In re: Alfredo Palacios

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: April 15, 2013
• Docket: CC-12-1502-KiPaTa
• Status: Unpublished

Opinion

FILED APR 15 2013 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-12-1502-KiPaTa ) 6 ALFREDO PALACIOS, ) Bk. No. 12-31480-WB ) 7 Debtor. ) ) 8 ) ALFREDO PALACIOS, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) UPSIDE INVESTMENTS LP, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on March 22, 2013, at Pasadena, California 15 Filed - April 15, 2013 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Julia W. Brand, Bankruptcy Judge, Presiding 19 Appearances: Andrew Edward Smyth, Esq. argued for appellant, 20 Alfredo Palacios; Daniel Singer, Esq. of the Law Offices of Les Zieve argued for appellee, Upside 21 Investments LP. 22 Before: KIRSCHER, PAPPAS and TAYLOR, Bankruptcy Judges. 23 24 25 26 1 This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th 28 Cir. BAP Rule 8013-1. 1 Appellant, chapter 132 debtor Alfredo Palacios (“Palacios”), 2 appeals an order granting appellee, Upside Investments LP 3 (“Upside”), relief from the automatic stay to pursue its 4 foreclosure rights against property owned by Palacios. We AFFIRM 5 in part and REVERSE in part.3 6 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 7 Palacios (and his then-wife, Leandra) obtained a fee interest 8 in property located in South Gate, California (“Property”) in 9 1994. On or about February 27, 2010, Palacios obtained a loan for 10 $200,000 from Upside. In exchange for the loan, Palacios executed 11 a promissory note (“Note”) and first deed of trust (“DOT”) against 12 the Property in favor of Upside.4 According to the Note, Palacios 13 was to make interest only payments of $2,000 per month for 14 23 months at 12% interest, to begin on March 1, 2010, with a 15 balloon payment of the remaining $202,000 balance due, in full, on 16 March 1, 2012. Palacios agreed to pay interest on any unpaid 17 principal until the full amount of principal had been paid and to 18 make monthly payments until he had paid the entire principal, 19 interest and any other charges he might owe under the Note. If 20 Palacios failed to pay the full amount of each monthly payment 21 2 22 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 23 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. 24 3 In order to fully understand the facts underlying this appeal, we have taken judicial notice of certain documents filed 25 with the bankruptcy court on its electronic docket. See O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 26 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 27 4 A second deed of trust in the amount of $60,000 held by 28 Jose and Hilda Jimenez also exists on the Property.

-2- 1 due, the Note holder could demand immediate payment of all amounts 2 owed under the Note. Payments were to be made to The Argus Group 3 (“Argus”), servicer of the loan. Under the terms of the DOT, 4 Palacios was required to “provide, maintain and deliver” hazard 5 insurance on the Property with loss payable to Upside. 6 Palacios defaulted on the loan. Upside recorded a notice of 7 default on February 16, 2012. A foreclosure sale of the Property 8 was scheduled for June 21, 2012. 9 To stop the foreclosure, Palacios filed a chapter 13 10 bankruptcy case on June 20, 2012, thus imposing the automatic stay 11 under § 362(a). In his Schedule D, Palacios valued the Property, 12 which was his principal residence and place of business, at 13 $321,000 and asserted that the value of Upside's secured claim was 14 $216,965.46. It is undisputed that the debt to Upside had matured 15 by its own terms prior to the bankruptcy, and that Palacios did 16 not pay the final balloon payment as agreed. 17 In his proposed chapter 13 plan filed with his bankruptcy 18 petition, Palacios asserted that the prepetition arrears owed to 19 Upside on the loan were $15,205.42, and he proposed to cure the 20 arrearages by paying Upside $253.42 per month for sixty months at 21 0% interest. Except for the arrearages, Palacios's plan did not 22 provide for any other monthly mortgage payments to Upside. 23 Upside opposed confirmation of Palacios's proposed chapter 13 24 plan, contending that the actual prepetition arrears owed were 25 $19,687.91 and, because the loan had fully matured, it should have 26 been classified as a Class 3 creditor, which required monthly 27 28

