In rе Russell L. SMITH and Joy C. Smith, Debtors. Russell L. Smith and Joy C. Smith, Appellants, v. Elizabeth F. Rojas, Chapter 13 Trustee; United States Trustee, Appellees. In re Steven Hamburg and Michelle Hamburg, Debtors. Steven Hamburg and Michelle Hamburg, Appellants, v. Elizabeth F. Rojas, Chapter 13 Trustee; United States Trustee, Appellees.
BAP Nos. CC-09-1321-DMkJa, CC-09-1364-DMkJa. Bankruptcy Nos. SV 09-13847-MT, SV 09-17343-MT.
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Filed July 8, 2010.
435 B.R. 637
Argued and Submitted on May 20, 2010.
Further, even if the appellants had complied with the rule, the bankruptcy court did not abuse its discretion. Bad faith is a “highly factual determination” but does not generally require an evidentiary hearing. C-TC 9th Ave. Partnership v. Norton Co. (In re C-TC 9th Ave. Partnership), 113 F.3d 1304, 1312 (2nd Cir. 1997). The appellants argue that whether Nicholson wrote the Notes was a material and disputed fact. However, the appellants had every opportunity to prove this fact without Nicholson‘s testimony. They retained the full range of rights to discovery in this contested matter, see In re Khachikyan, 335 B.R. at 126, and were even permitted to supplement the record with declarations and other evidence. Thus, the bankruptcy court was able to determine this disputed fact from the record alone. Again, however, since we remand this matter for further proceedings, the bankruptcy court may, in the exercise of its discretion, determine whether an evidentiary hearing is appropriate.
VI. CONCLUSION
Because we conclude that the bankruptcy court applied the incorrect burden of proof to the trustee‘s objection to the debtors’ claim of exemption, we VACATE the bankruptcy court‘s order overruling the trustee‘s objection and REMAND this matter for further proceedings consistent with this opinion.
OPINION
DUNN, Bankruptcy Judge.
The bankruptcy court dismissed debtors’ chapter 132 cases on the basis that the debtors exceeded the
I. FACTS3
The parties in these сases are casualties of the steep decline in real property values that resulted when the so-called “Housing Bubble” burst.
The Smiths
On September 20, 2006, Russell and Joy Smith purchased their California residence (“Smith Residence“) for $570,000. Countrywide Home Loans (“Countrywide“) financed the purchase price with a $545,000 loan to the Smiths, secured by a first position deed of trust on the Smith Residence. One year later, Washington Mutual Bank (“WAMU“) loaned the Smiths an additional $250,000, secured by a second position deed of trust on the Smith Residence. One year and five days later, the Smiths filed a voluntary chapter 13 petition. In their bankruptcy schedules, the Smiths asserted the value of the Smith Residence as of the petition date was
The chapter 13 trustee moved to dismiss the Smiths’ bankruptcy case, or convert it to a chapter 7 case, asserting that because WAMU‘s claim was not secured by a lien, the debt underlying the claim must be counted as unsecured debt for purposes of chapter 13 eligibility. Adding WAMU‘s unsecured debt to the unsecured debt the Smiths included in their Schedule F brought the Smiths’ total unsecured debt to $470,035.36, an amount that exceeded the $336,900 statutory maximum for chapter 13 eligibility. The Smiths countered that the WAMU debt remained secured, notwithstanding WAMU‘s treatment under the Smith Plan, both because the “strip off” occurred postpetition, and because WAMU‘s lien would not actually be void until the Smiths received their chapter 13 discharge. Asserting itself to be bound by the Ninth Circuit‘s decision in Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 981 (9th Cir.2001), the bankruptcy court entered its Memorandum of Law (“Eligibility Memorandum“) determining that the Smiths exceeded thе unsecured debt limit for chapter 13 eligibility and granting the chapter 13 Trustee‘s motion to dismiss. The Smiths timely filed their notice of appeal.
