Judge Maureen Tighe Approves Lam Motion in Chapter 20, Reconsiders Her Position on the Issue

United States Bankruptcy Court Central District of California
San Fernando Valley
Tuesday, March 27, 2012 Hearing Room 302
9:00 am
1:11-15373 David Darzian Chapter 13
Second Amended Motion to avoid junior lien on Principal Residence ***

Docket #: 27
On October 2, 2009, David Darzian (“Debtor”) filed a voluntary chapter 7 petition.  Debtor received a discharge in that case on February 10, 2010. Subsequently on May 1, 2011, Debtor filed a voluntary chapter 13 petition.  This in turn resulted in what is colloquially known as a chapter 20 case.  Now, Debtor has filed a Motion to Avoid (“Motion to Avoid”) the junior lien on his principal residence held by J.P. Morgan Chase Bank, N.A. (“JP Morgan”).  An opposition has not been filed.  At the January 24, 2012 continued hearing, Debtor was instructed to file additional briefing by February 22, 2012 addressing this Court’s previous ruling in In re Winitzky, 2009 Bankr. Lexis 2430 (Bankr. C.D. Cal. 2009).  There, this Court held that chapter 20 debtors are not entitled to avoid junior liens because of their inability to obtain a discharge.  Debtor was asked to address why this Court should permit this chapter 20 debtor to avoid the junior lien of JP Morgan.  The Court noted that subsequent to its ruling in In re Winitzky, several cases have come down and conflicting rulings have been reached. On February 22, 2012, Debtor filed his Brief. Based on an analysis of subsequent cases, the Court will re-consider its position with respect to avoiding junior liens in chapter 20 cases.

Based on an analysis of further discussions of this subject, the court is inclined to agree that the controlling event, then, is not discharge but rather completion of plan payments.  Discharge in chapter 13 and an individual chapter 11 is only granted once the plan payments have been completed.  It is also dispositive that a discharge does not, in and of itself, strip a lien; instead, discharge simply operates as a statutory injunction against the “commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.”  In re Oksosisi, 451 B.R. 90, (Bankr. D. Ne 2011),  In re Frazier, 448 B.R. 803, 809, and 11 U.S.C. § 524(a)(2).  Other courts, as discussed below, identify the completion of plan payments as the controlling event governing permanence of lien avoidance and modification of rights.

In In re Tran, the Bankruptcy Court for the Northern District of California held that “the Bankruptcy Code does not condition a chapter 13 debtor’s right to strip off a wholly unsecured junior lien on the debtor’s eligibility for a discharge.” 431 B.R. 230, 235 (Bankr. N.D. Cal. 2010). The Tran court held that the right to strip is conditioned on completion of a chapter 13 plan that has been confirmed as meeting all the statutory requirements.  The Frazier court agreed, holding that, “upon completion of the Chapter 13 plan and payment of the value in the collateral securing the claim, there is no obligation remaining to be secured by the lien.” 448 B.R. at 807.  A valuation pursuant § 506(a) is used to value the collateral and in turn to determine the status of the claims alleged to be secured by the subject property. Frazier at 810. Thereafter, completion of the plan payments, which would provide for the claim as classified by a § 506(a) motion to value, constitutes full performance under the “new contract created under the Bankruptcy Code.” Id.

In support of its position, the Tran court turned to §§ 109(a), (e) and (g), which set forth the eligibility requirements for chapter 13. The Tran court concluded that these sections do not condition a debtor’s eligibility for relief under chapter 13 on the debtor’s eligibility for a discharge. The Tran court also considered the fact that debtor’s eligibility for discharge is not a requirement under § 1325. Finally, the Tran courted noted that under § 1325(a)(5)(B)(i)(II), failure to complete a plan will reinstate any previously stripped lien. Much like in a regular chapter 13, then, any state rights are reinstated upon Debtor’s failure to complete a plan. Thus, the Tran court reasoned that the Code makes completion of the new contract, (i.e.) the plan, the controlling act affecting lien stripping. The court adopts this reasoning.

