In re Victorio, Case No. 10-07125-LT13

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California
Writing for the CourtPETER W. BOWIE
Docket NumberCase No. 10-07125-LT13
Decision Date08 July 2011

and JENNY VICTORIO, Debtors.

Case No. 10-07125-LT13


DATED: July 8, 2011



The Victories filed a joint Chapter 7 petition on or about October 31, 2007. They listed their house as valued at $455,000, with $448,000 in consensual liens on it. Indymac was scheduled as having the senior lien, of $359,909, and CitiMortgage was listed in junior position at $89,083. The case proceeded routinely, and debtors received their Chapter 7 discharge on or about February 8, 2008.

More than two years later, the Victories filed again, this time under Chapter 13. Their petition, filed April 28, 2010, declared that their home was now worth $213,500, while after more than two years having passed they still owed the identical amounts to Indymac and Citimortgage as they had listed in

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October, 2007. In addition, they had accrued $2,212.91 in unpaid real property taxes, and their proposed plan indicated they had accrued $7,969 in arrears to Indymac between filings.

Because of their earlier Chapter 7 discharge, debtors listed a number of unsecured creditors for "Notice Only", except for three. One debt, scheduled as having been incurred in July, 2009 was for $3,598 to WAMU's collection agent. The second was incurred in August, 2009, also to WAMU and its agent. The third was a debt of their daughter for $402, on which they cosigned, and was owed to United Consumer Financial.

Central to the multi-phased, and lengthy discussion which follows, is the Victories' proposal to strip off the junior lien of CitiMortgage on their home on the theory that there was no equity to which its lien could attach, all as set out in paragraph 19 of their proposed plan. In addition, debtors propose to pay 100% of unsecured claims.

The Chapter 13 trustee promptly objected to confirmation, including as a ground for objection that debtors were not eligible for a discharge so any interim lien strip would be illusory. The trustee recognized that "[d]ismissal results in reinstatement of voided lien under Section 349(b)." The trustee cited to a then-recently published decision of this Court on a relief from stay motion in a Chapter 13 case that had followed on the heels of a Chapter 7 discharge.

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The debtors responded to the trustee's objection, stating:

Debtors can infer from the reading of the preliminary stay relief decision by this Court in the Casey case that the Trustee is disavowing any knowledge of the '4th option'. Debtors suggest that the ruling of In re Leavitt, 717 F.3d 1219 (9th Cir. 1999), is distinguishable and now not applicable, as it relates to the finding that "A Chapter 13 case concludes in one of three ways" Leavitt at 1223, after the application of the 'new' law as of 10/17/2005. The 4th option of administrative closing of the Ch. 13 case clearly exists and is used extensively by the Court itself, since the 'new' law was enacted.

The Court invited the parties to submit supplemental briefing, which they have done.

The Chapter 13 trustee filed first, and makes a number of arguments. The trustee asserts that the unsecured lien creditor has an in rem claim which it retains throughout the case because "the lien strip is complete only upon discharge." Because of that legal fact, failure to make significant payments to that creditor results in "undue delay". The trustee argues that upon completion of a no-discharge Chapter 13 plan the case ought to be "administratively dismissed", thereby invoking 11 U.S.C. § 349 and reinstating the lien on the property.

Debtors respond by asserting -- without citation to any authority -- "Bankruptcy cases that are ineligible for discharge have always been permitted to administratively close without dismissal." They also assert that because they believe the value of the creditor's claim is $0 on a secured claim, there is no undue delay. Debtors press their argument for the so-called

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"4th option" of administrative closing by asserting that other amendments to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) contemplate a case ending without a discharge if, for example, a debtor fails to obtain a certificate of completion of a financial management course, 11 U.S.C. § 727(a)(11). That statute is silent regarding closing the case, and it is an amendment to Rule 4006, enacted by the Judicial Conference in 2008 that mentions "closing the case without the entry of a discharge".

After receiving the supplemental briefing from both sides, the Court took the matter under submission. The issues raised by both are important ones and, as discussed later, have been the subject of careful consideration by courts all over the country, albeit without unanimity of views.

As will be set out more extensively, this Court finds and concludes that debtors in a Chapter 20 case cannot obtain a "permanent" avoidance of a wholly unsecured junior lien on their principal residence unless they pay the claim amount in full, or obtain a discharge. Because the Victories' Plan does not contemplate paying the junior lien creditor at all, and because if they did so intend, they could not do so with the present plan over the maximum term allowed for a Chapter 13, the objection of the Chapter 13 trustee is sustained.

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The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).


The severe economic downturn over the past several years has brought out a number of issues, including the ones raised by the trustee and the debtors. It has also prompted resulting strategies of debtors in various parts of the United States where the bubble of the housing market has burst, including the Southern District of California. Lenders on properties which once provided substantial security for loans made against equity in the real estate have discovered that the tide of high values which formerly was in, has receded. While the tide was in, owners borrowed against that high value. Now that it has gone out, the junior lenders have discovered that the loans they made are no longer secured by value in the property. Moreover, in many instances, even a substantial part of the value securing the senior liens has been carried off by the receding tide.

During the Presidential election cycle of 2008, debates included consideration of ways in which home mortgages might be modified to reflect the changes in market value, with one goal of trying to keep families in homes at a price they might be able to maintain. The hows, whys, and why nots are not relevant to this opinion. Ultimately, the country's leaders chose to attempt

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to address the complicated problems in other ways. In the meantime, however, experienced bankruptcy practitioners recognized that the Bankruptcy Code provided certain tools debtors might invoke to attempt to address at least junior liens on primary residences that had become wholly unsecured by any value in the subject property after recognizing that the debt owed to the senior lender exceeded the value of the property. Among those tools is 11 U.S.C. § 1322(b)(2), which provides that a Chapter 13 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 . . . .

See also 11 U.S.C. § 1123(b)(5), to the same effect in Chapter 11 cases.

In 1997 the Ninth Circuit Bankruptcy Appellate Panel handed down its seminal decision in In re Lam, 211 B.R. 36, in which the panel held that the prohibition against modification of a loan secured by an interest in a debtor's principal residence, as set out in § 1322(b)(2) does not apply if there is no value to which the security interest could attach because already fully subsumed by the security interest of a senior lienholder. Lam was followed in 2002 by In re Zimmer, 313 F.3d 1220, decided by a panel of the Ninth Circuit Court of Appeals.

Within the universe of Chapter 13 cases that propose to strip off junior liens on homes that are principal residences, there is a subset of cases that have become known as "Chapter 20"

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cases. That is, the Chapter 13 case was preceded by a Chapter 7 case, and that Chapter 7 resulted in discharge of the debtor's personal liability on the underlying obligation. Johnson v. Home State Bank, 501 U.S. 78, 83 (1991). Johnson is recognized for its holding that even though a debtor has discharged his or her personal liability on the obligation on a mortgage in a Chapter 7 case, the debtor may still file a Chapter 13 case to address the lender's claim against the debtor's real property because "the Code provides that a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy." 501 U.S. at 83. Under Johnson, the fact that a debtor had already obtained a Chapter 7 discharge of his or her personal liability on the same debt did not preclude the debtor from filing a sequential Chapter 13 case to obtain a discharge through performance of a confirmed...

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