In re: Michael Paul Free Hak Suk Free
542 B.R. 492
| 9th Cir. BAP | 2015Background
- Debtors filed chapter 7 (discharge received) listing a residence subject to three liens: a first mortgage and two wholly-unsecured junior liens.
- While the chapter 7 case remained open (after discharge), Debtors filed chapter 13 to strip the two wholly-unsecured junior liens through a chapter 13 plan (a "chapter 20" filing).
- Trustee moved to dismiss under 11 U.S.C. § 109(e), contending Debtors’ unsecured debt (including the junior liens as unsecured claims) exceeded the statutory unsecured-debt cap and thus made them ineligible for chapter 13.
- Bankruptcy court granted dismissal, counting the discharged-in-personam junior liens as unsecured debt for § 109(e) eligibility.
- BAP reversed: it held that debts for which in personam liability was discharged in a prior chapter 7 are not "unsecured debts" for § 109(e) eligibility purposes and remanded with instruction to reinstate the chapter 13 case.
Issues
| Issue | Debtors' Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether wholly-unsecured junior liens, whose in personam liability was discharged in a prior chapter 7, must be counted as unsecured debt under § 109(e) for chapter 13 eligibility | Discharged in personam liability means no "debt" or "right to payment" exists for unsecured purposes; such claims should be excluded from the § 109(e) unsecured-debt calculation | The junior liens remain "claims" because of an in rem right to payment (per Johnson and related decisions) and therefore must be included when measuring unsecured debt for eligibility | Reversed dismissal: discharged in personam liability does not create an unsecured debt for § 109(e); the junior liens should not be counted toward the unsecured-debt cap |
Key Cases Cited
- Johnson v. Home State Bank, 501 U.S. 78 (1991) (secured creditor’s in rem right can constitute a "claim" under § 101(5) even after discharge of in personam liability)
- Quintana v. Commissioner (In re Quintana), 915 F.2d 513 (9th Cir. 1990) (interpreting "aggregate debts" in chapter 12 context; claim/debt treated broadly)
- Davis v. Bank of America (In re Davis), 778 F.3d 809 (9th Cir. 2015) (chapter 12/aggregate-debt analysis: in rem right may include unsecured portion enforceable against property despite prior discharge)
- Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001) (undersecured portion of a secured creditor’s claim counts as unsecured debt in chapter 13 eligibility when in personam liability remains)
- Smith v. Rojas (In re Smith), 435 B.R. 637 (9th Cir. BAP 2010) (applied Scovis to classify wholly-unsecured junior trust deeds as unsecured debt in chapter 13 where no prior discharge existed)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (limitation on reducing an undersecured lien in chapter 7 under § 506(d))
- Bank of Am. v. Caulkett, 135 S. Ct. 1995 (2015) (held Dewsnup principle extends to wholly unsecured junior liens in chapter 7 context)
- In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 2014) (held a chapter 7 discharge can render a previously unsecured claim disallowable in subsequent chapter 13 because the in personam liability was extinguished)