In re: Michael Paul Free Hak Suk Free

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 17, 2015
• Docket: WW-14-1395-JuKiF
• Status: Published

Opinion

FILED DEC 17 2015 1 ORDERED PUBLISHED 2 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. WW-14-1395-JuKiF ) 6 MICHAEL PAUL FREE and HAK SUK ) Bk. No. 3:14-bk-41876-PBS FREE, ) 7 ) Debtors. ) 8 ______________________________) ) 9 MICHAEL PAUL FREE; HAK SUK ) FREE, ) 10 ) Appellants, ) 11 ) v. ) O P I N I O N 12 ) MICHAEL G. MALAIER, Chapter 13) 13 Trustee,* ) ) 14 Appellee. ) ______________________________) 15 Argued and Submitted on September 25, 2015 16 at Seattle, Washington 17 Filed - December 17, 2015 18 Appeal from the United States Bankruptcy Court for the Western District of Washington 19 Honorable Paul B. Snyder, Bankruptcy Judge, Presiding 20 _________________________ 21 Appearances: Dorothy A. Bartholomew argued for appellants Michael Paul Free and Hak Suk Free; Samuel J. Dart 22 argued for appellee K. Michael Fitzgerald. _________________________ 23 Before: JURY, KIRSCHER, and FARIS, Bankruptcy Judges. 24 25 * On May 15, 2015, the BAP Clerk’s Office entered an order 26 substituting K. Michael Fitzgerald as the successor chapter 13 27 trustee in place of the former chapter 13 trustee, David M. Howe. After the appeal was heard and submitted, Michael G. Malaier was 28 appointed the successor chapter 13 trustee to Fitzgerald. 1 JURY, Bankruptcy Judge: 2 3 Appellants Michael Paul Free and Hak Suk Free (Debtors) 4 filed a chapter 71 petition and received their § 727 discharge. 5 The discharge released them from personal liability on two 6 wholly-unsecured junior liens that encumbered their real 7 property. Before their chapter 7 case was closed, Debtors filed 8 this chapter 13 case intending to strip off the two junior liens 9 from their real property through their chapter 13 plan. The 10 chapter 13 trustee, David M. Howe (Trustee), moved to dismiss 11 their case, arguing that Debtors were ineligible for chapter 13 12 relief because their unsecured debt, which included the two 13 wholly-unsecured junior liens, exceeded the statutory limit for 14 eligibility under § 109(e). The bankruptcy court agreed and 15 entered an order dismissing Debtors’ case. This appeal followed. 16 For the reasons set forth below, we REVERSE and REMAND. 17 I. FACTS 18 The facts are undisputed. Debtors filed a chapter 7 19 bankruptcy petition on December 23, 2013. Debtors scheduled 20 their real property located on Taylor Street in Milton, 21 Washington as having a current value of $425,000. Such real 22 property is encumbered by three liens: first deed of trust in the 23 amount of $438,621.93 held by Deutsche Bank Trust Company 24 Americas, as Trustee for Residential Accredit Loans, Inc., 25 26 1 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.

-2- 1 Mortgage Asset-backed Pass-through Certificates, Series 2003-QS9 2 (Deutsche); second deed of trust in the amount of $348,481.01 3 held by Timberland Savings Bank (Timberland); and third deed of 4 trust in the amount of $186,705.68 held by Boeing Employees 5 Credit Union (BECU). Debtors received their § 727 discharge on 6 April 1, 2014. 7 Before their chapter 7 case was closed, Debtors filed this 8 joint chapter 13 case on April 3, 2014, intending to strip off 9 the wholly-unsecured junior liens of Timberland and BECU 10 (collectively, Junior Lienholders) through their chapter 13 plan. 11 In Schedule A, Debtors listed the value of their real property on 12 Taylor Street as $425,000 encumbered with secured claims in the 13 amount of $990,069.03. In Schedule D, Debtors listed creditors 14 holding secured claims in the amount of $1,018,280.54. In 15 Schedule E, Debtors listed $3,204.76 in unsecured business taxes 16 and in Schedule F listed a student loan creditor holding an 17 unsecured claim in the amount of $4,000. BECU filed a proof of 18 claim asserting a secured claim in the amount of $180,187.80. 19 Trustee moved to dismiss Debtors’ case, arguing that the 20 unsecured debt, including the wholly-unsecured Junior 21 Lienholders’ debt totaling $535,186.69, exceeded the unsecured 22 debt limit of $383,175 for chapter 13 eligibility under § 109(e). 23 Relying on In re Shenas, 2011 WL 3236182 (Bankr. N.D. Cal. 24 July 28, 2011), Debtors asserted that the unsecured junior liens 25 should not be included in the unsecured debt calculation of 26 § 109(e) when the claims were unenforceable against Debtors due 27 to their chapter 7 discharge. 28 At the July 31, 2014 hearing on the matter, the bankruptcy

