In re: Lucio Chagolla Maria D. Hernandez Murueta

Opinion

FILED

1 FEB 09 2016 2 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NC-15-1142-JuKuW )

6 LUCIO CHAGOLLA AND MARIA D. ) Bk. No. 08-57523 HERNANDEZ MURUETA, )

7 )

Debtors. )

8 ______________________________)

)

9 LUCIO CHAGOLLA; MARIA )

D. HERNANDEZ MURUETA, )

10 )

)

11 Appellants, ) O P I N I O N v. )

12 )

JP MORGAN CHASE BANK, N.A.,1 )

13 )

Appellee. )

14 ______________________________) 15 Argued and Submitted on January 21, 2016 at San Francisco, California 16 Filed - February 9, 2016

17 Appeal from the United States Bankruptcy Court 18 Northern District of California 19 Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding

________________________

20 21 Appearances: Leela V. Menon of the Law Offices of David A.

Boone for appellants Lucio Chagolla and Maria D.

22 Hernandez Murueta. 23 ________________________ 24 Before: JURY, KURTZ, and WANSLEE,2 Bankruptcy Judges.

25 26 1 JP Morgan Chase Bank did not participate in this appeal.

27 2 Hon. Madeleine C. Wanslee, United States Bankruptcy Judge 28 for the District of Arizona, sitting by designation.

(continued...)

1 JURY, Bankruptcy Judge: 2 3 Appellants Lucio Chagolla and Maria D. Hernandez Murueta 4 (“Debtors”) appeal the bankruptcy court’s order denying their 5 unopposed valuation motion under 11 U.S.C. § 506(a) and (d) and 6 Federal Rule of Bankruptcy Procedure (“FRBP”) 3012, seeking to 7 value real property upon which the junior lienholder, JP Morgan 8 Chase Bank, N.A. (“JP Morgan”), is secured.3 Although the 9 valuation motion was brought after Debtors completed their plan 10 and received a discharge, Debtors assert that the bankruptcy 11 court erred in denying the motion as untimely. We agree with 12 Debtors. In the absence of prejudicial delay, we find that a 13 motion to value and avoid the lien of a junior lienholder may be 14 brought after discharge if the confirmed plan called for its 15 avoidance and treated it as unsecured and if no prejudice to the 16 junior lienholder will occur. Accordingly, for the reasons 17 stated below, we REVERSE the bankruptcy court’s order and REMAND 18 the matter to the bankruptcy court for further proceedings 19 consistent with this opinion. 20 I. FACTS 21 The facts are not in dispute. Debtors owe more money on 22 their home than it is worth. The fair market value of their 23 home on the confirmation date was much less than the amount due 24

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25 26 3 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules of Bankruptcy 28 Procedure.

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1 on the first mortgage, let alone what is owed on the second. 2 The second mortgage held by JP Morgan is the subject of the 3 instant appeal. 4 Debtors filed a petition and Chapter 13 plan on December 5 23, 2008. Pursuant to the plan, Debtors would pay zero percent 6 to unsecured creditors and would file an adversary proceeding to 7 avoid the junior lien of JP Morgan within ninety days of the 8 commencement of the case. The plan was confirmed at a hearing 9 on February 19, 2009, with the order entered on March 2, 2009. 10 JP Morgan did not object to its treatment at confirmation. The 11 confirmation hearing was held prior to the end of the ninety-day 12 period provided in the plan to file the adversary to avoid JP 13 Morgan’s lien. However, no adversary proceeding was ever 14 commenced by Debtors. On March 12, 2014, after completing all 15 payments required by the plan, Debtors obtained a discharge. 16 The case was closed on April 11, 2014. 17 Nearly a year after the case was closed and six years after 18 the plan was confirmed, Debtors filed a motion to reopen the 19 case for the sole purpose of filing a lien avoidance motion. 20 After the court reopened the case, on February 23, 2015, Debtors 21 filed their lien avoidance motion, which provided: (1) the fair 22 market value of their home at confirmation was $550,000.00; 23 (2) Countrywide Home Loans Servicing, L.P. holds a senior deed 24 of trust with a principal balance of $628,804.83; and (3) JP 25 Morgan holds a junior lien with a principal balance of 26 $130,686.22. Relying on the holding of Zimmer v. PSB Lending 27 Corporation(In re Zimmer), 313 F.3d 1220 (9th Cir. 2002), 28 Debtors argued that based on the property valuation, the wholly

