Victorio v. Billingslea

• Decision Date: 24 February 2012
• Docket Number: No. 11–cv–1825–MMA.,11–cv–1825–MMA.
• Citation: 470 B.R. 545
• Court: U.S. District Court — Southern District of California
• Parties: Ricardo VICTORIO & Jenny Victorio, Appellants, v. Thomas H. BILLINGSLEA, Jr., Chapter 13 Trustee, Appellee.

470 B.R. 545

Ricardo VICTORIO & Jenny Victorio, Appellants,

v.Thomas H. BILLINGSLEA, Jr., Chapter 13 Trustee, Appellee.

No. 11–cv–1825–MMA.

United States District Court,

S.D. California.

Feb. 24, 2012.

John Clayton Colwell, Law Offices of John C. Colwell, APLC, San Diego, CA, for Appellants.

ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

MICHAEL M. ANELLO, District Judge.

Currently before the Court is an appeal of a decision by the Bankruptcy Court not to confirm Appellant's chapter 13 ¹ Confirmation Plan and sua sponte reversing the order disallowing CitiMortgage's proof of claim. Having considered the parties' submissions and the oral arguments of counsel, for the reasons set forth below, the Court AFFIRMS the Bankruptcy Court's decision.

I. Background

Appellants, Ricardo and Jenny Victorio, jointly filed for Bankruptcy protection under chapter 7 of the Bankruptcy Code in 2007. [Case 07–06247–LT7.] 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 held a junior lien of $89,083. Appellants received a discharge in that case on or about February 5, 2008.

On April 28, 2010, the Victorios filed for Bankruptcy again, this time under chapter 13. Their petition declared their home was now worth $213,500 and they still owed the identical amounts to IndyMac and CitiMortgage as they listed in their chapter 7 bankruptcy. Appellants' chapter 13 plan proposed to make monthly payments of $400 to cure an estimated $7,969 in arrears to IndyMac, $2,213 in property tax debts to the San Diego County Assessor, and to pay a dividend of 100% on $4,500 in unsecured personal debt that accrued in the two years since their prior bankruptcy. Appellants also proposed to “strip” CitiMortgage's now wholly unsecured junior lien on their property.² Appellants' chapter 13 Plan did not provide for any payments to be made on any debts that had been discharged in their prior bankruptcy, including the debt owed on CitiMortgage's junior lien.

On June 7, 2010, Appellee, the Bankruptcy Trustee, objected to confirmation of the proposed chapter 13 plan and moved to dismiss. The ground for the objection was that debtors were not eligible for a discharge, so any interim lien strip would be illusory. [Objection to Confirmation Plan, 10–07125–LT13 Doc. No. 17] On July 9, 2010, Appellants filed a motion to strip CitiMortgage's lien. Neither CitiMortgage nor the Trustee opposed the motion. Judge Mann granted the motion to strip, finding that “junior lienholder's ... claim may be treated as unsecured for purposes of this case and the lien may be stripped off the debtor's interest in the property following plan confirmation, completion of the plan, and resulting discharge if applicable.” [Tentative Order dated September 10, 2010, 10–07125–LT13 Doc. No. 36, adopted as the Final Order of the Court on September 14, 2010, 10–07125–LT13 Doc. No. 38.]

On August 23, 2010 (subsequent to the filing to the motion to strip the lien, but before the Order was entered) CitiMortgage submitted an unsecured claim for $91,538.46. On September 11, 2010, Appellants objected to CitiMortgage's claim, arguing that the claim should be dismissed in its entirety because it was listed and discharged in debtors' prior chapter 7 case. [10–07125–LT13 Doc. No. 39.] On October 18, 2010, Judge Taylor granted the objection and disallowed CitiMortgage's claim.

On July 8, 2011, Judge Bowie issued an Order on Appellee's Objection to Confirmation. After a lengthy discussion regarding the pre-BAPCPA case law and the conflicting case law regarding lien stripping in “chapter 20” cases, the Bankruptcy Court held that “debtors in a chapter 20 case cannot ‘permanently’ avoid a wholly unsecured junior lien without a discharge, or without paying it in full.” Additionally, the Bankruptcy Court sua sponte reversed Judge Taylor's Order disallowing CitiMortgage's proof of claim. Finally, the Bankruptcy Court held that the plan was not confirmable, as it could not pay all claims in full within statutory time limits at the proposed rate of payment.

On August 17, 2011, Appellants sought leave to appeal the Bankruptcy Court's Order [Doc. No. 2], which the Court granted on August 22, 2011. [Doc. No. 3.] Thereafter, the parties briefed the issues on the appeal [Doc. Nos. 7, 9, and 10] and on February 21, 2012, the Court held oral argument. [Doc. No. 13.]

