Frazier v. REAL TIME RESOLUTIONS, INC.Frazier v. REAL TIME RESOLUTIONS, INC.
- Reporters:
- , ,
- Before:
- England
MEMORANDUM AND ORDER
MORRISON C. ENGLAND, JR., District Judge.
Real Time Resolutions, Inc. (“Appellant”), appeals from the Bankruptcy Court’s order approving the removal of Appellant’s junior lien on debtors Phillip and Leslie Frazier’s (“Appellees”) primary residence and confirming Appellees’ Chapter 13 plan. The main issue presented by this appeal is one that has been addressed by multiple bankruptcy courts since the collapse of the housing market: whether a Chapter 13 debtor can “strip-off’ a wholly unsecured secondary or junior lien on the debtor’s principal residence when the debt- or is ineligible for discharge because of a prior Chapter 7 discharge pursuant to
The Bankruptcy Court’s decision joins the growing split of authority among bankruptcy courts across the country on this same issue. For the reasons set forth below, the Bankruptcy Court’s decision is affirmed. 1
BACKGROUND
On August 3, 2009, Appellees filed a voluntary Chapter 13 bankruptcy petition. On August 17, 2009, Appellees’ Chapter 13 petition was converted into a Chapter 7 case. At that time, Appellees were not eligible to proceed under Chapter 13 because their scheduled, unsecured debts exceeded the debt limits imposed by
Appellees received a Chapter 7 discharge on December 21, 2009, which relieved them of in personam liability for those mortgage liens securing the subject property; however, the in rem liability on the subject property remained intact. Accordingly, the senior and junior lien holders’ state law lien rights in the subject property “rode through” the Chapter 7 discharge and the mortgage liens became non-recourse debts.
On December 30, 2009, Appellees filed a Chapter 13 petition to address the outstanding liens secured by the subject property, arrears, priority tax debt and other unsecured claims. (Excerpt of Record (“ER”), ECF No. 19 at 9.) Courts colloquially refer to this type of situation as a
Schedule D of Appellees’ Chapter 13 plan lists BOA as the senior lien holder of the First Deed of Trust for the amount of $275,681.00, secured by the subject property. (Id. at 33.) Schedule D also lists BOA as the junior lien holder of the Second Deed of Trust for $47,400.00, again secured by the subject property. (Id.)
On January 6, 2010, Appellant filed a proof of claim for $53,591.82, representing the principal, interest, and late fees owed on the Second Deed of Trust (“junior lien”) on the subject property. (Id. at 61-63.) Appellant identified itself as the loan servi-cer for BOA’s junior lien on the subject property. (Id.)
The Chapter 13 plan proposed to pay BOA, the senior lien holder, as a class-one creditor holding a “secured claim” pursuant to
In order to remove Appellant’s junior lien, Appellees filed a Motion to Value Appellant’s claim against the value of the subject property pursuant to
In their Motion to Value, Appellees listed the value of the subject property as $240,000.00.
4
(Id.
at 60.) Appellant objected to Appellees’ Motion to Value and to the confirmation of Appellees’ Chapter 13 plan, arguing that Appellees could not strip Appellant’s junior lien because they were not eligible to receive a Chapter 13 discharge pursuant to
The Bankruptcy Court overruled Appellant’s objections and confirmed Appellees’ Chapter 13 Plan.
(Id.
at 174, 194.) The Bankruptcy Court found that BOA’s senior lien securing an obligation of $275,681.00 exhausted all of the value in the subject property.
(Id.
at 190.) Accordingly, the Bankruptcy Court determined that Appellant’s junior lien was a wholly unsecured allowed claim under
The Bankruptcy Court also rejected Appellant’s contention that the amendment to
The Bankruptcy Court rejected Appellant’s argument that a lien may only be stripped upon discharge.
(Id.
at 187.) In an effort to explain how the case would end in light of the lack of discharge in Appellees’ Chapter 20 case, the Bankruptcy Court likened Appellees’ Chapter 13 plan to a contract between Appellees and the creditors.
(Id.
at 187.) Specifically, the Bankruptcy Court stated, “[i]t is the Chapter 13 plan, by which the debtor commits him or herself to a plan, which becomes the new contract between debtors and creditors.”
(Id.