-3- 1 court ruled that Debtors were ineligible to be debtors under 2 chapter 13 since their unsecured debts exceeded the statutory 3 limit. The court invited Debtors to submit additional authority 4 supporting their position. The court continued the matter to 5 August 7, 2014, for the purpose of entering a dismissal order. 6 On August 6, 2014, Debtors filed a motion for reconsideration of 7 the July 31, 2014 oral ruling. Because the bankruptcy court had 8 not yet entered an order on Trustee’s motion to dismiss, the 9 court construed Debtors’ motion for reconsideration as a 10 supplemental memorandum in opposition to Trustee’s motion. 11 On August 14, 2014, the bankruptcy court entered the order 12 dismissing Debtors’ case. The court noted that there were cases 13 within the Ninth Circuit that addressed components of the issue 14 before it, but acknowledged that there was no controlling case 15 directly on point. Relying on the holdings in Johnson v. Home 16 State Bank, 501 U.S. 78 (1991), and Quintana v. Commissioner 17 (In re Quintana) (Quintana II), 915 F.2d 513 (9th Cir. 1990), 18 aff’g (Quintana I), 107 B.R. 234 (9th Cir. BAP 1989), and the 19 analysis set forth in Davis v. Bank of America (In re Davis) 20 (Davis I), 2012 WL 3205431 (9th Cir. BAP Aug. 3, 2012)2 21 (Quintana I, Quintana II, and Davis I were all chapter 12 cases), 22 and In re DiClemente, 2012 WL 3314840 (D.N.J. Aug. 13, 2012), the 23 bankruptcy court included the Junior Lienholders’ unsecured debt 24 in its eligibility calculation despite Debtors’ chapter 7 25 discharge. Therefore, because Debtors were not eligible for 26 chapter 13 due to their unsecured debt exceeding the statutory 27 28 2 Aff’d (Davis II), 778 F.3d 809 (9th Cir. 2015).

-4- 1 limit under § 109(e), the bankruptcy court granted Trustee’s 2 motion to dismiss their case. Debtors filed a notice of appeal 3 from the order on the same day. 4 Debtors subsequently filed a motion to vacate the order of 5 dismissal and impose a stay pending appeal. The bankruptcy court 6 denied their motion. 7 II. JURISDICTION 8 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 9 §§ 1334 and 157(b)(2)(A) and (O). We have jurisdiction under 28 10 U.S.C. § 158. 11 III. ISSUE 12 Did the bankruptcy court err when it counted the wholly- 13 unsecured Junior Lienholders’ debt as unsecured debt for purposes 14 of determining chapter 13 eligibility under § 109(e)? 15 IV. STANDARD OF REVIEW 16 Eligibility determinations under § 109 involve issues of 17 statutory construction and conclusions of law, including 18 interpretation of Bankruptcy Code provisions, which we review de 19 novo. Smith v. Rojas (In re Smith), 435 B.R. 637, 642 (9th Cir. 20 BAP 2010). 21 V. DISCUSSION 22 A. The bankruptcy court erred in relying upon inapplicable and distinguishable case law. 23 24 Section 109(e) limits eligibility for chapter 13 relief to 25 those individuals with regular income who owe on the date of the 26 filing of the petition, noncontingent, liquidated, unsecured 27 debts of less than $383,175 and noncontingent, liquidated, 28

