IN THE MATTER OF: ROBERT S. BLENDHEIM AND DARLENE G. BLENDHEIM, Debtor, HSBC BANK USA, National Association, as Indenture Trustee of the Fieldstone Mortgage Investment Trust, Series 2006-1, Appellant/Cross-Appellee, v. ROBERT S. BLENDHEIM; DARLENE G. BLENDHEIM, Appellees/Cross-Appellant.
Nos. 13-35354 13-35412
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
October 1, 2015
D.C. No. 2:11-cv-02004-MJP
FOR PUBLICATION
OPINION
Appeal from the United States District Court for the Western District of Washington Marsha J. Pechman, Chief District Judge, Presiding
Argued and Submitted October 7, 2014—Seattle, Washington
Filed October 1, 2015
Before: Richard A. Paez, Jay S. Bybee, and Consuelo M. Callahan, Circuit Judges.
Opinion by Judge Bybee
SUMMARY*
Bankruptcy
Affirming in part and vacating in part the district court‘s judgment, the panel held that an amendment to the Bankruptcy Code—barring debtors from receiving a discharge at the conclusion of their Chapter 13 reorganization if they received a Chapter 7 discharge within four years of filing for Chapter 13 relief—does not render such “Chapter 20” debtors ineligible for Chapter 13‘s lien-voidance mechanism, which allows a debtor to void or modify certain creditor liens on the debtor‘s property, permanently barring the creditor from foreclosing on that property.
The panel held that the bankruptcy court properly voided a creditor‘s lien under
The panel held that the voiding of the creditor‘s lien was permanent such that the lien would not be resurrected upon the completion of the debtors’ Chapter 13 plan. Agreeing with the Fourth and Eleventh Circuits, the panel held that
The panel held that the voiding of the lien comported with due process because the creditor received notice that its rights might be affected when the debtors objected to its proof of claim.
The panel held that under the totality of the circumstances, the bankruptcy court did not clearly err in concluding that the Chapter 13 petition was filed in good faith. Agreeing with the Eleventh Circuit, the panel rejected a per se rule prohibiting a debtor from seeking the benefits of Chapter 13 reorganization during the post-discharge period when his Chapter 7 case remains open and pending. The panel affirmed the bankruptcy court‘s lien-voidance order, plan confirmation order, and plan implementation order.
Vacating the district court‘s denial of attorneys’ fees, the panel held that the district court lacked jurisdiction to determine whether the debtors were entitled to attorneys’ fees because this issue was not addressed, in the first instance, by the bankruptcy court.
COUNSEL
Taryn M. Darling Hill (argued) and David F. Betz, Impact Law Group, Seattle, Washington, for Appellees/Cross-Appellants.
OPINION
BYBEE, Circuit Judge:
Robert and Darlene Blendheim are colloquially known as “Chapter 20” debtors. Like many others who sought bankruptcy relief during the housing crisis, they took advantage of the bankruptcy tools available under Chapter 7 and then filed for Chapter 13 relief. One of the tools available in a Chapter 13 reorganization is lien voidance, or “lien stripping.” Ordinarily, the Bankruptcy Code permits Chapter 13 debtors to void or modify certain creditor liens on the debtor‘s property, permanently barring the creditor from foreclosing on that property. However, a 2005 amendment to the Bankruptcy Code bars Chapter 20 debtors from receiving a discharge at the conclusion of their Chapter 13 reorganization if they received a Chapter 7 discharge within four years of filing for Chapter 13 relief.
In this case, we are tasked with deciding whether by making Chapter 20 debtors like the Blendheims ineligible for a discharge, Congress also rendered them ineligible for Chapter 13‘s lien-voidance mechanism. This question has divided
I. BANKRUPTCY PROCEEDINGS
A. Claim Disallowance and Lien Voidance
In 2007, Robert and Darlene Blendheim filed for bankruptcy under Chapter 7 of the Bankruptcy Code. The Blendheims eventually received a discharge of their unsecured debts in 2009. The day after receiving the discharge in their Chapter 7 case, the Blendheims filed a second bankruptcy petition under Chapter 13 to restructure debts relating to their primary residence, a condominium in West Seattle. In their schedule, the Blendheims listed their condo at a value of $450,000, subject to two liens: a first-position lien securing a debt of $347,900 owed to HSBC Bank USA, N.A., and a second-position lien securing a debt of $90,474 owed to HSBC Mortgage Services. The first-position lien is the only interest at issue in this appeal.
