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FILED

AUG 04 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-13-1506-DJuKu

)

CATHERINE JAN KOSTLAN, ) Bk. No. 11-30865-HLB

DBA CKRT Properties, )

DBA Parsimonius Design, )

)

Debtor. )

______________________________)

)

DAVID KAPNICK; LINDA KAPNICK, )

)

Appellants, )

) A M E N D E D

v. ) M E M O R A N D U M1

)

E. LYNN SCHOENMANN, Chapter 7 )

Trustee, )

)

Appellee. )

______________________________)

Argued and Submitted on July 24, 2014

at San Francisco, California

Filed - August 4, 2014

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable Hannah L. Blumenstiel, Bankruptcy Judge, Presiding

 

Appearances: Gary M. Kaplan, Esq., of Farella Braun & Martel

LLP argued for appellants; Katherine D. Ray, Esq.,

of GOLDBERG, STINNETT, DAVIS & LINCHEY argued for

appellee.

 

Before: DUNN, JURY, and KURTZ, Bankruptcy Judges.

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.
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The appellants, David and Linda Kapnick (together,

“Kapnicks”), guaranteed payment of a mortgage loan taken out by

the debtor, Catherine Jan Kostlan (“debtor”), to purchase real

property located in San Francisco, California (“Property”). 

Although the debtor defaulted on the mortgage loan, the lender,

Bank of America, N.A. (“Bank of America”), has not made a demand

on the Kapnicks under the guaranty. 

After the debtor filed for bankruptcy relief, the Kapnicks

filed a proof of claim in an unknown amount based, in part, on

the guaranty.2 The chapter 7 trustee objected to the claim for a

number of reasons, including § 502(e)(1)(B), which provides for

the disallowance of certain contingent claims. The bankruptcy

court sustained the chapter 7 trustee’s objection.

The Kapnicks appeal the bankruptcy court’s disallowance of

their claim.3 For the reasons set forth below, we VACATE and

REMAND for further proceedings.

FACTS

The facts appear to be undisputed. In March 2003, the

debtor purchased the Property, financing the purchase with an

$850,000 loan from First Republic Bank. The bank secured

2 Unless otherwise indicated, all chapter and section

references are to the federal Bankruptcy Code, 11 U.S.C. §§ 101-

1532, and all “Rule” references are to the Federal Rules of

Bankruptcy Procedure, Rules 1001-9037.

3 The Kapnicks also appeal the bankruptcy court’s decision

not to estimate their proof of claim under § 502(c)(1). Because

we vacate and remand the bankruptcy court’s § 502(e)(1)(B)

determination, we do not reach the claim estimation issue.

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repayment of the loan by a deed of trust on the Property. First

Republic Bank later assigned the deed of trust to Bank of

America.

In May 2003, the Kapnicks executed a continuing guaranty

with First Republic Bank (“Continuing Guaranty”). Under the

Continuing Guaranty, the Kapnicks promised to pay First Republic

Bank any debt owed by the debtor on the mortgage loan. 

Specifically, the Continuing Guaranty stated:

To induce [Bank of America] . . . to grant credit and

or make financial accommodations to [the debtor] and in

consideration thereof of any loans, advances, or

financial accommodations heretofore or hereafter

granted by [Bank of America] to or for the account of

[the debtor], the undersigned [i.e., the Kapnicks]

(hereinafter called “Guarantors”) jointly and severally

unconditionally guarantee and promise to pay [Bank of

America] or order, on demand, in lawful money of the

United States, any and all indebtedness (as hereinafter

defined) of [the debtor] to [Bank of America] under any

existing or future agreement or otherwise, and also

guarantee the due performance by [the debtor] of all

its obligations under all existing and future contracts

and agreements with [Bank of America].

The Kapnicks’ obligations to First Republic Bank were independent

of the debtor’s obligations to First Republic Bank.

Seven years later, the debtor executed a guaranty

reimbursement agreement (“Reimbursement Agreement”) with the

Kapnicks. Under the Reimbursement Agreement, for recited

consideration of $1,000, the debtor promised to reimburse the

Kapnicks for any and all amounts they expended pursuant to the

Continuing Guaranty, including any payments made on the mortgage

loan or any costs and expenses incurred in connection with it. 