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1 unsecured second lien of JP Morgan should be avoided. Although 2 the motion was properly served, JP Morgan did not file an 3 opposition or participate in the proceeding. 4 On April 21, 2015, the bankruptcy court entered an order 5 denying the motion. Although recognizing that there is not a 6 time limitation in the Bankruptcy Code or Rules which would 7 prevent Debtors from bringing their valuation motion after the 8 case was closed, the court held that (1) it lacked jurisdiction 9 to grant the motion, (2) the motion was untimely based on case 10 law the court reviewed, and (3) the motion was not heard in 11 conjunction with the hearing on the plan as required by 12 § 506(a). This timely appeal followed. 13 II. JURISDICTION 14 The bankruptcy court had jurisdiction over this proceeding 15 under 28 U.S.C. §§ 1334 and 157(b). We have jurisdiction under 16 28 U.S.C. § 158. 17 III. ISSUE 18 Whether the bankruptcy court erred in denying, as being 19 untimely, Debtors’ motion to value and avoid a junior lien that 20 was brought after Debtors were discharged and the case was 21 closed. 22 IV. STANDARD OF REVIEW 23 Questions of law are subject to de novo review. United 24 States v. Lang, 149 F.3d 1044, 1046 (9th Cir. 1998). Questions 25 of fact are reviewed under the clearly erroneous standard. 26 Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982). 27 Based on the undisputed facts, we review the bankruptcy 28 court’s conclusions of law de novo. Havelock v. Taxel (In re

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1 Pace), 67 F.3d 187, 191 (9th Cir. 1995); United States v. Lang, 2 149 F.3d at 1046. 3 V. DISCUSSION 4 The bankruptcy court denied Debtors’ valuation motion for 5 the reasons stated above. We will address each in turn. 6 A. The bankruptcy court retained jurisdiction over the plan 7 confirmation order 8 The bankruptcy court concluded it lacked jurisdiction to 9 grant relief on Debtors’ motion. We disagree. Bankruptcy 10 courts have always been empowered to interpret and enforce their 11 own orders, which includes an order confirming a chapter 13 12 plan. 13 The jurisdiction of bankruptcy courts, like all federal 14 courts, is created and limited by statute. See Celotex Corp. V. 15 Edwards, 514 U.S. 300, 307 (1995). As such, a bankruptcy court 16 retains jurisdiction over proceedings “‘arising under title 11, 17 or arising in or related to cases under title 11.’” Wilshire 18 Courtyard v. California Franchise Tax Board (In re Wilshire 19 Courtyard), 729 F.3d 1279, 1287 (9th Cir. 2013) (quoting 28 20 U.S.C. § 157(b)(1)). 21 It is well established that a bankruptcy court retains 22 continuing jurisdiction to interpret and enforce its own orders. 23 See Travelers Indemnity Company v. Bailey, 557 U.S. 137, 151 24 (2009); see also In re Wilshire Courtyard,729 F.3d at 1287. 25 “Related to” jurisdiction is not indefinite. Prior to a debtor 26 confirming a plan, a bankruptcy court has broad discretion 27 “related to” almost “every matter directly or indirectly related 28 to the bankruptcy.” Sasson v. Sokoloff, 424 F.3d 864, 868 (9th

