In re Brawders

• Decision Date: 10 May 2005
• Docket Number: Adversary No. SV-00-01370-KL.,BAP No. CC-04-1165-MoPK.,Bankruptcy No. SV-00-15661-KL.
• Citation: 325 B.R. 405
• Parties: In re Robert BRAWDERS and Cheryl Brawders, Debtors. County of Ventura Tax Collector, Appellant, v. Robert Brawders; Cheryl Brawders, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

Page 405

325 B.R. 405

In re Robert BRAWDERS and Cheryl Brawders, Debtors County of Ventura Tax Collector, Appellant, v. Robert Brawders; Cheryl Brawders, Appellees.

BAP No. CC-04-1165-MoPK.

Bankruptcy No. SV-00-15661-KL.

Adversary No. SV-00-01370-KL.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted January 20, 2005.

Filed May 10, 2005.

COPYRIGHT MATERIAL OMITTED

Donald O. Hurley, Esq., Assistant County Counsel, County of Ventura, Ventura, CA, for Appellant.

Michael D. Kwasigroch, Esq., Law Offices of Michael D. Kwasigroch, Simi Valley, CA, for Appellee.

Before MONTALI, PERRIS and KLEIN, Bankruptcy Judges.

OPINION

MONTALI, Bankruptcy Judge.

In rare circumstances, the res judicata effect of a confirmed Chapter 13 plan can effectively avoid a creditor's lien or modify its in rem rights even if there is no valid legal basis for doing so, provided that the plan does so explicitly and due process considerations are met.¹

Although the Chapter 13 plan in this case has language that clearly affects some secured creditors' rights, none of that language applies to the specific rights at issue here. Alternatively, even if the plan could be read to affect the secured creditor's rights, applying that strained reading in hindsight is no substitute for clear advance notice to the secured creditor, as required for due process. For each of these independent reasons, we REVERSE and REMAND a judgment awarding damages for violation of the automatic stay based on an erroneous interpretation of the effect of the confirmed plan.

I. FACTS

Debtors Robert and Cheryl Brawders ("Debtors") have a long standing dispute with the County of Ventura Tax Collector ("Ventura") over the amount of real property tax assessments on their principal residence (the "House"). Debtors claim that the amount due was reduced to $9,350.00 in an earlier Chapter 13 case (Case No. ND-95-10521-RR, Bankr.C.D. Cal.) (the "First Case"), filed on February 8, 1995. Now, in their current Chapter 13 case (SV-00-15661-KL) (the "Second Case"), Debtors seek damages for Ventura's attempt to collect a higher amount.

Ventura's collection attempt was to issue a "Notice of Impending Tax Collector's Power to Sell" on June 2, 1997, asserting $30,264.32 in past due taxes (the "Tax Lien Notice"). Ventura sent that notice after confirmation of Debtors' Chapter 13 plan in the First Case (the "Plan") but before the House had revested in Debtors. Ventura admits that sending the Tax Lien Notice violated the automatic stay, though it disputes whether this resulted in any damage to Debtors and it denies that the First Case had any effect on its lien rights or reduced the amount of its tax assessment.²

Ventura sent a copy of the Tax Lien Notice to Debtors' mortgage lender ("Bank"). Bank responded by making a payment to Ventura, without notice to Debtors, and then demanding reimbursement. This and other disputes with Bank precipitated Debtors' filing of this Second Case on June 14, 2000.

On June 27, 2000, Debtors filed an adversary proceeding against Ventura (SV-00-01370-KL). Bank was also named as a defendant but was later dismissed based on a consensual resolution involving refinancing the House and paying Bank. In their second amended complaint Debtors sought damages for issuance of the Tax Lien Notice, among other things.

On Ventura's motion for summary judgment the bankruptcy court entered an order stating that Ventura had violated the automatic stay and leaving for trial an accounting and the amount of attorneys' fees and other damages to be awarded.³ The bankruptcy court simultaneously entered a "Memorandum on Legal Issue: The Effect of the Provision for the County's Claim and Lien Interest in the Plan Confirmed in Case No. ND 95-10521 RR" (the "Res Judicata Decision") which determined that Debtors' House had revested in them "free of any lien interest held by [Ventura] on account of its pre-petition claims" and that those claims had been reduced by the Plan to $9,350.00. There is no dispute that if Ventura's tax assessments are reduced to that amount then it was overpaid by Bank and Debtors, and Ventura will owe Debtors a refund of $12,905.00.