She further promised to “remain obligated under [the

Reimbursement Agreement] for as long as [the Kapnicks] remain[]

liable under the [Continuing Guaranty].” In conjunction with the

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Reimbursement Agreement, the debtor gave the Kapnicks a junior

deed of trust on the Property.

The debtor filed her chapter 11 bankruptcy petition on

March 4, 2011; her case was converted to chapter 7 on June 7,

2011.4 E. Lynn Schoenmann initially was appointed as chapter 11

trustee, and later was reappointed as chapter 7 trustee

(“Trustee”).

Bank of America filed a proof of claim in May 2011 (“Bank of

America Claim”), asserting a $957,471.99 secured claim based on

the mortgage loan and deed of trust.

The Kapnicks filed a proof of claim in September 2011

(“Kapnick Claim”), asserting a secured claim in an unknown amount

based on the Reimbursement Agreement and the junior deed of

trust.5 They contended that the Kapnick Claim included “all

4 As of July 30, 2014, no discharge order has been entered.

5 The Kapnicks also asserted a $3,570.25 unsecured priority

claim for administrative expenses under §§ 503(b)(1) and

507(a)(2), based on amounts the Kapnicks spent for property

insurance from May 5, 2011 to November 17, 2011, and for storage

fees for the debtor’s personal property. The Trustee objected to

this portion of the Kapnick Claim as well, contending that this

amount was not entitled to administrative expense priority

because it did not provide a benefit to the bankruptcy estate.

The bankruptcy court indicated at the hearing that it was

inclined to sustain the Trustee’s objection to the unsecured

priority portion of the Kapnick Claim without prejudice, subject

to the Kapnicks filing and serving an application for payment of

administrative expenses. The bankruptcy court did not

specifically refer to the unsecured priority portion of the

Kapnick Claim in the Kapnick Claim Order; rather, it merely

stated that it was sustaining the Trustee’s objection for the

reasons stated on the record at the hearing and in its tentative

continue...

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amounts owed now or in the future by the Debtor for any

reimbursement, indemnification, or other obligation of the Debtor

pursuant to the [Reimbursement Agreement] and applicable law,

including, without limitations, any amounts paid or to be paid by

[the Kapnicks] to [Bank of America] with respect to the [mortgage

loan].”

Meanwhile, in August 2011, the Trustee moved to abandon the

estate’s interest in the Property and any of the debtor’s

personal property located there under § 554 (“Motion to

Abandon”). She sought abandonment on the grounds that the

Property lacked equity,6 and any sale thereof might create

adverse tax consequences for the bankruptcy estate. When no

objections were made to the Motion to Abandon, the bankruptcy

court entered an order on September 27, 2011 (“Abandonment

Order”), authorizing the Trustee to abandon the Property and the

debtor’s personal property located there.

In March 2013, the Trustee filed an objection to the Bank of

America Claim, requesting that the entire Bank of America Claim

be disallowed. She noted that Bank of America had not initiated

5...continue

ruling.

In their opening brief, the Kapnicks do not mention the

bankruptcy court’s disallowance of that portion of their claim

seeking reimbursement of administrative priority expenses. 

Because they do not raise this issue on appeal in their opening

brief, they have waived it. Dilley v. Gunn, 64 F.3d 1365, 1367

(9th Cir. 1995)(“Issues not raised in the opening brief usually

are deemed waived.”).

6 The Trustee believed the Property lacked equity based on

its scheduled value of $850,000, and Bank of America’s secured

claim of $957,371.99.

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any foreclosure proceedings to enforce its secured claim.7 The

Trustee challenged the Bank of America Claim on the ground that

it was unenforceable against the bankruptcy estate because the

Property was no longer part of the bankruptcy estate, having been

abandoned under § 554, among other grounds.

Bank of America never responded to the Trustee’s objection

to its proof of claim. Consequently, the bankruptcy court

entered an order (“Bank of America Claim Order”) sustaining the

Trustee’s objection.

The Trustee also filed an objection to the Kapnick Claim

seeking disallowance of the entire Kapnick Claim on various

grounds.8 Among them, she sought disallowance of the Kapnick

7 Bank of America did not move for relief from stay as to

the Property at any time during the debtor’s bankruptcy case.