The first-position lien holder (“HSBC“), represented in bankruptcy proceedings by its servicing agent, filed a proof of claim in the Chapter 13 proceeding seeking allowance of its claim, which authorizes a creditor to participate in the bankruptcy process and receive distribution payments from the estate. The Blendheims filed an objection to the claim on the basis that, although HSBC properly attached a copy of the relevant deed of trust to its proof of claim, HSBC failed to attach a copy of the promissory note.1 The Blendheims also alleged that a copy of the promissory note they had previously received appeared to bear a forged signature. For reasons unknown, HSBC never responded to the Blendheims’ objection to its proof of claim. The deadline for responding passed, and in November 2009, hearing no objection from HSBC, the bankruptcy judge entered an order disallowing HSBC‘s claim. Even after the Blendheims served HSBC and its counsel with a copy of the disallowance order, HSBC took no action in response. Instead, it withdrew its pending motion and requested no future electronic notifications from the court.
In April 2010, the Blendheims filed an adversary proceeding complaint seeking, among other things, to void HSBC‘s first-position lien pursuant to
Even though the threat of voidance loomed, a year passed, and still HSBC took no action to set aside the order. Once more, the court advised HSBC to file a motion to set aside the disallowance order. This time, almost a year and a half after the disallowance order was entered, HSBC responded. In April 2011, HSBC filed a motion for reconsideration of the disallowance order, alleging grounds of mistake, inadvertence, surprise, excusable neglect, due process violations, and inadequate service. Following a hearing, the bankruptcy court denied the motion. The court explained that HSBC presented “no argument or evidence as to why its failure to respond was due to mistake, inadvertence, surprise, or excusable neglect,” and “[HSBC] has not provided any rationale for waiting nearly 18 months after entry of the [disallowance] order to request reconsideration.” It therefore declined to set aside the disallowance order.
The Blendheims subsequently moved for summary judgment, once again seeking lien voidance. HSBC filed a response, arguing that it would be improper and inequitable to void the lien after the claim was disallowed for mere failure to respond. In support of its argument, HSBC pointed to a Seventh Circuit case called In re Tarnow, 749 F.2d 464 (7th Cir. 1984), which had similarly dealt with the voidance of liens under
The bankruptcy court held a hearing and offered an oral ruling at the conclusion of argument. The bankruptcy court acknowledged that voiding HSBC‘s lien under
The claim [in Tarnow] was only disallowed because it was late in a situation where they didn‘t need to file a claim at all. . . . So it‘s as if the secured creditor in Tarnow didn‘t file the claim at all.
That‘s substantially different than what we have here where the claim was filed. There was a[n] objection to it that went to the substance, did not have anything to do with the form of the claim or the lateness of the claim.
And regardless of arguments now as to whether that would have been a meritorious objection if it had been responded to, [HSBC] just slept on its rights . . . .
Because HSBC‘s claim had been disallowed and the court had found no legitimate basis for setting aside the disallowance, the disallowance was “clearly a predicate under 506(d) for disallowance of the lien . . . and therefore the lien should be set aside.” The court ordered that
B. Plan Confirmation and Permanent Lien-Voidance
The parties then proceeded to the plan confirmation process. The bankruptcy court rejected several proposed plans, ultimately confirming the Blendheims’ eleventh amended plan. The bankruptcy court‘s discussion of its reasons for rejecting the Blendheims’ ninth amended plan, however, is relevant here.
After the Blendheims filed their proposed ninth amended plan, HSBC objected on two grounds. First, HSBC argued that the Blendheims “improperly seek to cancel and void [HSBC‘s] lien upon completion of the . . . Plan.” According to HSBC, even if a lien is properly voided under
The bankruptcy court rejected HSBC‘s argument that a lien may not be voided upon plan completion. Recognizing a split of authority among lower courts, the court observed that a Chapter 13 debtor‘s ability to void a lien does not depend on the debtor‘s eligibility for a discharge. It concluded that “it is not per se prohibited for Debtors to propose a Chapter 13 plan stripping the First or Second Position Lien on their Residence, notwithstanding their lack of eligibility for a Chapter 13 discharge.” The court went on to address good faith. It concluded that the Chapter 13 petition had been filed in good faith, as the Blendheims had valid reorganization goals and did not appear to be “serial repeat filers” who were “systematically and regularly abusing the bankruptcy system.” However, the court ultimately concluded that the plan had not been proposed in good faith; the plan would authorize the Blendheims to void both the first- and second-position liens, even though the second-position lien would become fully secured (and thus legally enforceable) at the moment HSBC‘s first-position lien was deemed void. Accordingly, the court rejected the ninth amended plan, but permitted the Blendheims to amend.
