Bankruptcy Law

James Cole, Esquire

Ineligibility of Chapter 13 debtor for discharge does not preclude a plan that permits stripping off wholly-unsecured junior residential mortgages.  In re Fisette, No. 11-6012, U.S. Bankruptcy Appellate Panel (BAP) for the Eight Circuit, August 29, 2011. 

“Chapter 20” was curtailed by BAPCPA, but it retains vitality for the purpose of lien stripping. The Bankruptcy Appellate Panel holds that the Bankruptcy Code allows a debtor to follow a Chapter 7 with a Chapter 13 in which he proposes to strip wholly unsecured junior liens from his residence.  Debtor’s ineligibility for discharge does not bar such lien avoidance; the avoidance will be effective when debtor completes plan payments.  The panel further holds that debtor must treat the holders of the avoided liens as general unsecured claimants.

The party in possession of a promissory note that has become a “bearer” note by endorsement in blank holds the related mortgage on property. Banks v. Kondaur Capital Corp. (In re Banks), No. 11-6025 U.S. Bankruptcy Appellate Panel (BAP) for the Eight Circuit, October 11, 2011.

Plaintiffs-debtors attacked the validity of defendant-creditor’s lien on debtors’ residence on the ground that the mortgage loan had previously been assigned to another creditor entirely.  Defendant moved to dismiss, attaching a copy of the note.  The court treated the motion as one for summary judgment.  The note had been endorsed by the original lender in blank.  Endorsement in blank made the note a “bearer” note pursuant to Minn. UCC sec. 3-205(b).  The panel found that defendant’s failure to account for the original of the note rendered summary judgment inappropriate.  The case was remanded to determine who had possession of the note.