In re: MICHAEL PAUL FREE and HAK SUK FREE, Debtors. MICHAEL PAUL FREE; HAK SUK FREE, Appellants, v. MICHAEL G. MALAIER, Chapter 13 Trustee, Appellee.
BAP No. WW-14-1395-JuKiF
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
December 17, 2015
Before: JURY, KIRSCHER, and FARIS, Bankruptcy Judges.
ORDERED PUBLISHED. Bk. No. 3:14-bk-41876-PBS. Appeal from the United States Bankruptcy Court for the Western District of Washington Honorable Paul B. Snyder, Bankruptcy Judge, Presiding. Argued and Submitted on September 25, 2015 at Seattle, Washington.
O P I N I O N
Appearances:
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* On May 15, 2015, the BAP Clerk‘s Office entered an order substituting K. Michael Fitzgerald as the successor chapter 13 trustee in place of the former chapter 13 trustee, David M. Howe. After the appeal was heard and submitted, Michael G. Malaier was appointed the successor chapter 13 trustee to Fitzgerald.
JURY, Bankruptcy Judge:
Appellants Michael Paul Free and Hak Suk Free (Debtors) filed a chapter 71 petition and received their
I. FACTS
The facts are undisputed. Debtors filed a chapter 7 bankruptcy petition on December 23, 2013. Debtors scheduled their real property located on Taylor Street in Milton, Washington as having a current value of $425,000. Such real property is encumbered by three liens: first deed of trust in the amount of $438,621.93 held by Deutsche Bank Trust Company Americas, as Trustee for Residential Accredit Loans, Inc., Mortgage Asset-backed Pass-through Certificates, Series 2003-QS9 (Deutsche); second deed of trust in the amount of $348,481.01 held by Timberland Savings Bank (Timberland); and third deed of trust in the amount of $186,705.68 held by Boeing Employees Credit Union (BECU). Debtors received their
Before their chapter 7 case was closed, Debtors filed this joint chapter 13 case on April 3, 2014, intending to strip off the wholly-unsecured junior liens of Timberland and BECU (collectively, Junior Lienholders) through their chapter 13 plan. In Schedule A, Debtors listed the value of their real property on Taylor Street as $425,000 encumbered with secured claims in the amount of $990,069.03. In Schedule D, Debtors listed creditors holding secured claims in the amount of $1,018,280.54. In Schedule E, Debtors listed $3,204.76 in unsecured business taxes and in Schedule F listed a student loan creditor holding an unsecured claim in the amount of $4,000. BECU filed a proof of claim asserting a secured claim in the amount of $180,187.80.
Trustee moved to dismiss Debtors’ case, arguing that the unsecured debt, including the wholly-unsecured Junior Lienholders’
At the July 31, 2014 hearing on the matter, the bankruptcy court ruled that Debtors were ineligible to be debtors under chapter 13 since their unsecured debts exceeded the statutory limit. The court invited Debtors to submit additional authority supporting their position. The court continued the matter to August 7, 2014, for the purpose of entering a dismissal order. On August 6, 2014, Debtors filed a motion for reconsideration of the July 31, 2014 oral ruling. Because the bankruptcy court had not yet entered an order on Trustee‘s motion to dismiss, the court construed Debtors’ motion for reconsideration as a supplemental memorandum in opposition to Trustee‘s motion.
On August 14, 2014, the bankruptcy court entered the order dismissing Debtors’ case. The court noted that there were cases within the Ninth Circuit that addressed components of the issue before it, but acknowledged that there was no controlling case directly on point. Relying on the holdings in Johnson v. Home State Bank, 501 U.S. 78 (1991), and Quintana v. Commissioner (In re Quintana) (Quintana II), 915 F.2d 513 (9th Cir. 1990), aff‘g (Quintana I), 107 B.R. 234 (9th Cir. BAP 1989), and the analysis set forth in Davis v. Bank of America (In re Davis) (Davis I), 2012 WL 3205431 (9th Cir. BAP Aug. 3, 2012)2 (Quintana I, Quintana II, and Davis I were all chapter 12 cases), and In re DiClemente, 2012 WL 3314840 (D.N.J. Aug. 13, 2012), the bankruptcy court included the Junior Lienholders’ unsecured debt in its eligibility calculation despite Debtors’ chapter 7 discharge. Therefore, because Debtors were not eligible for chapter 13 due to their unsecured debt exceeding the statutory limit under
Debtors subsequently filed a motion to vacate the order of dismissal and impose a stay pending appeal. The bankruptcy court denied their motion.