[citing
In re Than,
215 B.R. 430 (9th Cir. BAP 1997) ]). The Bankruptcy Court explained that the debt- or must pay the full amount of the
Finally, the Bankruptcy Court, on several grounds, overruled Appellant’s objection that Appellees’ Chapter 13 plan was not filed in good faith. First, the Bankruptcy Court overruled Appellant’s objections based on
On January 25, 2011, Appellant filed the Notice of Appeal with the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.
(Id.
at 196-197.) On January 31, 2011, Appel-lees transferred the appeal to this Court pursuant to
STANDARD
An appellant may petition the district court for review of a bankruptcy court’s decision.
Findings of fact are “clearly erroneous” only if the reviewing court is “left with the definite and firm conviction that a mistake has been committed.” In re Marquam Inv. Corp., 942 F.2d 1462, 1466 (9th Cir.1991) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Appellant has the burden of proving such error has been committed, and the reviewing court should not reverse simply because another decision could have been reached. In re Windor Indus., Inc., 459 F.Supp. 270, 275 (N.D.Tex.1978).
ANALYSIS
Real Time’s appeal rests on two arguments: (1) the Bankruptcy Court erred in determining that Appellees could remove Appellant’s lien without obtaining a Chapter 13 discharge, and (2) the Bankruptcy Court erred in entering an order confirming Appellees’ Chapter 13 Plan when Appellant’s claim was not treated in the proposed Chapter 13 Plan. (Appellant’s Opening Brief, ECF No. 17 at 8-9.)
A. Removal of Lien Without a Chapter 13 Discharge
The central issue on appeal presents a question of law addressed by conflicting court decisions concerning the interplay between various provisions of the Bankruptcy Code affecting “Chapter 20” bankruptcy cases, including provisions modified by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPC-PA”).
Put simply, the issue presented by cases of this nature is whether a Chapter 20 debtor may strip a wholly unsecured, inferior mortgage lien off the debtor’s primary residence in a Chapter 13 case filed less than four years after having received a Chapter 7 discharge. More specifically, the issue is whether a debtor, who has been discharged of in personam liability for a home mortgage debt by receiving a Chapter 7 discharge, may then modify the in rem rights of the holder of the mortgage debt by removing the lien through a Chapter 13 plan even though the debtors are ineligible for discharge, and if so, under what circumstances.
Courts adopting the first approach “allow Chapter 20 lien stripping because nothing in the Bankruptcy Code prevents it.” 6 Id. These courts contend that the mechanism that voids the lien is plan completion, and that Chapter 20 cases end in administrative closing — not discharge. Id.
Courts that adopt the second approach allow Chapter 20 lien stripping; however, after plan consummation, without a discharge, the parties’ pre-bankruptcy rights are reinstated. 7 Id. These courts assert that a Chapter 13 discharge is required to void the lien, and that Chapter 20 plans end in dismissal because they are ineligible for discharge. Id.
Courts utilizing the third approach “hold that Chapter 20 lien stripping is impermissible because it amounts to a de facto discharge,” which is prohibited by
For the reasons that follow, the Court agrees with those courts adopting the first approach, which hold that a wholly unse
The determination of whether Appellees’ Chapter 13 plan may remove Appellant’s junior lien necessitates analysis of the interplay between
1. Secured and Unsecured Claims Under
Whether Appellees’ Chapter 13 plan may remove Appellant’s lien dependent on its
“An allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”
Holding an allowed secured claim under the Bankruptcy Code is not necessarily synonymous with holding a security interest outside of bankruptcy.
See In re Zimmer,
313 F.3d at 1223. “Secured claim” is a term of art within the Bankruptcy Code and means something different than it does for a creditor to have a security interest or lien outside of bankruptcy.
Id.; In re Okosisi,
451 B.R. 90, 93 (Bankr.D.Nev.2011). Outside of bankruptcy, if a creditor has a valid security interest, regardless of the collateral’s value, it may be thought of as a secured creditor.
Id.
Conversely, in bankruptcy, a creditor is only a secured creditor if its claim is classified under
In this case, BOA’s senior lien for $275,681.00 exhausted all the $240,000.00 of value in the subject property.
Thus, there is zero value in the subject property for Appellant’s junior lien to attach, rendering Appellant’s claim a wholly unsecured allowed claim pursuant to
2. Lien Stripping and Chapter 13
The status of Appellant’s unsecured allowed claim dictates whether or not Appel-lees’ Chapter 13 plan can remove Appellant’s junior lien.
