A client calls his lawyer after receiving his chapter 7 discharge. He’s pleased; after all, a discharge is “the holy grail” of chapter 7. [i] But there’s an unexpected adversary proceeding pending that alleges that the client owes a debt for a willful and malicious injury. [ii] The client believes in his defenses but understands that this debt won’t be discharged if the claim succeeds. [iii] After the lawyer mentions that a chapter 13 discharge covers such debts after full plan performance, [iv] the client asks whether he should file a new chapter 13 case. The lawyer explains that while a debtor may file a chapter 7 case, discharge his personal liability for most debts, and quickly file a chapter 13 case to confirm a repayment plan for any remaining debts (a “chapter 20” [v]), he can’t receive a chapter 13 discharge if he recently obtained a discharge in a chapter 7 case. [vi]

While saying this, the lawyer opens the Bankruptcy Code to confirm it. The Code states that “the court shall not grant a discharge of all debts provided for in the plan … if the debtor has received a discharge … in a case filed under chapter 7 … during the 4-year period preceding the date of the order for relief under this chapter.” [vii] This verifies the fact that a typical “chapter 20” debtor doesn’t receive a chapter 13 discharge. Out of curiosity, the lawyer then reads the conversion section, which provides: “Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but … does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.” [viii]

The lawyer then wonders whether the client can convert immediately and get two discharges in one case. The Code only bars a chapter 13 discharge when a debtor receives a discharge in a chapter 7 case preceding the order for relief in the new chapter 13 case. [ix] While a voluntary chapter 7 petition is an order for relief, [x] and a conversion order is a second order for relief, conversion “does not effect a change in the date of … the order for relief.” [xi] Thus, one order for relief wouldn’t precede the other.

There Is Not a Uniform View

The lawyer promises to call the client back and starts researching. A debtor may convert a case from chapter 7 to chapter 13 “at any time” if it hasn’t converted already. [xii] This right isn’t absolute, however; courts may deny conversion to prevent abuse or due to a debtor’s ineligibility for chapter 13. [xiii] Seeking to convert owing to a nondischargeability action or to stop a trustee’s sale of a home isn’t per se bad faith, although it can evince bad faith. [xiv]

From there, the case law varies widely. Some pre-Marrama courts refused to allow a post-discharge conversion. [xv] Several have only allowed it if the chapter 7 discharge is revoked; [xvi] one even likens conversion without discharge revocation to an impermissible version of “chapter 20.” [xvii] But many courts have held that the Code doesn’t require a chapter 7 discharge revocation prior to conversion to chapter 13. [xviii]

Several opinions state that the Code doesn’t allow two discharges in one case. A handful say it without much discussion. [xix] A couple assert, notwithstanding §348(a), that the chapter 7 order for relief impermissibly would precede the chapter 13 order for relief upon conversion. [xx] Some hold that a pre-conversion discharge renders a debtor ineligible for a chapter 13 discharge in the same case, as no debts remain or because converting before full estate administration violates chapter 7’s “quid pro quo.” [xxi] Other opinions reject this reasoning. [xxii]

Finally, several opinions preceding the BAPCPA amendments to §1328(f) assert that the Code doesn’t bar a debtor from receiving two discharges in one case. [xxiii] Courts have issued a chapter 7 discharge and a chapter 13 discharge to a debtor in one case (including at least twice post-BAPCPA) [xxiv] or appear poised to do so upon plan completion. [xxv] Moreover, legislative history states BAPCPA revised §1328(f)(1) “to prohibit the issuance of a discharge in a subsequent chapter 13 case if the debtor received a discharge in a prior chapter 7 case within four years preceding the filing of the subsequent chapter 13 case.” [xxvi]

It's Worth a Shot … in the Right Case

The lawyer advises the client that it’s unclear whether he can obtain two discharges in one case, and the path to success appears challenging. Even if the case successfully converts without the chapter 7 discharge being vacated, the law isn’t settled on whether a debtor can receive a chapter 13 discharge after full plan performance. Appellate courts haven’t written on this, bankruptcy courts are split, and courts finding that two discharges may be issued are in the minority.

Because the client’s easiest path to discharge his potential §523(a)(6) debt is to win the adversary proceeding, he opts to focus on his trial. But the lawyer files away the research for future use. After all, construing the Code properly requires a focus on its plain language. [xxvii] While it may be “statutorily awkward,” [xxviii] a viable argument exists that the text of §§1328(f)(1) and 348(a) allows two discharges in a converted case. Legislative history buttresses this view, and the case law goes both ways. If the right debtor comes along, the lawyer will have a persuasive argument to offer.

Section 522(f)(2) of the Bankruptcy Code allows debtors to avoid certain liens, including judicial liens, that impair debtors’ exemptions. [i] But § 522(f)(2)(C) says that “this paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure,” leaving courts to decide whether debtors can avoid mortgage deficiency judgments under § 522(f). Recently, the U.S. Bankruptcy Court for the District of Connecticut’s In re Gramigna [ii] opinion has joined an overwhelming majority of cases that have said that debtors can avoid mortgage deficiency judgments. These majority courts have relied on three predominant rationales.