-5- 1 secured debts of less than $1,149,525.3 Eligibility debt limits 2 are strictly construed. Soderlund v. Cohen (In re Soderlund), 3 236 B.R. 271, 274 (9th Cir. BAP 1999). 4 On appeal, Debtors ask the Panel to hold that wholly- 5 unsecured liens are not “unsecured debts” for eligibility 6 purposes in a so-called chapter 20 case (a chapter 13 case filed 7 after the debtor receives a chapter 7 discharge). Debtors assert 8 that they do not “owe” Timberland or BECU unsecured “debt” for 9 the purpose of establishing chapter 13 eligibility under § 109(e) 10 because any unsecured debts Debtors owed to their creditors were 11 discharged. 12 We begin with the relevant words of § 109(e), “unsecured 13 debts.” “The term ‘debt’ means liability on a claim.” 14 § 101(12). “The term ‘claim’ means . . . right to payment 15 . . . .” § 101(5)(A). Thus, there is no “unsecured debt” unless 16 the creditor has a “right to payment” on an unsecured basis. 17 Next, we turn to the relatively simple analysis of what 18 occurred in Debtors’ prior chapter 7 case. Debtors discharged 19 their personal liability to Timberland and BECU in that case when 20 they received their § 727 discharge. Under applicable law, 21 § 524(a)(2), the discharge “operates as an injunction against the 22 commencement or continuation of an action, the employment of 23 process, or an act, to collect, recover or offset any such debt 24 as a personal liability of the debtor.” The discharge injunction 25 “provides for a broad injunction against not only legal 26 27 3 Under § 104, these monetary limits are periodically 28 adjusted for inflation.

-6- 1 proceedings, but also any other acts to collect a discharged debt 2 as a personal liability of the debtor . . . . It extends to all 3 forms of collection activity . . . .” 4 Collier on Bankruptcy, 4 ¶ 524.02[2] (Alan N. Resnick and Henry J. Sommer, eds. 16th ed. 5 2010). Simply put, no creditor can demand payment on a 6 discharged debt, and the debtors have no personal liability to 7 pay such a debt. 8 The references to “personal liability” in § 524(a) preserve 9 any in rem rights a creditor might have in the debtor’s property. 10 This is the source of the dogma that liens “ride through” 11 bankruptcy. But the discharge bars any claims that are not 12 secured. Thus, applying the statutory definitions to the words 13 of § 109(e), debts that were discharged in chapter 7 are not 14 “unsecured debts.” 15 The analysis of Shenas, which Debtors cited to the 16 bankruptcy court, is persuasive. In Shenas, chapter 13 debtors 17 who had previously received a chapter 7 discharge sought to strip 18 off a wholly unsecured junior lien against their primary 19 residence. The creditor argued that treating its claim as 20 unsecured rendered debtors ineligible for relief because the 21 debtors’ unsecured claims would then exceed the § 109(e) 22 limitation. The bankruptcy court disagreed, ruling that the 23 discharge operated to render the debtors’ debt to the creditor 24 unenforceable as a personal liability. 25 Being unenforceable as a personal liability, the debt is not allowable as an unsecured claim in this case. 26 Sections 502(b) and 506(a). It follows that the [d]ebtors do not owe any unsecured debt to Green Tree 27 for purposes of the unsecured debt limitation of § 109(e). 28

-7- 1 In re Shenas, 2011 WL 3236182, at *1. 2 The bankruptcy court here rejected Debtors’ contentions and 3 found that Shenas was not persuasive. Instead, it stated that 4 its decision on this issue of first impression was controlled by 5 the Supreme Court’s ruling in Johnson, the Ninth Circuit’s 6 decision in Quintana II, and this Panel’s rulings in Quintana I 7 and Davis I. We disagree that those cases control the outcome of 8 the question before us for the reasons stated below and hold that 9 debts for which the in personam liability was discharged in a 10 prior chapter 7 should not be counted toward the unsecured debt 11 limit for eligibility under § 109(e). 12 1. Johnson’s limited holding does not support the bankruptcy court’s ruling. 13 14 We think the bankruptcy court (and other courts reaching a 15 similar conclusion) erred partly because it misread Johnson, so 16 we begin with that Supreme Court case. If anything, we find the 17 words of the Supreme Court supportive of our position that the 18 prior discharge means these “stripped” mortgages do not revert to 19 unsecured debt for eligibility purposes. 20 In Johnson, the debtor, who had previously discharged his in 21 personam liability on his mortgage in a chapter 7 case, filed a 22 subsequent chapter 13 case with the intent to pay an in rem 23 judgment based on foreclosure litigation through the terms of the 24 plan. Although the bankruptcy court found such use of chapter 13 25 proper, the district and circuit courts both held otherwise, 26 ruling that because the in personam liability for the lien had 27 been discharged, no “claim” remained to be reorganized through 28 the chapter 13 plan. Based on a circuit split, the Supreme Court

