Tag Archives: chapter 13

January 12, 2016

Ninth Circuit BAP Holds That a Wholly Unsecured Junior Lien, Discharged in Chapter 7, is not Included in Calculating Chapter 13 Eligibility Under Sec. 109(e)

Section 109(e) of the Bankruptcy Code limits eligibility for chapter 13 relief to those individual debtors whose noncontingent, liquidated unsecured debts do not exceed statutory limits. In calculating eligibility to file chapter 13, should a court consider debts which have been discharged in a prior chapter 7 case and which are “out of the money” because, while secured by a trust deed against the debtor’s residence, the value of the debtor’s residence is insufficient to cover the debt relating to the first trust deed? The Ninth Circuit Bankruptcy Appellate Panel answered this question in the negative, holding in Free v. Malaier (In re Free), 2015 WL 9252592 (9th Cir. BAP 2015) that such debts are not to be included in determining eligibility for chapter 13 relief.

In Free the debtors owned a home which they valued in their chapter 7 schedules at $425,000. The home secured three debts totaling over $900,000, with the first lien holder owed more than the value of the home. The debtors received a chapter 7 discharge and shortly thereafter commenced a chapter 13 case in which they sought to strip off the two subordinate liens. The chapter 13 trustee filed a motion to dismiss the case, arguing that these two wholly unsecured subordinate liens should be included in determining eligibility, and doing so rendered the debtors ineligible for chapter 13 relief. While noting that there was no Ninth Circuit controlling case directly on point, the bankruptcy court relied on several opinions in the Ninth Circuit in chapter 12 cases to conclude the subordinate liens should be included in the calculation and finding the debtors were not eligible for chapter 13 relief.

The BAP reversed, concluding that the discharged debts reflected by the wholly unsecured subordinate liens, should not be considered in determining chapter 13 eligibility. The court began its analysis with the definitions of “debt” and “claim” in section 101 of the Code. Because “claim” is defined as a right to payment and “debt” is defined as liability on a claim, the court held “there is no ‘unsecured debt’ unless the creditor has a ‘right to payment’ on an unsecured basis.” The court next concluded that the result of the debtors’ chapter 7 discharge resulted in their having no personal liability to pay the debts relating to the subordinate liens.

Because the bankruptcy court based its ruling in part on the U.S. Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78 (1991), the BAP addressed its perceived distinctions between the facts in Johnson and the facts in the present case.   In Johnson, the debtor obtained a chapter 7 discharge of a judgment in a foreclosure action and then filed a chapter 13 case with the intent to pay the in rem judgment through his chapter 13 plan. In addressing the question of whether an in rem claim for which personal liability has been discharged can properly be included in a chapter 13 plan, the Supreme Court held that such a claim can be treated in a chapter 13 plan because the claim was enforceable against the debtor’s property even though it was not enforceable against the debtor himself.

The BAP also distinguished the decision of the Ninth Circuit in Quintana v. Commissioner, 915 F.2d 513 (9th Cir. 1990) and the Ninth Circuit BAP in Davis v. Bank of America (In re Davis), 2012 WL 3205431 (9th Cir. BAP 2012), both of which involved chapter 12 proceedings. In Quintana, a judgment creditor agreed to waive any deficiency judgment following the sale of the debtor’s real property securing the judgment. Because the real property had not yet been sold, making a determination of the relative amounts of the secured and unsecured debts uncertain, the Ninth Circuit held it appropriate to include the full amount of the judgment debt in determining the debtor’s eligibility for chapter 12 relief. The BAP also noted the differences between § 109(e), which segregates secured and unsecured debts in determining eligibility, and § 101(18), which determines who is a family farmer by looking to the individual’s aggregate debts. The BAP distinguished its prior decision in Davis on similar grounds.

The BAP then distinguished the Ninth Circuit’s decision in Scovis v. Henrichsen (In re Scovis), 249 F.3d 975 (9th Cir. 2001) and the Ninth Circuit BAP’s decision in Smith v. Rojas (In re Smith), 435 B.R. 637 (9th Cir. BAP 2010) both of which held that the unsecured portion of partially secured debts are to be included in determining chapter 13 eligibility on the grounds that both Scovis and Smith dealt with cases where the chapter 13 proceeding was not preceded by a chapter 7 discharge of the debtor’s personal liability on the debt in question.