-3- 1 payments of $3,366.66 that Palacios was unable to fund.5 2 On July 28, 2012, Upside sought relief from stay under 3 § 362(d)(1), contending that its interest in the Property was not 4 adequately protected and that Palacios had not made postpetition 5 payments on the Note (“Stay Relief Motion”). In support, Upside 6 offered a declaration from Argus employee Jennifer Bercy 7 (“Bercy”). According to Bercy, the entire Note was due and 8 payable because it had matured on March 1, 2012. Upside's claim 9 as of July 9 was $220,937.22, including the $200,000 principal, 10 $14,597.26 in accrued interest, and other late charges and costs. 11 Bercy asserted that Palacios's total postpetition delinquency on 12 the loan was $5,740.63, and that an additional payment of 13 $4,914.63 was due and payable on August 1, 2012. Bercy conceded 14 that Upside had received a $2,000 payment from Palacios on 15 July 16, 2012. Finally, although Upside had not checked the box 16 on the stay relief form indicating that Palacios's failure to 17 provide proof of insurance on the Property was a basis for its 18 lack of adequate protection claim, Bercy had checked the box in 19 her declaration indicating that Upside had not been provided with 20 evidence that the Property was currently insured, as required 21 under the terms of the loan. 22 Palacios opposed the Stay Relief Motion, contending that 23 Upside's assertion that one postpetition payment of $4,914.63 had 24 not been made was inconsistent with its assertion that the loan 25 had fully matured on March 1, 2012, which, in that case, argued 26 27 5 The chapter 13 trustee also opposed confirmation of Palacios's proposed plan for nonfeasibility because it failed to 28 pay Upside its prepetition claim of $19,687.

-4- 1 Palacios, no payments would be due and any amount due would be 2 classified as prepetition arrearages curable through the plan. 3 The bankruptcy court held a hearing on the Stay Relief Motion 4 on September 11, 2012. Palacios agreed that the Note had come due 5 on March 1, 2012, and he was willing to pay the full amount of the 6 Note over the term of the plan. Upside was willing to consider 7 Palacios's proposal, but argued that based on his scheduled 8 income, Palacios was clearly unable to make such payments. Upside 9 further argued that it had not been provided any proof of 10 insurance on the Property, and now taxes had come due that 11 remained unpaid. Other than counsel's argument, Upside offered no 12 evidence regarding the alleged unpaid taxes. 13 Palacios agreed with the bankruptcy court's suggestion that 14 Upside's loan would have to be paid off in five years should the 15 plan be confirmed. However, Palacios argued that this was a 16 confirmation issue, not a stay relief issue. As for proof of 17 insurance, Palacios's counsel said he was never informed that 18 insurance needed to be provided, but he could provide it in a 19 timely manner. 20 After considering the parties' arguments, the bankruptcy 21 court orally granted the Stay Relief Motion under § 362(d)(1) for 22 Palacios's “failure to make payments which would be required under 23 the plan” and “lack of insurance.” Hr'g Tr. (Sept. 11, 2012) 24 4:6-7. The court granted further relief under § 362(d)(2), based 25 on its determination that the Property was not necessary to an 26 effective reorganization. Id. at 4:8-9. 27 The bankruptcy court entered an order granting the Stay 28 Relief Motion under § 362(d)(1) and (d)(2) on September 28, 2012

