In re Washington, Case No.: 6:17-bk-15102-MH

587 B.R. 356

IN RE: Gwendolyn WASHINGTON

Case No.: 6:17-bk-15102-MH

United States Bankruptcy Court, C.D. California, Riverside Division.

Signed July 23, 2018

Julie J. Villalobos, Oaktree Law, Cerritos, CA, for Debtor.

MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISALLOW CLAIM

Mark Houle, United States Bankruptcy Judge

I. BACKGROUND

On June 19, 2017, Gwendolyn Washington ("Debtor") filed a Chapter 13 voluntary petition. Previously, on August 1, 2012, Debtor obtained a discharge in a Chapter 7 proceeding. On July 10, 2017, Debtor filed a motion to avoid lien with "Option One Mortgage Corp serviced by Real Time Resolutions Inc." This lien predated the petition date of Debtor's Chapter 7 case. On August 8, 2017, the Court entered an order granting the motion. Section 4b(4) of the form order 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." Section 4b(5) of the form order states:

The junior lienholder's claim on the deed of trust, mortgage or lien shall be allowed as a non-priority general unsecured claim in the amount per the filed Proof of Claim. The junior lienholder is not required to, but may file an amended Proof of Claim listing its claim as an unsecured claim to be paid in accordance it the Debtor's chapter 13 plan. If an amended claim is not filed, the trustee may treat any claim on the debt (secured or unsecured) filed by the junior lienholder as unsecured upon entry of this order.

On August 17, 2017, Debtor's Chapter 13 case was confirmed. On August 29, 2017, Real Time Resolutions, Inc. ("Creditor") filed a secured claim in the amount of $307,049.79, including arrears in the amount of $177,235.84 ("Claim 5"). On December 15, 2017, Debtor filed an objection to Claim 5. The basis for Debtor's objection is that her personal liability on Claim 5 was discharged in a previous bankruptcy case, and the Court's order avoiding the lien of Creditor means that the claim is no longer secured. On January 24, 2018, Creditor modified Claim 5, identifying the entirety of Claim 5 as unsecured.

II. APPLICABLE LAW :

A. Claim Objection

Pursuant to 11 U.S.C. § 502(a), a proof of claim is deemed allowed unless a party in interest objects. Absent an objection, a proof of claim constitutes prima facie evidence of the validity and amount of the claim under Federal Rule of Bankruptcy Procedure ("FRBP") 3001(f). See Lundell v. Anchor Constr. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000). When a party files an objection to a proof of claim, that filing "creates a dispute which is a contested matter" within the meaning of FRBP 9014 and the Court must resolve the matter after notice and opportunity for hearing upon a motion for relief. Id.

When a creditor has filed a proof of claim that complies with the rules (thereby giving rise to the presumption of validity), the burden shifts to the objecting party who must "present evidence to overcome the prima facie case." In re Medina , 205 B.R. 216, 222 (9th Cir. BAP 1996). To defeat the claim, the objecting party must provide sufficient evidence and "show facts tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves." Lundell , 223 F.3d at 1039 (quoting In re Holm , 931 F.2d 620, 623 (9th Cir. 1991) ). "The objector must produce evidence, which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." Lundell , 223 F.3d at 1040 (quoting In re Allegheny Int'l, Inc. , 954 F.2d 167, 173-74 (3d Cir. 1992) ). If the objecting party produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts back to the claimant to prove the validity of the claim by a preponderance of the evidence. See In re Consol. Pioneer Mort , 178 B.R. 222, 226 (9th Cir. BAP 1995), aff'd , 91 F.3d 151 (9th Cir. 1996) (quoting Allegheny Int'l , 954 F.2d at 173-74 ). The ultimate burden of persuasion remains at all times on the claimant. See Lundell , 223 F.3d at 1039 ; see also Holm , 931 F.2d at 623.