In April 2012, the bankruptcy court confirmed the Blendheims’ eleventh amended Chapter 13 plan. This plan reinstated the second-position lien, the voidance of which had caused the previous plan to fail. The court concluded that the reinstatement of the second-position lien “cure[s] what [the court] found was in bad faith before,” and thus confirmed the plan. Importantly, the confirmed plan replicated the ninth amended plan in permitting the Blendheims to permanently void HSBC‘s first-position lien upon the completion of the plan. The court subsequently issued an order implementing the plan.
II. APPELLATE PROCEEDINGS
A. District Court Proceedings
HSBC appealed to the U.S. District Court for the Western District of Washington. The district court concluded that
First, the court considered whether the bankruptcy court had properly voided HSBC‘s lien. The court assumed that the initial voidance of the lien under
The district court next rejected HSBC‘s argument that it was denied due process. The court explained that the lien was voided in an adversary proceeding, which granted HSBC a “full and fair opportunity to litigate the issue.” The district court then went on to reject HSBC‘s argument that the Blendheims’ Chapter 13 case was not filed in good faith, explaining that the bankruptcy court‘s findings that the Blendheims had valid reorganization goals other than lien stripping, did not file in order to defeat state court litigation, and did not exhibit any egregious behavior, were not clearly erroneous. Finally, the district court rejected the Blendheims’ request for attorneys fees.
B. Ninth Circuit Proceedings
HSBC timely appealed the district court‘s affirmance of the bankruptcy court‘s orders permanently voiding HSBC‘s lien. The Blendheims cross-appealed, seeking a determination that the district court erred in its denial of attorneys fees. Several months after the appeal was docketed, the Blendheims successfully completed their plan payments, meaning that they were poised to permanently void HSBC‘s lien upon the closure of their case in the bankruptcy court. We granted HSBC‘s motion for an emergency stay of the bankruptcy court‘s order closing the case, pending the outcome of its appeal to this court.
III. STATUTORY FRAMEWORK
There are several Bankruptcy Code provisions at issue in this case. To assist the reader, we begin by walking through the relevant chapters and sections.
A. The Life of a Bankruptcy Case
A bankruptcy case begins with the filing of a petition and the creation of an estate, which comprises the debtors’ legal and equitable interests in property.
The Bankruptcy Code contains two chapters designed to give relief exclusively to individual debtors: Chapters 7 and 13. To decide which chapter to file under, a debtor must compare his means and goals against the purposes of each chapter. In a Chapter 7 bankruptcy proceeding, also called a “liquidation,” a bankruptcy trustee immediately gathers up and sells all of a debtor‘s nonexempt assets in the estate, using the proceeds to repay creditors in the order of the priority of their claims.
By contrast, a Chapter 13 proceeding, often called a “reorganization,” is designed to encourage financially overextended debtors to use current and future income to repay creditors in part, or in whole, over the course of a three- to five-year period. See Harris, 135 S. Ct. at 1835. Only debtors with a “regular income,” which is “sufficiently stable and regular” to enable them to make payments under a plan, are eligible for Chapter 13 reorganization.
A Chapter 13 debtor formulating a proposed plan of reorganization must include certain mandatory provisions, but also has at his disposal various discretionary provisions—the “tools” in the reorganization toolbox. See In re Cain, 513 B.R. 316, 322 (B.A.P. 6th Cir. 2014). Mandatory provisions, which all Chapter 13 plans must contain in order to qualify for confirmation, are set forth in §§ 1322(a) and 1325 of the Bankruptcy Code. Among other things, these sections require a plan to be “proposed in good faith,”
Modification is a powerful tool; voidance—or “avoidance“—of a lien permits debtors to nullify a creditor‘s in rem rights by effectively removing from a creditor his right to foreclose on a property.
Another useful tool in a Chapter 13 reorganization, which is also available in Chapter 7, is the discharge.
If a debtor‘s proposed plan conforms with the mandatory requirements described above and all voluntary provisions similarly satisfy the “good faith” and “best interests of creditors” tests, then the bankruptcy court will confirm the Chapter 13 plan. The Bankruptcy Code provides that the “provisions of a confirmed plan bind the debtor and each creditor,”
Many debtors, however, fail to complete a Chapter 13 plan successfully, often because they cannot make payments on time. Recognizing this, the Bankruptcy Code permits debtors who fail to complete their plans to convert their Chapter 13 case to a case under a different chapter, or dismiss their case entirely.
