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In Re Phillip Leslie Frazier and Jennifer Jo Frazier v. Real Time Resolutions

March 8, 2012

IN RE PHILLIP LESLIE FRAZIER AND JENNIFER JO FRAZIER
DEBTORS/APPELLEES,
v.
REAL TIME RESOLUTIONS, INC., CREDITOR/APPELLANT.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Real Time Resolutions, Inc. ("Appellant"), appeals from the Bankruptcy Court's order approving the removal of Appellant's junior lien on debtors Phillip and Leslie Frazier's ("Appellees") primary residence and confirming Appellees' Chapter 13 plan.

The main issue presented by this appeal is one that has been addressed by multiple bankruptcy courts since the collapse of the housing market: whether a Chapter 13 debtor can "strip-off" a wholly unsecured secondary or junior lien on the debtor's principal residence when the debtor is ineligible for discharge because of a prior Chapter 7 discharge pursuant to 11 U.S.C. § 1328(f)(1).

The Bankruptcy Court's decision joins the growing split of authority among bankruptcy courts across the country on this same issue. For the reasons set forth below, the Bankruptcy Court's decision is affirmed.*fn1

BACKGROUND

On August 3, 2009, Appellees filed a voluntary Chapter 13 bankruptcy petition. On August 17, 2009, Appellees' Chapter 13 petition was converted into a Chapter 7 case. At that time, Appellees were not eligible to proceed under Chapter 13 because their scheduled, unsecured debts exceeded the debt limits imposed by 11 U.S.C. § 109(e). Appellees indicated that there were two outstanding mortgage liens secured by their primary residence, located at 5610 Illinois Avenue, Fair Oaks, California, 95628 ("subject property").

Appellees received a Chapter 7 discharge on December 21, 2009, which relieved them of in personam liability for those mortgage liens securing the subject property; however, the in rem liability on the subject property remained intact. Accordingly, the senior and junior lien holders' state law lien rights in the subject property "rode through" the Chapter 7 discharge and the mortgage liens became non-recourse debts.

On December 30, 2009, Appellees filed a Chapter 13 petition to address the outstanding liens secured by the subject property, arrears, priority tax debt and other unsecured claims. (Excerpt of Record ("ER"), ECF No. 19 at 9.) Courts colloquially refer to this type of situation as a "Chapter 20" case.*fn2

In Chapter 20 cases, the debtors file for Chapter 7 bankruptcy, receive a Chapter 7 discharge, and then file for Chapter 13 bankruptcy.*fn3 Appellees admitted that one of the reasons they filed the second Chapter 13 petition was to stay a foreclosure action commenced by senior lien holder, Bank of America ("BOA"), against the subject property. (Id. at 110-11.)

Schedule D of Appellees' Chapter 13 plan lists BOA as the senior lien holder of the First Deed of Trust for the amount of $275,681.00, secured by the subject property. (Id. at 33.) Schedule D also lists BOA as the junior lien holder of the Second Deed of Trust for $47,400.00, again secured by the subject property. (Id.)

On January 6, 2010, Appellant filed a proof of claim for $53,591.82, representing the principal, interest, and late fees owed on the Second Deed of Trust ("junior lien") on the subject property. (Id. at 61-63.) Appellant identified itself as the loan servicer for BOA's junior lien on the subject property. (Id.)

The Chapter 13 plan proposed to pay BOA, the senior lien holder, as a class-one creditor holding a "secured claim" pursuant to 11 U.S.C. § 506(a)(1). (Id. at 115.) Appellees' plan proposed to treat Appellant as a class-two creditor holding an "unsecured claim" and to avoid Appellant's junior lien on the subject property on the theory that there was not equity to which its lien could attach. (Id. at 56.)

In order to remove Appellant's junior lien, Appellees filed a Motion to Value Appellant's claim against the value of the subject property pursuant to 11 U.S.C. § 506(a)(1). Section 506(a)(1) classifies a creditor's allowed claim as a "secured allowed claim" or "unsecured allowed claim." See 11 U.S.C. § 506(a)(1). After a claim is classified by 506(a)(1), a debtor can propose to modify the rights of certain holders of unsecured allowed claims pursuant to 11 U.S.C. § 1322(b)(2).

In their Motion to Value, Appellees listed the value of the subject property as $240,000.00.*fn4 (Id. at 60.) Appellant objected to Appellees' Motion to Value and to the confirmation of Appellees' Chapter 13 plan, arguing that Appellees could not strip Appellant's junior lien because they were not eligible to receive a Chapter 13 discharge pursuant to 11 U.S.C. § 1328(f)(1).*fn5

(Id. at 64-68.)

Section 1328(f)(1) renders debtors who have received a Chapter 7 bankruptcy in the past four years ineligible to receive a Chapter 13 discharge. Both Appellant and Appellees filed extensive briefing with the Bankruptcy Court concerning Appellant's objections. (See id. at 88-129.)