-8- 1 granted certiorari and framed the issue before it: “The issue in 2 this case is whether a mortgage lien that secures an obligation 3 for which a debtor’s personal liability has been discharged in a 4 Chapter 7 liquidation is a ‘claim’ subject to inclusion in an 5 approved Chapter 13 reorganization plan.” Id. at 82 (emphasis 6 added). Following rules of statutory construction, the Court 7 determined that the mortgage lien was a claim within the terms of 8 § 101(5) because the mortgage lien holder retained a “right to 9 payment” in the form of its right to the proceeds from the sale 10 of the debtor’s property. Id. at 84. In observing that this 11 holding was consistent with other parts of the Code, including 12 § 502(b)(1), the Court stated: “In other words, the court must 13 allow the claim if it is enforceable against either the debtor or 14 his property.” Id. at 85 (emphasis in the original). 15 In sum, the Court reached the conclusion that the in rem 16 right to proceeds from a sale of its collateral meant the secured 17 creditor held a claim which could be addressed in a chapter 13 18 plan. That is the only determination the Court made. In fact, 19 the Court reinforced the effect of the chapter 7 discharge with 20 regard to an unsecured liability of the debtor: “The Court of 21 Appeals thus erred in concluding that the discharge of 22 petitioner’s personal liability on his promissory notes 23 constituted the complete termination of the Bank’s claim against 24 petitioner. Rather, a bankruptcy discharge extinguishes only one 25 mode of enforcing a claim - namely, an action against the debtor 26 in personam - while leaving intact another - namely, an action 27 against the debtor in rem.” Id. at 84 (last emphasis added). 28 ///

-9- 1 2. The Quintana and Davis line of cases concerning chapter 12 are distinguishable and do not control 2 the current case. 3 The Ninth Circuit and BAP cases relied on by the bankruptcy 4 court, two before Johnson and two after, reach similar 5 conclusions that, because of the “right to payment” based on a 6 secured lien, a claim - and therefore a debt - exists even though 7 in personam liability is unenforceable. However, they apply that 8 holding in the context of determining whether a chapter 12 9 debtor’s “aggregate debts” exceeded the statutory limitation as 10 set by §§ 109(f) and 101(18).4 We find that Quintana I, 11 Quintana II, Davis I, and Davis II, which speak of “aggregate 12 debts,” are distinguishable from the separately calculated 13 secured and unsecured debt limits for a chapter 13 case. 14 In Quintana I and Quintana II, as pertinent here, a judgment 15 creditor of the debtors had agreed to waive any right to a 16 deficiency judgment against the debtors after sale of the real 17 property subject to its judgment lien, which property was 18 purportedly worth far less than the amount of the judgment. In 19 seeking relief in chapter 12, the debtors asserted that because 20 any personal liability had been waived by the judgment creditor, 21 making it a nonrecourse obligation, only the secured value of the 22 4 23 Section 109(f) provides: “Only a family farmer or family fisherman with regular annual income may be a debtor under 24 chapter 12 of this title.” 25 “Family farmer” is defined by § 101(18)(A) as an “individual 26 or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $4,031,575 . . . .” (This debt 27 limit is as currently effective and has been adjusted periodically under § 104. Also, § 101(18) was § 101(17) prior to 28 2005.)