8 The Trustee argued that the Reimbursement Agreement was

unenforceable under California law because: 1) it was void as an

illegal contract, as it required the debtor to waive her antideficiency protections; 2) it was unconscionable in unreasonably

favoring the Kapnicks by requiring the debtor to waive any

defenses she might have; and 3) the debtor’s waiver of her

defenses was not knowing and intelligent.

The bankruptcy court did not base its ruling on any of the

Trustee’s state law arguments. In fact, at the September 12,

2013 hearing on the Trustee’s objection to the Kapnick Claim, the

bankruptcy court explained that it was “not sustaining the

objection on any grounds other than the fact that [it] believe[d]

that the claim [was] contingent.” Tr. of Sept. 12, 2013 hr’g,

3:18-20. The bankruptcy court stated that it was “not finding

that the contract [was] illegal . . . or that the contract [was]

unconscionable.” Tr. of Sept. 12, 2013 hr’g, 3:17-18.

On appeal, neither the Trustee nor the Kapnicks address the

state law grounds asserted by the Trustee in her objection to the

Kapnick Claim. We therefore decline to address them further in

this disposition.

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Claim under § 502(e)(1)(B). 

The Trustee argued that § 502(e)(1)(B) provided for

mandatory disallowance of contingent guaranty claims when the

following three circumstances were present: 1) the claim was

contingent; 2) the claim was for reimbursement or contribution;

and 3) the claimant was co-liable with the debtor with respect to

the claim. She alleged that all three circumstances were present

in that: 1) the Kapnicks’ claim was contingent because they had

not yet paid any amounts to Bank of America under the Continuing

Guaranty and might not have to pay if Bank of America’s debt was

satisfied through enforcement against the Property; 2) the

Kapnicks’ claim was based on a guaranty, which, by its nature,

was a claim for contribution or reimbursement; and 3) the

Kapnicks and the debtor were co-liable to Bank of America on the

mortgage loan in that the debtor had direct liability on the

mortgage loan as the primary obligor and the Kapnicks had

secondary liability on the mortgage loan as guarantors under the

Continuing Guaranty.

The Kapnicks countered the Trustee’s objection, arguing that

the Trustee failed to provide any evidence to support it. They

also contended that § 502(e)(1)(B) did not apply because there

was no possibility of duplicate liability now that the Bank of

America Claim had been disallowed. Further, if the Kapnicks

satisfied their obligations under the Continuing Guaranty, which

they anticipated doing, disallowance of the Kapnick Claim would

be pointless. If the bankruptcy court were inclined to sustain

the Trustee’s objection, the Kapnicks asked that the bankruptcy

court estimate their claim under § 502(c)(1).

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In her reply, the Trustee stressed that the Kapnicks’

reimbursement claim remained contingent and unliquidated. The

Kapnicks did not present any evidence showing that their

reimbursement claim would ever mature or be liquidated. In fact,

the Kapnicks did not specify a dollar amount for the secured

portion of their claim. Their claim was entirely contingent on

the Kapnicks’ payment to Bank of America for any deficiency

resulting from the debtor’s default on the mortgage loan and Bank

of America’s foreclosure sale, which had not occurred and had not

even been noticed.

She noted that the Kapnicks bore the burden of proof to

establish the validity and amount of their claim, but they failed

to do so. The Trustee emphasized that the claim of co-debtors,

such as guarantors like the Kapnicks, is allowed only to the

extent that the co-debtors actually paid the third party’s claim.

However, the Kapnicks had not provided any evidence that they had

paid Bank of America under the Continuing Guaranty or that Bank

of America was seeking to enforce the Continuing Guaranty.

The Trustee advised the bankruptcy court that she did not

object to temporary disallowance of the Kapnick Claim, subject to

reconsideration under § 502(j).

The bankruptcy court scheduled a hearing on the Trustee’s

objection to the Kapnick Claim for September 12, 2013. The day

before the hearing, the bankruptcy court issued a tentative

ruling indicating that it was inclined to sustain the Trustee’s

objection to the Kapnick Claim under § 502(e)(1)(B), subject to

reconsideration under § 502(j), if and when the Kapnick Claim

became noncontingent.

