Court Opinion

ID: 4514580
Source: CourtListenerOpinion
Date Created: 2020-03-11 00:01:44.426758+00
Date Added: 2024-06-11T09:44:12.815058
License: Public Domain

FILED
                                                                    JUL 30 2019

                                                                SUSAN M. SPRAUL, CLERK
                                                                  U.S. BKCY. APP. PANEL
                                                                  OF THE NINTH CIRCUIT

                       ORDERED PUBLISHED

         UNITED STATES BANKRUPTCY APPELLATE PANEL
                   OF THE NINTH CIRCUIT

In re:                                        BAP No. CC-18-1206-LKuF

GWENDOLYN WASHINGTON,                         Bk. No. 6:17-bk-15102-MH

                 Debtor.

GWENDOLYN WASHINGTON,

                 Appellant,

v.                                            OPINION

REAL TIME RESOLUTION, INC., as
agent for Wells Fargo Bank, N.A., as
Trustee for Option One Mortgage Loan
Trust 2006-2, Asset-Backed Certificates,
Series 2006-2,

                 Appellee.

                  Argued and Submitted on June 20, 2019
                         at Pasadena, California

                             Filed – July 30, 2019

             Appeal from the United States Bankruptcy Court
                  for the Central District of California
           Honorable Mark D. Houle, Bankruptcy Judge, Presiding

Appearances:        Jenny L. Doling of Doling Shaw & Hanover, APC argued
                    for Appellant Gwendolyn Washington; Renee M. Parker
                    of The Mortgage Law Firm, PLLC argued for Appellee
                    Real Time Resolution, Inc., as agent for Wells Fargo Bank,
                    N.A., as Trustee for Option One Mortgage Loan Trust
                    2006-2, Asset-Backed Certificates, Series 2006-2.

Before: LAFFERTY, KURTZ, and FARIS, Bankruptcy Judges.

LAFFERTY, Bankruptcy Judge:

                                 INTRODUCTION

      Appellant-Debtor Gwendolyn Washington obtained a chapter 71

discharge, which extinguished her personal liability on the debt secured by

a junior lien on her residence. About five years later, she filed a chapter 13

case; she obtained an order valuing at zero the junior lien held by Option

One Mortgage Corporation, serviced by Appellee Real Time Resolutions,

Inc. (“RTR”). RTR filed an unsecured claim in the full amount of the debt it

believed it was owed; Ms. Washington objected on the ground that her

      1
       Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                            2
personal liability had been discharged. The bankruptcy court overruled the

objection, concluding that the discharge did not fully eliminate the claim

and that the plain language of § 506(a) required the allowance of RTR’s

unsecured claim in the amount of $307,049.79.

      We REVERSE.

                          FACTUAL BACKGROUND

      In 2012, Ms. Washington obtained a chapter 7 discharge, eliminating

her personal liability on a debt secured by a second deed of trust on her

residence in Corona, California. In June 2017, Ms. Washington filed this

chapter 13 case. In her schedules, she valued her residence at $410,000,

encumbered by a first mortgage in favor of Wells Fargo Home Mortgage in

the amount of $577,069.53 and a second deed of trust in favor of RTR in the

amount of $174,000. She then filed a “Motion to Avoid Junior Lien on

Principal Residence,” seeking to have RTR’s lien valued at zero. 2 RTR did

not oppose the motion, and the bankruptcy court granted it.3 At the same

      2
         Ms. Washington’s motion was submitted on the approved form of the
Bankruptcy Court for the Central District of California, which is entitled “Motion to
Avoid Junior Lien on Principal Residence [11 U.S.C. § 506(d) ].” However, because
avoidance would not have occurred until Ms. Washington had completed her plan, we
refer to the motion as one “to value lien at zero.” See Asset Mgmt. Holdings, LLC v.
Hernandez (In re Hernandez), BAP No. CC-16-1228-LKuF, 2017 WL 1395741, at *1 n.3 (9th
Cir. BAP Apr. 11, 2017), aff’d, 754 F. App’x 632 (9th Cir. 2019).
      3
         The order granting the motion valued the residence at $410,000, encumbered by
a first deed of trust in the amount of $606,774.64. Avoidance of RTR’s lien was
contingent upon Ms. Washington receiving a discharge in the chapter 13 case.