II. JURISDICTION
The bankruptcy court had jurisdiction pursuant to
III. ISSUE
Did the bankruptcy court err when it counted the wholly unsecured Junior Lienholders’ debt as unsecured debt for purposes of determining chapter 13 eligibility under
IV. STANDARD OF REVIEW
Eligibility determinations under
V. DISCUSSION
A. The bankruptcy court erred in relying upon inapplicable and distinguishable case law.
Section 109(e) limits eligibility for chapter 13 relief to those individuals with
On appeal, Debtors ask the Panel to hold that wholly unsecured liens are not unsecured debts for eligibility purposes in a so-called chapter 20 case (a chapter 13 case filed after the debtor receives a chapter 7 discharge). Debtors assert that they do not owe Timberland or BECU unsecured debt for the purpose of establishing chapter 13 eligibility under
We begin with the relevant words of
Next, we turn to the relatively simple analysis of what occurred in Debtors’ prior chapter 7 case. Debtors discharged their personal liability to Timberland and BECU in that case when they received their
The references to personal liability in
The analysis of Shenas, which Debtors cited to the bankruptcy court, is persuasive. In Shenas, chapter 13 debtors who had previously received a chapter 7 discharge sought to strip off a wholly unsecured junior lien against their primary residence. The creditor argued that treating its claim as unsecured rendered debtors ineligible for relief because the debtors’ unsecured claims would then exceed the
Being unenforceable as a personal liability, the debt is not allowable as an unsecured claim in this case. Sections 502(b) and 506(a). It follows that the [d]ebtors do not owe any unsecured debt to Green Tree for purposes of the unsecured debt limitation of
§ 109(e) .
In re Shenas, 2011 WL 3236182, at *1.
The bankruptcy court here rejected Debtors’ contentions and found that Shenas was not persuasive. Instead, it stated
1. Johnson‘s limited holding does not support the bankruptcy court‘s ruling.
We think the bankruptcy court (and other courts reaching a similar conclusion) erred partly because it misread Johnson, so we begin with that Supreme Court case. If anything, we find the words of the Supreme Court supportive of our position that the prior discharge means these stripped mortgages do not revert to unsecured debt for eligibility purposes.
In Johnson, the debtor, who had previously discharged his in personam liability on his mortgage in a chapter 7 case, filed a subsequent chapter 13 case with the intent to pay an in rem judgment based on foreclosure litigation through the terms of the plan. Although the bankruptcy court found such use of chapter 13 proper, the district and circuit courts both held otherwise, ruling that because the in personam liability for the lien had been discharged, no claim remained to be reorganized through the chapter 13 plan. Based on a circuit split, the Supreme Court granted certiorari and framed the issue before it: The issue in this case is whether a mortgage lien that secures an obligation for which a debtor‘s personal liability has been discharged in a Chapter 7 liquidation is a claim subject to inclusion in an approved Chapter 13 reorganization plan. Id. at 82 (emphasis added). Following rules of statutory construction, the Court determined that the mortgage lien was a claim within the terms of
In sum, the Court reached the conclusion that the in rem right to proceeds from a sale of its collateral meant the secured creditor held a claim which could be addressed in a chapter 13 plan. That is the only determination the Court made. In fact, the Court reinforced the effect of the chapter 7 discharge with regard to an unsecured liability of the debtor: The Court of Appeals thus erred in concluding that the discharge of petitioner‘s personal liability on his promissory notes constituted the complete termination of the Bank‘s claim against petitioner. Rather, a bankruptcy discharge extinguishes only one mode of enforcing a claim - namely, an action against the debtor in personam - while leaving intact another - namely, an action against the debtor in rem. Id. at 84 (last emphasis added).
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2. The Quintana and Davis line of cases concerning chapter 12 are distinguishable and do not control the current case.
The Ninth Circuit and BAP cases relied on by the bankruptcy court, two before Johnson and two after, reach similar conclusions that, because of the right to payment based on a secured lien, a claim - and therefore a debt - exists even though in personam liability is unenforceable.
In Quintana I and Quintana II, as pertinent here, a judgment creditor of the debtors had agreed to waive any right to a deficiency judgment against the debtors after sale of the real property subject to its judgment lien, which property was purportedly worth far less than the amount of the judgment. In seeking relief in chapter 12, the debtors asserted that because any personal liability had been waived by the judgment creditor, making it a nonrecourse obligation, only the secured value of the judgment lien, as measured by the value of the property, should count toward the aggregate debt limit for a family farmer. By measuring its debt against only this secured value, debtors contended they were under the debt limit. After the bankruptcy court disagreed and found the debtors ineligible, debtors appealed to the BAP. Observing that the term aggregate debts includes all types of debts, the BAP looked to the definitions of debt and claim in
[b]ecause the term claim is coextensive with the term debt, this obligation is a debt of the debtors which is defined by the amount of the claim against the property. Connecticut General‘s claim against the property is approximately $1.528 million because it has the right to payment of that amount from the property or from the proceeds of the sale of the property.
