Court Opinion

ID: 9696513
Source: CourtListenerOpinion
Date Created: 2023-08-25 18:49:58.293277+00
Date Added: 2024-06-11T18:20:22.972055
License: Public Domain

*899BROWN, Bankruptcy Judge,
concurring.
I agree with the Majority that the bankruptcy court did not err in overruling the Debtor’s objection to stay relief to the extent it was based on its argument that it had proposed a confirmable plan. The Debtor argued that no cause existed for granting relief because the amended plan on file properly treated Wells Fargo’s claim as only partially secured. It defended its proposed treatment of Wells Fargo on the basis that it had failed to file a proof of claim before the claims bar date. It then argued that the failure to file a proof of claim means that its schedules determined the amount of Wells Fargo’s claim and its lien status.
The Debtor relies on 11 U.S.C. § 1111(a), which states:
A proof of claim or interest is deemed filed under section 501 of this title for any claim or interest that appears in the schedules filed under section 521(1) or 1106(a)(2) of this title, except a claim or interest that is scheduled as disputed, contingent, or unliquidated.
This section only specifies that an uncontested, scheduled claim has the same effect as a filed proof of claim. The statute does not purport to address the question of a creditor’s lien status when the creditor has failed to file a proof of claim and the claim is unscheduled.
The Debtor is correct in its assumption that the failure to file a claim limited Wells Fargo’s right to participate in a distribution from the estate. Because the Debtor listed Wells Fargo as a partially secured creditor, recognizing a deficiency claim, § 1111(a) provides that Wells Fargo is deemed to have filed a proof of claim against the estate only to the extent reflected in the schedules. But the Debtor then assumes that this limits Wells Fargo’s lien status. There is a certain logic to this reasoning. If the Debtor’s liability is limited or eliminated under these circumstances, then should Wells Fargo’s lien value be reduced or eliminated to correspond with the amount of debt, if any, that remains owing by the Debtor? Outside of the bankruptcy world this would be the case. For example, if a debtor owes $50,000 on a house worth $100,000, the bank’s interest in the house is limited to $50,000. If the debtor repays the mortgage in full, then Wells Fargo has no further right to assert its lien status.
But a long line of cases, from the Supreme Court on down, have held that the bankruptcy process does not abrogate a secured creditor’s lien rights.
A long line of cases, though none above the level of bankruptcy judges since the Bankruptcy Code was overhauled in 1978, allows a creditor with a loan secured by a lien on the assets of a debtor who becomes bankrupt before the loan is repaid to ignore the bankruptcy proceeding and look to the lien for the satisfaction of the debt. See Long v. Bullard, 117 U.S. 617, 620-21, 6 S.Ct. 917, 918, 29 L.Ed. 1004 (1886); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 582-83, 55 S.Ct. 854, 859-60, 79 L.Ed. 1593 (1935); United States Nat’l Bank v. Chase Nat’l Bank, 331 U.S. 28, 33, 67 S.Ct. 1041, 1044, 91 L.Ed. 1320 (1947) (dictum); In re Woodmar Realty Co., 307 F.2d 591, 594-95 (7th Cir.1962); Dizard & Getty, Inc. v. Wiley, 324 F.2d 77, 79-80 (9th Cir.1963); Clem v. Johnson, 185 F.2d 1011, 1012-14 (8th Cir.1950); DeLaney v. City and County of Denver, 185 F.2d 246, 251 (10th Cir.1950); In re Bain, 527 F.2d 681, 685-86 (6th Cir.1975); In re Honaker, 4 B.R. 415, 416 and n. 3 (Bankr.E.D.Mich.1980); cf. In re Rebuelta, 27 B.R. 137, 138-39 (Bankr.N.D.Ga.1983); *900In re Hines, 20 B.R. 44, 48 (Bankr.S.D.Ohio 1982).
In re Tarnow, 749 F.2d 464, 465 (7th Cir.1984). “Unless the collateral is in the possession of the bankruptcy court or the trustee, the secured creditor does not have to file a claim.” Hoxworth v. Blinder, 74 F.3d 205, 210 (10th Cir.1996) (citing Tarnow, 749 F.2d at 465). If a court specifically ruled that a particular creditor’s debt is unenforceable or the lien invalid, then such a ruling would change this result. But the mere failure to participate in the bankruptcy proceedings does not have the effect of limiting or invalidating the secured creditor’s lien rights. In fact, in enacting § 506(d)(2), Congress codified this longstanding judicial interpretation.