-5- 1 (“Stay Relief Order”). Palacios timely appealed. 2 On October 3, 2012, the motions panel entered an order 3 granting stay pending appeal on the condition that Palacios make 4 monthly payments to Upside of $3,682.29, the amount that would be 5 paid under his chapter 13 plan. The stay would terminate upon the 6 earlier of either confirmation of a plan, or the dismissal or 7 conversion of Palacios's case to chapter 7.6 8 II. JURISDICTION 9 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 10 and 157(b)(2)(G). We have jurisdiction under 28 U.S.C. § 158. 11 III. ISSUES 12 1. Did the bankruptcy court abuse its discretion when it granted 13 the Stay Relief Motion under § 362(d)(1)? 14 2. Did the bankruptcy court abuse its discretion when it granted 15 the Stay Relief Motion under § 362(d)(2)? 16 IV. STANDARD OF REVIEW 17 We review an order granting relief from stay for abuse of 18 discretion. Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 19 450 B.R. 897, 914 (9th Cir. BAP 2011). A bankruptcy court abuses 20 its discretion if it applied the wrong legal standard or its 21 findings were illogical, implausible or without support in the 22 record. TrafficSchool.com, Inc. v. Edriver, Inc., 653 F.3d 820, 23 832 (9th Cir. 2011). 24 25 26 6 As of the date of this Memorandum, Palacios has been making 27 timely payments, no plan has been confirmed, and the case has not been dismissed or converted to chapter 7. In fact, the case has 28 been idle since October 2012.

-6- 1 V. DISCUSSION 2 A. The bankruptcy court did not abuse its discretion when it granted the Stay Relief Motion under § 362(d)(1). 3 4 Under § 362(d), a party in interest may request relief from 5 the automatic stay. Section 362(d)(1) authorizes relief from stay 6 “for cause, including the lack of adequate protection of an 7 interest in property of such party in interest.” “Cause” has no 8 clear definition and is determined on a case-by-case basis. 9 Mac Donald v. Mac Donald (In re Mac Donald), 755 F.2d 715, 717 10 (9th Cir. 1985); Kronemyer v. Am. Contractors Indem. Co. 11 (In re Kronemyer), 405 B.R. 915, 921 (9th Cir. BAP 2009). The 12 party requesting relief from the automatic stay has the burden on 13 the issue of debtor's equity in property; the opposing party has 14 the burden on all other issues. In re Farmer, 257 B.R. 556, 559 15 (Bankr. D. Mont. 2000)(citation omitted); § 362(g). If the movant 16 establishes a prima facie case, the burden shifts to the debtor to 17 prove adequate protection. Section 362(g). 18 The bankruptcy court granted relief under § 362(d)(1) because 19 Palacios had failed to provide Upside with proof of current 20 insurance on the Property, and because he had failed to make 21 postpetition mortgage payments to Upside – payments the bankruptcy 22 court contended would have been required under his eventual 23 chapter 13 plan. 24 Palacios assigns several errors. He first contends he was 25 deprived of proper notice because the bankruptcy court granted 26 relief upon grounds which Upside's Stay Relief Motion failed to 27 assert. For example, Palacios contends the Stay Relief Motion 28 failed to assert that no proof of insurance had been provided to

-7- 1 Upside. We agree that while Upside did not check the box on the 2 first page of the stay relief motion form F 4001-1 indicating lack 3 of insurance as a basis for relief, Bercy's uncontroverted 4 testimony established that Upside had not been provided with proof 5 that the Property was currently insured, as required under the 6 terms of the DOT. Thus, Palacios was on notice about the 7 insurance issue prior to the stay relief hearing. 8 Palacios further argues that Upside's interest was adequately 9 protected due to the approximate $100,000 equity cushion available 10 for its $220,937.22 claim. Therefore, according to Palacios, the 11 bankruptcy court's decision to grant Upside relief on the basis of 12 lack of adequate protection was erroneous. Upside did not assert 13 as a basis for relief the lack of an equity cushion. Further, 14 nothing in the bankruptcy court's ruling indicates that it granted 15 relief for lack of adequate protection because no equity cushion 16 existed. Rather, one reason the bankruptcy court granted relief 17 was because Palacios did not meet his burden of proof that he 18 presently had insurance on the Property. A debtor's failure to 19 insure property can be a basis to grant a secured creditor relief 20 from stay under § 362(d)(1) for lack of adequate protection of its 21 collateral. See Delaney-Morin v. Day (In re Delaney-Morin), 22 304 B.R. 365, 370 n.3 (9th Cir. BAP 2003)(a secured creditor lacks 23 adequate protection if threatened with a decline in the property's 24 value, and a threat to decline includes failure to maintain 25 property insurance). Although Palacios offered to provide proof 26 of current insurance to Upside, nothing in the record indicates 27 that he ever did so. 28 Palacios also contends that the bankruptcy court erred when