                                          3
hearing, the court confirmed Ms. Washington’s chapter 13 plan, which

provided for payment of 100 percent to holders of allowed general

unsecured claims.

      Thereafter, RTR filed a proof of claim, asserting a secured debt of

$307,049.79. Ms. Washington filed an objection to RTR’s claim in which she

asserted that the claim needed to be amended or withdrawn because Ms.

Washington had discharged the debt to RTR in her chapter 7 case. RTR did

not file a response, but it amended its proof of claim to reclassify the claim

as unsecured. After a hearing, the court issued a memorandum decision

and order overruling Ms. Washington’s objection and allowing RTR’s claim

as amended. In re Washington, 587 B.R. 349 (Bankr. C.D. Cal. 2018). The

court found that the plain language of § 506(a) 4 requires that the valuation

of a lien under that section must result in an unsecured claim that had to be

provided for in the chapter 13 plan. The court noted that there was a split

of authority on the issue but found persuasive the cases holding that even

where a debtor had discharged her personal liability on a secured claim in

a chapter 7 case, a creditor whose lien was valued at zero in a subsequent

      4
          Section 506(a) provides, in relevant part:

      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.

                                              4
chapter 13 case was entitled to an unsecured claim. E.g., In re Akram, 259

B.R. 371 (Bankr. C.D. Cal. 2001).

      The court also noted that the language of the Central District of

California’s form motion and order for valuation of a lien supported its

conclusion. The form motion used by Ms. Washington, dated December

2012, included the following language: “Respondent’s claim on the junior

position lien shall be allowed as a nonpriority general unsecured claim in

the amount per the filed Proof of Claim.” (Emphasis added.) The form

order granting the motion, dated December 2013, states: “The claim of the

junior lienholder is to be treated as an unsecured claim and is to be paid

through the plan pro rata with all other unsecured claims.” (Emphasis

added.)5

      Accordingly, the court concluded that RTR was entitled to an allowed

unsecured claim for the entire amount of the debt. Ms. Washington timely

appealed the court’s order overruling her objection.

      In November 2018, the bankruptcy court dismissed Ms. Washington’s

case for failure to submit to the chapter 13 trustee copies of her 2017 federal

and state tax returns. RTR moved to dismiss the appeal as moot. A BAP

motions panel denied the motion to dismiss because the bankruptcy court’s

      5
        As discussed below, both forms were revised, effective December 2017. The
forms now include the words “unless otherwise ordered” to preface the quoted
provisions.

                                          5
decision as to claim allowance could have preclusive effect in a future

proceeding with respect to the claim. See Bevan v. Socal Commc’ns Sites, LLC

(In re Bevan), 327 F.3d 994, 997 (9th Cir. 2003).

                               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

      Whether the bankruptcy court erred in overruling Ms. Washington’s

objection to RTR’s claim.

                          STANDARD OF REVIEW

      As the issue on appeal is solely an issue of law, our review is de

novo. See Veal v. Am. Home Mortg. Serv., Inc. (In re Veal), 450 B.R. 897, 918

(9th Cir. BAP 2011). “When we conduct a de novo review, we look at the

matter anew, the same as if it had not been heard before, and as if no

decision previously had been rendered, giving no deference to the

bankruptcy court’s determinations.” Barnes v. Belice (In re Belice), 461 B.R.

564, 572–73 (9th Cir. BAP 2011) (citations omitted).

                                DISCUSSION

      Section 1322(b)(2) of the Bankruptcy Code prohibits a chapter 13 plan

from modifying the rights of holders of secured claims when the claim is

“secured only by a security interest in real property that is the debtor’s

principal residence . . . .” Despite this prohibition, the Ninth Circuit Court

                                        6
of Appeals has held that if such a lien is determined to be wholly

unsecured, a debtor may avoid that lien in a chapter 13 proceeding without

running afoul of § 1322(b)(2). Zimmer v. PSB Lending Corp. (In re Zimmer),

313 F.3d 1220 (9th Cir. 2002).

       A chapter 13 debtor seeking to avoid a wholly unsecured lien on her

residence must first obtain an order valuing the lien pursuant to § 506(a). If

the lien is determined to be wholly unsecured (i.e., if the value of the

property less senior liens leaves no equity to which the junior lien may

attach), the court values the lien at zero.6 Under § 506(a), the valuation of

that lien results in an unsecured claim for the full amount owed. Where the

debtor has not previously received a discharge, the junior lienholder will

ordinarily be left with an allowed unsecured claim that must be provided

for in the debtor’s plan in the same manner as other general unsecured

claims.