Congressional Intent/Statutory construction
Prior to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act
(“BAPCPA”) enactment, [A] chapter 20 was a useful tool for a debtor who exceeded the monetary limits for a Chapter 13 case […] through the subsequently Chapter 13 plan debtors could save their residence from foreclosure by curing any arrearage through the plan or establish a court enforced repayment plan for nondischargeable debt, such as tax obligations. Additionally, debtors could seek to have the claim secured by a junior lien valued pursuant to § 506(a) for treatment under the confirmed Chapter 13 plan.  Frazier, 448 B.R. 807.  Also, only three possible resolutions to a chapter 13 case existed, dismissal, conversion or discharge. Post BAPCPA and with the addition of § 1328(f), Congress created a fourth option, the ability to simply close a case. By permitting chapter 20s to be filed, Congress must have anticipated valid purposes underlying the filing of a chapter 20.  Any concerns as to abusive or fraudulent purposes can be addressed, and creditors protected, by the separate requirement of good faith under § 1325(a)(7).  The question remains what the congressional intent was behind enactment of BAPCPA, specifically the intent behind the specific changes made and those that where not.  In attempting to discern congressional intent, it is well settled that the starting point is the existing statutory text.  Lamie v. United States Tr., 540 U.S. 526 (2004).

The Tran and Frazier courts’ logic highlight the fact that Congress could have prevented chapter 20s from being refiled altogether by inserting the appropriate language in the sections addressing chapter 13 debtor eligibility.  In enacting BAPCPA, however, Congress merely chose to add § 1328(f), which focuses on eligibility of discharge and not eligibility of filing a chapter 20.  Additionally, by permitting debtors to file chapter 20s the court essentially created a fourth option by which to resolve a chapter 13 closing a case.  Dismissal would not be an appropriate avenue because dismissal of a chapter 13 only occurs upon voluntary request or for cause. 11 U.S.C. § 1307;  In re Okosisi, 451 B.R. at 100.  Because neither a dismissal nor conversion is triggered at the completion of chapter 20 plan payments the permanence of the lien avoidance is not affected.  Once the payments are complete, “the provisions of the plan become permanent, and the lien avoidance is, similarly, permanent.”  In re Okosisi, 451 B.R. at 100.  Under § 1327, a confirmed plan is binding on the debtor and its creditors.  Confirmation of the plan vests all of the property of the estate in the debtor and this property vests free and clear of any claim or interest of any creditor provided for by the plan.  In a chapter 20, upon completion of plan payments the case is closed and all obligations as created in the binding and confirmed plan are complete.

In addition to § 1325(f), Congress amended § 1325(a)(5) to require as a condition of confirmation that for each allowed secured claim provided for by plan, one of the following occur: 1) the holder of such claim accept the Plan or 2) the holder retain the lien securing such claim until the earlier of (a) payment of the underlying debt determined under non-bankruptcy law or (b) a discharge being granted under section § 1328, with the value of payments under the plan to be not less than the allowed amount of such claim. Frazier, 448 B.R. 810.  Section 1325(a)(5) presupposes that the claim at issue is an “allowed secured claim.”  An “allowed secured claim” is a term of art that has been discussed by the Supreme Court and Ninth Circuit Court of Appeals in Nobelman v. American Savings Bank, 508 U.S. 324 (1993) and Zimmer v. PSB Lending Corporation, 313 F.3d 1220 (2002).  Under Nobleman, an allowed secured claims is defined by § 506(a). 508 U.S. 325. Zimmer, which interpreted Nobelman, held that an allowed secured claim is one where there is value in the collateral for the creditor’s interest. Zimmer, 313 F.3d 1227.  If there is no value, then the creditor merely has a lien and an unsecured claim. Zimmer, 313 F.3d 1225. Where, as here, there is no value in the collateral to secure the junior lien, then the junior lien holder does not hold a secured claim and therefore does not have a basis for asserting rights under § 1325(a)(5).

Considering the 2005 amendments, it is clear that Congress “altered the landscape for a debtor attempting to” reorganize under chapter 13. Frazier, 448 B.R. at 810. Even with these amendments, Congress still did not make valuation under § 506(a) or modification or rights under § 1322(b)(2) contingent on discharge. Congress also did not amend § 1322(b)(2) in response to Nobelman or Zimmer in order to create uniformity in the claims discussed in §§ 1322(b)(2) and 506(a). Instead, the Nobelman distinction between claims discussed in 1322(b)(2) and 506(a) remains intact. This Court will not substitute its judgment for that of Congress, which has been spelled out in the Bankruptcy Code; especially, when Congress had the opportunity to speak knowing full well the landscape of the case law and chose not to make such amendments.

