Opinion
Case No. 8:16-bk-07215-RCT
10-23-2018
In re: Vickie Joann Roseman, Debtor.
Chapter 13 ORDER SUSTAINING DEBTOR'S OBJECTION TO CLAIM NO. 7-1 OF GRAND OAKS MASTER ASSOCIATION , INC.
In this "chapter 20" case, the court must decide what becomes of a secured creditor's claim in the chapter 13 case when the lien is successfully stripped pursuant to 11 U.S.C. §§ 506(a) and 1322(b)(2) and when, in the prior chapter 7 case, the debtor discharged her personal liability for the underlying debt. Does the once-secured creditor have an allowed, unsecured claim payable through the chapter 13 plan? Courts are divided on this question. After reviewing the applicable law, this court joins those who find that the creditor does not hold an allowed, unsecured claim.
A "chapter 20" case is where a debtor, after having obtained a chapter 7 discharge, files a chapter 13 case to address non-dischargeable priority or secured debts through a plan of adjustment, notwithstanding that the debtor is not eligible for a second discharge. E.g. In re Akram, 259 B.R. 371, 371 and n.1 (Bankr. C.D. Cal. 2001).
Statutory references are to 11 U.S.C. §§ 101-1532 ("Code" or "Bankruptcy Code"), unless otherwise stated.
Introduction
The facts are undisputed. Debtor Vickie Joann Roseman filed this chapter 13 case on August 22, 2016. Approximately 18 months earlier, on February 3, 2015, Ms. Roseman filed a chapter 7 case and received a discharge. Under § 1328(f)(1), Ms. Roseman is therefore not eligible to receive a discharge in her chapter 13 case.
Doc. 1.
Case No. 8:15-bk-01075-MGW, Docs. 1 and 13.
Doc. 9.
Ms. Roseman owns her home at 25081 Bloomsbury Court in Land O' Lakes, Florida (the "Property"), which is located within a community managed by Grand Oaks Master Association, Inc. ("Grand Oaks"). Grand Oaks obtained a final judgment against Ms. Roseman and her Property on December 23, 2014. Ms. Roseman duly scheduled Grand Oaks and the debt in her chapter 7 case, which she filed shortly after entry of the judgment. The debt was not reaffirmed.
Doc. 1.
Claim No. 7-1 Ex. B.
See Case No. 8:15-bk-01075-MGW.
In this chapter 13 case, Ms. Roseman again duly scheduled Grand Oaks. Ms. Roseman's schedule D splits the debt owed to Grand Oaks into "Pre Chapter 7" and "Post Chapter 7" amounts. Consistent with schedule D, Ms. Roseman's proposed chapter 13 plan provides for Grand Oaks as follows: (a) direct payment of ongoing assessments, (b) curing of the "Post Chapter 7" arrears paid at 18%, and (c) stripping of Grand Oaks's lien.
Doc. 1 Sch. D.
Doc. 30. Although not mentioned in the papers, the court notes that Ms. Roseman's amended chapter 13 plan proposes to pay allowed unsecured claims "$5,000 - 100%". Although subject to a slight adjustment based on the claims filed, the proposal to pay unsecureds in full could be possible only if the "Pre Chapter 7" amounts due Grand Oaks are not considered.
Grand Oaks filed a fully secured claim in this case in the amount of $25,344.43, payable at 18% interest. (Claim No. 7-1). In its claim summary, Grand Oaks acknowledges the prior chapter 7 case and, like Ms. Roseman, splits its claim into pre- and post-chapter 7 amounts. Grand Oaks asserts that although it holds an in-rem claim in the full amount of $25,344.43, it recognizes that Ms. Roseman is personally liable only for the post-chapter 7 amounts, which Grand Oaks calculates at $6,711.15. Debtor does not dispute her post-chapter 7 liability.
As contemplated by her chapter 13 plan, on March 19, 2018, Ms. Roseman filed a motion to determine the secured status of Grand Oaks and to strip its lien. The motion was served in accord with the negative notice provisions of Local Rule 2002-4. After Grand Oaks failed to respond timely, the court entered an order granting Ms. Roseman's motion on May 1 (the "Lien Strip Order"). The order provides, in relevant part:
Doc. 59.
Doc. 65.
If Creditor timely filed a proof a claim, the claim shall be treated as an unsecured claim in the chapter 13 case. If Creditor has not timely filed a proof of claim, the Motion is not deemed an informal proof of claim except for the purpose of initiating the Debtor's ability to request relief pursuant to 11 U.S.C. § 506(a).
About a week after entry of the Lien Strip Order, Ms. Roseman filed her objection to Grand Oaks's proof of claim (the "Claim Objection") (Doc. 68), which is presently before the court. She objects to Grand Oaks's claim to the extent it seeks to recover the "Pre Chapter 7" amounts, noting that the recent lien strip and her chapter 7 discharge, taken together, render those amounts no longer owed by her or, by extension, the chapter 13 estate.