In
Nobelman v. American Savings Bank,
the Supreme Court addressed the issue of “whether
After reviewing the statutory language and applicable case law, the Court held that a Chapter 13 debtor cannot strip-down a partially unsecured residential mortgage lien secured by the debtor’s principal residence.
Id.
at 332, 113 S.Ct. 2106. The Supreme Court confirmed that the appropriate starting point to determine whether a lien strip-down or strip-off is appropriate is through application of
In 1997, the Ninth Circuit Bankruptcy Appellate Panel addressed a corollary question not at issue in
Nobelman:
whether the holder of a mortgage against a Chapter 13 debtor’s residence which is wholly unsecured is entitled to the protections of the antimodification provisions of
Thus,
In re Lam
and
In re Zim-mer
instruct that the antimodification provision does not protect a creditor whose junior lien on a debtor’s primary residence has been classified as an “unsecured claim” by
Other courts addressing whether lien stripping is allowed in a Chapter 13 case also have considered
Accordingly,
3. 2005 BAPCPA Amendments to the Bankruptcy Code
The prior discussion brings us to
The 2005 amendments to the Bankruptcy Code affected changes to
Still, even with the inclusion of
Further, the court in
In re Hill
argued that “to judicially impose a discharge requirement on the debtor’s ability to strip a lien when none is required by statute cannot be reconciled with the Supreme Court’s holding in
Johnson v. Home State Bank,
501 U.S. 78, 87 [111 S.Ct. 2150].” 440 B.R. at 181-82. Specifically, “[i]n
Johnson,
the Court held ‘Congress did not intend to categorically foreclose the benefit of Chapter 13 lien reorganization to a debtor who previously filed for Chapter 7 relief.’”
Id.
(internal citations omitted). “By its plain terms,
Put more simply, “denying certain [C]hapter 13 debtors the right to a discharge did nothing to change the fact that lien stripping is generally allowed under Chapter 13.”
In re Fair,
450 B.R. at 857. In many Chapter 13 cases, “it is the ability to reorganize one’s financial life and pay off debts, not the ability to receive a discharge, that is the debtor’s holy grail.”
Id.
(citing
In re Bateman,
515 F.3d 272, 283 (4th Cir.2008)). Accordingly, Con
Applied here,
Instead of discharge, the Court agrees with the underlying Bankruptcy Court and finds plan completion is the appropriate end to Appellees’ Chapter 20 case. The lien strip will become permanent not upon a discharge, as would happen in a typical Chapter 13 case, but upon completion of all payments as required by the plan. See In re Blenheim, 2011 WL 6779709 (Bankr.W.D.Wash. Dec. 27, 2011). The reasoning set forth in In re Tran, 431 B.R. 230 (Bankr.N.D.Cal.2010), is persuasive:
[T]he Bankruptcy Code does not condition a chapter 13 debtor’s right to strip off a wholly unsecured junior lien on the debtor’s eligibility for a discharge. Rather, such right is conditioned on the debtor’s obtaining confirmation of, and performing under, a chapter 13 plan that meets all of the statutory requirements.
431 B.R. at 235; accord In re Hill, 440 B.R. 176, 182 (Bankr.S.D.Cal.2010) (“[L]ien strips are permitted in Chapter 20 cases even without a discharge.”); In re Okosisi, 451 B.R. at 100 (“[Cjhapter 20 bankruptcy is permissible under the Code, and [debtors] may take advantage of all available chapter 13 restructuring tools,” including lien stripping.); In re Fisette, 455 B.R. 177, 185 (8th Cir. BAP 2011) (“We hold that the strip off of a wholly unsecured lien on a debtor’s principal residence . . . is not contingent on his receipt of a Chapter 13 discharge”). Further, as noted by the court in In Re Okosisi,
“[a]t the successful completion of all payments in a no-discharge chapter 13 ease, no order discharging the debtor will be entered because the debtor is not eligible for a discharge . . . [I]n this situation, the proper result is for the court to close the case without discharge .... Because the no-discharge case is closed without discharge, rather than dismissed, the code sections that reverse any lien avoidance actions contained within a chapter 13 plan upon conversion or dismissal are not implicated, and, thus, do not act to prevent the permanence of the lien avoidance.... Once a debtor successfully complete all plan payments required by a chapter 13 plan, the provisions of the plan become permanent, and the lien avoidance is, similarly permanent.”