[I]n 1984 Congress enacted a new section 506(d)(2), replacing the former 506(d)(1), and the new section preserves the lien if the claim “is not an allowed secured claim due only to the failure of any entity to file a proof of such claim....” Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, § 448(b), 98 Stat. 374. The change was intended “to make clear that the failure of the secured creditor to file a proof of claim is not a basis for avoiding the lien of the secured creditor.” S.Rep. No. 65, 98th Cong., 1st Sess. 79 (1983).
Matter of Tarnow, 749 F.2d 464, 467 (7th Cir.1984).
The Debtor’s proposed treatment of Wells Fargo caused its plan to be uneon-firmable on its face. One of the requirements of confirmation is that a plan be “fair and equitable.” 11 U.S.C. § 1129(b)(2). In pertinent part, § 1129(b)(2)(A) defines “fair and equitable” with respect to secured claims as follows:
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides—
(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property!)]
Subsection 1129(b)(2)(A)(i)(II) allows a plan proponent to essentially write a new loan. But the payment terms of the new loan must meet certain criteria: (1) deferred cash payments; and (2) the stream of payments must “[total] at least the allowed amount of such claim, of a value, as of the effective date of the plan.” Id. This language requires a present value analysis. 7 Collier on Bankruptcy ¶ 1129.05[2][a] at 1129-143 (Alan N. Resnick ed. 15th ed. rev.2007).
This subsection further requires that the stream of payments be “of at least the value of such holder’s interest in the estate’s interest in such property.” 11 U.S.C. § 1129(b)(2)(A)(i)(II). The estate’s interest in this case is that of an owner of the property. The bankruptcy court valued the ownership interest at $410,000. Thus, the Debtor’s plan must pay the present value of the full amount owed to Wells Fargo, up to this valuation amount. The valuation of Wells Fargo’s interest in the property is controlled by § 506, not § 1111(a). The Debtor’s interpretation of § 1111(a) contradicts § 506(d)(2).
*901Even if the Debtor’s objection to stay relief was not well-founded, Wells Fargo had the initial burden of going forward with evidence to establish “cause.” In re Anthem Cmtys./RBG, LLC, 267 B.R. 867, 870-71 (Bankr.D.Colo.2001). To satisfy this burden, Wells Fargo offered as its only evidence eight exhibits: its judgment obtained in state court, certain of the Debtor’s schedules, the two plans proposed by the Debtor, and a summary of its calculation of the debt owed by the Debtor. While its motion had asserted that the bankruptcy case had been filed in bad faith, it did not offer any evidence to this effect. Instead it argued at hearing that the amended plan had been filed in bad faith. Likewise, the bankruptcy court held that the amended plan had been filed in bad faith. It did not find, nor could it have found based on the evidence presented, that the case had been filed in bad faith.1
Courts are not in agreement as to whether a bad faith filing is sufficient cause for either dismissal under § 1112(b) or stay relief under § 362(d)(1). See In re Capitol Food Corp. of Fields Corner, 490 F.3d 21, 24 (1st Cir.2007) (citing cases on both sides of this issue). The Tenth Circuit has previously recognized “cause” for granting stay relief based on a case filed in bad faith. In re Nursery Land Dev., Inc., 91 F.3d 1414, 1415-16 (10th Cir.1996). There may be some room to doubt the continued vitality of this doctrine following Congress’ adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), Pub.L. No. 109-8, 119 Stat. 23 (2005), which recently included in the Code an explicit “good faith” requirement in § 362(c)(3)(B), (C). It did not amend either § 1112(b) or § 362(d) to include lack of “good faith” as an additional basis for a finding of “cause.” While neither section purports to contain an exclusive list of reasons for finding “cause,” the absence of any reference to “good faith” may be indicative of Congressional intent. However, this case was filed before the effective date of BAPCPA and, in any event, it is not necessary to reach this issue in this case.
Even if bad faith continues to be grounds for stay relief, it requires a showing of bad faith in the filing of the petition. The Tenth Circuit has stated that “classic badges of a bad faith bankruptcy filing” include when the debtor:
(1) has only one asset; (2) has only one creditor; (3) acquired property which was posted for foreclosure and the prior owners had been unsuccessful in defending against the foreclosure; (4) was revitalized on the eve of foreclosure to acquire the insolvent property; (5) has no ongoing business or employees; and (6) lacks a reasonable possibility of reorganization, and (7) the Charter 11 filing stopped the foreclosure. See Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd.), 40 F.3d 1084, 1090 (10th Cir.1994)(upholding sanctions for bad faith Chapter 11 filing where one-asset debtor lacking ability to reorganize filed for bankruptcy one day before foreclosure on asset); Laguna Assocs. Ltd. Partnership v. Aetna Casualty & Sur. Co. (In re Laguna Assocs. Ltd. Partnership), 30 F.3d 734, 738 (6th Cir.1994) (listing indicia of bad faith Chapter 11 filing); Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072-73 (5th Cir.1986) (same).