B. BAPCPA
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), to make several significant changes to the Bankruptcy Code. One of Congress‘s purposes in enacting BAPCPA was “to correct perceived abuses of the bankruptcy system.” Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 231-32 (2010); see also H.R. Rep. 109-31 (I), at 2 (2005) (explaining that the enactment also sought to “ensure that the system is fair for both debtors and creditors“). Included among the provisions “intended to provide greater protections for creditors,” according to the House Report, are reforms “prohibiting abusive serial filings and extending the period between successive discharges.” H.R. Rep. No. 109-31(I), at 16 (2005). One of BAPCPA‘s new provisions extending the period between successive discharges appears in Chapter 13, § 1328(f): “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, 11, or 12 of this title
Significantly,
IV. DISCUSSION
As the bankruptcy court below aptly summarized, this case presents “unique issues stemming from the almost bizarre lack of diligence by [HSBC] early on in the case.” HSBC‘s inexplicable failure to respond to the bankruptcy court‘s order disallowing its claim in the bankruptcy proceeding has generated a litany of issues, including several questions of first impression. In Part A, we first address whether the bankruptcy court properly voided HSBC‘s lien under
Before proceeding with our discussion of these questions, we briefly examine the justiciability of HSBC‘s claims. Because HSBC failed timely to appeal the order disallowing its claim and order denying reconsideration to the district court, we, like the district court, lack jurisdiction over these orders. See In re Mouradick, 13 F.3d 326, 327 (9th Cir. 1994) (“[T]he untimely filing of a notice of appeal deprives the appellate court of jurisdiction to review the bankruptcy court‘s order.“). But HSBC‘s failure to timely appeal these orders does not, as the Blendheims have suggested, render HSBC‘s appeal of the bankruptcy court‘s other orders moot. The Blendheims are correct that the unappealed orders preclude this Court from offering HSBC any remedy in bankruptcy, but their argument misses the mark: HSBC is
not seeking a remedy in bankruptcy. Rather, as we address in greater detail below, HSBC asks us to determine whether, now that the Blendheims have successfully completed their Chapter 13 plan, HSBC maintains a lien on the property such that it may pursue its non-bankruptcy, state-law remedy—foreclosure—against the Blendheims. Deciding this question requires us to examine the validity of the bankruptcy court‘s lien-voidance order, plan confirmation order, and implementation order, which together permanentlyA. § 506(d) Permits Voidance of HSBC‘s Lien
First, we consider whether the bankruptcy court properly voided HSBC‘s lien pursuant to
The provision at issue here,
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under
section 502(b)(5) or502(e) of this title; or(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under
section 501 of this title.
The Supreme Court‘s decision in Dewsnup v. Timm, 502 U.S. 410 (1992), confirms this interpretation. There, a Chapter 7 debtor sought to use
Here, it is undisputed that HSBC‘s claim was not allowed. Although HSBC filed a proof of claim, the bankruptcy court expressly disallowed the claim after the Blendheims objected and HSBC failed to respond. See
HSBC has pointed to decisions from three of our sister circuits, but these decisions are not contrary to our holding. The Fourth, Seventh, and Eighth Circuits have concluded that bankruptcy courts may not use
Congress codified the principle that liens may pass through bankruptcy in
These decisions are distinguishable from this case, where HSBC timely filed its proof of claim. Because this case does not concern a late-filed or non-filed claim,
Where a claim is timely filed and objected to, on the other hand, disallowance is not automatic. This case is a good example: HSBC timely filed its proof of claim, received service of the Blendheims’ objection, and then had a full and fair opportunity to contest the disallowance of its claim—it simply chose not to. Thus, while voiding a lien securing an untimely filed claim might be considered a “disproportionately severe sanction” for untimeliness, In re Tarnow, 749 F.2d at 465, voidance is not so severe a sanction in a case like this one, where the bankruptcy court disallowed the claim because, as the bankruptcy court put it, HSBC “just slept on its rights” and refused to defend its claim. HSBC refused to defend its lien after it was challenged by the Blendheims for failure of proof and because their copy allegedly bore a forged signature. In these circumstances, HSBC‘s failure to respond is more akin to a concession of error than a failure to file a timely claim. HSBC simply forfeited its claim.