-8- 1 it determined that relief was warranted under § 362(d)(1) due to 2 his failure to make postpetition payments on the Note. Palacios 3 argues that, because the loan had matured prepetition on March 1, 4 2012, no postpetition payments could have come due. He further 5 argues that any payments due should have been classified as 6 prepetition arrearages, which was an issue to be determined at 7 confirmation, not on a motion for relief from stay. 8 As a general rule, chapter 13 debtors may not modify the 9 rights of holders of claims secured solely by a security interest 10 in real property that is the debtor's principal residence.7 11 Section 1322(b)(2). However, § 1322(c)(2)8 carves out an 12 exception to the anti-modification rule against home mortgages, 13 allowing modification if the last payment on the original payment 14 schedule for the mortgage is due prior to the date on which the 15 final plan payment is due. Several courts have held that 16 § 1322(c)(2) applies to balloon mortgage payments that mature 17 prepetition, and that § 1322(c)(2) allows chapter 13 debtors to 18 cure such defaults by providing for full payment to the mortgagee 19 20 7 Palacios has not asserted that because he also uses the 21 Property as a place of business that the Property is not his principal residence. 22 8 Section 1322(c)(2) was adopted in 1994. It provides: 23 (c) Notwithstanding subsection (b)(2) and applicable 24 nonbankruptcy law — 25 (2) in a case in which the last payment on the original payment schedule for a claim secured only by a security 26 interest in real property that is the debtor’s principal residence is due before the date on which the final payment 27 under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325 (a)(5) of 28 this title.

-9- 1 over the life of the plan. In re Jones, 188 B.R. 281, 282 (Bankr. 2 D. Or. 1995)(concluding that § 1322(c)(2) overruled Seidel v. 3 Larson (In re Seidel), 752 F.2d 1382 (9th Cir. 1985), which held 4 that a debtor could not cure a prepetition fully matured mortgage 5 because such a cure would be a modification prohibited by 6 § 1322(b)(2)); In re Lobue, 189 B.R. 216, 218 (Bankr. S.D. Fla. 7 1995)(recognizing the overruling of In re Seidel); In re Chang, 8 185 B.R. 50, 53 (Bankr. N.D. Ill. 1995)(recognizing the overruling 9 of In re Seidel); In re Escue, 184 B.R. 287, 293 (Bankr. M.D. 10 Tenn. 1995). See also In re Yett, 306 B.R. 287, 292 (9th Cir. BAP 11 2004)(questioning the viability of In re Seidel following the 1994 12 addition of § 1322(c)(2)). 13 Any doubts of a chapter 13 debtor's ability to cure mortgage 14 defaults such as Palacios's under the plan is further eliminated 15 by § 1322(c)(1), which provides that, notwithstanding § 1322(b)(2) 16 and applicable nonbankruptcy law, a default with respect to, or 17 that gave rise to, a lien on the debtor's principal residence may 18 be cured under § 1322(b)(3) or (5), until the residence is sold at 19 a foreclosure sale. See 8 COLLIER ON BANKRUPTCY ¶ 1322.07[2] (Alan N. 20 Resnick & Henry J. Sommer, eds., 16th ed. 2012)(also recognizing 21 the language of § 1322(c)(1) has overruled In re Seidel). 22 Palacios conceded at the stay relief hearing that in any 23 proposed chapter 13 plan he would have to pay Upside the full 24 amount of the Note over the term of the plan. We agree. However, 25 we cannot agree with Palacios's argument that considering the 26 matter of plan payments at this point was premature. Palacios's 27 chapter 13 plan, filed with his bankruptcy petition nearly three 28 months prior to the stay relief hearing, proposed to cure only the