By a subsequent motion Debtors also sought to recover their expenses associated with refinancing their House to reimburse Bank for what it had paid to Ventura, the alleged cost of a higher interest rate for their refinance when the new lenders learned that the loan was in default, over $40,000.00 in attorneys' fees and costs, and pre-judgment interest. On June 19, 2003, the bankruptcy court issued a "Memorandum on Trial and Motion for Attorneys Fees and Costs" (the "Damages Decision") awarding $39,668.21 to Debtors, including the $12,905.00 for tax overpayments. The bankruptcy court entered a judgment, Debtor appealed,⁴ and Ventura cross-appealed. Before us is the cross-appeal.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and 157. We have jurisdiction over this final judgment that determines the amount of damages for Ventura's violation of the automatic stay. 28 U.S.C. § 158(a) and (b). See Dyer, 322 F.3d at 1186 and n. 10.⁵

III. ISSUE

Did the bankruptcy court err in awarding damages, based on its conclusion that res judicata reduced the enforceable amount of Ventura's lien to the amount stated in Debtors' Plan?⁶

IV. STANDARDS OF REVIEW

We review de novo the res judicata effect of a Chapter 13 plan and interpretation of the Bankruptcy Code and Rules, because these matters are legal issues or mixed questions of law and fact in which legal issues predominate. George v. Morro Bay (In re George), 318 B.R. 729, 732-33 (9th Cir. BAP 2004); Wells Fargo Bank v. Yett (In re Yett), 306 B.R. 287, 290 (9th Cir. BAP 2004). Interpretation of the contractual terms of a Chapter 13 plan is generally a factual issue which we review for clear error (Yett, 306 B.R. at 290) but such factual issues can become mixed with legal issues. Whether a contract is ambiguous is a matter of law, which we review de novo. Miller v. United States (In re Miller), 253 B.R. 455, 458 (Bankr.N.D.Cal.2000) ("Miller I") (citing cases), aff'd, 284 B.R. 121 (N.D.Cal.2002) ("Miller II").

In this case we need not decide which standard applies to interpretation of the Plan because we would reach the same result whether we reviewed the bankruptcy court's interpretation for clear error or de novo. Whether adequate notice has been given for purposes of due process in a particular instance is a mixed question of law and fact that we review de novo. Educ. Credit Mgmt. Corp. v. Repp (In re Repp), 307 B.R. 144, 148 (9th Cir. BAP 2004).

V. DISCUSSION

There is no question that Ventura violated the automatic stay by sending the Tax Lien Notice. The question is what damages are appropriate, if any.

The bankruptcy court held Ventura partly responsible for Debtors' legal fees and the costs associated with resolving their disputes with Bank, including some of the costs of refinancing their House to repay Bank what it had paid Ventura. The bankruptcy court also awarded Debtors $12,905.00 based on its view that Ventura's lien had been reduced to $9,350.00 by the res judicata effect of the Plan and by Section 1327, which states in full:

§ 1327. Effect of confirmation

(a) The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.

(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.

(c) Except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.

11 U.S.C. § 1327.

It is well established that principles of res judicata and finality, as partly codified in Section 1327, can make even "illegal" provisions of a Chapter 13 plan binding. See Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir.1999) (student loan debt discharged by confirmation of Chapter 13 plan so providing, even though debt may have been nondischargeable); Multnomah County v. Ivory (In re Ivory), 70 F.3d 73 (9th Cir.1995) (res judicata precluded collateral attack on confirmation order, despite possible jurisdictional error).⁷

This general proposition is subject to some major limitations. The starting point is that a debtor asserting res judicata "has the burden of proof on all elements and bears the risk of non-persuasion." Repp, 307 B.R. at 148 n. 3 (citations omitted).

Next, a plan should clearly state its intended effect on a given issue. Where it fails to do so it may have no res judicata effect for a variety of reasons: any ambiguity is interpreted against the debtor, any ambiguity may also reflect that the court that originally confirmed the plan did not make any final determination of the matter at issue, and claim preclusion generally does not apply to a "claim" that was not within the parties' expectations of what was being litigated, nor where it would be plainly inconsistent with the fair and equitable implementation of a statutory or constitutional scheme. See Miller I, 253 B.R. at 456-59, aff'd, Miller II, 284 B.R. at 124; Repp, 307 B.R. at 148 n. 3; Associated Vintage Group, 283 B.R. at 554-65.

Another major limitation is that due process requires adequate notice and procedures. See, e.g., Repp, 307 B.R. at 149-54 (notice requirements); Enewally v. Wash. Mutual Bank (In re Enewally), 368 F.3d 1165, 1173 (9th Cir.), cert. denied, ___ U.S. ___, 125 S.Ct. 669, 160 L.Ed.2d 497 (2004) (confirmation has no preclusive effect on matters requiring adversary proceeding, or where plan does not give adequate notice of proposed treatment).

The foregoing limitations on...