Court Opinion

ID: 9651791
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:49:07.951842+00
Date Added: 2024-06-11T13:33:07.262061
License: Public Domain

MARKELL, Bankruptcy Judge,
dissenting:
I respectfully dissent. The majority essentially holds that a debtor may not, in its own bankruptcy, unilaterally defend against a lender’s inequitable claim if that lender is also a bankruptcy debtor. I disagree.1
The central inquiry here is what a debt- or may do in response to a creditor’s filing a proof of claim.2 Normally, this inquiry presents no issue. The only limits are those imposed by the relevant nonbank-ruptcy law. As recognized by the lender’s home bankruptcy court, that law includes the law of equitable subordination. See In re Metiom, 301 B.R. 634 (Bankr.S.D.N.Y.2003) (permissible to join equitable subordination allegation with general claims objection).
Here, however, the creditor is also a debtor in bankruptcy. As such, the creditor is entitled to the benefits of the automatic stay with respect to actions against it and its estate. That much is undisputed.
*669What is disputed is whether the lender’s stay extends to the Debtors’ equitable subordination claims raised in response to the lender’s assertion of its claim in the Debtors’ bankruptcy. In holding that the lender’s stay extends to such actions, but not to any efforts to disallow outright the same claims, the majority’s opinion essentially holds that equitable subordination claims are not related to the adjustment of debt- or-creditor rights.
Existing law does not mandate this result. The Code and our precedents recognize implicit equitable exceptions to the automatic stay that permit a debtor to defend against a filed proof of claim in any manner permitted by applicable nonbank-ruptcy law. All the bankruptcy court did here was to protect that right. Even if I am wrong, however, I believe Lehman Commercial waived its right to raise automatic stay issues when it filed its proof of claim. I would therefore affirm the bankruptcy court’s ruling.
Although I believe this case is controlled by recognized exceptions to the automatic stay, those exceptions are not found in § 362(b). While § 362(b) lists explicit exceptions to the automatic stay, there are additional, implicit, equitable exceptions necessary for a practical and functioning bankruptcy system. One is that a creditor does not need relief from stay to seek relief from stay. Another is that a creditor does not need relief from stay to file and prosecute a proof of claim. Common sense dictates both these exceptions, even if § 362(b) does not mention them.
Our precedents identify a third equitable exception: a debtor need not seek relief from stay to object to a proof of claim filed by a creditor who coincidentally happens to be a debtor in bankruptcy. As we stated in Hi-Tech Commc’n. Corp. v. Poughkeepsie Bus. Park, LLC (In re Wheatfield Business Park, LLC), 308 B.R. 463, 466 (9th Cir. BAP 2004), “the automatic stay does not apply under such circumstances.” See also Eisinger v. Way (In re Way), 229 B.R. 11, 13 (9th Cir. BAP 1998); Gordon v. Whitmore (In re Merrick), 175 B.R. 333, 338 (9th Cir. BAP 1994).
Merrick provides the analytical underpinning for this equitable exception. In Merrick, we noted that:
[A]n equitable principle of fairness requires a defendant to be allowed to defend himself from the attack without imposing on him a gratuitous impediment in dealing with an adversary who suffers no correlative constraint. The automatic stay should not tie the hands of a defendant while the plaintiff debtor is given free rein to litigate.
Merrick, 175 B.R. at 338.
The majority rejects Merrick and our other precedents as inapplicable on two grounds. Initially, they contend that we permitted these equitable exceptions only in the context of disallowance of a claim under § 502 but not subordination under § 510, and therefore any attempt to subordinate Lehman Commercial’s claim under § 510 would be “offensive.”3 Second, the *670majority notes that Lehman Commercial’s claim is secured. Therefore, they believe that any subordination pursuant to § 510 would adversely affect Lehman Commercial’s property interest and violate § 362(a)(3) as it applies in Lehman Commercial’s bankruptcy estate.
Neither of these arguments is convincing. The majority initially distinguishes between claim allowance and claim subordination. Under these facts, this is a distinction without a difference. A bankruptcy court has core jurisdiction over “proceedings affecting the ... adjustment of the debtor-creditor ... relationship.” 28 U.S.C. § 157(b)(2)(0). Along with claim disallowance, equitable subordination has historically been one such proceeding within that broad grant of jurisdiction. Long before the enactment of the 1978 Bankruptcy Code, the Supreme Court had recognized that “[i]n appropriate cases, acting upon equitable principles, [the bankruptcy court] may also subordinate the claim of one creditor to those of others in order to prevent the consummation of a course of conduct by the claimant which, as to them, would be fraudulent or otherwise inequitable.” Heiser v. Woodruff, 327 U.S. 726, 732-33, 66 S.Ct. 853, 90 L.Ed. 970 (1946).
Heiser and § 510(c) confirm that equitable subordination has a venerable history as a doctrine available to avoid inequitable distributions. With this heritage, equitable subordination is surely as much a part of the adjustment of debtor-creditor rights as is claim disallowance. I thus fail to see any link between § 510’s language regarding application to “allowed claims” and the nonapplicability of Merrick equitable principles. Put another way, there is no good reason to require a bankruptcy estate to seek permission from another court to avoid inequitable results in its own case, so long as what is sought is confined to the defense of the claim asserted. Any other result unnecessarily hobbles estates in their attempt to maximize fair returns to their creditors.4
The unfairness of the majority’s position can be seen under the facts present here. When Lehman Commercial sought to establish its claim, the Debtors had a duty on behalf of the estate to respond by raising all appropriate responses. The Debtors believed this response included a challenge to the equity of Lehman Commercial’s claimed priority. But the majority’s position would have required the Debtors to obtain permission from Lehman Commercial’s home bankruptcy court before responding on this ground. This extra step is just the type of “gratuitous impediment in dealing with an adversary who suffers no correlative constraint” that Merrick condemned. See also In re Metiom, 301 B.R. 634 (Bankr.S.D.N.Y.2003) (under pri- or version of Rule 3007, court finds that joining equitable subordination to claims objection permissible).
The majority’s reliance on § 362(a)(3) also does not survive scrutiny. In this context, adjustment of lien priorities is no different from an adjustment of claim priorities. A lien is nothing but an incident of the debt it secures; there can be no lien without a debt to support it. See, e.g., Satsky v. United States, 993 F.Supp. 1027, 1029 (S.D.Tex.1998). As a result, if no stay relief is necessary to adjust priority of *671payment, no stay relief should be necessary to adjust liens securing those debts. The majority’s position essentially allows creditors to immunize inequitable conduct from equitable subordination by the simple expedient of taking a security interest.
Finally, the majority’s fears that the bankruptcy court’s ruling could somehow usurp the alleged right of Lehman Commercial’s home court to determine whether subordination would violate § 362(a)(3) are easily allayed. By filing the proof of claim, Lehman Commercial clearly put its entire claim at risk. At a minimum, Lehman Commercial impliedly consented to have all its claims against the Debtors adjudicated in the Debtors’ bankruptcy case. Metiom, a decision from Lehman Commercial’s home court, holds as much. Moreover, as the Ninth Circuit has made explicit, “[wjhen a creditor submits to bankruptcy court jurisdiction by filing a proof of claim in order to collect all or a portion of a debt, it assumes certain risks ... bankruptcy converts the creditor’s legal claim into an equitable claim to a pro rata share of the res.” Hong Kong & Shanghai Banking Corp. Ltd. v. Simon (In re Simon), 153 F.3d 991, 997 (9th Cir.1998).
It is the height of formalism — and the nadir of equity — to allow Lehman Commercial to file its proof of claim under an implied waiver from the Debtors’ stay, only to deny the Debtors a correlative and reciprocal waiver with respect to any accepted challenge to that proof of claim.
For these reasons, I would affirm.

