In re Howell

In Re THEODORE A. HOWELL, JR. MONA L. HOWELL Debtors

Case No. 15-14095

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF OHIO WESTERN DIVISION

April 14, 2017

Chapter 13

Judge Hopkins

ORDER OVERRULING CLAIM OBJECTIONS

Before the Court are two claim objections ("Objections")(Docs. 67 & 68) filed by the Debtors. The Objections seek the disallowance of two claims ("Claims")(Claim Nos. 12 & 13) filed by WesBanco Bank, Inc. ("WesBanco"). WesBanco opposes the Objections.

ISSUE

The Objections raise a prickly issue in chapter 20 jurisprudence: whether the in rem claim that survives a chapter 7 discharge must be paid as an allowed unsecured claim in a subsequent chapter 13 when the claim does not constitute a secured claim due to insufficient equity in the collateral. This Court believes that it must.

FACTS

The Claims are secured by junior mortgages against the Debtors' residence. The Debtors discharged their personal liability on the Claims in a chapter 7 case filed in 2014. Thirteen months later, the Debtors filed this chapter 13 case. The Debtors' confirmed plan provides:

Claims of WesBanco for junior mortgages to be bifurcated into secured claims in accordance with 11 U.S.C. 506, valued at zero, and unsecured claims in accordance with 11 U.S.C. 1322(b)(2). WesBanco to release its liens upon completion of plan payments.

Consistent with the plan, the parties entered into an agreed order providing that the junior mortgages "are wholly unsecured and void pursuant to 11 U.S.C. §§ 506, 1322(b)(2), 1325(a), and 1327(c) . . . unless [this case] is dismissed or converted[.]" See Doc. 54. The agreed order further clarified that the junior mortgages "are not permanently avoided until plan completion." Id. Lastly, the agreed order provided that "any claim filed upon these mortgages shall be scheduled for payment as unsecured claims, subject to claims objections." Id.

Subsequent to the entry of the agreed order, WesBanco filed its Claims. The Debtors objected, seeking the disallowance of the Claims as secured or unsecured.

THE PARTIES' POSITIONS

The Debtors concede that WesBanco possesses a "claim" as defined by 11 U.S.C. § 101(5).¹ The question is whether the Claims are "allowed" under 11 U.S.C. § 502(b). The Debtors argue that the Claims cannot be allowed because § 502(b)(1) precludes the allowance of claims that are "unenforceable against the debtor and property of the debtor under . . . applicable law[.]" According to the Debtors, the Claims are unenforceable against: (1) the Debtors because their in personam liability was discharged in their chapter 7 case; and (2) property of the Debtors because the Debtors avoided the junior mortgages in this case.

WesBanco concedes that the Debtors' personal liability on the Claims was discharged in their chapter 7 case. However, WesBanco argues that the Claims are currently enforceable against property of the Debtors because its junior mortgages are not permanently avoided until the Debtors complete their chapter 13 plan payments.

ANALYSIS

Courts are divided on this issue. Compare In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 2014)(disallowing unsecured claim); In re Sweitzer, 476 B.R. 468 (Bankr. D. Md. 2012)(disallowing unsecured claim); In re Scantling, 465 B.R. 671 (Bankr. M.D. Fla. 2012)(disallowing unsecured claim); with In re Gounder, 266 B.R. 879 (Bankr. E.D. Cal.2001)(allowing unsecured claim); In re Akram, 259 B.R. 371 (Bankr. C.D. Cal. 2001)(allowing unsecured claim). For reasons not raised in the case law, this Court believes that WesBanco holds allowed unsecured claims.

1. Invoking § 506(a) Necessitates an Allowed Claim

The Debtors avoided WesBanco's junior mortgages by invoking § 506(a) and its interpretation by In re Lane, 280 F.3d 663 (6^th Cir. 2001). The express language of § 506(a)(1) necessitates a pre-existing "allowed claim." The introductory clause of the statute makes clear that the statute applies to "[a]n allowed claim of a creditor[.]"² Case law and commentators agree that an allowed claim is a prerequisite to invoking § 506(a). See In re Linkous, 141 B.R. 890, 895-96 (W.D. Va. 1992)("Allowance as a prerequisite to invoking § 506(a) is also widely recognized.")(collecting cases), aff'd, 990 F.2d 160 (4^th Cir. 1993); 4 Collier on Bankruptcy ¶ 506.03[2] (Alan N. Resnick & Henry J. Sommer eds. 2016)("the question of allowance is a necessary . . . prerequisite to establishing the existence of a 'secured claim' for purposes of section 506(a)."); Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 55 (D. Michael Lynn et al. eds., 2016)(describing an "allowed claim" as a threshold condition for employment of § 506(a)).

Therefore, by invoking § 506(a) to avoid the junior mortgages pursuant to the confirmed plan, the Debtors have implicitly conceded that WesBanco possesses an allowed claim. See 11 U.S.C. § 1327(a)("The provisions of a confirmed plan bind the debtor[.]"); United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 274 (2010)(terms of confirmed plan are binding).

The Debtors cannot have their cake and eat it too. They want to avoid the junior mortgages under § 506(a) and then circle back to § 502(b)(1) and argue that the remaining claim is unenforceable due to the lien avoidance. The Bankruptcy Code does not permit this order of analysis. It requires a § 502(b) analysis before undertaking a § 506(a) analysis. If allowance of WesBanco's claim is addressed prior to a § 506(a) analysis and lien avoidance, then WesBanco's claim must be allowed because, prior to a § 506(a) analysis, the claim is "enforceable against . . . property of the debtor[.]" See § 502(b)(1).

2. Timing of Lien Avoidance

Alternatively, In re Cain, 513 B.R. 316 (B.A.P. 6^th Cir. 2014) suggests that the junior mortgages are not avoided until plan completion. If so, they remain "enforceable against. . . property of the debtor" until plan completion.

Cain addressed the question of whether a chapter 20 debtor can avoid a wholly unsecured mortgage if the debtor is not eligible for a discharge. Answering in the affirmative, Cain followed a line of decisions holding that a wholly unsecured mortgage in a chapter 20 case is avoided upon plan completion instead of discharge. Cain, 513 B.R. at 321 ("These courts contend that the mechanism that voids the lien is plan completion."). This construction reconciles the timing of the lien avoidance with 11 U.S.C. § 348(f)(1)(C)(i)(upon conversion from a chapter 13 case "the claim of any creditor holding security as of the date of the filing of the petition shall continue to be secured by that security unless the full amount of such claim determined under applicable nonbankruptcy law has been paid in full as of the date of conversion, notwithstanding any valuation or determination of the amount of an allowed secured claim made for the purposes of the case under chapter 13").

CONCLUSION

For the foregoing reasons, the Objections are OVERRULED. Claim No. 12 and Claim No. 13 filed by WesBanco are ALLOWED claims.³

Copies to:

Default List

This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.

IT IS SO ORDERED.

/s/_________

Jeffery P. Hopkins

United States Bankruptcy Judge

Dated: April 14, 2017

###

1. The United States Supreme Court held the same in Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)(following a chapter 7 discharge, mortgagee's surviving in rem rights constitute a "claim" in a subsequent chapter 13 case).

2. Section 506(a)(1) provides: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest."

3. Counsel for the Debtors filed a First Amended Application For Attorney Fees Pre-Confirmation ("Application")(Doc. 70)....