542 B.R. 492
9th Cir. BAP2015Background
- Debtors filed chapter 7, received a § 727 discharge, then filed chapter 13 before the chapter 7 case closed (a "chapter 20" filing) to strip two wholly-unsecured junior liens on their residence.
- Property value $425,000; three liens: first mortgage (Deutsche) and two junior liens (Timberland and BECU) whose unsecured amounts exceeded the § 109(e) unsecured-debt cap.
- Trustee moved to dismiss the chapter 13 for ineligibility under § 109(e), counting the junior lien amounts as unsecured debt; Debtors argued those amounts were discharged in chapter 7 and thus should not count.
- Bankruptcy court dismissed the chapter 13, treating the discharged in personam liability as still countable toward the unsecured-debt limit, and Debtors appealed.
- BAP reversed: held that debts for which in personam liability was discharged in prior chapter 7 are not "unsecured debts" for § 109(e) eligibility calculations and remanded to vacate dismissal.
Issues
| Issue | Free's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether wholly-unsecured junior liens whose in personam liability was discharged in a prior Chapter 7 count as "unsecured debts" under § 109(e) for Chapter 13 eligibility | Discharged in personam liability means no enforceable unsecured "debt" exists; those liens should not be counted | The junior liens retain a "right to payment" in rem and thus their unsecured amounts count toward the § 109(e) unsecured-debt cap | Reversed: discharged in personam liability cannot be counted as unsecured debt for § 109(e) eligibility; the junior liens’ unsecured amounts are excluded from the unsecured-debt calculation |
Key Cases Cited
- Johnson v. Home State Bank, 501 U.S. 78 (1991) (a lienholder retains an in rem right to payment after a Chapter 7 discharge; a lien can be a "claim" in a Chapter 13 plan)
- Quintana v. Commissioner (In re Quintana), 915 F.2d 513 (9th Cir. 1990) (aggregate-debt analysis for Chapter 12; entire claim can count toward debt caps prior to disposition of collateral)
- Quintana v. Commissioner (In re Quintana), 107 B.R. 234 (9th Cir. BAP 1989) (BAP treatment of aggregate debts and claims against property)
- Davis v. Bank of America (In re Davis), 778 F.3d 809 (9th Cir. 2015) (Chapter 12 aggregate-debt includes unsecured portions enforceable in rem despite prior Chapter 7 discharge)
- Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001) (for Chapter 13 eligibility, undersecured portion of secured claim is treated as unsecured debt)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (Chapter 7 debtor cannot "strip down" an undersecured lien under § 506(d))
- Bank of Am. v. Caulkett, 135 S. Ct. 1995 (2015) (a wholly unsecured junior lien cannot be voided in Chapter 7 via § 506(d))
- HSBC Bank USA v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. 2015) (no per se bad faith for serial Chapter 7→Chapter 13 filings; distinguishes discharge from lien-voiding relief)
- In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 2014) (where in personam liability was discharged, a creditor’s unsecured claim may be disallowed in a subsequent Chapter 13)