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At the hearing, the bankruptcy court explained the basis for

its tentative ruling: it reasoned that § 502(e)(1)(B) required

denial of the Kapnick Claim because the Kapnick Claim was

contingent. The bankruptcy court stressed that it was “not

finding that the contract [was] illegal . . . [and] that the

contract [was] unconscionable.” Tr. of Sept. 12, 2013 hr’g,

3:17-18. It was “not sustaining the [Trustee’s] objection on any

grounds other than the fact that [it] believe[d] that the claim

[was] contingent. And [it] didn’t see in the record . . . before

[it] any dispute as to the contingent nature of [the Kapnick

Claim].” Tr. of Sept. 12, 2013 hr’g, 3:18-22.

Counsel for the Kapnicks “agree[d] that there’s not evidence

in the record on this issue one way or the other at this point.” 

Tr. of Sept. 12, 2013 hr’g, 3:23-25. He insisted that the

bankruptcy court needed to hold a further hearing to receive

evidence on the issue as to whether the Kapnick Claim was

contingent. Counsel for the Kapnicks noted that the only

evidence the bankruptcy court had was the Kapnick Claim itself.

He conceded that at the time the Kapnick Claim was filed, it

was “a bit of a contingent . . . .” Tr. of Sept. 12, 2013 hr’g,

4:4. But, he pointed out that, in the Motion to Abandon, the

Trustee represented that there was no equity in the Property. If

that were true, he argued, then the Kapnicks apparently would be

liable under the Continuing Guaranty because the value of the

Property was insufficient to satisfy the debt owed by the debtor

to Bank of America. Counsel for the Kapnicks noted that, while

some of these circumstances “[were] hypothetical,” the amount of

the Kapnick Claim likely would be substantial, given that the

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Property “[was] underwater and [it would] likely be sold for even

less than the market value at a foreclosure sale.” Tr. of

Sept. 12, 2013 hr’g, 5:3-7.

Upon questioning by the bankruptcy court, counsel for the

Kapnicks admitted that no foreclosure proceedings had been

commenced, to his knowledge, and that Bank of America had made no

demand on the Continuing Guaranty. He reported that it was

“mostly true” that the Kapnicks had not paid anything toward the

Continuing Guaranty, noting that they nonetheless had maintained

insurance on the Property as required under the Continuing

Guaranty. Tr. of Sept. 12, 2013 hr’g, 5:14-18. Counsel for the

Kapnicks also informed the bankruptcy court that the debtor had

not made any payments on the mortgage loan since the petition

date.

Quoting § 502(e)(1)(B), the bankruptcy court then asked him

whether the Kapnick Claim was not a “‘claim for reimbursement of

an entity that [had] secured the claim of a creditor,’” as set

forth in the statute. Tr. of Sept. 12, 2013 hr’g, 5:23-25, 

6:1-2. Counsel for the Kapnicks agreed with this

characterization.

The bankruptcy court noted that counsel for the Kapnicks

conceded in his papers that the Kapnick Claim was contingent. It

also pointed out that the Kapnicks had “plenty of time to move

for reconsideration of an order disallowing [their] claims [sic]

should it become noncontingent, which exactly [is] what

[§] 502(j) provides for.” Tr. of Sept. 12, 2013 hr’g, 7:18-21. 

It further advised counsel for the Kapnicks that if called upon

to do so, it would estimate the Kapnick Claim at zero because it

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was contingent.

Counsel for the Kapnicks disagreed, contending that the

bankruptcy court needed to take into account “the likelihood of a

contingency occurring coupled with the anticipated damages if it

did occur.” Tr. of Sept. 12, 2013 hr’g, 8:3-5. He insisted that

if evidence were presented on the issue, the amount of the

Kapnick Claim would not be zero.

In the end, the bankruptcy court took the matter under

submission. A few weeks later, on September 30, 2013, the

bankruptcy court entered an order (“Kapnick Claim Order”),

sustaining the Trustee’s objection to the Kapnick Claim for the

reasons stated on the record at the hearing and in its tentative

ruling. Appellants’ ER, Tab 13 at 188. Notably, since the

bankruptcy court entered the Kapnick Claim Order, as of July 11,

2014, the Kapnicks have not moved for reconsideration of

disallowance of the Kapnick Claim under § 502(j).

The Kapnicks timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C.

