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Bowman v. Cal. Franchise Tax Bd. (In re Bowman)

United States District Court, N.D. California
Sep 27, 2022
630 F. Supp. 3d 1216 (N.D. Cal. 2022)

Opinion

Case No.: 4:21-CV-07129-YGR Bankruptcy Case No. 13-55508 SLJ Adversary Proceeding No. 20-05050 SLJ

2022-09-27

IN RE: Donna Marie BOWMAN, Debtor. Donna Marie Bowman, Appellant, v. California Franchise Tax Board, Appellee.

Robert Lawrence Goldstein, Eduardo Antonio Gonzalez, Law Offices of Robert L. Goldstein, San Francisco, CA, for Appellant. Karen W. Yiu, Office of the Attorney General, Oakland, CA, for Appellee.


Robert Lawrence Goldstein, Eduardo Antonio Gonzalez, Law Offices of Robert L. Goldstein, San Francisco, CA, for Appellant. Karen W. Yiu, Office of the Attorney General, Oakland, CA, for Appellee.

OPINION AFFIRMING BANKRUPTCY COURT JUDGMENT

Yvonne Gonzalez Rogers, United States District Court Judge

This action arises out of a bankruptcy order granting appellee California Franchise Tax Board's ("FTB") motion for judgment on the pleadings on a complaint brought by appellant Donna Marie Bowman seeking, in part, (i) declaratory and injunctive relief to void the FTB's lien based upon the completion of her Chapter 13 plan and (ii) damages for an alleged violation of a discharge injunction.

In short, the legal question is straightforward. Does FTB's lien pass through Chapter 13 bankruptcy proceedings unaffected even if FTB filed an unsecured proof of claim with a reservation of its lien? The answer is yes, whether or not it appears unfair to the appellant. Based on Ninth Circuit law, the bankruptcy court properly granted the motion for judgment on the pleadings. Judgment was entered in favor of the FTB and Bowman timely commenced this appeal.

The Court's analysis follows having carefully considered the parties' briefing and relevant portions of the record. The Court AFFIRMS the bankruptcy court's order granting the FTB's motion for judgment on the pleadings.

Throughout the appeal process, Bowman failed to comply with basic procedural rules. For instance, she initially filed an excessive opening brief without leave claiming that this case was complex enough to justify the tactic. That brief was stricken and, while the Court disagrees with the characterization of this case as complex, she was ordered to resubmit a new opening brief that complied with the increased word count permitted by the Court. After the FTB filed a responsive brief, Bowman, again, without seeking leave, then filed a new opening brief raising new arguments in excess of the word limit permitted on reply. The Court did not accept the tactic and Bowman was directed to file a compliant reply brief. Given this posture, the controlling opening brief is at Docket Number 13, the responsive brief is at Docket Number 17, and the reply brief is at Docket Number 22.

Pursuant to Federal Rules of Bankruptcy Procedure Rule 8019(b)(3), the Court determines that "the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument."

I. FACTUAL AND PROCEDURAL BACKGROUND

The following background is not disputed:

Record citations herein are to docket numbers in the bankruptcy court's docket for the Chapter 13 proceedings, In re: Donna Marie Bowman, No. 15-55508 ["BK"], or the adversary proceedings, In re: Donna Marie Bowman, No. 20-5050 ["AP"]. Most facts are drawn from the allegations contained in the First Amended Complaint filed in the adversary proceedings. Some additional facts are drawn from the docket of the Chapter 13 proceedings because the Court can take judicial notice of public records to the extent they are not disputed.

Bowman petitioned for Chapter 13 bankruptcy on October 17, 2013. Her Schedule E listed the FTB as having an unsecured claim that totaled $13,000. (AP, Dkt. No. 6-1.) On December 30, 2013, the FTB filed a proof of claim asserting a general unsecured claim for $12,422.35 for California state income tax liability for the 2008 tax year. (AP, Dkt. No. 6-2.) While the lien was marked as unsecured on the proof of claim form, the proof of claim contained an attachment that provided "to the extent it is secured, is secured by all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to debtor(s) and located in this state." (Id. at 3.) The attachment further provided that "because the debtor's plan does not provide for the FTB's secured claim, FTB has an unsecured claim in this case. FTB has done so without waiving its lien rights. Accordingly, to the extent that FTB's secured claim . . . is not paid . . . , FTB will continue to assert its lien rights during and after this case." (Id. (emphasis supplied).)