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1 Cir. 2005). However, post-confirmation, the Ninth Circuit has 2 restricted “related to” jurisdiction to matters that are 3 “closely related,” including all “matters ‘affecting the 4 interpretation, implementation, consummation, execution, or 5 administration of the confirmed plan.’” In re Wilshire 6 Courtyard,729 F.3d at 1287 (quoting Binder v. Price Waterhouse & 7 Co. (In re Resorts Int’l, Inc.), 372 F.3d 154, 166-67 (3rd Cir. 8 2004). 9 Based on Debtors’ confirmed plan, which stated the junior 10 lien of JP Morgan would be avoided and treated as unsecured, the 11 bankruptcy court retained jurisdiction over the matter to 12 “implement” or “enforce” the plan confirmation order. See 13 Travelers Indemnity Company, 557 U.S. at 151 (“[i]t is 14 undisputed that [a] bankruptcy court [has] continuing 15 jurisdiction to interpret and enforce its own ...orders”); see 16 also In re Wilshire Courtyard,729 F.3d at 1287. Furthermore, 17 § 105(a) provides additional authority for the bankruptcy court 18 to implement the plan order. Section 105(a) allows a court to 19 issue any order, process, or judgment that is necessary or 20 appropriate to carry out the provisions of the Bankruptcy Code. 21 Therefore, the bankruptcy court had jurisdiction to 22 implement and enforce Debtors’ confirmed chapter 13 plan order 23 with respect to treatment of the second lien of JP Morgan. 24 B. Debtors’ motion was not untimely under § 506(a) or Rule 3012 25 Section 506(a) provides for judicial valuation of 26 collateral in order to determine the status of a creditors’ 27 claim. See Nobelman v. American Savings Bank, 508 U.S. 324, 328 28 (1993). The statute “divides claims into ‘secured claims’ and

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1 ‘unsecured claims.’” In re Zimmer, 313 F.3d at 1222-23 (quoting 2 11 U.S.C. § 506(a)). Specifically, § 506(a) provides: 3 An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a 4 secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . .

5 and is an unsecured claim to the extent of the value of such creditor’s interest...is less than the amount of such 6 allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed 7 disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan 8 affecting such creditor’s interest. 9 As such, the “thrust of § 506(a) is to classify allowed claims 10 as either secured or unsecured, which in turn affects how the 11 bankruptcy code treats them.” Woolsey v. Citibank N.A. (In re 12 Woolsey), 696 F.3d 1266, 1272 (10th Cir. 2013). 13 Rule 3012 provides the procedure for valuing collateral and 14 is to be read together with § 506(a). It provides: 15 The court may determine the value of a claim secured by a lien on property in which the estate has an interest on 16 motion of any party in interest and after a hearing on notice to the holder of secured claim and any other entity 17 as the court may direct. 18 The bankruptcy court correctly conceded that neither 19 § 506(a) nor Rule 3012 has a time limit for filing a valuation 20 motion. See Collier on Bankruptcy, ¶ 3012.01 (16th ed. 2012) 21 (“The timing of the determination of a particular valuation will 22 vary depending on the purpose for which it is sought.”). 23 Furthermore, we are not aware of any reported Ninth Circuit 24 cases which place a time bar on bringing a valuation motion 25 after discharge or after the case is closed. Therefore, the 26 motion was not per se untimely. 27 In a practical sense, we see little difference between an 28 avoidance motion filed under § 506(a) and one filed under

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1 § 522(f) such that only the passage of time, without prejudice to 2 a creditor, bars recovery. Although a lien avoidance under 3 § 522(f)4 is substantively different, an analogy to the timing of 4 such motion is appropriate. It has been consistently held that 5 there exists no time limit to bring a motion to avoid a lien 6 under § 522(f). Yazzie v. Postal Fin. Co. (In re Yazzie), 24 7 B.R. 576, 577 (9th Cir. BAP 1982) (“No provisions of the Code or 8 Rules (present or proposed) have established a time limit for 9 bringing an action to avoid a lien under [] § 522(f).”); see also 10 Goswami v. MTC Distributing (In re Goswami), 304 B.R. 386, 392 11 (9th Cir. BAP 2003); Luna v. California National Bank (In re 12 Luna), 2007 WL 7541003, at *3 (9th Cir. BAP 2007). Rather, the 13 key to whether the bankruptcy court will allow a § 522(f) lien 14 avoidance to be filed after a case is closed is “whether the 15 creditor is sufficiently prejudiced so that i[t] would be 16 inequitable to allow avoidance of the lien.” ITT Financial Serv. 17 v. Ricks (In re Ricks), 89 B.R. 73, 75-6 (9th Cir. BAP 1988); see 18 also In re Goswami, 304 B.R. at 392. This argument can be 19 applied equally in a § 506(a) lien avoidance. 20 Under both statutes, neither the Code nor the Rules 21 establish a time limitation for filing the avoidance motion. 22 Because Congress has not placed any statutory limitations, nor 23 are there any common law doctrines which draw a time bar, we are 24 persuaded that no arbitrary time limitation exists. However, 25

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26 Section 522(f) provides: the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent 27 that such lien impairs an exemption to which the debtor would have been entitled . . . if such lien is – (A) a judicial 28 lien . . . .

