Mission Hen LLC v. Lee (In re Lee)

655 B.R. 340

IN RE: Jason M. LEE and Janice Chen, Debtors.

Mission Hen LLC, Appellant, v. Jason M. Lee; Janice Chen; Amrane Cohen, Chapter 13 Trustee, Appellees.

BAP No. CC-22-1250-FLC

Bk. No. 8:22-bk-10127-MH

United States Bankruptcy Appellate Panel of the Ninth Circuit

November 13, 2023

Appeal from the United States Bankruptcy Court for the Central District of California Mark D. Houle, Bankruptcy Judge, Presiding

Sanford P. Shatz of McGlinchey Stafford, argued on behalf of appellant.

Michael Smith of Shioda, Langley & Chang LLP, argued on behalf of appellees Jason M. Lee and Janice Chen.

Before: FARIS, LAFFERTY, and CORBIT, Bankruptcy Judges.

OPINION

FARIS, Bankruptcy Judge:

INTRODUCTION

Debtors Jason M. Lee and Janice Chen proposed a chapter 13¹ plan that would bifurcate and cram down the claim of Mission Hen, LLC that is secured by a junior lien on the Debtors' residence. The bankruptcy court confirmed the plan over Mission Hen's objections.

Mission Hen appeals, arguing that the plan violated the anti-modification provision of § 1322(b)(2) by bifurcating its claim into secured and unsecured portions. The Debtors argue that § 1322(c)(2) creates an exception to the general rule against modification that applies to claims like Mission Hen's that mature during the plan term. Mission Hen also argues that the Debtors were ineligible for chapter 13 relief and that the plan was not feasible.

Mission Hen does not establish reversible error. We AFFIRM.

We publish to address the effect of § 1322(c)(2) on secured debts that mature during the plan term, which appears to be an issue of first impression at the appellate level in this circuit, and the calculation of a chapter 13 debtor's eligibility given the procedural history of the case.

FACTS

A. Prepetition events

In December 2006, Mr. Lee executed a promissory note in the sum of $846,359 (the "First Mortgage") in favor of IndyMac Bank, F.S.B. The note was secured by a deed of trust encumbering the residence of Mr. Lee and Ms. Chen (the "Property"). IndyMac Bank transferred its beneficial interest to Deutsche Bank National Trust Company.

Around the same time, Mr. Lee took out a home equity line of credit (the "HELOC") with IndyMac Bank, which was secured by a second deed of trust on the Property. The original credit limit was $211,589, and the maturity date was January 15, 2027. Mission Hen is the current holder of the HELOC and deed of trust.

Beginning in 2020, Mr. Lee defaulted on both the First Mortgage and the HELOC. Both lenders recorded notices of default. Mission Hen also recorded a notice of trustee's sale.

B. The bankruptcy petition

On January 26, 2022, Mr. Lee and Ms. Chen jointly filed a chapter 13 petition and schedules. In their Schedule A/B, they scheduled the Property and stated that its current value was $1.045 million. They did not claim any exemption in the Property.

The Debtors scheduled claims secured by the Property. They identified the First Mortgage as a $952,510.26 secured claim and scheduled the HELOC as a "disputed" secured claim of $465,670.41, of which $373,180.67 was unsecured (meaning that $92,489.74 was secured). The Debtors also scheduled two community association claims secured by the Property ($21,030.39 and $11,060.08), both of which they indicated were unsecured. Additionally, they scheduled $83,185.04 of unsecured nonpriority claims.

The Debtors reported that their combined monthly income was $10,010.95, which included a $1,200 monthly contribution from Ms. Chen's parents. After accounting for their monthly expenses, their net monthly income was $2,197.74.

C. The proposed chapter 13 plan

The Debtors' proposed chapter 13 plan provided that the Debtors would cure and maintain payments on the First Mortgage. The plan would bifurcate Mission Hen's second-position claim into secured and unsecured portions and pay only the secured portion at five percent interest. The plan did not include payment of any other debt.

The Debtors indicated that they would file a motion to value the Property and avoid Mission Hen's lien. They also intended to avoid the community association liens.

D. The valuation motion

Mr. Lee filed a motion for an order determining the value of the Property ("Valuation Motion"). He sought the value determination because he intended to bifurcate Mission Hen's claim under § 506(a), treating the portion of the debt covered by the value of the Property as a secured claim and the remainder as an unsecured claim. He asserted that the Property was worth $1.045 million. This meant that the First Mortgage was fully secured at $952,510.26; the secured portion of the HELOC was $92,489.80; and the unsecured portion was $364,180.61.