Finally, the BAP addressed the U.S. Supreme Courts’ decisions in Dewsnup v. Timm, 502 U.S. 410 (1992) and Bank of America v. Caulkett, 135 S. Ct. 1995 (2015) in connection with lien stripping efforts by chapter 13 debtors. The Court in Dewsnup held that a chapter 7 debtor cannot strip down a partially unsecured lien under § 506(d) to the value of the collateral. Subsequently in Caulkett the Court extended its holding in Dewsnup to situations involving wholly unsecured junior liens. The BAP noted that, following Dewsnup and Caulkett, litigants have argued that debtors who first file a chapter 7 case and obtain a personal discharge and then file a chapter 13 case seeking to strip the remaining in rem claim are acting in bad faith. The BAP refused to reach this issue as it had not been brought forward in the appeal but did state that this argument must be raised by filing a motion to dismiss the chapter 13 case as a bad faith filing and not in the context of whether the debtor is eligible under § 109(e) to file a chapter 13 case.

August 3, 2012

Ninth Circuit BAP Holds that a Solvent Debtor May Use Chapter 13 to Strip a Fully Unsecured Second Lien Against the Debtor’s Home

The Ninth Circuit BAP has ruled that a chapter 13 plan proposed by a solvent debtor whose purpose in filing the plan is to strip a fully unsecured second lien against the debtor’s home may, if other elements of confirmation are met, be confirmed.  Meyer v. Lepe (In re Lepe), 470 B.R. 851.  The debtor in Lepe filed bankruptcy, scheduling assets of $363,900 and debts of $581,380, of which only $549 consisted of general unsecured claims.  The debtor was capable of paying his living expenses, including the payment on the second mortgage.  None of the debtor’s creditors, including the holder of the second mortgage lien, objected to confirmation.  However, the chapter 13 trustee objected,
contending that, since the debtor had only $549 in general unsecured debt and was able to pay both that and the payments on the second mortgage, the debtor’s sole purpose in filing bankruptcy was to strip the second lien from the home and pay it less than in full.  The trustee contended that this intent was an abuse of the bankruptcy process and in bad faith.

In ruling against the trustee in this particular case, the BAP held that well-established Ninth Circuit precedent of Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982) requires a bankruptcy court to analyze a debtor’s good faith, or lack of it, in filing a chapter 13 plan by viewing the plan in a broad “totality of the circumstances” test, where no one factor will completely outweigh the others.  The BAP described the various factors to include the following: (a) the amount of proposed payments and the amount of the debtor’s surplus income after expenses, (b) the debtor’s income, employment
history and likelihood of future increases in income, (c) the expected duration of the plan, (d) the level of accuracy in the plan, (e) the extent of preferential treatment between classes of creditors, (f) the extent to which secured claims are modified, (g) whether debts to be discharged in the plan
would be excepted from discharge in a chapter 7 proceeding, (h) the existence of special circumstances, such as medical debt, (i) the frequency with which the debtor has sought bankruptcy relief, (j) the debtor’s motivations and sincerity, (k) the burden which the plan’s administration will place on the trustee, (l) whether the debtor manipulated the bankruptcy process in an inequitable manner, (m) whether the debtor filed bankruptcy only to defeat state court litigation, and (n) whether egregious behavior is present.  The BAP stated that no one factor, even if indicative of bad faith, cannot outweigh the other factors in the analysis.

The trustee argued for a bright line test that would hold any plan to be filed in bad faith if the debtor was otherwise able to pay debts, whose sole purpose for filing chapter 13 is to strip a totally unsecured lien on the debtor’s home, and proposes to pay unsecured creditors (including the stripped-down lien) only a percentage of their debt.  The BAP declined to do so, ruling that established case law clearly holds that there is no per se bad faith rule, and instead a failure by a bankruptcy court
to examine all factors in determining whether the debtor filed his plan in good faith would itself be improper.

Because good faith must be measured by a totality of factors, the fact that the debtor was able to pay his debts in the ordinary course was not per se indicative of bad faith.  In fact, the BAP noted that the debtor was insolvent on a balance sheet basis, although his cash flow was sufficient to enable him to pay his debts as they came due.  Citing the Ninth Circuit BAP’s decision in In re Stolrow’s, Inc., 84 B.R. 167 (9th Cir. BAP 1988), the BAP reiterated that neither balance sheet insolvency nor inability to pay debts as they came due is a prerequisite for filing a voluntary
petition.  In addition, the BAP held that the debtor’s intent to strip the second lien was not per se improper in light of the Ninth Circuit’s opinion in In re Zimmer, 313 F.3d 1220 (9th Cir. 2002), where the Ninth Circuit held that a debtor’s chapter 13 plan may strip the lien of a creditor holding a claim secured by the debtor’s house where there is no value to support the lien.

Finally, the BAP noted that, had Mr. Lepe filed a chapter 7 petition, the second mortgage holder and the other unsecured creditors would like have received nothing.  The chapter 13 plan proposed to
pay them a significant portion of their claims, which the court found to be a benefit to unsecured creditors.  Viewing all applicable factors, the BAP affirmed the bankruptcy court’s confirmation of
the debtor’s plan.