       But where the debtor has discharged her personal liability in a prior

chapter 7 case, courts have differed in their approaches to dealing with the

unsecured claim. Some courts, including In re Gounder, 266 B.R. 879 (Bankr.

E.D. Cal. 2001), aff’d, No. CIV.A. S-01-1707-WBS, 2001 WL 1688479 (E.D.

Cal. Dec. 19, 2001), and Akram, have concluded that such an unsecured

       6
        The lien is not actually avoided, however, until the debtor completes her plan
and obtains a discharge. If the debtor is not eligible for a chapter 13 discharge, the lien is
avoided when the debtor completes her payments under the plan. See HSBC Bank USA,
N.A. v. Blendheim (In re Blendheim), 803 F.3d 477, 493 (9th Cir. 2015).

                                              7
claim must be provided for in the debtor’s plan despite the discharge.

       In Akram, relied upon by the bankruptcy court in this case, the

bankruptcy court ruled that where (1) debtors had received a chapter 7

discharge of their personal liability for debts secured by junior liens on

their residence, and (2) those junior liens were valued at zero for purposes

of confirming a subsequent chapter 13 plan, those debtors were required to

pay the resulting unsecured claims in their plan. The court reasoned that,

although the chapter 7 discharge eliminated the debtors’ personal liability

on the claims, it did not eliminate the liens themselves, citing Dewsnup v.

Timm, 502 U.S. 410, 418 (1992). As a result, when the debtors filed their

chapter 13 case, the junior liens were fully secured. And when the court

subsequently valued the liens at zero pursuant to § 506(a), the secured

claims were reclassified as unsecured claims. In re Akram, 259 B.R. at 378-

79.7

       Subsequent “chapter 20” cases reaching the same result have relied

upon the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S.

       7
        We note that this Panel has previously cited Akram favorably, albeit in a slightly
different context. Cal. Fidelity, Inc. v. Eaton (In re Eaton), BAP No. EC-05-1261-PaNMa,
2006 WL 6810924 at *6 (9th Cir. BAP February 28, 2006). The primary issue in Eaton was
whether the bankruptcy court had erred in valuing a junior creditor’s lien as of the
petition date. The bankruptcy court’s order also valued the unsecured claims at zero
because the debtors had previously received a chapter 7 discharge. In its memorandum,
the Panel stated that it disagreed with the valuation of the unsecured portions at zero.
Citing Akram, the Panel concluded that the junior lienholders whose liens had been
valued at zero were entitled to be paid as unsecured creditors under the plan. Id.

                                            8
78 (1991). E.g., In re Gounder, 266 B.R. 879 (discussed below). See also Victorio

v. Billingslea, 470 B.R. 545, 550–51 (S.D. Cal. 2012); In re Renz, 476 B.R. 382,

392 (Bankr. E.D.N.Y. 2012).

      In Johnson, the Supreme Court held that the chapter 7 discharge does

not eliminate a secured creditor’s in rem rights against real property in a

subsequent chapter 13 case, and the in rem remedy constitutes a claim

against the property in that chapter 13 case. Relying on that holding, the

Gounder court reasoned that even though the creditor could not enforce its

claim against the debtor personally, as of the petition date it retained its

right to satisfy its claim against the debtor’s property, which had become

property of the estate. In re Gounder, 266 B.R. at 881. Accordingly, the court

concluded, the creditor has an allowable claim in the chapter 13 case as a

claim against the estate. Id.

      In contrast to the above-cited cases, the bankruptcy court for the

Northern District of California has held that in the chapter 20 context, a

junior lienholder whose secured claim has been valued at zero in the

chapter 13 case is not entitled to an unsecured claim. In re Rosa, 521 B.R. 337

(Bankr. N.D. Cal. 2014). The Rosa court acknowledged that, pursuant to

Johnson, a lienholder has an in rem claim remaining after a chapter 7

discharge of a debtor’s personal liability. But it concluded that neither

Johnson nor the Bankruptcy Code, including § 506(a)(1), mandates that the

creditor has an allowed unsecured claim as a result of the valuation of its

                                        9
lien at zero. Id. at 339-40. See also In re Sweitzer, 476 B.R. 468 (Bankr. D. Md.