-10- 1 judgment lien, as measured by the value of the property, should 2 count toward the aggregate debt limit for a family farmer. By 3 measuring its debt against only this secured value, debtors 4 contended they were under the debt limit. After the bankruptcy 5 court disagreed and found the debtors ineligible, debtors 6 appealed to the BAP. Observing that the term “aggregate debts” 7 includes “all types of debts,” the BAP looked to the definitions 8 of debt and claim in § 101 and determined that “debt” had the 9 same broad meaning as “claim.” Quintana I, 107 B.R. at 237. It 10 then observed that under the provisions of § 102(2), a claim 11 against property of the debtor is treated as a claim against the 12 debtor.5 It follows that 13 [b]ecause the term claim is coextensive with the term debt, this obligation is a debt of the debtors which is 14 defined by the amount of the claim against the property. Connecticut General’s claim against the 15 property is approximately $1.528 million because it has the right to payment of that amount from the property 16 or from the proceeds of the sale of the property. 17 Id. at 239. The Panel limited its reasoning to the secured 18 nature of the debt; nowhere does it state that any portion 19 survives as an unsecured liability. Quintana I does not suggest 20 the deficiency claim is an unsecured obligation, nor did it need 21 to, since it was looking at only “aggregate debts.” 22 In affirming the BAP, the Ninth Circuit took a more limited 23 approach. After determining that debt and claim were equivalent, 24 it looked to Idaho law to determine the effect of Connecticut 25 General’s waiver of deficiency and found that “there had not yet 26 5 27 The BAP’s reasoning in Quintana I is similar to the Supreme Court’s in Johnson but it should be noted that this 28 decision in 1989 predated Johnson which was issued in 1991.

-11- 1 been any determination of a deficiency, as the property had not 2 yet been sold.” Quintana II, 915 F.2d at 516. Therefore, only 3 after an actual sale would the waiver have any relevance. 4 Debtors were not released from any liability and the entire claim 5 counted against the aggregate debt limit. Id. at 517. Like our 6 Panel in Quintana I, the appellate court did not address what 7 would happen to any remaining claim after the in rem liability 8 was exhausted. 9 The Davis cases are similarly distinguishable. After 10 discharging her personal liability in a chapter 7, Ms. Davis 11 filed a chapter 12 case in which she scheduled secured debt which 12 exceeded the § 101(18) aggregate debt limit. In her amended 13 plan, she proposed to pay her secured creditors only the value of 14 their collateral, which collectively was substantially less than 15 the debt limit.6 This plan drew an objection from secured 16 creditor Bank of America, arguing among other things that the 17 debtor was ineligible based on the scheduled debt. Ms. Davis 18 countered that because her personal liability had been 19 discharged, the aggregate debt was only that secured by the 20 property as valued, substantially less than the debt limit. The 21 bankruptcy court agreed with Bank of America and debtor appealed 22 to the BAP, Davis I. The BAP looked to the prior holdings in 23 Quintana I and Quintana II and reasoned that because the entire 24 amount of the debt was part of the secured liens: 25 the full amount owed continues to be a claim against the collateral, and hence a ‘debt’ under the Bankruptcy 26 27 6 Because of her prior chapter 7 discharge, she scheduled no 28 unsecured debt.