Id. at 239. The Panel limited its reasoning to the secured nature of the debt; nowhere does it state that any portion survives as an unsecured liability. Quintana I does not suggest the deficiency claim is an unsecured obligation, nor did it need to, since it was looking at only aggregate debts.
In affirming the BAP, the Ninth Circuit took a more limited approach. After determining that debt and claim were equivalent, it looked to Idaho law to determine the effect of Connecticut General‘s waiver of deficiency and found that there had not yet been any determination of a deficiency, as the property had not yet been sold. Quintana II, 915 F.2d at 516. Therefore, only after an actual sale would the waiver have any relevance. Debtors were not released from any liability and the entire claim counted against the aggregate debt limit. Id. at 517. Like our Panel in Quintana I, the appellate court did not address what would happen to any remaining claim after the in rem liability was exhausted.
the full amount owed continues to be a claim against the collateral, and hence a debt under the Bankruptcy
Code, unless and until the collateral is sold. Furthermore, as stated in Johnson, a prior chapter 7 discharge only extinguishes one mode of enforcing the claim but does not extinguish the claim itself (or any portion thereof).
Davis I, 2012 WL 3205431, at *5. Davis I looked only at the aggregate debt, not an unsecured deficiency.
The Ninth Circuit in Davis II focused the inquiry: whether the term aggregate debts in
Johnson and Davenport teach that the meaning of debt is coextensive with the meaning of claim and, in turn, that claim is broadly defined to include any right to payment or any right to an equitable remedy giving rise to a right to payment. A creditor retains a right to payment, enforceable in rem, on the unsecured portion of a loan for which in personam liability may have been discharged. We therefore agree with the BAP that Davis’ aggregate debts include the unsecured portions of the undersecured mortgage loans that remain enforceable against Davis’ property, even though the loans are not enforceable against Davis personally.
Davis II, 778 F.3d at 813. The court of appeals very carefully distinguished between the available in rem relief and the unavailable in personam liability, so to stretch its holding to mean the debt revives as an unsecured claim is inconsistent with the decision.
In sum, because these four cases are chapter 12 cases that consider only the aggregate debt limit, and none of them speak to reviving discharged in personam liability, they are not controlling here.
3. Scovis and Smith are also distinguishable and would lead to an inequitable result.
Under the holding of Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001), and Smith v. Rojas (In re Smith), 435 B.R. 637 (9th Cir. BAP 2010), when determining a debtor‘s chapter 13 eligibility, the undersecured portion of a secured creditor‘s claim should be counted
B. Debts for which the in personam liability was discharged in a prior chapter 7 cannot be counted toward the unsecured debt limit for eligibility under § 109(e) .
Although in a slightly different context - that of the allowability of an unsecured claim filed by a creditor with a stripped off second where personal liability had been previously discharged in a chapter 7 - the well-reasoned decision of the bankruptcy court in In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 2014), supports our opinion. In Rosa, the chapter 20 debtor, similar to the debtors here, used
The court observed that although
personal liability had been discharged in the prior chapter 7, the court applied the discharge injunction provided by
That serial filings are not per se bad faith was first addressed by the Supreme Court in Johnson where the creditor maintained that such filings evaded the limits that Congress intended to place on these remedies. The Court disagreed: Congress has expressly prohibited various forms of serial filings. . . . The absence of a like prohibition on serial filings of Chapter 7 and Chapter 13 petitions, combined with the evident care with which Congress fashioned these express prohibitions, convinces us that Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief. Johnson, 501 U.S. at 87.
The Ninth Circuit earlier embraced the substance of this holding in Downey Savings and Loan Association v. Metz (In re Metz), 820 F.2d 1495, 1497 (9th Cir. 1987), and recently reiterated it in In re Blendheim, 803 F.3d 477, where the court went so far as to find no per se bad faith even if a chapter 13 petition was filed while the chapter 7 was still pending. There, the court recognized that a debtor should be allowed to use the tools in the tool box if done so with a good-faith purpose. Id. at 500.
Finally, we do not see how the purposes of a chapter 13 reorganization are met by counting the discharged unsecured obligations of the chapter 20 debtor in the eligibility calculation. Assuming the case is filed in good faith and proper chapter 13 purposes - such as curing an arrearage on a first mortgage or paying priority tax debt - are present, it makes no sense to include in the debt limit calculation a claim for which the right to payment has been discharged. Neither the Code nor case law compels inclusion of the discharged in personam liability in such calculation.
VI. CONCLUSION
For the reasons stated above, we REVERSE the decision of the bankruptcy court dismissing the chapter 13 for ineligibility and REMAND with instructions to vacate the dismissal and reinstate the case.