E. Mission Hen's objections to the chapter 13 plan and Valuation Motion

Mission Hen objected to the proposed plan. First, it asserted that the fair market value of the Property was significantly higher and that its claim was fully secured. Second, it argued that the plan failed to properly calculate the interest due on its claim. Third, it argued that the plan was not feasible because the Debtors would not be able to fund the plan. Finally, it contended that the Debtors had not established that all of the expenses in their schedules were "reasonably necessary."

Mission Hen similarly opposed the Valuation Motion. It contended that the Property's true value was $1.36 million.

The bankruptcy court held an evidentiary hearing and issued an order ("Valuation Order") finding that the value of the Property on the petition date was $1.225 million. Accordingly, it ruled that the secured portion of Mission Hen's claim was $265,473.06 and the unsecured portion was $204,030.50.

F. First amended plan

The Debtors filed a first amended plan. Based on the higher value of the Property fixed by the court, they increased their plan payments to pay the secured portion of the HELOC in full. Because their income had not increased, they accomplished the higher plan payment by increasing Ms. Chen's parents' monthly contribution from $1,200 to $4,900.

Ms. Chen's mother, Linda Chen, filed a declaration in support of the amended plan. She said that she and her husband had been residing at the Property with the Debtors since September 2021 and paying the Debtors $1,200 per month in rent. In January 2022, the sale of their home closed, and they netted the $910,000 sale price minus transaction costs. (She attached a copy of the closing statement to her declaration, although the declaration did not directly authenticate the document.) As a result, she stated that they were able and willing to increase their monthly contribution to $4,900. She confirmed that she was committed to making the contribution for the five-year plan term and did "not foresee any financial difficulty continuing to do so." She said that she had the ability to make the monthly contribution and did not have any other housing expense.

G. Second amended plan

Mission Hen objected to the amended plan, so the Debtors filed a second amended plan in response. Mission Hen objected to the second amended plan, arguing (for the first time) that the Debtors were ineligible to proceed as chapter 13 debtors because they exceeded the unsecured debt limits. It calculated that the unsecured claims on the claims register ($195,287.72), the unsecured portion of its HELOC claim ($204,030.50), and the two community association liens ($32,679.31 and $10,281.66) totaled $442,279.19, which exceeded the statutory limit of $419,275 set forth in § 109(e). It also argued that the Debtors failed to use the appropriate interest rate, that the plan was unfeasible because the Debtors failed to substantiate Mr. Lee's gross monthly income, and that the Debtors did not satisfy the best efforts test.

H. Third amended plan and objections

The Debtors filed a third amended plan that provided for periodic increases in the monthly plan payments.

Mission Hen objected to the third amended plan, maintaining that the Debtors were ineligible because they had too much unsecured debt.

Mission Hen further argued that the plan was not feasible. Among other things, Mission Hen argued that there was insufficient evidence to support Ms. Chen's parents' ability to make the contribution. Furthermore, even with the contribution, the Debtors' income was insufficient: from the tenth month of the plan, the plan payments would exceed the Debtors' monthly net income by approximately $400.

For the first time, Mission Hen argued that the plan violated the anti-modification provision of § 1322(b)(2). It argued that a chapter 13 plan may not modify a lien secured only by a debtor's principal residence, including a claim that is undersecured. While § 1322(c)(2) allows a modification of a "payment of the claim" if the final payment falls within the plan term, Mission Hen argued that the statute allows for modification of only the payment term, not the claim itself.

I. Fourth amended plan and response to objections

The Debtors filed a fourth amended plan that fixed typographical and calculation errors but otherwise left the bulk of the prior plan intact.

The Debtors also responded to Mission Hen's objection to the third amended plan. First, they argued that their unsecured debt was within the limit of § 109(e). They contended that the court should determine the amount of their debt by looking at the initial schedules, ascertain whether the debtors filed the schedules in good faith, and make an adjustment based on its Valuation Order. They asserted that, based on this formula, the unsecured claims totaled $400,318.22 and were within § 109(e)'s statutory limit.

Second, as to feasibility, the Debtors contended that Linda Chen's declaration was sufficient.

Third, the Debtors argued that recent case law explicitly allows a debtor to strip down a secured lien that matures during the life of the chapter 13 plan under § 1322(c)(2).

J. Confirmation of the fourth amended plan

The bankruptcy court held a hearing on plan confirmation and other matters. The ...