-12- 1 Code, unless and until the collateral is sold. Furthermore, as stated in Johnson, a prior chapter 7 2 discharge only extinguishes one ‘mode of enforcing’ the claim but does not extinguish the claim itself (or any 3 portion thereof). 4 Davis I, 2012 WL 3205431, at *5. Davis I looked only at the 5 aggregate debt, not an unsecured deficiency. 6 The Ninth Circuit in Davis II focused the inquiry: “whether 7 the term ‘aggregate debts’ in § 101(18)(A) includes the unsecured 8 portion of a creditor’s claim from which the debtor has been 9 discharged in an earlier chapter 7 bankruptcy proceeding.” 10 Davis II, 778 F.3d at 812. Relying on Johnson and an earlier 11 Supreme Court decision, Pennsylvania Department of Public Welfare 12 v. Davenport, 495 U.S. 552 (1990), it concluded: 13 Johnson and Davenport teach that the meaning of “debt” is coextensive with the meaning of “claim” and, in 14 turn, that “claim” is broadly defined to include any right to payment or any right to an equitable remedy 15 giving rise to a right of payment. A creditor retains a right to payment, enforceable in rem, on the 16 unsecured portion of a loan for which in personam liability may have been discharged. We therefore agree 17 with the BAP that Davis’ “aggregate debts” include the unsecured portions of the undersecured mortgage loans 18 that remain enforceable against Davis’ property, even though the loans are not enforceable against Davis 19 personally. 20 Davis II, 778 F.3d at 813. The court of appeals very carefully 21 distinguished between the available in rem relief and the 22 unavailable in personam liability, so to stretch its holding to 23 mean the debt revives as an unsecured claim is inconsistent with 24 the decision. 25 In sum, because these four cases are chapter 12 cases that 26 consider only the aggregate debt limit, and none of them speak to 27 reviving discharged in personam liability, they are not 28 controlling here.

-13- 1 3. Scovis and Smith are also distinguishable and would lead to an inequitable result. 2 3 Under the holding of Scovis v. Henrichsen (In re Scovis), 4 249 F.3d 975 (9th Cir. 2001), and Smith v. Rojas (In re Smith), 5 435 B.R. 637 (9th Cir. BAP 2010), when determining a debtor’s 6 chapter 13 eligibility, the undersecured portion of a secured 7 creditor’s claim should be counted as unsecured debt. In re 8 Scovis, 249 F.3d at 983. Although Scovis was speaking about the 9 unsecured portion of a partially secured obligation, its holding 10 was extended to wholly unsecured junior trust deeds in Smith. In 11 re Smith, 435 B.R. at 648-49. However, in both of these cases, 12 the chapter 13 case was not preceded by a prior chapter 7 where 13 the in personam liability had been discharged;7 the obligation of 14 the debtor to pay the undersecured or wholly unsecured claims in 15 pari passu with other unsecured creditors through the plan was 16 intact. If one makes that reclassification of debt in the 17 chapter 20 context, one is reviving the liability which has been 18 discharged. It makes no sense that a creditor whose in personam 19 claim is unenforceable in any other context due to the § 727 20 discharge should fare better in the subsequent chapter 13 case.8 21 7 22 Although the chapter 13 proceeding in Scovis had been preceded by a chapter 7, the debt at issue had been found 23 nondischargeable and therefore the effect of the discharge injunction was not in play. 24 8 The Ninth Circuit’s recent decision by which it confirmed 25 the ability of a chapter 20 debtor to strip wholly unsecured 26 junior liens, HSBC Bank USA v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. 2015), carefully distinguishes a discharge 27 from in rem voidance provisions: a strip off of a lien is not the same as receiving a discharge because the discharge releases in 28 (continued...)

-14- 1 B. Debts for which the in personam liability was discharged in a prior chapter 7 cannot be counted toward the unsecured 2 debt limit for eligibility under § 109(e). 3 Although in a slightly different context - that of the 4 allowability of an unsecured claim filed by a creditor with a 5 stripped off second where personal liability had been previously 6 discharged in a chapter 7 - the well-reasoned decision of the 7 bankruptcy court in In re Rosa, 521 B.R. 337 (Bankr. N.D. Cal. 8 2014), supports our opinion. In Rosa, the chapter 20 debtor, 9 similar to the debtors here, used § 506(a) to value her residence 10 to determine whether EMC Mortgage, LLC (EMC) had an allowed 11 secured claim in her chapter 13 case. After the court determined 12 that, based on its valuation, the EMC claim was not supported by 13 an equity in the property, the debtor objected to EMC’s unsecured 14 claim in conjunction with plan confirmation. She argued that her 15 chapter 7 discharge terminated her personal liability and that 16 the claim should be disallowed. The chapter 13 trustee objected 17 to plan confirmation, asserting that the unsecured claim was 18 resurrected after the valuation motion found the secured claim 19 wholly unsecured. 20 The court observed that although § 101(5)(A) defines a claim 21 and § 506(a) prescribes how a secured claim is to be treated, 22 neither determined whether such claim was allowed for payment 23 purposes. That determination was to be made if an objection was 24 filed under § 502(b), as the debtor filed here. Because the 25 26 8 (...continued) 27 personam liability but does not affect the in rem rights of the lien. Id. at 494. The Circuit says nothing about resurrecting 28 unsecured liability after the lien strip.

