Gwendolyn Wash. v. Real Time Resolution, Inc. (In Re Washington)

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.
7We 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