II. Jurisdiction and Standard of Review

The Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(3), which grants district courts jurisdiction to hear appeals from interlocutory orders and decrees, other than those issued under section 1121(d) of title 11, with leave of the Court.

When considering an appeal from the bankruptcy court, a district court applies the same standard of review that a circuit court would use in reviewing a decision of a district court. See Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir.1997). On appeal, a district court reviews a bankruptcy court's findings of fact under the clearly erroneous standard. See Fed. R. Bankr. P. 8013; see also Sigma Micro Corp. v. Healthcentral.com ( In re Healthcentral.com ), 504 F.3d 775, 783 (9th Cir.2007). The bankruptcy court's conclusions of law, including its interpretation of the Bankruptcy Code, are reviewed de novo. Zurich Am. Ins. Co. v. Int'l Fibercom, Inc. ( In re Int'l Fibercom, Inc.), 503 F.3d 933, 940 (9th Cir.2007).

III. Issues on Appeal

1. Did the Bankruptcy Court err in sua sponte overruling the order disallowing CitiMortgage's claim?

2. Did the Bankruptcy Court err in concluding that a “chapter 20” ³

debtor cannot permanently avoid an unsecured junior lien without a discharge or payment in full?

3. What is the disposition of a “chapter 20” case upon completion of the plan payments where debtor is ineligible for discharge?

4. Did the Bankruptcy Court err in concluding that Appellants' chapter 13 plan is not confirmable as proposed?

IV. Discussion

1. The Status of CitiMortgage's Claim

Appellants argue the Bankruptcy Court erred in holding that CitiMortgage had an unsecured claim in their chapter 13 case. According to Appellants, CitiMortgage cannot have an allowed claim in their chapter 13 case, because CitiMortgage's unsecured claim was discharged in their prior chapter 7 case. Appellants also argue the claim is not enforceable against Appellants personally because all personal liability for the debt was extinguished by the chapter 7 discharge. Furthermore, Appellants argue the claim is not enforceable against their property because it is unsecured.

In response, Appellee argues that according to the Supreme Court's decision in Johnson v. Home State Bank, the chapter 7 discharge extinguishes the in personam (personal) liability on a debt secured by the debtor's property, but the in rem liability (the creditor's right to foreclose on the collateral) survives or passes through bankruptcy. 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). This argument is persuasive.

Johnson is the seminal case establishing the status of a creditor's lien on the debtor's property after a chapter 7 discharge. In that case, the Supreme Court held that a discharge in a chapter 7 extinguishes the debtor's in personam liability for the debt, but “a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy.” Johnson, 501 U.S. at 83, 111 S.Ct. 2150 (citations omitted). The Supreme Court went on to say that “the mortgage interest that survives the discharge of a debtor's personal liability is a ‘claim’ within the terms of § 101(5).” ⁴Id. at 84, 111 S.Ct. 2150. According to the Supreme Court,

Even after the debtor's personal obligations have been extinguished, the mortgage holder still retains a “right to payment” in the form of its right to the proceeds from the sale of the debtor's property. Alternatively, the creditor's surviving right to foreclose on the mortgage can be viewed as a “right to an equitable remedy” for the debtor's default on the underlying obligation. Either way, there can be no doubt that the surviving mortgage interest corresponds to an “enforceable obligation” of the debtor.

Id.

Here, Appellants received a discharge in their chapter 7 bankruptcy and subsequently filed for bankruptcy under chapter 13. In response to Appellants' chapter 13, CitiMortgage submitted an unsecured claim for $91,538.46. Appellants objected to CitiMortgage's claim arguing that the claim should be dismissed in its entirety because it was listed and discharged in debtors' prior chapter 7 case. Judge Taylor granted the objection and disallowed CitiMortgage's claim. Later, however, Judge Bowie sua sponte overruled Judge Taylor's order disallowing CitiMortgage's claim.

According to Johnson, the chapter 7 discharge did not extinguish CitiMortgage's junior lien or remove it from Appellants' property; it merely enjoined CitiMortgage from enforcing the discharged debt against Appellants personally. Nevertheless, Appellants attempt to distinguish this case from Johnson, by arguing that there is nothing in Johnson to indicate that the claim in that case was unsecured, whereas here CitiMortgage's claim is unsecured. Therefore, Appellants argue, by virtue of the fact the claim is unsecured, it is no longer enforceable against Appellants or their property.

This argument is unpersuasive because the express language of § 101(5) defines a claim as a right to payment, or a right to an equitable remedy, whether or not the right is secured or unsecured.§ 101(5). Furthermore, the determination of whether a claim is unsecured under § 506(a), and thus void under § 506(d), does not determine whether the claim is allowed or disallowed, it only prescribes how a secured claim is to be treated. See In re Hill, 440 B.R. 176, 184 (2010). Instead, § 502 serves that function. Under § 502(a) proof of a claim is “deemed allowed” in that amount, “unless a party in...