2012).

      The court noted the distinction between a “claim” and an “allowed

claim,” pointing out that under § 502(b) the bankruptcy court is to

determine the amount of the claim and allow it unless it is unenforceable

against the debtor and property of the debtor. In re Rosa, 521 B.R. at 340.

Under § 524, the chapter 7 discharge enjoins enforcement of the claim

against the debtor personally, and nothing in the Bankruptcy Code

authorizes resurrecting the creditor’s in personam rights. Id. at 340-41. Nor,

the court concluded, is there any basis for the conclusion that the

elimination of the debtor’s personal liability results in the imposition of

liability on the estate:

      The court respectfully disagrees with [the Gounder court’s]
      attempt to impose liability on the Chapter 13 bankruptcy estate
      where none exists for the Chapter 13 debtor. Bankruptcy Code
      § 101(10) defines the term “creditor” as an entity “(A) . . . that
      has a claim against the debtor that arose at the time of or before
      the order for relief concerning the debtor; (B) . . . that has a
      claim against the estate of a kind specified in section 348(d),
      502(f), 502(g), 502(h) or 502(I) of this title; or (C) . . . that has a
      community claim.” All the creditors at issue in Akram, Gounder,
      and herein fall squarely—and only—within § 101(10)(A). There
      is no language in § 506(a) which suggests otherwise. In other
      words, if these creditors do not have an allowable unsecured
      claim against the Chapter 13 debtor, they do not have an
      allowable unsecured claim that must be paid through the

                                        10
      Chapter 13 plan. Moreover, Congress knows how to turn a
      nonrecourse claim into a recourse obligation (see § 1111(b)(1)),
      and no such text can be found in § 506(a)(1).

Id. at 341-42.

      The court also observed that its decision did not run afoul of Johnson

because the Supreme Court in that case did not mandate that the in rem

claim becomes an allowed unsecured claim if a § 506(a) motion renders the

secured claim valueless. Id. at 342.

      Importantly, this Panel has held that, for eligibility purposes, debts

for which in personam liability has been discharged in a prior chapter 7

case cannot be counted toward the unsecured debt limitation of § 109(e).

Free v. Malaier (In re Free), 542 B.R. 492, 497 (9th Cir. BAP 2015). Although

Free deals with eligibility, its analysis is on point with the issue raised here.

In that case, the debtors had received a chapter 7 discharge and then filed a

chapter 13 case, intending to strip off two junior liens from their real

property. The bankruptcy court granted the chapter 13 trustee’s motion to

dismiss the case because debtors’ unsecured debts, including the two

wholly unsecured junior liens, exceeded the statutory limit of § 109(e). The

Panel reversed and remanded.

      Observing that § 101(12) defines a “debt” as “liability on a claim,”

and § 101(5)(A) defines a “claim” as a “right to payment,” the Panel

concluded that there could be no unsecured debt unless the creditor has a

                                       11
right to payment on an unsecured basis. Because § 524 provides that the

discharge operates as an injunction against enforcement of a debt as a

personal liability of the debtor, the creditor has no right to payment and

thus has no claim. Accordingly, “debts that were discharged in chapter 7

are not ‘unsecured debts’” for purposes of § 109(e). Id. at 496.

      The Panel concluded that the bankruptcy court had misread Johnson,

observing that the Supreme Court had made only one determination, that

“the in rem right to proceeds from a sale of its collateral meant the secured

creditor held a claim which could be addressed in a chapter 13 plan.” Id. at

497. The Panel further noted that the Supreme Court in Johnson had

actually confirmed that the effect of the chapter 7 discharge was to

extinguish the debtor’s in personam liability. Id.

      Notably, the Free Panel observed that the “well-reasoned decision of

the bankruptcy court” in Rosa supported its opinion. The Panel restated the

Rosa court’s analysis as follows:

      The [Rosa] court observed that although § 101(5)(A) defines a
      claim and § 506(a) prescribes how a secured claim is to be
      treated, neither determined whether such claim was allowed
      for payment purposes. That determination was to be made if an
      objection was filed under § 502(b), as the debtor filed here.
      Because the personal liability had been discharged in the prior
      chapter 7, the court applied the discharge injunction provided
      by § 524(a)(2) to come to the unremarkable conclusion that no
      allowed claim remained for payment purposes in the chapter
      13.