§§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C.

§ 158.

ISSUE

Did the bankruptcy court err in disallowing the Kapnick

Claim?

///

///

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STANDARDS OF REVIEW

We review a bankruptcy court’s decision to disallow a claim

for an abuse of discretion. See U.S. v. Berger (In re Tanaka

Bros. Farms, Inc.), 36 F.3d 996, 998 (10th Cir. 1994)(“The

decision of the bankruptcy judge to disallow the amended proof of

claim is reviewable under an abuse of discretion standard.”

(citation omitted)); Bitters v. Networks Elec. Corp.

(In re Networks Elec. Corp.), 195 B.R. 92, 96 (9th Cir. BAP

1996). We apply a two-part test to determine objectively whether

the bankruptcy court abused its discretion. United States v.

Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009)(en banc). First,

we “determine de novo whether the bankruptcy court identified the

correct legal rule to apply to the relief requested.” Id. 

Second, we examine the bankruptcy court’s factual findings under

the clearly erroneous standard. Id. at 1252 & n.20. A

bankruptcy court abuses its discretion if it applied the wrong

legal standard or its factual findings were illogical,

implausible or without support in the record. Trafficschool.com,

Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).

DISCUSSION

Section 502(e)(1)(B) provides, in relevant part:

[T]he court shall disallow any claim for reimbursement

or contribution of an entity that is liable with the

debtor on or has secured the claim of a creditor to the

extent that . . . such claim for reimbursement or

contribution is contingent as of the time of allowance

or disallowance of such claim for reimbursement or

contribution . . . .

Under section 502(e)(1)(B), “[a] claim will be disallowed

only if (1) the claim is for reimbursement or contribution;

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(2) the party asserting the claim is liable with the debtor on

the claim of a creditor; and (3) the claim is contingent at the

time of allowance or disallowance.” Dant & Russell, Inc. v.

Burlington N.R.R. Co. (In re Dant & Russell, Inc.), 951 F.2d 246,

248 (9th Cir. 1991). The party seeking disallowance of the claim

must show all three elements. Norpak v. Eagle-Picher Indus.,

Inc. (In re Eagle-Picher Indus., Inc.), 131 F.3d 1185, 1187-88

(citing Dant & Russell, Inc., 951 F.2d at 248 (9th Cir. 1991)). 

The Kapnicks do not challenge the first requirement; the

Kapnick Claim clearly is for reimbursement. Moreover, counsel

for the Kapnicks agreed with the bankruptcy court at the hearing

that the Kapnick Claim was a claim for reimbursement. They also

do not challenge the third requirement. And even if the Kapnicks

did contest the bankruptcy court’s determination on the

contingent nature of the claim, we cannot conclude that the

bankruptcy court clearly erred in its determination. The claim

still remains contingent as Bank of America still has not made a

demand for payment on the Kapnicks.

Instead, the Kapnicks seek to set aside the bankruptcy

court’s ruling by focusing on the second requirement,

co-liability. They contend that, under Dant & Russell, Inc., a

determination on the second requirement is central to disallowing

a claim under § 502(e)(1)(B). Specifically, the Kapnicks argue

that their claim is not subject to disallowance under

§ 502(e)(1)(B) because co-liability no longer exists given the

earlier disallowance of the Bank of America Claim. 

The Kapnicks’ argument that disallowance of the Bank of

America Claim eliminated their co-liability with the debtor is

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not supported by any authority and makes no sense. Disallowance

of the claim by default precludes Bank of America from

participating in any distribution from the debtor’s bankruptcy

estate, but it does not establish anything regarding liability or

co-liability on the mortgage loan debt. While the debtor

ultimately may receive a discharge in her bankruptcy case, the

Kapnicks are not in bankruptcy, and their obligation under the

Continuing Guaranty (if any) will not be discharged.

However, the problem here is that the bankruptcy court did

not make any finding as to co-liability. Nothing in the record,

including the Kapnick Claim Order, indicates that the bankruptcy

court made such a finding. Accordingly, we must vacate and

remand for the bankruptcy court to make a co-liability

determination as a required element under § 502(e)(1)(B).

CONCLUSION

For the foregoing reasons, we VACATE and REMAND for further

proceedings consistent with this disposition.

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