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1 this finding is not without limitation. In order to bring a 2 motion to avoid lien under § 506(a) after a debtor has received a 3 discharge or the case is closed, at a minimum, the following must 4 be satisfied: first, the confirmed plan must call for avoiding 5 the wholly unsecured junior lien and treat any claim as 6 unsecured; second, the chapter 13 trustee must treat the claim as 7 unsecured pursuant to the plan; and third, the creditor must not 8 be sufficiently prejudiced so that it would be inequitable to 9 allow avoidance after entry of discharge or the closing of the 10 case. 11 In this case, the confirmed plan provided that the wholly 12 unsecured junior lien of JP Morgan would be avoided and treated 13 as unsecured. JP Morgan did not object to either its treatment 14 under the plan or to Debtors’ valuation motion. The docket 15 reflects that prior to confirmation JP Morgan filed a secured 16 claim based on the second lien. The Trustee’s Final Report 17 acknowledges the claim was scheduled as secured but asserted as 18 unsecured and shows that it, like all the other unsecured claims, 19 received nothing.5 Therefore, there is nothing in the record to 20 indicate that JP Morgan has been prejudiced in any way by 21 Debtors’ delay in avoiding their lien.6 22 23

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Although neither JP Morgan’s proof of claim nor the 24 Trustee’s Final Report were included in the record, we may take judicial notice of the underlying bankruptcy court records 25 relating to an appeal. See O’Rourke v. Seaboard Sur. Co. (In re 26 E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989).

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27 The confirmed plan paid 0% to unsecured creditors, so whether JP Morgan did or did not file a claim, its mandatory 28 treatment would have been the same.

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1 The record indicates Debtors gave JP Morgan adequate notice 2 of both the plan and the subsequent motion. Consistent with the 3 plan, the motion set forth the proposed treatment of JP Morgan’s 4 lien, the address of the property, the property value, and that 5 this value was less than the amount owed on the first mortgage. 6 As such, JP Morgan had “adequate notice” of the proceeding, yet 7 chose not to participate. See Mullane v. Cent. Hanover Bank & 8 Trust Co., 339 U.S. 306, 314 (1950) (“[adequate notice is notice 9 that is] reasonably calculated, under all circumstances, to 10 apprise interested parties of the pendency of the action and 11 afford them an opportunity to present their objections”). 12 Furthermore, as noted, the chapter 13 trustee made payments over 13 the life of the plan on the basis that JP Morgan’s claim was 14 unsecured. As such, the chapter 13 plan is preclusive as to the 15 treatment of JP Morgan’s claim. See Lomas Mortgage USA v. Wiese, 16 980 F.2d 1279, 1284 (9th Cir. 1993) (“An order confirming a 17 Chapter 13 plan is res judicata as to all justiciable issues 18 which were or could have been decided at the confirmation 19 hearing.”). 20 Based on the foregoing, we see no prejudice and therefore no 21 reason why JP Morgan’s lien could not be avoided. 22 C. Reading of § 506(a) 23 The bankruptcy court concluded that § 506(a) requires the 24 valuation determination be made in conjunction with a hearing on 25 the plan. It reasoned that because Debtors’ motion was not heard 26 at the same time as the confirmation hearing, it was untimely. 27 We disagree with the court’s analysis. Section 506(a) 28 requires that the “. . . value shall be determined . . . in