-15- 1 personal liability had been discharged in the prior chapter 7, 2 the court applied the discharge injunction provided by 3 § 524(a)(2) to come to the unremarkable conclusion that no 4 allowed claim remained for payment purposes in the chapter 13. 5 In arriving at this conclusion, the bankruptcy court found that 6 its analysis did not run afoul of Johnson: “The Supreme Court did 7 not hold nor suggest that this allowed secured claim would, by 8 definition, be an allowed, unsecured claim if a § 506(a)(1) 9 motion renders the secured claim valueless.” In re Rosa, 521 10 B.R. at 342. 11 We recognize that Dewsnup v. Timm, 502 U.S. 410 (1992), held 12 that a chapter 7 debtor could not “strip down” - or reduce - a 13 partially underwater lien under § 506(d) to the value of the 14 collateral. Id. at 412-13, 417. This prohibition was recently 15 extended to a wholly unsecured junior lien by the Supreme Court 16 in Bank of America v. Caulkett, 135 S. Ct. 1995, 1999 (2015). 17 Parties have argued against allowing a chapter 20 debtor to “two- 18 step” around the Dewsnup/Caulkett restrictions - i.e., first 19 filing a chapter 7 to discharge the personal liability, then 20 following it with a chapter 13 to value the property and strip 21 the remaining in rem claim - as bad faith. And it well may be, 22 but that argument is better addressed by filing an objection to 23 confirmation based on bad faith rather than eligibility. If such 24 an objection is made, then the bankruptcy court must consider on 25 a case-by-case basis the totality of the circumstances standard, 26 as directed in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 27 1224 (9th Cir. 1999), and Drummond v. Welsh (In re Welsh), 711 28 F.3d 1120, 1127-30 (9th Cir. 2013), in determining whether such

-16- 1 bad faith exists. 2 That serial filings are not per se bad faith was first 3 addressed by the Supreme Court in Johnson where the creditor 4 maintained that such filings evaded the limits that Congress 5 intended to place on these remedies. The Court disagreed: 6 “Congress has expressly prohibited various forms of serial 7 filings. . . . The absence of a like prohibition on serial 8 filings of Chapter 7 and Chapter 13 petitions, combined with the 9 evident care with which Congress fashioned these express 10 prohibitions, convinces us that Congress did not intend 11 categorically to foreclose the benefit of Chapter 13 12 reorganization to a debtor who previously has filed for Chapter 7 13 relief.” Johnson, 501 U.S. at 87. 14 The Ninth Circuit earlier embraced the substance of this 15 holding in Downey Savings and Loan Association v. Metz (In re 16 Metz), 820 F.2d 1495, 1497 (9th Cir. 1987), and recently 17 reiterated it in In re Blendheim, 803 F.3d 477, where the court 18 went so far as to find no per se bad faith even if a chapter 13 19 petition was filed while the chapter 7 was still pending. There, 20 the court recognized that a debtor should be allowed to use the 21 tools in the tool box if done so with a good-faith purpose. 803 22 F.3d at 500. 23 Finally, we do not see how the purposes of a chapter 13 24 reorganization are met by counting the discharged unsecured 25 obligations of the chapter 20 debtor in the eligibility 26 calculation. Assuming the case is filed in good faith and proper 27 chapter 13 purposes – such as curing an arrearage on a first 28 mortgage or paying priority tax debt - are present, it makes no

-17- 1 sense to include in the debt limit calculation a claim for which 2 the right to payment has been discharged. Neither the Code nor 3 case law compels inclusion of the discharged in personam 4 liability in such calculation. 5 VI. CONCLUSION 6 For the reasons stated above, we REVERSE the decision of the 7 bankruptcy court dismissing the chapter 13 for ineligibility and 8 REMAND with instructions to vacate the dismissal and reinstate 9 the case. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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