Bowman then proceeded to file an amended Chapter 13 plan. (BK, Dkt. No. 17.) The amended plan was confirmed on February 13, 2015. (BK, Dkt. No. 34.) Despite the FTB's reservation of rights and proof of claim, the amended plan did not state that any liens are avoided, terminated, or reduced by its operation. No payment was made to the FTB or other general unsecured claims. (BK, Dkt. No. 17.) Having completed the plan, Bowman received a discharge. (BK, Dkt. No. 44.) The discharge order provided that "[a] creditor with a lien may enforce a claim against the debtor's property subject to that lien unless the lien was avoided or eliminated." (Id. at 1.)

Following the discharge, the FTB renewed its lien. (AP, Dkt. No. 6 at ¶¶ 23-24.) Bowman then paid the FTB to secure a release of the lien. (Id.) After making her payment, Bowman commenced an adversary proceeding against the FTB seeking declaratory and injunctive relief that the FTB's lien was void upon completion of her Chapter 13 amended plan. (See generally id.) She also sought damages for violation of the discharge injunction and its preclusive effect. In addition to her individual relief, Bowman sought to enjoin the FTB's conduct for all similarly situated debtors on a class-wide basis.

In response, the FTB moved for judgment on the pleadings. (AP, Dkt. No. 19.) After hearing oral argument, the bankruptcy court granted the motion on August 13, 2021. (AP, Dkt. Nos. 32, 40.) Over Bowman's objection that the FTB waived its lien by filing an allowed unsecured claim, the bankruptcy court held that the applicable rules and statutes did not require the FTB to file a secured claim, 11 U.S.C. § 506 did not operate to terminate the FTB's lien, the amended plan did not address or impact the FTB's lien, and under binding Ninth Circuit law in the Chapter 13 context, the FTB's lien passed through bankruptcy unaffected. (AP, Dkt. No. 40.) The motion was granted with leave to amend. After Bowman did not timely amend, judgment was entered in favor of the FTB. (AP, Dkt. No. 41.) This appeal followed.

II. LEGAL STANDARD

The parties do not dispute the appropriate standard applicable to motions for judgment on the pleadings and make no argument that the bankruptcy court erred by applying an erroneous standard. Pursuant to 28 U.S.C. § 158(a), district courts have jurisdiction to hear both interlocutory and final appeals from bankruptcy court orders and judgments. See 28 U.S.C. § 158(a). When reviewing a bankruptcy court's decision, the district court functions as an appellate court would, and applies the same standards of review as a federal court of appeals. Beal Bank v. Crystal Props., LTD. (In re Crystal Props., Ltd.), 268 F.3d 743, 755 (9th Cir. 2001). The bankruptcy court's conclusions of law are reviewed de novo and its factual findings for clear error. See Brace v. Speier (In re Brace), 979 F.3d 1228, 1232 (9th Cir. 2020). Since the bankruptcy court effectively dismissed Bowman's complaint for failure to state a claim under its interpretation of the bankruptcy code, the dismissal and interpretation are reviewed de novo. See Albert-Sheridan v. State Bar of Cal. (In re Albert-Sheridan), 960 F.3d 1188, 1192 (9th Cir. 2020); Vibe Micro, Inc. v. SIG Capital, LLC (In re 8Speed8, Inc.), 921 F.3d 1193, 1195 (9th Cir. 2019).

III. DISCUSSION

The issues on appeal are narrow notwithstanding Bowman's prolific hyperbole. It is not disputed that the FTB had a valid tax lien prior to the commencement of the Chapter 13 bankruptcy. (AP, Dkt. No. 6 ¶ 11.) Instead, the central question is whether the FTB's lien was waived or avoided by virtue of its participation in the Chapter 13 proceedings by its filing of an unsecured claim and the discharge obtained through those Chapter 13 proceedings. While it is not clear why the FTB proceeded to file an unsecured claim with a reservation of its rights in lieu of a secured claim, the Court ultimately agrees with the bankruptcy court and cannot find that the FTB waived its lien. To do so would contradict binding precedent in this circuit in the Chapter 13 context.

Bowman's approach to briefing reflects her frustration with the state of the law. Numerous arguments misrepresent the state of the law and myriad red herrings are asserted. For instance, Bowman's opening brief addresses the actual bankruptcy court's order in passing near the end of the brief. Accordingly, the Court focuses on the most salient issues that were presented to the bankruptcy court in this Opinion.

