Submitted March 12, 2014
Appeal from United States District Court for the District of Minnesota - Minneapolis.
For Minnesota Housing Finance Agency, Appellant: Mychal A. Bruggeman, Manty & Associates, Minneapolis, MN.
For Jamey Albert Schmidt, Keeley Ariel Schmidt, Appellees: Timothy Casey Theisen, Attorney, Theisen Law, Theisen Law.
Before COLLOTON, SHEPHERD, and KELLY, Circuit Judges.
COLLOTON, Circuit Judge.
Jamey and Keeley Schmidt filed for bankruptcy under Chapter 13 of the bankruptcy code. Chapter 13 allows individuals with regular income to adjust their debts through flexible repayment plans funded primarily from future income. See 8 Collier on Bankruptcy ¶ 1322.01 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2013).
The bankruptcy court generally has authority to approve a debtor's Chapter 13 plan that modifies the rights of creditors. A plan may modify the rights of holders of unsecured claims; it also may modify the rights of holders of secured claims, " other than a claim secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). In the bankruptcy context, a creditor's claim is a " secured claim" only to the extent of the value of the creditor's interest in the collateral that secures the claim. Id. § 506(a)(1).
This case involves a scenario in which a creditor holds a third mortgage that is secured only by the debtor's principal residence, but the value of the creditor's interest in the home is zero, because the value of the residence is insufficient to make whole the holders of the first and second mortgages. The question presented on this appeal is whether the debtor may engage in a practice known as " lien stripping," in which the debtor seeks to (1) have the creditor's claim reclassified from secured to unsecured, (2) modify the terms of the mortgage for the duration of the Chapter 13 plan, and (3) avoid the creditor's mortgage entirely upon discharge from bankruptcy. See generally Harmon v. United States, 101 F.3d 574, 582 (8th Cir. 1996).
The bankruptcy court confirmed a Chapter 13 plan that reclassified the third-mortgage creditor's claim as unsecured and provided for avoidance of the creditor's lien upon discharge. The district court affirmed, and the third-mortgage holder appeals. Consistent with the decisions of all other circuits that have addressed the question, we affirm.
In June 2012, the Schmidts filed for relief under Chapter 13 of the Bankruptcy Code. Their home, which has an appraised value of $140,000, is encumbered by three mortgages. The senior mortgage, in the amount of $154,578.20, is held by U.S. Bank Home Mortgage. The second-priority mortgage, also held by U.S. Bank Home Mortgage, is for $39,451.99. The Minnesota Housing Finance Agency holds the third-priority mortgage, in the amount of $26,469.31. The Schmidts' home is the only collateral that secures the debt owed to the Agency.
In November 2012, the Schmidts filed a " motion to value" in the bankruptcy court, seeking (1) a determination that there was no equity in their home to support the Agency's lien, (2) reclassification of the Agency's claim from secured to nonpriority unsecured, and (3) avoidance of the Agency's lien upon the Schmidts' successful completion of their Chapter 13 plan. They also filed a modified Chapter 13 plan that treats the Agency as an unsecured creditor ...