-10- 1 prepetition arrearages on the Note, with monthly payments of 2 $253.42 for sixty months. The plan proposed no monthly mortgage 3 payments for the remaining balloon amount due and owing. As a 4 result, the plan was unconfirmable on its face. Further, at the 5 time of the stay relief hearing, Palacios's Schedules I and J 6 reflected that he would be unable to pay any amount closely 7 approximating the $3,682.29 monthly payment required to pay Upside 8 in full. Although Palacios claimed at oral argument that his 9 financial situation has improved due to securing a tenant, he has 10 yet to file amended Schedules I and J to reflect this. Finally, 11 leaving aside the proposed plan, Palacios was required under the 12 Note to make monthly interest payments to Upside on any unpaid 13 principal until it had been paid in full. The record established 14 that he made only one of those $2,000 payments by the time of the 15 hearing. 16 We are unable to say that the bankruptcy court abused its 17 discretion by considering this evidence in determining that 18 termination of the stay was warranted for “cause.” See 19 In re Redden, 2011 WL 2292312, at *10 (Bankr. S.D. Tex. June 7, 20 2011) (considering proposed plan and granting relief from stay 21 where debtor would be unable to make the necessary payments to 22 movant in full during the life of the plan); In re Moreland, 23 124 B.R. 921, 923 (Bankr. D. Conn. 1991)(considering proposed plan 24 and denying relief from stay where chapter 13 debtor had proposed 25 good faith plan payments to pay matured prepetition mortgage in 26 full). Even if considering this evidence was somehow an abuse of 27 the bankruptcy court's discretion, it was certainly within its 28 right to terminate the stay due to Palacios's failure to provide

-11- 1 proof of current insurance on the Property. Accordingly, the 2 bankruptcy court did not abuse its discretion when it granted 3 Upside relief from stay under § 362(d)(1) for “cause.” 4 B. The bankruptcy court abused its discretion when it granted the Stay Relief Motion under § 362(d)(2). 5 6 Section 362(d)(2) authorizes relief from stay when the debtor 7 has no equity in the property and the property is not necessary to 8 an effective reorganization. Section 362(d)(2)(A) and (B). Both 9 elements of the test must be met. See 3 COLLIER ON BANKRUPTCY at 10 ¶ 362.07[4]. Equity is “the amount or value of a property above 11 the total liens or charges.” Stewart v. Gurley, 745 F.2d 1194, 12 1196 (9th Cir. 1984)(citations omitted). 13 The bankruptcy court granted relief under § 362(d)(2) because 14 it determined that the Property was not necessary to an effective 15 reorganization. Palacios assigns several errors here, including 16 that the court erred because the elements of § 362(d)(2) were not 17 met as Palacios has at least $40,000 equity in the Property. 18 We agree that Palacios has equity in the Property. We 19 further note that Upside did not request any relief under 20 § 362(d)(2), and it did not provide any evidence in support of 21 such relief. It is also uncontroverted that the Property serves 22 not only as Palacios's principal residence, but also as his place 23 of business. Therefore, presumably, it may be necessary to an 24 effective reorganization. 25 Moreover, the bankruptcy court made no detailed findings of 26 fact and conclusions of law as to why relief was proper under 27 § 362(d)(2), which, since this was a contested matter under 28 Rule 9014, it was required to do under Rule 7052. See

-12- 1 Rule 9014(c) incorporating Rule 7052; In re Veal, 450 B.R. at 919 2 (bankruptcy court must make findings of fact, either orally on the 3 record or in a written decision, in contested matters, and the 4 findings must be sufficient to enable a reviewing court to 5 determine the factual basis for the court's ruling). 6 Accordingly, the bankruptcy court did abuse its discretion 7 when it granted Upside relief from stay under § 362(d)(2). 8 VI. CONCLUSION 9 The bankruptcy court did not abuse its discretion when it 10 granted Upside relief under § 362(d)(1), and we AFFIRM that 11 portion of the Stay Relief Order. However, we REVERSE the portion 12 of the Stay Relief Order granting relief under § 362(d)(2), 13 because the record reflects that Palacios has equity in the 14 Property, and because the bankruptcy court did not articulate any 15 findings on the record to support its decision to grant such 16 relief. 17 18 19 20 21 22 23 24 25 26 27 28

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