Tag Archives: eligibility

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.

March 31, 2015

Ninth Circuit Holds Discharged Debts are Still Debts for Purposes of Determining Eligibility to File under Chapter 12

In a case of first impression, the Ninth Circuit held that the unsecured portion of a secured debt, for which the debtor’s liability has been discharged in a prior chapter 7 proceeding, is still a debt for determining the debtor’s eligibility to be a debtor under chapter 12 of the Bankruptcy Code.  Davis v. U.S. Bank (In re Carolyn Davis), 2015 WL 662001 (9th Cir. 2015).  Carolyn Davis owned three parcels of real property on which she created a vineyard.  The appraised value of the three parcels totaled $1,600,000, and Davis owed debts secured by the properties totaling $4,100,000.  When her vineyard venture failed, Davis filed a personal chapter 7 case and received a discharge of her liability on the three loans.  She then filed a chapter 12 petition seeking to restructure the secured debt.  At the time, the statutory limit for debt in order to be eligible to file a chapter 12 petition was $3,792,650.  Although the loans secured by her real property totaled $4,100,000, Davis contended she was eligible to file a chapter 12 petition because the value of the collateral securing these loans was below the statutory limit and she had received a discharge of her liability on these loans in her chapter 7 case.

The bankruptcy court dismissed her chapter 12 petition concluding her “aggregate debts” exceeded the statutory limit of $3,792,650 in effect at the time under 11 U.S.C. § 101(18)(A).  The Ninth Circuit BAP affirmed, holding that the term “aggregate debts” in § 101(18)(A) included the unsecured portion of the debts secured by her real property even though her personal liability for the debts had been discharged.  The Ninth Circuit affirmed.

In concluding the bankruptcy court and BAP had reached the correct conclusion, the Ninth Circuit began with viewing the plain language of the statute.  First it noted that a “debt” is a “liability on a claim.”  11 U.S.C. § 101(12).  Next, it noted that the Code defined the term “claim” as a “right to payment . . . or right to an equitable remedy for breach of performance.”  11 U.S.C. § 101(5).  Citing the U.S. Supreme Court’s opinion in Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990), the Ninth Circuit stated “the plain meaning of a ‘right to payment’ is nothing more nor less than an enforceable obligation, regardless of the objectives [sought] in imposing the obligation,” and that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.”  Further, the Ninth Circuit noted the opinion of the U.S. Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991), where the Court held that a debtor must include a mortgage lien in a chapter 13 plan even though the obligation secured by the mortgage was discharged in an earlier chapter case.  As a result, the Ninth Circuit concluded that the word “claim” in § 101(5) is to be given the “broadest definition available.” 

The Ninth Circuit held that the creditors’ right to foreclose in rem against the debtor’s properties constituted a “debt” and a “claim” even though the debtor’s personal liability had been previously discharged.  As a result, the debtor’s “aggregate debts” for purposes of determining eligibility exceeded the statutory limit, and the dismissal of the debtor’s chapter 12 case was affirmed.