451 B.R. at 99-100 (noting that although, per
In re Leavitt,
171 F.3d 1219, 1223 (9th Cir.1999), a Chapter 13 case can only end in one of three ways: conversion, dismissal, or discharge. BAPCPA’s addition of
Conversely, if a Chapter 13 case is dismissed or converted to a Chapter 7 prior to the successful completion of all plan payments, actions taken to avoid a lien are undone, and a junior lien holder’s in rem rights would remain intact.
Importantly, in order for a Chapter 13 plan to be confirmed in this scenario, the plan must otherwise comply
In Appellees’ case, Appellant’s lien will be permanently stripped upon plan completion and the case will end in administrative closing. Assuming Appellees complete their Chapter 13 plan, Appellant will receive a pro-rata distribution of Appellees’ disposable income—which here, is zero— and a pro rata distribution of any assets remaining after completion of payments to creditors holding allowed secured claims and priority unsecured creditors. In the event that Appellees do not make all required Chapter 13 plan payments, Appel-lees’ Chapter 13 plan would be converted to a Chapter 7 or dismissed. Appellant would then have the option to exercise its remaining in rem rights against the subject property recognized by state law.
Based on the foregoing, the Court affirms the Bankruptcy Court’s holding that Appellees could remove Appellant’s lien without obtaining a Chapter 13 discharge.
B. Treatment of Appellant’s Claim Under the Chapter 13 Plan
Appellant’s second argument on appeal is that the Bankruptcy Court erred in confirming Appellees’ Chapter 13 plan because Appellant’s claim was not “treated” in the proposed Chapter 13 plan. (Appellant’s Opening Brief, ECF No. 17 at 21.)
Appellant’s argument is not the model of clarity. To paraphrase, Appellant argues that the Bankruptcy Court erred in confirming Appellees’ Chapter 13 plan because new consideration was not provided as part- of the contract which arises out of Appellees’ Chapter 13 plan.
Specifically, Appellant challenges the Bankruptcy Court’s confirmation of Appel-lees’ Chapter 13 plan arguing that Appel-lees did not provide “new consideration” to them as an unsecured creditor. (Appellant’s Opening Brief, ECF No. 17 at 21, 23.) The Bankruptcy Court likened Appellees’ Chapter 13 plan to a contract between Appellees and creditors, thus, Appellant is now demanding “new consideration” to support this “contract.”
First, Appellant cites to no authority requiring new consideration to be provided to an unsecured creditor in order for a bankruptcy court to confirm a debtor’s proposed Chapter 13 plan. Further, the Chapter 13 plan is authorized by the Bankruptcy Code, which does not require the concept of “new consideration” in order for a bankruptcy court to approve Appellees’ Chapter 13 plan. Thus, Appellant’s reliance on a California statute requiring consideration for a contract to be valid is misplaced. The Bankruptcy Code governs the contents and confirmation of Appellees’ Chapter 13 plan, not California statutory or common law governing contracts. Further, the Bankruptcy Court found that Ap-pellees’ Chapter 13 plan was proposed in good faith and that the contents of the Chapter 13 plan complied with
Appellant argues that Appellees’ Chapter 13 plan should not have been confirmed because it does not meet one the requirements for plan confirmation—
(a) Except as provided in subsection (b), the court shall confirm a plan if . . . (4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.
Appellant contends that Appel-lees’ Chapter 13 plan fails under the liquidation analysis provided by
To the contrary, the Bankruptcy Court specifically found that Appellees’ Chapter 13 plan complied with the plan confirmation requirements set forth in
As to Appellant’s claim that it is not treated at all in Appellees’ Chapter 13 plan, that argument is disingenuous. Appellant holds an unsecured allowed claim and its claim is subject to modification of its rights under
Thus, to the extent that Appellant argues that its claim is not “treated” in Appellees’ Chapter 13 plan, the Court finds its position untenable. Appellees’ Chapter 13 plan provides for Appellant’s claim and treats Appellant as a creditor holding an allowed unsecured claim. Accordingly, the Court affirms the Bankruptcy Court’s decision to confirm Appellees’ Chapter 13 Plan.
CONCLUSION
The Bankruptcy Court did not err in confirming Appellees’ Chapter 13 plan and approving the removal of Appellant’s junior lien, despite the fact Appellees were ineligible for discharge pursuant to
IT IS SO ORDERED.
