need for a declaratory judgment that is another basis for making Rule 7001 inapplicable here. We are not looking for a proceeding to obtain a declaratory judgment.  

Further lien dealing in Rule 7001 pertains to "to determine the validity, priority, or extent of a lien or other interest in property.”

As used in Bankruptcy Rule 7001(2), the term 'validity' means the existence or legitimacy of the lien itself, 'priority' means the lien's relationship to other claims to or interests in the collateral, and 'extent' means the scope of the property encompassed by or subject to the lien.   See   In re King, 290 B.R. 641 (Bankr. C.D. Ill. 2003).

Unsecured lien could be valid, with clear priority vis-à-vis other interest and extent as length and breadth could be very clear.  However these are questions about the substantive aspect of the lien.   Lien is fine, the focus here is not the lien, it is the subject matter of the lien that deserves the attention.  When the focus is lien, adversary is fine, but it is the property, the collateral that merits the consideration for lien stripping.  That is why valuation is the remedy to see if the property escapes the lien hold.