The first rationale adopted by many courts considers the overall structure of § 522(f)(2) to conclude that its language is unambiguous. [iii] Under this rationale, Congress’s use of the term “paragraph” instead of “subsection” indicates that Congress did not intend for § 522(f)(2)(C) to modify the entirety of § 522(f). Instead, courts endorsing the first rationale hold that § 522(f)(2)(C) merely clarifies that foreclosure judgments do not convert otherwise unavoidable consensual mortgages into avoidable judicial liens. Consequently, the plain language of § 522(f)(2)(C) allows debtors to avoid nonconsensual judicial liens, including mortgage deficiency judgments. [iv]

The second rationale relies on the application of state foreclosure law. In re Smith is the most prominent example of this rationale. [v] The Smith court considered the history of New York law and noted that “the equitable relief of foreclosure continues to be distinguishable from a deficiency judgment, with its origin as an action at law.” [vi] The Smith court reasoned that foreclosure proceedings are equitable suits under common law, while deficiency judgments are remedies incidental to foreclosure. Thus, the Smith court concluded that mortgage deficiency judgments do not “arise out of” mortgage foreclosures under § 522(f)(2)(C).

The third rationale focuses on the “procedural mechanisms of state foreclosure law.” [vii] For example, in In re McMorris, [viii] the court considered Louisiana state foreclosure law when it held that under the plain language of § 522(f)(2), a deficiency judgment is merely incidental to the mortgage foreclosure and does not arise out of the mortgage foreclosure. Specifically, under Louisiana law creditors may proceed to seize and sell property by executory process, and after the sheriff’s sale and distribution of sale proceeds, the creditor may file suit against the debtor for a deficiency judgment. Thus, state law supports a finding that such mortgage deficiency judgments do not “arise out” of a mortgage foreclosure. Notably, under the third rationale, whether the jurisdiction at issue requires judicial foreclosures or permits nonjudicial foreclosures is integral in determining whether a deficiency “arises out of” a mortgage foreclosure. [ix]

In contrast, Hon. Albert Dabrowski, the lone champion of the minority view, held that mortgage deficiency judgements were unavoidable in In re Criscuolo [x] and In re Vincent. [xi] In Criscuolo, Judge Dobrowski, taking on critics of his earlier Vincent decision, concluded that § 522(f)(2)(C) was ambiguous because its purpose was not clear on its face. The court compellingly pointed out that under the plain language of § 522(f)(2)(C), which refers to paragraph (2) rather than the entire subsection, a “judgment arising out of a mortgage foreclosure” could potentially be avoided, yet subparagraphs (A) and (B) would not apply — thus, leaving an avoidable judgment without means to calculate the extent to which it impairs an exemption. Judge Dabrowski argued that this is an untenable result that reinforces that § 522(f)(2)(C)’s purpose cannot be discerned from its plain text.

The court therefore considered two potential purposes for § 522(f)(2)(C): that (1) Congress intended to clarify that a foreclosure judgment does not transform an otherwise unavoidable consensual mortgage lien into an avoidable judgment lien, or (2) Congress intended to exclude mortgage deficiency judgments to promote the flow of capital into the mortgage lending market. Judge Dabrowski rejected the first rationale (much like he did in Vincent) because he found no authority suggesting that Congress was concerned with clarifying that a mortgage foreclosure judgment did not turn unavoidable liens into avoidable judgment liens. In contrast, Judge Dabrowski argued that there are numerous instances where Congress expressed an intention to promote affordable capital in the real estate lending industry. Ultimately, Judge Dabrowski conceded that “this is one of those rare instances in which Congress failed to draft a statutory provision in a manner that plainly effectuated its true purpose.” Nevertheless, the court determined that it was not absolved from construing the statute as consistent with Congress’s most likely purpose.

While courts have described the divided precedent as a minority view and majority view, these cases actually present several different approaches to dealing with mortgage deficiency judgments under § 522(f)(2) that parties should be aware of if they confront this issue in practice. The majority view is itself fractured, where some courts consider, with varying degrees of emphasis, aspects of state law to decide whether a mortgage deficiency judgment arises out of a mortgage foreclosure. Other courts, however, rely more narrowly on the text of the Code, saying that Congress merely intended § 522(f)(2)(C) to clarify that mortgage deficiency judgments do not convert unavoidable consensual liens into avoidable liens.

Judge Dabrowski’s decisions remain relevant because most circuits have not addressed this issue, and even though courts have been critical of the Vincent and Criscuolo decisions, Judge Dabrowski is correct that the purpose of § 522(f)(2)(C) is ambiguous — a point that is further reinforced by varying analyses among majority courts. Thus, what we are left with, for now, is a prevailing view in which courts, for one reason or another, agree that debtors can avoid mortgage deficiency judgments, and an increasingly waning view that debtors cannot avoid mortgage deficiency judgments. But debtors should expect creditors to occasionally point to the Vincent and Criscuolo decisions until this issue is put to rest in their circuit or by the Supreme Court.