Notes
. Because oral argument will not be of material assistance, the Court deemed this matter suitable for decision without oral argument. See E.D. Cal. Local Rule 230(g).
. The Supreme Court has expressly held that the Bankruptcy Code allows debtors to file Chapter 20 cases. Johnson v. Home State Bank, 501 U.S. 78, 87, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (holding a debtor could file a Chapter 13 after a Chapter 7 because the Bankruptcy Code did not prohibit it and Congress specifically prohibited other types of consecutive filings, therefore its choice not to prohibit it meant that this type of filing was allowed).
. The Bankruptcy Court in this case aptly described the strategy behind “Chapter 20” filings:
“[pjrior to the enactment of . . . [the Bankruptcy Abuse Prevention and Consumer Protection Act] . . . a Chapter 20 was a useful tool for a debtor who exceeded the monetary limits for a Chapter 13 case. See11 U.S.C. § 109(e) . By filing the Chapter 7 case to discharge unsecured indebtedness, debtors could reduce their debts to be within the monetary limits for the filing a subsequent Chapter 13 case. Then, through the subsequent Chapter 13 plan, debtors could save their residence from foreclosure by curing any arrearage through the plan or establish a court enforced repayment plan for nondischargeable debt, such as tax obligations.”
In re Frazier, 448 B.R. 803, 807 (Bankr.E.D.Cal.2011)
. No parties opposed Appellees’ valuation of the subject property.
.
. See In re Hill, 440 B.R. 176; In re Tran, 431 B.R. 230 (Bankr.N.D.Cal.2010); In re Okosisi, 451 B.R. 90 (Bankr.D.Nev.2011); In re Fisette, 455 B.R. 177 (8th Cir. BAP 2011); In re Scotto-DiClemente, 459 B.R. 558 (Bankr.D.N.J. Nov. 18, 2011); In re Miller, 462 B.R. 421 (Bankr.E.D.N.Y. Dec. 15, 2011); In re Gloster, 459 B.R. 200 (Bankr.D.N.J.2011); In re Sadowski, 2011 WL 4572005 (Bankr.D.Conn. Sept. 30, 2011); In re Jennings, 454 B.R. 252 (Bankr.N.D.Ga.2011); In re Fair, 450 B.R. 853 (E.D.Wis.2011); In re Waterman, 447 B.R. 324 (Bankr.D.Colo.2011); In re Davis, 447 B.R. 738 (Bankr.D.Md.2011).
. See In re Casey, 428 B.R. 519 (Bankr.S.D.Cal.2010); In re Trujillo, 2010 WL 4669095 (Bankr.M.D.Fla. Nov. 10, 2010); In re Colbourne, 2010 WL 4485508 (Bankr.M.D.Fla. Nov. 8, 2010); Hart v. San Diego Credit Union, 449 B.R. 783 (Bankr.S.D.Cal.2010); In re Jazo, 2010 WL 3947303 (Bankr.S.D.Cal. Sept. 28, 2010); In re Davis, 447 B.R. 738 (Bankr.D.Md.2011).
.
See In re Victorio,
454 B.R. 759, 2011 WL 2746054 (Bankr.S.D.Cal. July 8, 2011);
In re Winitzky,
2009 Bankr.LEXIS 2430 (Bankr.C.D.Cal. May 7, 2009);
In re Gerardin,
447 B.R. 342 (Bankr.S.D.Fla.2011) (holding that Chapter 20 debtor could not avoid lien because of ineligibility for discharge);
In re Fenn,
428 B.R. 494 (Bankr.N.D.Ill.2010) (holding that by virtue of
. See In re Lane, 280 F.3d 663, 667-69 (6th Cir.2002); Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122, 126 (2d Cir.2001); In re Tanner, 217 F.3d 1357, 1359-60 (11th Cir.2000); In re Bartee, 212 F.3d 277, 288, 295 (5th Cir.2000); In re McDonald, 205 F.3d 606, 611 (3d Cir.2000). Bankruptcy Appellate Panels have also reached this same result. See In re Griffey, 335 B.R. 166, 167-68 (10th Cir. BAP 2005); See In re Mann, 249 B.R. 831, 836 (1st Cir. BAP 2000).
. During the bankruptcy proceedings, Appellants argued that Appellees’ Chapter 13 plan could not remove Appellant’s junior lien because under