We therefore affirm the bankruptcy court‘s conclusion that
B. Chapter 20 Debtors May Permanently Void Liens
Voiding a lien under
The question whether discharge-ineligible Chapter 20 debtors may obtain the permanent release of lien obligations has divided lower courts within our circuit. Compare Frazier v. Real Time Resolutions, Inc., 469 B.R. 889, 895–901 (E.D. Cal. 2012) (holding that liens may be permanently voided in a Chapter 20 case), In re Okosisi, 451 B.R. 90, 99–100 (Bankr. D. Nev. 2011) (same)4, In re Hill, 440 B.R. 176, 181–82 (Bankr. S.D. Cal. 2010) (same), and In re Tran, 431 B.R. 230, 237 (Bankr. N.D. Cal. 2010) (same), aff‘d, 814 F. Supp. 2d 946 (N.D. Cal. 2011), with In re Victorio, 454 B.R. 759, 779–80 (Bankr. S.D. Cal. 2011) (holding that liens cannot be permanently voided in a Chapter 20 case), aff‘d sub nom. Victorio v. Billingslea, 470 B.R. 545 (S.D. Cal. 2012), In re Casey, 428 B.R. 519, 523 (Bankr. S.D. Cal. 2010) (same), and In re Winitzky, 2009 Bankr. LEXIS 2430, at *14 (Bankr. C.D. Cal. May 7, 2009) (same). Two other courts of appeals and bankruptcy appellate panels from three circuits, including our own, have also addressed the question, all concluding that Chapter 20 debtors may void liens irrespective of their eligibility for a discharge. See In re Scantling, 754 F.3d 1323, 1329–30 (11th Cir. 2014); In re Davis, 716 F.3d 331, 338 (4th Cir. 2013); In re Boukatch, 533 B.R. 292, 300–01 (B.A.P. 9th Cir. 2015); In re Cain, 513 B.R. 316, 322 (B.A.P. 6th Cir. 2014); In re Fisette, 455 B.R. 177, 185 (B.A.P. 8th Cir. 2011).5 We will omit the citations here, but we note that bankruptcy and district courts in other circuits have also divided over this question. And so we turn to the next question before us: whether the Bankruptcy Code permits discharge-ineligible Chapter 20 debtors, like the Blendheims, to permanently void a lien upon the completion of a Chapter 13 plan.
Here, the bankruptcy court voided HSBC‘s secured claim under
1. A discharge is not necessary to close a Chapter 13 case or permanently void a lien
HSBC argues that a discharge is necessary to obtain the benefits of lien voidance because, apart from conversion or dismissal, discharge is the only mechanism available to bring a Chapter 13 case to close in a manner that makes lien voidance “permanent.” As authority for that proposition, HSBC points to our decision in In re Leavitt, 171 F.3d 1219 (9th Cir. 1999).
HSBC‘s theory rests upon a fatal flaw: our decision in Leavitt imposed no “rule” that a Chapter 13 case must end in conversion, dismissal, or discharge, and the Bankruptcy Code is devoid of any such requirement. In Leavitt, we were not tasked with deciding all the ways in which a Chapter 13 case can end. Rather, we were called upon to determine whether the bankruptcy court below had properly dismissed a bad faith Chapter 13 petition with prejudice. Our statement that a Chapter 13 case “concludes in one of three ways” was not necessary to our holding, and is therefore dictum. That much should be clear from the context in which the statement was made; in fact, we made clear in the sentence immediately following that “[h]ere, we are only concerned with dismissal.” Leavitt, 171 F.3d at 1223. Our statement in Leavitt should not be read to describe an exhaustive list of ways in which a Chapter 13 case may conclude.
Nor has HSBC cited any provision in the Bankruptcy Code stating that a Chapter 13 plan may end only in conversion, dismissal, or discharge. Indeed, contrary to the so-called “Leavitt rule,” the Code contemplates closure of a case pursuant to
Fundamentally, a discharge is neither effective nor necessary to void a lien or otherwise impair a creditor‘s state-law right of foreclosure. As defined under
We acknowledge that there has been considerable confusion on this point. In Victorio, the bankruptcy court rejected the notion that closure pursuant to
Victorio cited various cases for the proposition that modifications to creditors’ rights are effective only to the extent that they can be “discharged,” Victorio, 454 B.R. at 777–78, but this conclusion does not follow from the cases. Each of the cited cases concerns certain non-dischargeable debts for which the debtor remains personally liable after the completion of his Chapter 13 plan. See, e.g., Bruning v. United States, 376 U.S. 358 (1964) (nondischargeable post-petition interest on unpaid tax debt remains a personal liability of the debtor); In re Foster, 319 F.3d 495 (9th Cir. 2003) (non-dischargeable post-petition interest on child support obligation may be collected personally against the debtor); In re Ransom, 336 B.R. 790 (B.A.P. 9th Cir. 2005) (non-dischargeable student loan interest is recoverable by creditor), rev‘d on other grounds sub nom. Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193 (9th Cir. 2008); In re Pardee, 218 B.R. 916 (B.A.P. 9th Cir. 1998) (non-dischargeable pre-petition interest on student loan debt remains personal liability of the debtor). These cases stand for nothing more than the uncontroversial proposition that the Bankruptcy Code renders certain debts non-dischargeable; if the debt is non-dischargeable, then a debtor remains personally liable for that debt. To conclude based on these cases that “the only way to make a lien strip ‘permanent’ is by discharge,” is to ignore the Bankruptcy Code‘s unequivocal distinction between in personam and in rem liability. See
2. Lien voidance does not subvert Congress‘s intent in enacting BAPCPA
HSBC contends that even if discharge is not the sole route to permanent lien-voidance, permitting Chapter 20 debtors to achieve permanent lien-voidance circumvents Congress‘s purpose in enacting
We disagree that permitting the Blendheims to void HSBC‘s lien subverts Congress‘s intent in prohibiting successive discharges. We take Congress at its word when it said in
Our interpretation gives full effect to Congress‘s intent to prevent abusive serial filings and successive discharges through BAPCPA. Prohibiting successive discharges helps curb abuse of the bankruptcy system by ensuring that a debtor once granted a discharge of debt is not granted yet a second discharge just a few years later. A debtor who has racked up significant credit card debt and received a Chapter 7 discharge, for example, will not obtain a second clean slate upon the filing of a Chapter 13 petition. Further, we agree with the district court that reaching the contrary conclusion would create “an extremely harsh result” that is inconsistent with the Bankruptcy Code‘s text and purpose. Congress created the Chapter 13 mechanism to permit eligible debtors, who are capable of diligently meeting their obligations under plans, to reorganize their financial affairs and pay a greater amount on debts than they would have otherwise done under a Chapter 7 liquidation.