Concerned that the appeal ultimately would be rendered moot by the Smiths’ inability to perform any plan in the event the dismissal order was reversed, the bankruptcy court confirmed the Smith Plan and abated the dismissal order until the appeal could be decided so that the Smiths could continue making payments under the Smith Plan.5 Further, the bankruptcy court, observing the implications on chapter 13 eligibility in a time of substantially reduced property values, certified the issue as appropriate for a direct appeal to the Ninth Circuit.
The Hamburgs
Steven and Michelle Hamburg purchased their California residence (“Hamburg Residence“) in August 2003. Flagstar Bank (“Flagstаr“) is the beneficial holder of the note secured by a first position deed of trust on the Hamburg Resi-
After entering the Eligibility Memorandum in the Smith case, the bankruptcy court determined, apparently sua sponte, that its analysis applied to the Hamburgs’ case as well. Because the Hamburgs’ unsecured debt, taking into consideration the amount of the BAC claim, exceeded the $336,900 unsecured debt limit established by
II. JURISDICTION
The bankruptcy court had jurisdiction under
There have been a number of other cases presenting this same issue, but they have been dismissed or converted to Chapter 7 for failure to make plan payments before any ruling on the debt limits issue could be issued. Debtors making decisions about how to save their home need to know clearly before a case is filed whether Chapter 13 is a viable option or whether they must find a way to file a much more expensive Chapter 11 case. This is a matter of significant public importance in an area where foreclosure rates are at an historic high and the debt limits set by Congress do not adequately address a large
number of average home owners in financial distress.
Eligibility Memorandum at 10:6-13.
Consistent with this invitation of the bankruptcy court, the Smiths and the Hamburgs invoked Rule 8001(f)(4) and requested that the bankruptcy court certify their appeal to be heard directly by the court of appeals, which it did. However, other than requesting and obtaining the certification, neither debtors took any other necessary action to bring the appeals before the Ninth Circuit. In particular, they did not comply with Rule 8001(f)(5), which is titled explicitly “Duties of Parties After Certification.” Rule 8001(f)(5) provides: “A petition for permission to appeal in accordance with
The bankruptcy clerk properly transmitted each of these appeals to our BAP Clerk, notwithstanding the existence of the certification. Blausey at 1128 (“The bankruptcy court should not have sent the record to our court until we granted the petition for permission to appeal.“). Thereafter, the BAP Clerk issuеd the briefing schedule.
In the Smith appeal, the Smiths brought the issue of the direct appeal certification to our attention by their motion requesting that our briefing schedule be vacated. Our motions panel granted an extension of the briefing dates, but noted that the mere existence of the certification did not suspend prosecution of an appeal before the BAP. Similarly, in the Hamburg appeal, the Hamburgs brought the issue of the direct appeal certification to our attention by their response to our Clerk‘s Notice of Deficient Appeal and Impending Dismissal, issued because the Hamburgs had not completed the record in their appeal. In this response, the Hamburgs requested that we transfer the appeal directly to the Ninth Circuit. Our motions pаnel denied the request that we certify the matter to the court of appeals, stating: “The bankruptcy court already made the predicate certification; Appellants did not file a timely petition for leave to appeal; it is up to the court of appeals, and not this panel, to decide whether to entertain a late petition for leave to appeal.”
The Ninth Circuit has not granted permission for either appeal to be heard as a direct appeal; we therefore retain jurisdiction to decide these appeals pursuant to
III. ISSUE
Whether a debt secured by a consensual lien that is wholly unsecured under
IV. STANDARDS OF REVIEW
Eligibility determinations under
V. DISCUSSION
A. The Problem
These appeals have arisen during the current difficult economic time which is being referred to as “The Great Recession.” The collapse of the “Housing Bubble” has been identified as a significant cause of a severely depressed housing market. The Central District of California, where these appeals originate, is one region thаt has been particularly hard hit by the downturn in the prices of homes. In some areas, home values are a mere 50% of what they were when the home values peaked a few years ago.
