Filter all site content by section

Business Law

In re Freeman, Local rules require that Chapter 13 debtor must file a motion or an adversary proceeding in order to modify a creditor’s lien, notwithstanding any related provisions of a confirmed plan.

SUMMARY

In In re Jeffrey Mark Freeman 2018 WL 4216653 (Bankr. C.D. Cal, 2018), the United States Bankruptcy Court for the Central District of California, Los Angeles Division held that the debtor had not met his burden to show any knowing violation of the discharge injunction. A copy of the decision can be reviewed here.

FACTS Jeffrey Mark Freeman (“Debtor”) filed his bankruptcy case on June 3, 2011. Among the assets owned by the Debtor was the property located at 28832 Benjie Way, Lancaster Way, CA 93536 (the “subject property”). Debtor listed the subject property in the bankruptcy schedules with a value of $215,000 and a first lien of over $300,000. BAC (“Creditor”) filed a proof of claim asserting a secured claim amount of $379,125.14. Debtor never filed a motion to value Creditor’s lien. Over a year into the bankruptcy case, the court set a final confirmation hearing directing debtor to file a confirmable plan by a date certain, or Debtor’s case would be dismissed. Debtor filed a second amended plan, but did not seek a formal order avoiding or reducing the value of Creditor’s lien. Instead the Plan provided as follows:

“Debtor and lender (BAC) are attempting to schedule an interior inspection for appraisal. Property was previously valued at no more than $215,000. BAC is to receive the current value of the Property in equal monthly payments with interest over the course of the plan … .”

Creditor filed an objection to confirmation as to the proposed interest rate, but did not object to the value listed by Debtor. In order to resolve Creditor’s objection, the parties agreed to incorporate the following language into the confirmation order:

For purpose of plan confirmation, the value of the real property commonly known as 28832 Benjie Way, Lancaster, CA 93536 is determined to be $194,000. The amount of the secured claim which shall be paid, in full, during the life of the chapter 13 plan is $169,340 with interest at the rate of 6.75% for the remaining 48 months of the chapter 13 plan.

A plan was confirmed with this language.

Approximately a year and a half after plan confirmation, Debtor filed a motion to refinance property and companion motion to modify chapter 13 plan seeking to pay off the loan at a reduced rate. Debtor sought to pay off Creditor’s lien for $117,976.00, which Debtor claimed was the remaining balance under the Plan. The court denied both motions, opining that Debtor had not put Creditor on notice its debt and lien had been modified or alternatively, any final reduction of Creditor’s debt required further proceedings. Creditor’s opposition to both of those motions asserted that the total debt was controlled by the filed proof of claim, to which Debtor had never objected, and which was not reduced. As to lien avoidance, Creditor asserted there was no evidence that an order had been entered avoiding or reducing the value of the subject property. Debtor later withdrew both of these motions.

In 2014, Debtor filed another motion to modify his plan, again proposing to pay off his plan early from a refinance or sale of the subject property within 60 days after the motion’s approval. This motion never mentioned any reduction of the debt owed to Creditor, and Creditor did not oppose the motion. The court granted Debtor’s motion.

In June, 2015, Debtor obtained his discharge. In July, 2015, Debtor sent Creditor a letter demanding it “cease all foreclosure activity” asserting that Creditor had no secured interest whatsoever in the subject property. Creditor continued to send letters and notices to Debtor, advising Debtor that it sought only to act on its in rem rights, and not on the in personam liability of Debtor. On April 5, 2016, Debtor filed a motion to reopen his bankruptcy case for an alleged violation of the discharge injunction. One year after the case was reopened, Debtor filed a motion for order to show cause for violation of discharge injunction by Creditor, alleging that the pending foreclosure caused the tenants at the subject property to not pay rent to the Debtor. Debtor sought unspecified actual and punitive damages. In an unauthorized supplemental filing, Debtor sought $893,964.85 in actual damages, and $15 million in punitive damages. The Bankruptcy Court denied both motions.

REASONING

The essential issue presented was whether or not Debtor had met his burden to demonstrate Creditor’s knowing violation of the discharge injunction. A discharge in bankruptcy “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2). A creditor who “knowingly violates the discharge injunction” can be “held in contempt under § 105(a).” In re Taggart, 548 B.R. 275, 286 (9th Cir. BAP 2016). Because the discharge injunction only prohibits efforts to collect debts as a personal liability of the debtor, “secured creditors can foreclose their liens after the discharge is entered.” In re Marino, 577 B.R. 772, 783-84 (9th Cir. BAP 2017) (citations and internal quotation marks omitted). This creates some tension for a lienholder whose lien has not been avoided: it is prohibited by § 524(a)(2) from communicating with a discharged debtor in an effort to extract payment as a personal liability, but it is usually required to communicate with that same debtor in order to enforce its lien, such as by giving notice of any foreclosure. Id. at 784.

The court addressed the question of whether there was an order that reduced Creditor’s claim or modified its lien. Debtor’s arguments that the language in the confirmation order and in the order modifying his plan implicitly had this effect were, in the court’s view, incorrect. The Debtor failed to provide sufficient evidence that the Creditor’s lien was modified by the Chapter 13 plan as the confirmation order requires a Debtor to either file a motion or an adversary proceeding in order to modify the Creditor’s lien.

Further and as a result of there being no order modifying the lien rights of the creditor, the Creditor was not subject to sanctions for violation of the discharge injunction when it notified the Debtor in writing that it would be proceeding with its in rem rights by seeking to foreclose on the lien. This was not an intent to collect on a discharged debt. Therefore, Debtor did not meet his burden of showing the Creditor knew the discharge injunction was applicable and acted with the intent to violate the injunction.

AUTHOR’S COMMENTARY

This was clearly the right call. Debtor could have at any time prior to discharge filed a motion or an adversary proceeding and obtained an order valuing the property, which is mandated under local rules. Instead, he relied on other orders and motions to circumvent the requirement to obtain a proper order as to value. As a caveat to this case, and given weight by the court, was the fact that Creditor ultimately reconveyed this lien, which the court observed was the “opposite of any knowing intent to violate the discharge injunction.”

Chapter 13 practice is a very challenging one, due in large part to the fact that the issues are often just as byzantine as large Chapter 11’s, but there are far fewer dollars available to fund the analysis. California Bankruptcy Courts (especially those in the Central District, by far the nation’s largest “consumer debtor” forum) have tried to respond to this reality by providing a relatively well-developed system of local procedural rules and forms by which debtors and their counsel can navigate this complex landscape.

The Freeman decision demonstrates the critical importance of following those procedures, using the forms correctly, and – perhaps most importantly – creating a clear record. Failure to do so here apparently cost the debtor significant damages (by the debtor’s own estimate, $87,000 in rent, $72,500 in new interest charges, and $3,000 in attorney’s fees), a result the Court described as “tragic.”

These materials were written by Adam N. Barasch of Severson & Werson, APC in San Francisco, California (anb@severson.com). Editorial contributions were provided by Jeff Curl of JC Law Group PC in San Mateo, California (jcurl@clawgroup.com) and Michael D. Good of the SouthBay Law Firm in Torrance, California (mgood@southbaylawfirm.com). Mr. Barasch is a member of the Insolvency Law Committee.

Forgot Password

Enter the email associated with you account. You will then receive a link in your inbox to reset your password.

Personal Information

Select Section(s)

Payment