Interpreting the Bankruptcy Code to permit lien modification through case closure does not, as Victorio warned, place discharge-ineligible debtors like the Blendheims in a better position than discharge-eligible debtors. Victorio posited that discharge-eligible debtors who fail to complete their plans will see their previously voided liens reinstated under
***
C. Voidance of the Lien Satisfied Due Process
Next, we turn to HSBC‘s claim that the bankruptcy court failed to afford HSBC due process before voiding its lien. Whether adequate notice has been given for the purposes of due process is a mixed question of law and fact that we review de novo. In re Brawders, 503 F.3d 856, 866 (9th Cir. 2007).
HSBC raises two related arguments in support of its due process claim, both of which essentially claim a lack of adequate notice. First, HSBC argues that the validity of its lien was not “effectively” determined under the procedural requirements set forth under the Bankruptcy Rules. Federal Rule of Bankruptcy Procedure 7001(2) requires actions determining the “validity, priority, or extent of a lien” to be brought in an adversary proceeding, which imposes certain notice requirements on plaintiffs. See Fed. R. Bankr. P. 7004 (requiring service of adversary summons and complaint in compliance with Federal Rule of Civil Procedure 4). Although HSBC acknowledges that the Blendheims initiated an adversary proceeding to bring their motion for summary judgment seeking lien voidance, and thus the lien was “technically voided in the Adversary Proceeding,” HSBC contends that the lien was substantively voided by the disallowance order because the disallowance of its claim rendered voidance a “fait accompli.” Accordingly, HSBC argues, the validity of its lien was actually decided outside of an adversary proceeding. Second, HSBC argues that the bankruptcy court “allowed [HSBC]‘s lien to be avoided ‘by ambush,‘” because the Blendheims never mentioned their intent to void HSBC‘s lien in their 2009 objection to the proof of claim. According to HSBC, not only did the Blendheims fail to give notice of their intent to seek voidance of the lien, but they affirmatively represented in several court filings that the lien was valid—suggesting that they would not seek to void the lien.
Both of HSBC‘s arguments fail under the Supreme Court‘s decision in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). In that case, the debtor filed a Chapter 13 petition and proposed a plan providing for repayment of the principal and discharge of the accrued interest on student loans he owed to United Student Aid Funds, Inc. (“United“). Id. at 264. After being served with notice of the plan, United filed a proof of claim reflecting both the principal and the accrued interest on the loan. Id. at 265. United did not, however, object to the plan‘s proposed discharge of interest or Espinosa‘s failure to initiate an adversary proceeding to determine the dischargeability of that debt. The bankruptcy court eventually confirmed the plan, and the Chapter 13 Trustee mailed United a notice of the plan confirmation, which advised United of its right to object within 30 days. Id. United did not object, and after Espinosa successfully completed the
It was not until three years later, when United attempted to collect on the unpaid interest and Espinosa moved for an order holding United in contempt for violating the discharge injunction, that United raised an objection to the discharge order. Id. at 266. United complained that the Bankruptcy Code requires student loans to be discharged in an adversary proceeding, and because Espinosa did not initiate any such proceeding or serve United with an adversary complaint, United was deprived of its due process rights. Id. The Court rejected United‘s argument, explaining that the standard for constitutionally adequate notice is “notice ‘reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.‘” Id. at 272 (quoting Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). Because United received actual notice of the filing and contents of Espinosa‘s plan, which United acknowledged by filing a proof of claim, the Court concluded, “[t]his more than satisfied United‘s due process rights.” Id. (emphasis added). Accordingly, the Court held that there was no due process violation. Id.