During the accelerated growth of home values as the bubble was building, homeowners gained substantial equity very quickly. Many homeowners accessed that equity through credit lines or other loans secured by second and sometimes third deeds of trust on their homes. As with the Smiths and Hamburgs, many individuals find themselves owing significantly more for their homes than the homes are now worth, and are struggling to meet the substantial payment obligations incurred both to purchase their homes and for their equity borrowings.
As mortgage defaults have increased, so have bankruptcy filings. While many homeowners have walked or will walk away from thеir homes, others are trying to save their homes by using the provisions of chapter 13. These appeals address one major challenge faced by homeowners attempting to save their homes in chapter 13: debt limits for chapter 13 eligibility.
As relevant to these appeals involving joint debtors, section 109(e) provides:
Only an individual with regular income and such individual‘s spouse, that owe, on the date of the filing of the petition, noncontingent, liquidated unsecured debts that aggregate less than $336,900 may be a debtor under chapter 13 of this title.
We are asked to determine whether, when the debt of a creditor that holds a second mortgage on a debtor‘s residence is wholly unsecured on the petition date, the debt constitutes unsecured debt for purposes of the
By way of background, we restate certain bankruptcy fundamentals, “The term ‘debt’ means liability on a claim.”
B. “Strip Off” Can Be Favorable to Chapter 13 Debtors
Section 1322(b)(2) provides that a chapter 13 plan may “modify the rights of holders of seсured claims, other than a
When, as in the cases before us, a home‘s value has fallen to the point that the second lienholder is fully unsecured,
The context in which “strip off” has become important to chapter 13 debtors in these “Housing Bubble” cases is in the application of
With respect to secured creditors,
Trejos v. VW Credit, Inc. (In re Trejos), 374 B.R. 210, 214 (9th Cir.BAP 2007). Thus, under
The actual lien stripping process is effectuated through
The purpose of
Section 506(a)(1) provides that
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... 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.
Rule 3012 implements
Pursuant to § 506(a) of the Code, secured claims are to be be valued and allowed as secured to the extent of the value of the collateral and unsecured, to the extent it is enforceable, for the excess over such value. The valuation of secured claims may become important in different contexts ....
(Emphasis added.)
Appellants invoked the provisions of
C. Implications of “Strip Off” for Chapter 13 Eligibility
An unintended consequence of “strip off” is the impact that changing a claim‘s “status” from secured to unsecured can have on chapter 13 debtor eligibility under
The Smiths and Hamburgs appear to concede that the claims of the wholly unsecured6 second lienholders, like any other unsecured claim, will be discharged upon completion of their chapter 13 plans. See Lam v. Investors Thrift (In re Lam), 211 B.R. 36, 41 (9th Cir.BAP 1997). However, they contend that the second lienholders retain the rights of secured creditors until the moment of discharge, and therefore, their claims cannot be counted as unsecurеd for chapter 13 eligibility purposes.
The Smiths and Hamburgs invoked
1. Scovis is controlling authority
The bankruptcy court recognized that Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 981 (9th Cir.2001), provided binding precedent for deciding that under
Appellants urge a “mechanical” application of Scovis based on the following language:
We now simply and explicitly state the rule for determining Chapter 13 eligibility under § 109(e) to be that eligibility should normally be determined by the debtor‘s originally filed schedules,
checking only to see if the schedules were made in goоd faith.
We agree with Appellants that no issue was raised that their schedules were not filed in good faith. Thus, they assert, if Scovis is to be applied “mechanically,” the bankruptcy court erred when it failed to count the second lienholder claims as secured claims simply because they were included as “Creditors Holding Secured Claims” on Schedule D, and not as “Creditors Holding Unsecured Nonpriority Claims” on Schedule F. Appellants find fault with the bankruptcy preparation software, asserting that it, not they, reduced the amount of the secured claims of the second lienholders to zero on Schedule D. Scovis, however, was intended to ensure a straightforward and realistic application by incorporating into eligibility determinations the concept that a debt‘s “status” could be as rеadily ascertainable as its “amount,” no matter in which schedule the debt appeared. See id. at 984. We observe that the software conducted exactly the simple formulaic calculation that the bankruptcy court otherwise would have done manually in this case, and the Appellants attested to the accuracy of their schedules by signing them “under penalty of perjury.”