Good Faith
There is fear that permitting chapter 20 debtors to strip liens results in a “de-facto discharge.”  Again, the Court must first rely on the plain meaning of the statutes.  Here, it is clear that with the addition of § 1328(f) Congress wished to limit a specific form of relief under specific chapter 13 filings.  Congress, however, chose not to limit applicability of §§ 506(a), 1322(b)(2), or 1325.  If Congress wanted to prevent chapter 20 filings, it could have.  By preventing discharge in chapter 20 cases, Congress on the one hand approved chapter 20 filings and at the same time created the fourth option of closing a case.  Because debtors have subjected themselves to the onerous task of complying with the obligations imposed on them by the Bankruptcy Code, yet again, and have confirmed a plan and completed plan payments they have properly taken advantage of the “restructuring tools contained within chapter 13,” tools that Congress has not specifically foreclosed to chapter 20 debtors.

To the extent parties are concerned about any abusive or fraudulent chapter 20 filings, the Bankruptcy Code affords chapter 20 creditors various protections. Amongst these protections is the requirement of good faith under § 1325(a)(7) that all courts must independently evaluate to confirm a plan. Section 1325(a)(7) states that, “the court shall confirm a plan if […] the action of the debtor in filing the petition was in good faith.”  Good faith, in the chapter 13 context, is to be determined on a case by case basis, after an examination of the totality of the circumstances. In re Warren, 89 B.R. 87, 93 (B.A.P. 9th Cir. 1988).

In looking at good faith, courts have considered whether a valid bankruptcy purpose in filing the chapter 13 exists or whether the sole purpose of filing the chapter 13 was to “unfairly manipulate the Bankruptcy Code to skirt” Dewsnup.  In re Okosisi, 451 B.R. at 92 (The debtors’ purpose for seeking relief in this chapter 13 case was to address the arrearages and outstanding liens on their primary residence and to pay priority tax claims over time); In re Frazier, 448 B.R. 803, 812 (The debtors were not merely filing a perfunctory chapter 13 Plan where no creditors were being paid or arrearage cured […] The curing of the arrearage and saving their family residence, and payment of several pre-petition claims represented a real, substantial plan and financial reorganization for the debtors); In re Tran, 431 B.R. at 237 (The totality of the circumstances showed that Tran filed the chapter 13 case solely for purposes of avoiding the second deed of trust under circumstances where such avoidance was not available in her chapter 7, and where no independent reasons existed for her subsequent chapter 13 filing); In re Blendheim, 2011 Bankr. Lexis 5122, *23 (Bankr. W.D. WA 2011)(debtors had valid reorganization goals other than lien stripping. debtors filed the chapter 13 case in good faith, not only to strip the Second Position Lien, but also to deal with fraud claims and other issues surrounding their First Position Lien. The Plan as proposed also repayed a secured debt owed to Harbor West for past-due homeowners association dues and other obligations, and clarified that ongoing post-petition dues would be paid outside the Plan); In re Hill, 440 B.R. at 184-5 (Considering their financial circumstances, the debtors acted equitably and with good intentions in proposing their Plan […]  There was no issue there regarding the debtors’ compliance with their responsibilities under the Code, or their motivation or sincerity […]  The debtors had no equity in their non-exempt assets, and were devoting a sum greater than their disposable income to the Plan. Debtors’ dhapter 7 case concluded with no distribution to unsecured creditors.  They had less income to devote to payment of creditors in this first case than in this second case. As a result, no creditor was to suffer worse treatment due to the dhapter 20 case).

Here Debtor alleges that his purpose for filing a chapter 13 is to cure the arrearages owed on the senior lien. Debtor’s proposed plan, filed on February 28, 2012, provides for the cure of $31,679 in arrears. It is clear that Debtor’s purpose for refilling is simply to save his home via the reorganization tools as laid out in chapter 13 of the Code.  There is no indication that Debtor wishes to manipulate the Code or skirt by the rationale of Dewsnup. Any concerns with respect to creditors’ rights lack support. To confirm a plan, Debtor must still comply with the requirements of § 1325. If Debtor fails to complete his plan payments, then JP Morgan’s rights will no longer be suspended and it can proceed on its state rights as laid out in non-bankruptcy law.  As an aside, the court also notes that this ruling will afford debtors in the SFV Division more predictability in analyzing whether reorganization is possible. There is an important interest to be served where all judges in a division can be consistent on an issue that determines whether or not a debtor should even incur the cost to file a case. Congress has allowed debtors to attempt to save their homes in this way, and they should know what the rules are relating to that where that law can be settled.

Motion is GRANTED. As there was no opposition and the court has no further questions, NO APPEARANCE IS REQUIRED.
PREVAILING PARTY TO LODGE FORM ORDER WITHIN 7 DAYS, A COPY OF WHICH CAN BE OBTAINED FROM THE COURT WEBSITE.
Trustee(s):
Elizabeth (SV) F Rojas (TR)

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