Espinosa indicates that regardless of whether HSBC‘s lien was technically voided in the adversary proceeding or upon entry of the default order, due process was satisfied when HSBC received notice that the Blendheims filed their objection to its proof of claim. Once HSBC received notice of that filing, it was deemed to have notice that its claim might be affected and it ignored the ensuing proceedings to its peril. See In re Gregory, 705 F.2d 1118, 1123 (9th Cir. 1983) (holding that for due process purposes, when the holder of a claim receives notice that the debtor has initiated bankruptcy proceedings, “it is under constructive or inquiry notice that its claim may be affected, and it ignores the proceedings to which the notice refers at its peril“). It bears emphasis that all that is constitutionally required for adequate notice is information sufficient to alert a creditor that its rights may be affected. See id. Due process does not demand the degree of specificity of notice to which HSBC claims entitlement. It is neither the court‘s nor the debtor‘s responsibility to ensure that a creditor fully understands and appreciates the consequences of the bankruptcy proceeding. Rather, it is HSBC‘s responsibility, once apprised of the bankruptcy proceeding, to investigate the potential consequences in store for its lien. HSBC did not have to file a claim to preserve its lien; but once it chose to do so, it subjected itself to the jurisdiction of the bankruptcy court and its rules. And once the Blendheims objected to HSBC‘s claim pursuant to
Indeed, the record shows that HSBC‘s inexplicable failure to assert its rights, and not any defect in process, led to its predicament here. After HSBC filed a proof of claim in the Blendheims’ Chapter 13 bankruptcy, the Blendheims objected to the proof of claim and served HSBC‘s servicing agent with a copy of the objection. HSBC failed to respond. Then, the bankruptcy court entered the default order disallowing HSBC‘s claim, and again, HSBC was served with a copy of the order. Once again, HSBC failed to respond, taking no action to undo the disallowance order. The Blendheims then initiated adversary proceedings declaring their intent to void
Far from revealing a due process violation, the record shows that HSBC‘s rights were honored at every turn. HSBC‘s own failure to assert its rights, which resulted in the entry of the lien-voidance order, does not make the lien-voidance order constitutionally defective. Accordingly, we affirm the district court‘s determination that the bankruptcy court afforded HSBC due process.
D. The Chapter 13 Petition was Filed in Good Faith
A Chapter 13 petition may be dismissed “for cause,” pursuant to
- whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or plan in an inequitable manner;
- the debtor‘s history of filings and dismissals;
- whether the debtor only intended to defeat state court litigation; and
- whether egregious behavior is present.
Leavitt, 171 F.3d at 1224 (internal quotation marks, citations, and alterations omitted). “[B]ankruptcy courts should determine a debtor‘s good faith on a case-by-case basis, taking into account the particular features of each Chapter 13 plan.” In re Goeb, 675 F.2d 1386, 1390 (9th Cir. 1982).
HSBC argues that the Blendheims’ Chapter 13 petition was filed in bad faith for two reasons. First, the Blendheims maintained two simultaneous bankruptcy proceedings at once because they filed the Chapter 13 proceeding while the Chapter 7 was technically still open. Second, the Blendheims filed the Chapter 13 proceeding to “re-invoke the automatic stay and stop [HSBC]‘s foreclosure after allowing the stay to be lifted” following the Chapter 7 case.