The Bankruptcy Court overruled Appellant's objections and confirmed Appellees' Chapter 13 Plan. (Id. at 174, 194.)

The Bankruptcy Court found that BOA's senior lien securing an obligation of $275,681.00 exhausted all of the value in the subject property. (Id. at 190.) Accordingly, the Bankruptcy Court determined that Appellant's junior lien was a wholly unsecured allowed claim under § 506(a)(1), and the value of its unsecured claims as $53,591.82. (Id.)

The Bankruptcy Court also rejected Appellant's contention that the amendment to 11 U.S.C. § 1325(a)(5) mandates discharge to effectuate a lien strip, or instead, mandates payment of both the secured and unsecured portions of its claim. (Id. at 188-89.) Relying on the Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) and Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002), the Bankruptcy Court held that a creditor attempting to assert rights under 11 U.S.C. § 1325(a)(5) must be a holder of an allowed secured claim under § 506(a)(1). (ER at 189.) Since Appellant did not hold a secured claim under § 506(a)(1), it did not have a basis for asserting rights under § 1325(a)(5). (Id.)

The Bankruptcy Court rejected Appellant's argument that a lien may only be stripped upon discharge. (Id. at 187.)

In an effort to explain how the case would end in light of the lack of discharge in Appellees' Chapter 20 case, the Bankruptcy Court likened Appellees' Chapter 13 plan to a contract between Appellees and the creditors. (Id. at 187.) Specifically, the Bankruptcy Court stated, "[i]t is the Chapter 13 plan, by which the debtor commits him or herself to a plan, which becomes the new contract between debtors and creditors." (Id. [citing In re Than, 215 B.R. 430 (9th Cir. B.A.P. 1997)]). The Bankruptcy Court explained that the debtor must pay the full amount of the § 506(a) secured claim held by BOA through the Chapter 13 plan, resulting in there being no outstanding obligation secured by the lien. (Id.) Then, upon completion of the plan, the debtor demands reconveyance of the deed of trust or release of the lien . . . .," from BOA as senior lien holder and Appellant, as junior lien holder. (Id.) As to the close of the case, the Bankruptcy Court noted, "[i]t is completion of the plan and performance under the new contract created under the Bankruptcy Code which results in the debtors having the right to demand and receive the release of the lien. The granting or denying of discharge does not alter or remove the lien, and it not . . . [a] basis for the court to denying [sic] a motion to value a creditor's secured claim." (Id.)

Finally, the Bankruptcy Court, on several grounds, overruled Appellant's objection that Appellees' Chapter 13 plan was not filed in good faith. First, the Bankruptcy Court overruled Appellant's objections based on § 1325(a)(5), as discussed above.

(Id. at 190.) Second, the court overruled Appellant's objection to Appellees' projected monthly personal and business expenses outlined in the Chapter 13 plan. (Id. at 191.) Third, the Bankruptcy Court overruled Appellant's objections that because Appellees' Chapter 13 plan was filed on the heels of their previous Chapter 7 discharge, Appellees' Chapter 13 was filed in bad faith. (Id. at 194.) To this end, the Bankruptcy Court addressed the purpose of Appellees' Chapter 13 plan and conducted a good faith analysis of the Chapter 13 plan. (Id. at 192-93.) In conclusion, the Bankruptcy Court found that Appellees' Chapter 13 plan had been proposed in good faith and was not forbidden by any law. (Id. at 194.) Importantly, the Bankruptcy Court also found that Appellees' Chapter 13 plan complies "with the provisions of 11 U.S.C. § 1322 for the contents of the plan and 11 U.S.C. § 1325(a) and (b) for confirmation of the plan proposed in this case." Id.

On January 25, 2011, Appellant filed the Notice of Appeal with the U.S. Bankruptcy Appellate Panel of the Ninth Circuit. (Id. at 196-197.) On January 31, 2011, Appellees transferred the appeal to this Court pursuant to 28 U.S.C. § 158. (Id. at 198.)

STANDARD

An appellant may petition the district court for review of a bankruptcy court's decision. Fed. R. Bankr. P. 8013. The applicable standard of review is identical to that employed by circuit courts of appeal in reviewing district court decisions.

See Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). Thus, legal conclusions are renewed on a de novo basis, and factual determinations are assessed pursuant to a "clearly erroneous" standard. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997) (en banc).

Findings of fact are "clearly erroneous" only if the reviewing fact is "left with the definite and firm conviction that a mistake has been committed." In re Marquam Inv. Corp., 942 F.2d 1462, 1466 (9th Cir. 1991) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). Appellant has the burden of proving such error has been committed, and the reviewing court should not reverse simply because ...


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