Grand Oaks makes two points in opposition to the Claim Objection. (Doc. 69). First, it asserts that paragraph 2 of the Lien Strip Order (quoted above) "explicitly establish[es]" that its claim is an allowed unsecured claim in the case. Second, because Grand Oaks held an in rem claim against the Property as of the petition date, the claim "is entitled to be treated in full as an unsecured claim against the estate." Id. at ¶¶ 6-7.
Following a preliminary hearing on the Claim Objection, the parties filed supplemental briefs.
Docs. 75 and 76.
Arguments of the Parties
Ms. Roseman argues that to allow Grand Oaks an unsecured claim for the "Pre Chapter 7" amounts impermissibly resurrects her personally liability for the debt and converts that debt, which is nonrecourse by virtue of her chapter 7 discharge, back into recourse debt. She notes that Congress expressly provided for such a result in chapter 11 cases, see § 1111(b), but elected not to extend this result into chapter 13. Ms. Roseman asserts that § 502(b)(1) is clear that a claim that is unenforceable against the debtor and her property, like Grand Oaks's, may not be an allowed claim. Accordingly, she asks the court to reduce Grand Oaks's claim to $6,711.15, i.e. the undisputed "Post Chapter 7" amounts.
Grand Oaks argues that its claim was valid as of the filing of the chapter 13 petition and therefore is an allowed claim irrespective of Ms. Roseman's chapter 7 discharge. Grand Oaks adds that the Lien Strip Order "explicitly provides" that its claim is allowed and must be treated as an unsecured claim, payable in full. And it notes that Ms. Roseman "agrees" with this result based upon the ad damnum clause in her motion that resulted in entry of the Lien Strip Order.
Discussion
Courts do not agree on how to treat the claim of creditor holding an in rem claim when the lien supporting that claim is stripped and the debtor's personal liability for the underlying debt was discharged. Compare In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 2014) (concluding the creditor did not hold an allowed, unsecured claim), and In re Sweitzer, 476 B.R. 468 (Bankr. D. Md. 2012) (same), with In re Jennings, 454 B.R. 252 (Bankr. N.D. Ga. 2011) (stating the creditor's claim must be treated as an allowed, unsecured claim under the chapter 13 plan), and In re Akram, 259 B.R. 371 (Bankr. C.D. Cal. 2001) (refusing to value the creditors' "stripped" claims at zero for purposes of the chapter 13 plan). The court finds the analyses in In re Rosa and In re Sweitzer well-reasoned and persuasive.
As an initial matter, the court can quickly dispense with Grand Oaks's contention that the Lien Strip Order is dispositive of the issue. First, the order does not expressly provide that Grand Oaks has an "allowed" unsecured claim. The order states simply that if Grand Oaks timely filed a claim, its claim "shall be treated as an unsecured claim". The word "allowed" is not used, which is consistent with the purpose of § 506(a). See In re Rosa, 521 B.R. at 339-40 (noting § 506(a) does not address the merits or the allowance of the resultant unsecured claim).
See also In re Sweitzer, 476 B.R. at 470-71 (noting the order avoiding the mortgagee's lien did not contain the language "shall be allowed as a general unsecured claim", which although the standard language provided in the court's local form had been omitted, seemingly intentionally, by debtor's counsel).
Second, Grand Oaks's claim was not timely filed. This point is not mentioned by the parties. The claims bar date set in this case was December 27, 2016. Grand Oaks's filed its claim March 2, 2017, 65 days later. Accordingly, even if the language in the Lien Strip Order upon which its argument rests were dispositive, Grand Oaks could not benefit as it failed to satisfy the express condition precedent.
Doc. 6.
Turning to the merits of the Claim Objection, the court agrees with Ms. Roseman that, to adopt Grand Oaks's position, would revive her personal liability for the discharged debt and convert the debt from nonrecourse into recourse. Grand Oaks is correct that as of the date of the chapter 13 petition, it held a valid in rem claim. But that is not the end of the analysis. Ms. Roseman's motion under § 506 and the resulting Lien Strip Order have terminated Grand Oaks's lien rights, albeit provisionally. And "nothing in the Bankruptcy Code mandates that [the creditor] has an allowed, unsecured claim as a result." In re Rosa, 521 B.R. at 339 (emphasis in original).
The definition of a claim under § 101(5) is very broad, but merely having a "claim" is not the same as having an "allowed claim". The allowance of claims is governed by § 502. Here, Grand Oaks's "claim," once stripped of its lien rights, is not enforceable against either Ms. Roseman or the Property. Thus, it must be disallowed under § 502(b)(1). See In re Rosa, 521 B.R. at 340-42; In re Sweitzer, 476 B.R. at 471-73.
Grand Oaks's argument as to the import of the phrase "as of the date of the filing of the petition" in the introduction of § 502(b) is of no moment. The phrase references merely to the time at which the court is to value "in lawful currency" any claim to which an objection is made. And contrary to suggestion, the analysis under § 502 does not come before applying § 506(a). See In re Dang, 467 B.R. 227, 234 (Bankr. M.D. Fla. 2012) (citing In re Jennings, 454 B.R. at 255).