Id. at 500.

                                      12
      Based on the foregoing, we conclude that the bankruptcy court here

skipped, as did the cases it relied on, a critical step in determining the

status of the unsecured claim. Once the bankruptcy court valued the

secured claim at zero under § 506(a), it concluded that the remaining

unsecured claim was automatically an allowed claim in the chapter 13 case.

But in light of Ms. Washington’s claim objection, the court was required to

consider whether the unsecured claim was enforceable against the debtor.

Because it was not, the claim should have been disallowed. There is simply

no statutory basis for resurrecting the debtor’s personal liability or for

treating the claim as a claim against the estate. In re Rosa, 521 B.R. at 339,

342-43. And the lien claim against property of the estate was conditionally

avoided through the valuation motion.

      RTR argues that we cannot consider Free because Ms. Washington

did not cite that case in the bankruptcy court. While we generally do not

consider arguments not made to the bankruptcy court, there is an

exception to that rule when the issue is purely one of law, and the

opposing party will suffer no prejudice as a result of the failure to address

the issue in the bankruptcy court. Enewally v. Wash. Mut. Bank (In re

Enewally), 368 F.3d 1165, 1173 (9th Cir. 2004). Those criteria are met here,

and RTR does not allege otherwise. RTR also attempts to distinguish Free

on grounds that it is an eligibility case. But RTR points to no part of the Free

analysis that cannot logically be applied to the facts of this case.

                                       13
      We also reject the notion that the bankruptcy court’s form motion

and order play any part in the analysis. As noted, the forms used by Ms.

Washington to value RTR’s lien contained language requiring the

unsecured portion of a bifurcated claim to be “allowed” (motion) and

“paid” (order) as an unsecured claim under the chapter 13 plan. But local

rules and forms must be consistent with the Bankruptcy Code and may not

enlarge, abridge, or modify any substantive right. Sigma Micro Corp. v.

Healthcentral.com (In re Healthcentral.com), 504 F.3d 775, 784 (9th Cir. 2007);

Steinacher v. Rojas (In re Steinacher), 283 B.R. 768, 772 (9th Cir. BAP 2002); see

also Drummond v. Wiegand (In re Wiegand), 386 B.R. 238, 241 (9th Cir. BAP

2008) (“When an Official Bankruptcy Form conflicts with the Code, the

Code always wins.”); Moncur v. Agricredit Acceptance Co. (In re Moncur), 328

B.R. 183, 192 (9th Cir. BAP 2005) (holding that it is impermissible for a local

alteration in an Official Form to have the effect of varying the terms of the

Bankruptcy Code or Federal Rules of Bankruptcy Procedure). The local

bankruptcy forms at issue simply do not address the situation where a

debtor has previously discharged her personal liability on the underlying

debt. To interpret them otherwise would be to impermissibly abridge the

debtor’s rights under § 524, which operates as an injunction against

collection of a discharged debt.

      Moreover, as noted, the Bankruptcy Court for the Central District of

California modified the relevant forms effective December 2017. The form

                                        14
motion (F 4003-2.4.JR.LIEN.MOTION) now provides: “Unless otherwise

ordered, any allowed claim in excess of this Secured Claim Amount is to be

treated as a nonpriority unsecured claim and is to be paid pro rata with all

other nonpriority unsecured claims in Class 5A of the Plan.” The form

order (F 4003.2.4.JR.LIEN.ORDER) now provides: “Unless otherwise

ordered, any allowed claim in excess of this Secured Claim Amount is to be

treated as a nonpriority unsecured claim and is to be paid pro rata with all

other nonpriority unsecured claims in Class 5A of the Plan.” The addition

of the phrase “unless otherwise ordered” leaves open the possibility that

the unsecured claim resulting from the valuation of the lien under § 506(a)

may not be allowed or paid, thus undercutting the bankruptcy court’s

reliance on the local forms as bolstering its ruling.

                               CONCLUSION

      For all of these reasons, we REVERSE.

                                       15