Scovis hinged on the status of a junior judgment lien. In ascertaining the extent to which the judgment lien, included in Schedule D rather than in Schedule F, was unsecured for
In the cases before us, both the Smiths and the Hamburgs listed in Schedule D the value of their residence and the amount owing on the first trust deed. Because the first trust deed in each case exceeded the value of the residence, the bankruptcy court had a “sufficient degree of certainty” to determine that the second liens were wholly unsecured under
Appellants also contend that under Slack v. Wilshire Ins. Co. (In re Slack), 187 F.3d 1070, 1073 (9th Cir.1999), the “bankruptcy court cannot look to post-petition events to determine the amount of the debt.” Appellants would have us read this phrase with “unsecured” as a modifier to “debt.” However, the issue in Slack was whether a debt was noncontingent and liquidated, and therefore whether it should be counted at all in a chapter 13 eligibility determination. There is no dispute before us that the amount of the debt of the second lienholders is fixed as of the petition date; our issue is whether the debt is unsecured. Significantly, this exact issue was addressed by the Scovis court:
Although [in Slack] we were defining the term ‘liquidated’ and not ‘secured,’ we included in the eligibility determination readily ascertainable amounts, even though liability on the debt had not been finally decided.... This principle of cer-
tainty carries equal force in the present context, where the homestead exemption‘s effect on the status of Debtors’ debt as secured or unsecured is readily ascertainable.
In the context before us, the “principle of certainty” applies where the effect of the value of the property on the status of Appellants’ debts as secured or unsecured is readily ascertainable. A claim is secured only to the extent of the value of a creditor‘s interest in the estate‘s interest in such property.
Appellants appear to concede that, in light of its reliance on Miller v. United States Through Farmers Home Admin. (In re Miller), 907 F.2d 80 (8th Cir.1990), Scovis applies to at least a subset of consensual liens. In Miller, the formulaic calculation of unsecured debt adopted by Scovis was applied to a consensual lien that was secured not only by the debtor‘s residence, but also by farmland and farm equipment. Id. at 81. The only issue we see, and as raised by the Smiths and the Hamburgs, is whether the Scovis analysis changes because the second lien claims in these cases were consensual liens secured solely by real property that is the principal residence of the debtors. Appellants, in a surprising inconsistency, argue that it is
2. Timing of lien “avoidance” does not matter
Nor are we persuaded that the Scovis analysis is in any way altered because the second liens may not have been avoided.7 Scovis itself involved a judgment lien that had not yet been avoided. In fact, it is difficult to imagine any situation where the original schedules in a case ever would include as a secured lien, a lien that already had been avoided in the bankruptcy case.
Scovis instructs that determination of the “status” of a judicial lien claim as
Appellants assert “[the second lienholders] retain all rights and remedies under California law, as well as their security interest, and therefore are secured for purposes of section 109(e) eligibility.” Appellants’ Opening Brief at 17:5-7. They contend that because the second liens are not irrevocably void until the chapter 13 discharge is entered, and because their lien rights arе not eliminated under California law until foreclosure, see, e.g.,
We do not dispute that the determination of property rights by the bankruptcy court ordinarily is controlled by state law. Butner v. United States, 440 U.S. 48, 54 (1979). However, we disagree that merely holding a security interest on the petition date means that the creditor is a secured creditor for purposes of the Bankruptcy Code generally, or
Under section 506(a), a creditor‘s rights in property are dependent on the bankruptcy estate‘s interest in property; the determination of the estate‘s interest is separate from and must precede the determination of the creditor‘s intеrest. If the estate has no interest in the property at issue, it is not possible for the claim of [the] creditor to be secured by that property under section 506(a). United States v. Snyder, 343 F.3d 1171, 1176 (9th Cir.2003). While Snyder addressed what happened to a creditor‘s lien if the property to which it attached never became property of the bankruptcy estate under
VI. CONCLUSION
Section 1322(b)(2) allows chapter 13 debtors to “strip off” from their residences wholly unsecured liens. Section 506(a) provides that an allowed “claim” of a “creditor” secured by a “lien” on “property in which the estate has an interest ... 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.” Thus, by its terms,
The bankruptcy court did no more than it was asked: it determined the secured status of the WAMU and BAC claims under
The bankruptcy court correctly determined that the Smiths and the Hamburgs exceeded the unsecured debt limits for chapter 13 eligibility in light of Scovis. Therefore, unless the Ninth Circuit revisits and alters the Scovis decision in this context, dismissal of the Appellants’ chapter 13 cases cannot constitute error.