Although we have held that successive filings do not constitute bad faith per se, In re Metz, 820 F.2d 1495, 1497 (9th Cir. 1987), we have never addressed whether simultaneous filings should be treated differently. Two of our sister circuits have addressed whether a debtor is permitted to maintain simultaneous bankruptcy cases as a matter of law, reaching different conclusions: In re Sidebottom, 430 F.3d 893 (7th Cir. 2005) (concluding that simultaneous proceedings are impermissible per se), and In re Saylors, 869 F.2d 1434 (11th Cir. 1989) (rejecting a per se prohibition on simultaneous filings). In Sidebottom, the Seventh Circuit rejected the rule, adopted by some courts, that a debtor can maintain simultaneous bankruptcies relating to the same debt. 430 F.3d at 898; see also In re Jackson, 108 B.R. 251, 252 (Bankr. E.D. Cal. 1989) (“The weight of authority holds that once a bankruptcy case is filed, a second case which affects the same debt cannot be maintained.“). Reasoning that
The Eleventh Circuit, by contrast, has rejected any per se rule against filing a Chapter 13 petition during the pendency of a Chapter 7 case. Saylors, 869 F.2d at 1437. In Saylors, the Eleventh Circuit observed that Congress enacted Chapter 13 to “create[] an equitable and feasible way for the honest and conscientious debtor to pay off his debts rather than having them discharged in bankruptcy.” Id. at 1436 (quoting H.R. Rep. No. 86-193, at 2 (1959)). It reasoned that Chapter 13 reorganizations remain accessible to debtors who have already received a Chapter 7 discharge, and thus barring debtors from Chapter 13 reorganization “would prevent deserving debtors from utilizing the plans.” Id. at 1438. “As a practical matter,” the court also noted, “considerable time” often elapses after a Chapter 7 debtor receives a discharge but before a trustee can close the case. Id. It thus concluded that a per se rule against filing a Chapter 13 proceeding while a Chapter 7 case remained open (although the discharge had been issued) “would conflict with the purpose of Congress in adopting and designing chapter 13 plans.” Id. at 1437. Rather than prohibiting such filings across the board, the court concluded that the Bankruptcy Code‘s good faith requirement “is sufficient to prevent undeserving debtors from using this procedure, yet does not also prevent deserving debtors from using the procedure.” Id. at 1436. After reviewing the bankruptcy court‘s findings regarding the debtor‘s good faith and finding no clear error, the court affirmed the bankruptcy court‘s conclusion that the confirmed plan was proposed in good faith. Id. at 1438–39.
We have already acknowledged the host of benefits that Chapter 13 reorganizations offers to debtors and have found no indication that Congress intended to deny such benefits to Chapter 20 debtors—who, by definition, file their Chapter 13 cases hard on the heels of a Chapter 7 discharge. Our conclusion here follows almost as a matter of course. We agree with the Eleventh Circuit‘s reasoning and reject a per se rule prohibiting a debtor from filing for Chapter 13 reorganization during the post-discharge period when the Chapter 7 case remains open and pending. Because nothing in the Bankruptcy Code prohibits debtors from seeking the benefits of Chapter 13 reorganization in the wake of a Chapter 7 discharge, we see no reason to force debtors to wait until the Chapter 7 case has administratively closed before filing for relief under Chapter 13. We also agree with the Eleventh Circuit that the fact-sensitive good faith inquiry, in which courts may examine an individual debtor‘s purpose in filing for Chapter 13 relief and take into account the unique circumstances of each case, is a better tool for sorting out which cases may proceed than the blunt instrument of a flat prohibition.
This conclusion also better comports with our decision in In re Metz. In Metz, we concluded that it did not constitute bad faith per se for a Chapter 13 debtor to include a mortgage claim in his plan of reorganization, even if his personal liability on the mortgage was discharged in a prior
Examining the facts presented here, and considering the totality of the circumstances, the bankruptcy court did not err in finding that the petition and plan were filed in good faith. The Blendheims received their Chapter 7 discharge in January 2009 and filed their Chapter 13 petition the following day; their Chapter 7 case was not closed until November 2010. Contrary to HSBC‘s contention that the Blendheims sought Chapter 13 relief solely to avert foreclosure, the bankruptcy court found that the Blendheims sought Chapter 13 protection for additional, valid reasons. The Blendheims filed their Chapter 13 case to deal with fraud claims and other issues surrounding the first-position lien, to repay secured debt owed to their homeowners association, and to clarify how post-petition debts would be paid. According to the court, the Blendheims “do not appear to be serial ‘repeat filers’ [who are] systematically and regularly abusing the bankruptcy system.” And with respect to the automatic stay, the court stated: “Although the Chapter 13 filing appears to be motivated by Debtors’ wish to avoid the foreclosure sale of their Residence, the Court does not find that filing for Chapter 13 bankruptcy under those circumstances necessarily constitutes bad faith.” It explained, “[m]any Chapter 13 debtors file for bankruptcy on the eve of foreclosure sale as a last resort.” The bankruptcy court did not clearly err in concluding that the Blendheims filed their Chapter 13 petition in good faith on these facts.
V. CONCLUSION
We conclude that the bankruptcy court properly voided HSBC‘s lien under
With respect to the Blendheims’ cross-appeal for attorneys’ fees, we conclude that the district court lacked jurisdiction to determine whether the Blendheims were entitled to attorneys’ fees because this issue was not addressed, in the first instance, by the bankruptcy court. See In re Vylene Enters., Inc., 968 F.2d 887, 895 (9th Cir. 1992) (“[W]e do not have
The judgment of the district court is
AFFIRMED in part, VACATED in part, and REMANDED. Costs on appeal are awarded to Appellees.