MN Housing Finance Agency v. Schmidt, et al., No. 13-2447 (8th Cir. 2014)Annotate this Case
This case involved 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 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. The court agreed with other circuits that when considering the rights of creditors who hold homestead liens, the dividing line drawn by 11 U.S.C. 1322(b)(2) runs between the lienholder whose security interest in the homestead property has some value, and the lienholder whose security interest is valueless. Section 1322(b)(2) protects a creditor's right in a mortgage lien only where the debtor's residence retains enough value - after accounting for other encumbrances that have priority over the lien - so that the lien is at least partially secured under 11 U.S.C. 506(a). Accordingly, the court affirmed the judgment of the district court.