In re Nursery Land Dev., Inc., 91 F.3d 1414, 1416 (10th Cir.1996). In upholding *902the court’s finding of bad faith in Nursery Land, the Tenth Circuit relied on Laguna Associates Ltd. Partnership v. Aetna Casualty & Surety Co. (In re Laguna Associates Ltd. Partnership), 30 F.3d 734, 738 (6th Cir.1994), which adopted a substantially similar list of factors for a court to consider, adding that
“no list is exhaustive of all the conceivable factors which could be relevant when analyzing a particular debtor’s good faith.” In re Caldwell, 851 F.2d 852, 860 (6th Cir.1988); see also In re Barrett, 964 F.2d 588, 591 (6th Cir.1992) (“Our circuit’s good faith test requires consideration of the totality of circumstances.”).
Laguna Assocs. at 738, cited in Nursery Land, 91 F.3d at 1416. While these factors are non-exclusive, the court is nevertheless required to make findings as to a bad faith filing of the petition. In this case, the bankruptcy court did not do so. The Majority reaches for facts that would support such a finding. But the issue is not whether the bankruptcy court could have made a bad faith finding. It is whether it actually did make such a finding and whether there was evidence admitted to support the finding.
Both the Majority and the bankruptcy court’s ruling are grounded in a perception that the Debtor has exhibited “headstrong persistence in filing a plan that utterly disregards a judicial finding of value under § 506(a) ...” See Majority Opinion at 898. I think this misses the Debtor’s point. The Debtor was not attempting to value the real estate differently. It was asserting a new legal theory for a different treatment of Wells Fargo’s claim. The bankruptcy court had not previously ruled on the significance of Wells Fargo’s failure to file a proof of claim.
It is well established that a finding of “cause” under § 362(d)(1) is reviewed under the abuse of discretion standard. Franklin Sav. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1023 (10th Cir.1994). This is a very difficult, but not impossible, hurdle to surmount. A court abuses its discretion when it makes an error of law. Koon v. United States, 518 U.S. 81, 100, 116 S.Ct. 2035, 135 L.Ed.2d 392 (1996). An appellate court may also assign abuse of discretion when it has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice. Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir.1994). This case takes me to the outer bounds of what is permissible choice.
The bankruptcy court’s ruling rests on only two findings: (1) the amended plan had been proposed in bad faith; and (2) 18 months had elapsed since the filing of the case. Lack of prospects for reorganization is expressly included as grounds for stay relief in § 362(d)(2)(B). But before stay relief may be granted, this subsection requires the additional finding of a lack of equity in the property. 11 U.S.C. § 362(d)(2)(A). If “cause” under § 362(d)(1) can be read so broadly as to allow relief when only one of the two required elements of § 362(d)(2) is present, then § 362(d)(2) becomes superfluous. I recognize that “cause” is an amorphous doctrine. But it must have some limits.
Is an unconfirmable plan, coupled with an 18-month delay, grounds for “cause” to lift the stay? Is the delay by itself sufficient “cause”? Prior to BAPCPA, § 1112(b)(2), (3) provided that “inability to effectuate a plan” and “unreasonable delay by debtor that is prejudicial to creditors” were grounds for “cause” to dismiss or convert a Chapter 11 case. It may seem logical to suppose that what is cause under one statute should be cause under the other, especially when the remedy of stay relief appears to be less draconian than conversion or dismissal. But it is only less draconian when viewed from a debtor’s *903perspective. These two grounds affect all creditors, not only a secured creditor. Granting stay relief instead of conversion or dismissal favors one creditor at the expense of the other creditors. This might be why Congress had expressly provided that these were grounds for “cause” to convert or dismiss.
Nevertheless, courts hearing appeals of stay relief motions have ruled that lack of reorganization prospects coupled with delay may be grounds for “cause.” See Marine Midland Bank v. Breeden (In re Bennett Funding Group, Inc.), 255 B.R. 616, 638-39 (N.D.N.Y.2000) (recognizing that lack of necessity for reorganization alone was insufficient, but when coupled with delay it satisfied “cause”). The bankruptcy court’s decision was driven, I believe, by a misunderstanding of the Debtor’s intentions. However, I can locate no precedent to assign abuse of discretion to the grant of a lift of stay motion on the grounds of delay coupled with lack of progress in reorganization. Thus, with great reluctance, I concur in the result.

. For example, the Majority observes that there is evidence of bad faith in part based on the Debtor’s threats to devalue the property. See Majority Opinion at 898. The bankruptcy court received no evidence at the stay hearing to support such a finding.