. I do not disagree, however, with the majority’s treatment of the mootness and standing issues addressed in Part II of the opinion. I therefore join the majority in its decision to reach the merits, and in its disposition of the Debtors' motion to dismiss and of Lehman Commercial’s motion to supplement the record.

. As the majority also points out, the issue was presented in the bankruptcy court in the context of the Debtors’ response to Lehman Commercial's relief from stay motion. But during the case and after the motions leading to this appeal were filed, Lehman Commercial filed proofs of claim related to the debt that formed the basis of the requested stay relief. At oral argument, counsel for Lehman Commercial conceded that, due to a lack of any prejudice, the legal issue as framed in the text is identical to the issue litigated in the bankruptcy court.

. The majority states that any action which "seeks affirmative relief, such as a counterclaim violates the automatic stay.” To the extent that this could be read to imply that all counterclaims seek affirmative relief. I disagree. Recoupment, for example, typically is asserted by counterclaim, and should not be considered offensive. Cf. Bull v. U.S., 295 U.S. 247, 262, 55 S.Ct. 695, 79 L.Ed. 1421 (1935) ("recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded”); ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 432 (S.D.Tex.2008) ("recoupment is a common-law, equitable doctrine that permits a defendant to assert a defensive claim aimed at reducing the amount of damages recoverable by a plaintiff”).

. There is also nothing in the history of § 510 that should cause equitable subordination claims to be treated differently. Indeed, Congress intended "that the term 'principles of equitable subordination' follow existing case law and leave to the courts development of this principle.” 124 Cong. Rec. 32, 398 (1978) (statement of Rep. Edwards); id. at 33, 998 (statement of Sen. DeConcini). See also, 4 Collier on Bankruptcy ¶ 510.05 (15th rev. ed.2009).