Further, as Ms. Roseman points out, Congress expressly provided for the conversion of a nonrecourse obligation into a recourse obligation in chapter 11 cases via § 1111(b), but declined to so provide in chapter 13. Knowing how to do so, Congress' silence in chapter 13 cannot simply be ignored. See In re Rosa, 521 B.R. at 342; In re Sweitzer, 476 B.R. at 472.
In support of its position, Grand Oaks directs the court to In re Dang, In re Jennings, and In re Akram. Although In re Dang and In re Jennings discuss the issue, they do so without detailed analysis. This is understandable as both courts were confronted not with an objection to claim but objections to confirmation of plan, and further were focused on the preliminary question of whether a junior lien could even be stripped off in a so-called "chapter 20." See In re Dang, 467 B.R. 227; In re Jennings, 454 B.R. 252.
In re Dang, 467 B.R. 227; In re Jennings, 454 B.R. 252; and In re Akram, 259 B.R. 371.
See In re Dang, 467 B.R. at 237-38; In re Jennings, 454 B.R. at 258-59.
At the time Dang and Jennings were decided, the question of whether a wholly unsecured junior lien could be stripped off in a "chapter 20" case was a hot topic, dividing the bankruptcy courts within this circuit and, for that matter, across the nation. See Wells Fargo Bank, N.A. v. Scantling (In re Scantling), 754 F.3d 1323, 1328-29 (11th Cir. 2014) (gathering cases). But in the summer of 2014, the Eleventh Circuit held in Scantling that the striping off a wholly unsecured junior lien in a "chapter 20" was permissible. The Scantling court, reaffirming its earlier holding in Tanner, stated that the stripping of a "worthless lien" was accomplished by a two-part procedure: a valuation under § 506(a) which determines whether a creditor holds a secured claim followed by a modification of the creditor's "rights" under § 1322(b)(2). Under this analysis, the court concluded that the debtor's ineligibility for a discharge in the chapter 13 case was "irrelevant to a strip off in a Chapter 20 case." Id. at 1329-30. The ability of a "chapter 20" debtor to strip off a wholly unsecured lien is now the rule in this circuit and is steadily becoming the majority rule nationwide. But then, the question remains—what becomes of the creditor's claim once its lien is rendered valueless and its rights are modified by stripping the lien from its collateral?
See also HSBC Bank USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d 477, 491-92 (9th Cir. 2015) (noting courts within the Ninth Circuit were split on whether "chapter 20" debtors may strip off lien obligations).
Tanner v. FirstPlus Fin. (In re Tanner), 217 F.3d 1357 (11th Cir. 2000).
See, e.g., In re Blendheim, 803 F.3d at 497 (joining the Eleventh and Fourth Circuits); Curwen v. Whiton (In re Curwen), 557 B.R. 39, 43-46 (D. Conn. 2016).
In re Akram supports Grand Oaks's position. There, in 2001, the court declined to "reach a result more damaging to creditors" than that already permitted by lien stripping in the first instance. The court refused to permit the debtors to value the creditors' claims at zero, thereby "depriving" them of a general unsecured claim in the case. In re Akram, 259 B.R. at 374.
But in In re Akram too, the procedural posture and the analysis are distinguishable. The court did not consider § 502. Instead, the court was concerned with a possible result that it perceived undermined the Supreme Court's holding in Dewsnup v. Timm, which barred lien stripping in chapter 7.
502 U.S. 410 (1992).
For the same reasons articulated in In re Rosa, this court also respectfully disagrees with the Akram court's analysis. In re Rosa, 521 B.R. at 340-42. The Akram court does not articulate a clear basis for providing that the creditors, once stripped of their liens, held allowed unsecured claims. And as also echoed by other courts, concerns over upholding Dewsnup are "better suited for a bad faith objection [to confirmation of plan]." Id. at 342 (citing cases); cf. In re Dang, 467 B.R. at 236-37 ("[A]n issue may arise as to whether the debtor is attempting to avoid the ruling . . . in [Dewsnup]. . . . The debtor's intent in filing the later case and seeking to strip the lien may impact on the good faith analysis under § 1325(a)(3) and § 1325(a)(7).").
For these reasons, it is ORDERED:
1. The Claim Objection (Doc. 68) is SUSTAINED, as provided below.
2. Claim No. 7-1 of Grand Oaks Master Association, Inc. is DISALLOWED, in part, as to any "Pre Chapter 7" amounts. Grand Oaks shall receive no distribution as to these amounts.
3. Grand Oaks's claim shall be reduced in amount to $6,711.15, i.e. the undisputed "Post Chapter 7" amounts, and shall be deemed an allowed unsecured claim payable through Debtor's chapter 13 plan.
11 U.S.C. § 502(a). --------
4. Consistent with the Lien Strip Order, this Order does not prohibit Grand Oaks from asserting, at any time prior to Debtor's successful completion of the chapter 13 plan, any rights it may have as a defendant in any foreclosure proceeding brought by a senior mortgagee, including the right to claim excess proceeds from any foreclosure sale.
ORDERED.
Dated: October 23, 2018
/s/_________
Roberta A. Colton
United States Bankruptcy Judge Attorney Robert DeLeon is directed to serve a copy of this Order on interested parties that are not served by CM/ECF and to file proof of service within 3 days of it entry.