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1 conjunction with any hearing on such disposition or use or on a 2 plan affecting such creditor’s interest.” The language of 3 § 506(a) is disjunctive. The hearing could in fact be in 4 conjunction with the disposition or use. It is not limited only 5 to the confirmation of the plan. Moreover, in “conjunction” does 6 not necessarily mean “a simultaneous occurrence,” but rather 7 could mean “a combination of circumstances.” Merriam Webster at 8 244 (10th Ed.). Under this reading, the statute could allow a 9 hearing on the value in “conjunction” with the continued use or 10 disposition of Debtors’ property, as was the case here. Since 11 the confirmed plan called for avoiding the junior lien and 12 treating it as unsecured, a valuation hearing at any time could 13 be deemed “in conjunction with” the plan. 14 D. Bankruptcy court’s authority is not persuasive 15 The bankruptcy court reached its conclusion by relying on 16 three cases, which we do not find controlling or persuasive. 17 The bankruptcy court first relied on In re Wilkins, 71 B.R. 18 665 (Bankr. N.D. Ohio 1987), asserting that the Wilkins court 19 denied a valuation motion as untimely when it was filed a mere 20 month after the confirmation of the chapter 13 plan. However, in 21 Wilkins, the confirmed plan provided for 100% payment of the 22 secured claim on a car. Only when the debtors realized that plan 23 would not be feasible did they file their valuation motion, to 24 which the creditor objected. Our case is different simply 25 because the plan called for JP Morgan’s treatment as unsecured 26 and it was paid as such. Debtors here did not materially change 27 the creditor’s expected treatment under the plan, making Wilkins 28 distinguishable.

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1 Secondly, it relied on McPherson v. Green Tree Servicing, 2 LLC (In re McPherson), 2013 WL 6657599 (D. Colo. December 17, 3 2013), an unpublished case out of Colorado. The McPherson 4 district court affirmed the bankruptcy court finding that a 5 reasonable interpretation of § 506(a) is that it requires the 6 valuation be made either separate from or during the confirmation 7 hearing and in conjunction with the confirmation of the plan. 8 However, in McPherson, the plan provided that the unsecured 9 status of the creditor would be determined subject to the court’s 10 order granting the valuation motion. No hearing was held and no 11 valuation made prior to confirmation, leaving the plan terms 12 uncertain. Here, the plan terms were certain and the later-filed 13 valuation motion was consistent with the terms. 14 Finally, the court relied on Cal. Fidelity, Inc. v. Eaton 15 (In re Eaton), 2006 WL 6810924 (9th Cir. BAP February 28, 2006). 16 The bankruptcy court relied on a footnote in Eaton, which 17 expressed “doubt” that a bankruptcy court can value a secured 18 claim under § 506(a) “in conjunction with any hearing on a plan” 19 when the valuation hearing was years after confirmation.7 Being 20 unpublished, Eaton is of no precedential value to this Panel and 21 the footnote provided no analysis. Moreover, the plan in Eaton 22 23 7 Footnote 14 provided: “We doubt, but need not decide 24 under these facts, whether the bankruptcy court can, consistent with [506(a),] value a secured claim in conjunction with any 25 hearing on ... a plan affecting such [secured] creditor’s 26 interest when that plan was confirmed years before, and the debtors have completed their performance of that plan and 27 received a discharge.” In re Eaton, 2006 WL 6810924, at *8 n.

14.

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1 was silent on the treatment of the secured claims, which caused 2 due process concerns not present in the instant case. 3 E. Despite § 1322(b)(2), the bankruptcy court may remove the 4 wholly unsecured lien of JP Morgan in this case 5 In a chapter 13, generally speaking, claims secured by a 6 security interest in a debtor’s principal residence may not be 7 modified. See § 1322(b)(2) (providing a plan may “modify the 8 rights of holders of secured claims, other than a claim secured 9 only by a security interest in real property that is the debtor’s 10 principal residence . . . .”). However, despite § 1322(b)(2), 11 such a lien may be “stripped off” and avoided under § 506(d) if 12 the bankruptcy court determined under § 506(a) that there is no 13 value in the residence to secure the claim and that the 14 creditor’s claim is rendered wholly unsecured. In re Zimmer, 313 15 F.3d at 1222-23. 16 As the record indicates, Debtors’ valuation motion 17 established that JP Morgan held a wholly unsecured second. Under 18 In re Zimmer, the JP Morgan second may be “stripped off” and 19 avoided under § 506(d). Therefore, we conclude that the trial 20 court erred in denying the lien avoidance sought by Debtors. 21 VI. CONCLUSION 22 For the reasons stated above, we REVERSE the decision of the 23 bankruptcy court and REMAND for further proceedings consistent 24 with the opinion. 25 26