B. Summary of Analysis

The avoidance of a consensual lien in a Chapter 13 case is effectuated by a two-step process. First, the Court engages in a § 506(a) valuation, bifurcating the claim into secured and unsecured portions. Then the Court applies § 1322(b)(2). If the § 506(a) valuation results in a "secured claim[s], other than a claim secured only by a security interest in real property that is the debtor's principal residence" or an unsecured claim, then the plan may modify the rights of the creditor under § 1322(b)(2), avoiding the lien. This is the result because the Supreme Court has concluded that after a § 506(a) valuation, a wholly underwater junior lien is to be treated as an unsecured claim, and unsecured claims are subject to modification under § 1322(b)(2).

If the debtor's personal liability on the underlying debt has been discharged in a previous bankruptcy case, however, the issue is more complex. Because there is no in personam liability on the underlying debt, it could be argued that there is no unsecured claim after the § 506(a) valuation. If there is no unsecured claim, however, the debtor would be ineligible to use § 1322(b)(2) to avoid the lien. Therefore, lien avoidance is only statutorily permissible if § 506(a) is interpreted as "creating" an unsecured claim for the purposes of the Chapter 13 bankruptcy. As outlined below, this result is logically necessary, and case law, this district's mandatory forms, and policy considerations all weigh in favor of the result.

III. ANALYSIS :

The sole basis for Debtor's objection to Claim 5 is that Claim 5 was the subject of (1) a prior discharge and (2) a lien avoidance order. To understand the legal argument made, a brief history of lien avoidance is necessary.¹

Prior to 1992, lien avoidance was available to debtors in both Chapter 7 and 13 proceedings, and for junior liens that were both wholly underwater and partially underwater. See e.g. , Gaglia v. First Fed. Savs. & Loan Ass'n , 889 F.2d 1304 (3rd Cir. 1989) (Chapter 7 debtors could strip down partially underwater junior lien). In 1992, however, the Supreme Court decided Dewsnup v. Timm , 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which held Chapter 7 debtors could not strip down a partially unsecured lien to the value of the collateral. In reaching conclusion, the Supreme Court noted the definition of secured claim in 11 U.S.C. § 506(a)(1), which states as follows:

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.

The Supreme Court also noted the language of 11 U.S.C. § 506(d), which states, in relevant part: "To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void." Prior to Dewsnup , courts have interpreted § 506(a)(1) and § 506(d), when read in conjunction, to establish a method by which debtors could void a lien to the extent such a lien was wholly or partially unsecured. The Supreme Court, however, rejected that reading, deferring to the "pre-Code rule that liens pass through bankruptcy unaffected." Id. at 778. In rejecting such a reading, the Supreme Court foreclosed the possibility of using § 506 as an independent mechanism to avoid wholly or partially underwater liens. Nevertheless, the Eleventh Circuit continued to allow Chapter 7 debtors to strip off wholly underwater liens, noting that the Supreme Court in Dewsnup had decided on the facts of a partially underwater lien. See, e.g. , In re McNeal , 735 F.3d 1263 (11th Cir. 2012).

In 2015, however, the Supreme Court returned to the issue, and rejected the Eleventh Circuit's approach, holding that Chapter 7 debtors could not avoid wholly underwater liens through the operation of § 506. While it is not exactly clear how § 506 could be applied differently depending on whether the lien is wholly or partially unsecured, the Supreme Court concisely reasserted that " Dewsnup defined the term ‘secured claim’ in § 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.... Dewsnup 's construction of ‘secured claim’ resolves the question presented here."

Nevertheless, Chapter 13 debtors have a different mechanism by which they can avoid liens which are partially or wholly underwater: 11 U.S.C. § 1322(b)(2), which states:

(b) Subject to subsections (a) and (c) of this section, the plan may –

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims

Prior to 1993, bankruptcy courts had allowed Chapter 13 debtors to use the above provision to avoid both wholly and partially underwater liens. In 1993, however, the Supreme Court decided Nobelman v. Am. Savs. Bank , 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), which limited Chapter 13 debtors' ability to use § 1322(b)(2) to avoid liens to only those circumstances where the junior lien was wholly underwater. Id. at 332, 113 S.Ct. 2106 ("In other words, to give effect to § 506(a)...