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In re Curwen

United States District Court, D. Connecticut

August 26, 2016

In re KASIA CURWEN, ROBERT CURWEN, Debtors/Appellants,
MOLLY T. WHITON, Trustee/Appellee. Bankruptcy No. 14-51331

         On appeal from United States Bankruptcy Court, District of Connecticut at New Haven


          STEFAN R. UNDERHILL, United States District Judge.

         The question in this bankruptcy appeal is whether a debtor in a Chapter 13 case who is ineligible for discharge as a result of receiving a Chapter 7 discharge within the prior four years is for that reason per se barred from obtaining confirmation of a plan that contemplates voiding (or “stripping off” or “lien-stripping”) a wholly unsecured, junior mortgage lien. That question can also be framed as whether it is correct to follow a 2011 opinion of U.S. Bankruptcy Judge Albert S. Dabrowski-In re Sadowski, 473 B.R. 12 (Bankr. D. Conn. 2011)-which concluded that a per se bar does exist, or a 2013 opinion of Chief U.S. District Judge Janet C. Hall-In re Rogers, 489 B.R. 327 (D. Conn. 2013)-which expressed her view that Sadowski was wrongly decided (albeit in dicta, because she affirmed on other grounds).

         The bankruptcy judges in this district have followed Sadowski, and apparently none has yet been reversed, despite Chief Judge Hall's discussion in Rogers. The position Chief Judge Hall expressed in Rogers, however, has become the majority rule elsewhere, and has been adopted by three Circuits. For the reasons that follow, I follow Chief Judge Hall and the decisions of those Circuits and accordingly REVERSE the decision of the Bankruptcy Court and REMAND to that Court for further proceedings consistent with this ruling.

         I. Standard of Review

         The district courts have jurisdiction to hear appeals from “final judgments, orders and decrees” of the bankruptcy court as well as from some interlocutory orders. 28 U.S.C. § 158(a). The Supreme Court recently decided that orders that deny confirmation of a plan are not final for purposes of appeal. Bullard v. Blue Hills Bank, 135 S.Ct. 1686 (2015). However, the Court noted its “expectation that lower courts will certify and accept interlocutory appeals from plan denials in appropriate cases.” Id. at 1696.

         The standard generally applied by district courts deciding whether to grant leave to appeal interlocutory orders of the bankruptcy court is the same as that set forth in 28 U.S.C. § 1292(b). See Weiner's Inc. v. T.G. & Y. Stores Co., 191 B.R. 30, 31 (S.D.N.Y. 1996); In re Orlan, 138 B.R. 374, 377 (E.D.N.Y. 1992). The district court should grant leave to appeal from an interlocutory order where the decision of the bankruptcy court involves: (1) a controlling question of law (2) as to which there is a substantial ground for difference of opinion, (3) where immediate appeal may materially advance the termination of the litigation. See 28 U.S.C. § 1292(b). I granted leave to appeal in this case (doc. # 7).

         When reviewing bankruptcy appeals, the district court must review conclusions of law de novo and apply the “clearly erroneous” standard to the bankruptcy court's findings of fact. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir. 1990). The issue on this appeal is a pure question of law and therefore subject to de novo review.

         II. Background

         Kasia and Robert Curwen received a discharge in a Chapter 7 liquidation case in May 2014, and in August 2014 they filed this Chapter 13 reorganization case. They filed a motion under sections 506(a) and (d) of the Bankruptcy Code to obtain a valuation of their home in Bridgeport, Connecticut, and an order entered finding that the value of the property is $120, 000, that the debt owed to the first mortgage on the home is $179, 858, and that the second mortgage therefore attaches to no value in the collateral and is totally unsecured.

         The Curwens filed a Chapter 13 plan of reorganization that would eliminate the junior mortgage holder's lien on the property under 11 U.S.C. § 1322(b)(2). The Trustee objected, arguing that the plan is unconfirmable as a matter of law because the Curwens are ineligible for discharge and the plan does not otherwise provide for payment under nonbankruptcy law as is required by 11 U.S.C. § 1325(a)(5)(B)(i)(I). Following Sadowski, Bankruptcy Judge Alan H.W. Shiff sustained the objection. The Curwens sought leave to file an interlocutory appeal, and I permitted them to do so.

         III. Discussion

         The parties dispute section 1325(a)(5)'s effect on the bankruptcy court's ability to confirm a Chapter 13 plan that contemplates “lien-stripping” under section 1322(b)(2). The crux of the dispute is whether the phrase “allowed secured claim, ” as set forth in section 1325(a)(5), should be defined using 11 U.S.C. § 506(a)'s definition of the phrase, or whether it should be defined as it was in Dewsnup v. Timm, 502 U.S. 410 (1992). To evaluate the dispute, I must first consider the distinctions between Chapter 7 liquidation and Chapter 13 reorganization.

         A. Chapter 7, Chapter 13, and ...

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