Chapter 13 debt limits are mandated by statute. Bankruptcy courts are required to apply the provisions of the Bankruptcy Code as they are written. To the extent the existing chapter 13 debt limits are too low to provide chapter 13 relief to homeowners impacted by the current economic climate, that is a matter within the purview of Congress.
We AFFIRM.
JAROSLOVSKY, Bankruptcy Judge, concurring:
The decision of my brethren is a proper application of binding case law, and I accordingly concur. I write separately only to point out that the confluence of new circumstances and old cases has created a perfect Catch-228 for the Smiths and the Hamburgs: they are ineligible for chapter 13 because they need the relief afforded by
I begin by noting that we are declaring ineligible debtors who were clearly intended by Congress to be eligible for chapter 13 relief. They are solid middle-class wage earners. When Congress fashioned the debt limits set forth in
The only meaningful relief under the Bankruptcy Code for debtors caught in the mortgage crisis is the ability, in some chapter 13 cases, to remove junior encumbrances from their home. For most of these debtors, the complexity and expense of a chapter 11 case is beyond their means. My sense of fairness and the depth of the crisis lead me to look for a way to make chapter 13 available to debtors like the Smiths and the Hamburgs.
We are expected by the Court of Appeals to follow the decisions of other circuits in most instances. United States v. Battley (In re Berg), 188 B.R. 615, 620 (9th Cir.BAP1995). This direction requires my concurrence. However, the Court of Appeals has the power to distinguish its prior decisions and consider whether it should follow those of other circuits. I believe that such an approach to the issue of chapter 13 eligibility would be wise.
The Smiths and Hamburgs have been declared ineligible because Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir.2001) and Miller v. United States (In re Miller), 907 F.2d 80 (8th Cir.1990), require the court to add some debt secured by a mortgage to the unsecured debt total. These two cases, combined with an unforeseen and unprecedented drop in home values, have created an impediment to chapter 13 relief certainly not within the contemplation of Congress in 1978.
Scovis is readily distinguishable on its facts. That case found that a debt: (1) which began as unsecured, (2) became secured by legal process, and (3) was readily returnable by operation of law to unsecured status, should be treated as unsecured for eligibility purposes. In that case, the intent of Congress was clearly honored; an unsecured debt was treated as such notwithstanding its fleeting status as technically secured. If Scovis were the only applicable case, I would urge that it be distinguished on that ground. However, Miller represents a more serious hurdle, as the Smiths and Hamburgs cannot prevail unless a conflict between the circuits is created.
In most instances, revisiting a more or less settled issue of law is not sound policy. However, this instance is the exception because application of Miller to the current situation creates losers without any winners. In the Smiths’ case, it was the chapter 13 trustee who sought dismissal. In the Hamburgs’ case, the court apparently raised the issue on its own. In neither case did the junior deed of trust holder object to avoidance of its lien; еconomic circumstance, not bankruptcy law, has rendered the liens worthless. It is purposeless to the point of cruelty to maintain a rule of law which benefits nobody, does only harm and severely limits the availability of a salutary law.
If I were free to visit the issue anew, I would hold that for chapter 13 eligibility purposes ordinary residential mortgage debt is properly treated as secured notwithstanding the current value of the collateral. Because I feel bound by Miller, I must concur in a different result.