Bowman also asserted in her opening brief that permitting the FTB to assert the lien despite its waiver provides the FTB with the benefits of a secured claim that was never filed in violation of due process. However, as the FTB noted, the due process argument was not properly submitted to the bankruptcy court and courts will not hear an issue raised for the first time on appeal. See Kaass Law v. Wells Fargo Bank, N.A., 799 F.3d 1290, 1293 (9th Cir. 2015). Bowman fails to adequately address this issue in reply, effectively conceding the point. Thus, the due process argument is not addressed.

Given the issues raised in this appeal, a short framing of Chapter 13 proceedings is instructive. The Court agrees with Bowman that the Ninth Circuit's decision in Spokane Law Enforcement Fed. Credit Union v. Barker (In re Barker), 839 F.3d 1189, 1198 (9th Cir. 2016) provides a helpful breakdown of the claims process:

In order to collect a debt from a debtor filing a Chapter 13 bankruptcy petition, an unsecured creditor must file a valid proof of claim, which has gone through the allowance process set forth in 11 U.S.C. § 502. A secured creditor, who wishes to receive distributions under a Chapter 13 plan, must also file a valid proof of claim. However, a secured creditor, who does not wish to participate in a Chapter 13 plan or who fails to file a timely proof of claim, does not forfeit its lien.
Id. at 1193-94 (internal citations and quotation marks omitted). As the foregoing illustrates, the Bankruptcy Code distinguishes between secured and unsecured claims. For instance, when the collateral securing the claim is worth less than the debt, debtors are able to split an otherwise secured claim into a secured and an unsecured claim.

See 11 U.S.C. § 506(a)(1) ("An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.").

Within the Bankruptcy Code, "secured claim" is a term of art that bears a different meaning than it does for a creditor, such as the FTB, to have a security interest or lien outside of bankruptcy proceedings. See Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330-31, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (recognizing that a claim, whether secured or unsecured, is defined by section 101(5), whereas whether a creditor holds a secured claim is "determined by application of [section] 506(a)"). Thus, "[o]utside of bankruptcy, if a creditor has a valid security interest, regardless of the collateral's value, it may be thought of as a secured creditor. However, in bankruptcy, a creditor is only a secured creditor if its claim is so classified. If the claim is not so classified, the once-secured creditor will have an unsecured claim and will thus be an unsecured creditor for purposes of the bankruptcy case." In re Okosisi, 451 B.R. 90, 93 (Bankr. D. Nev. 2011).

Bowman's appeal hinges on the argument that the FTB was required to file a secured proof of claim and that the FTB prevented her from filing a secured claim on behalf of the FTB by way of its participation with its unsecured claim in the bankruptcy proceedings. This misses the mark. Importantly, section 501 "does not require a creditor with a lien to file a secured proof of claim or any proof of claim at all" as Bowman acknowledges. (See Dkt. No. 22 at 7.) Indeed, as the bankruptcy court properly acknowledged, the statute says that a "creditor . . . may file a proof of claim." 11 U.S.C. § 501 (emphasis supplied). By its plain terms, the statute authorizes, but does not require, the filing of a proof of claim. If a proof of claim is timely filed, it is presumptively "deemed allowed." 11 U.S.C. § 502(a). To be allowed, the Bankruptcy Rules further provide that "[a] secured creditor, unsecured creditor or equity security holder must file a proof of claim or interest," however, "[a] lien that secures a claim against the debtor is not void due only to the failure of any entity to file a proof of claim." Fed. R. Bankr. P. 3002(a). Thus, the lien interest is not terminated solely by a creditor's failure to file a secured claim.

Indeed, as the Court noted above, failure to timely file a proof of claim does not result in a forfeiture of the lien. In re Barker, 839 F.3d at 1194. Furthermore, relevant here, it is established in the Ninth Circuit that "[a]bsent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected, regardless [of] whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed." County of Ventura Tax Collector v. Brawders (In re Brawders), 325 B.R. 405, 411 (B.A.P. 9th Cir. 2005) (citing Bisch v. United States (In re Bisch), 159 B.R. 546, 550 (B.A.P. 9th Cir. 1993) (holding that a federal tax lien on real property remained valid even though the Internal Revenue Service had filed an unsecured proof of claim instead of a secured claim in a Chapter 13 case)) (emphasis supplied). As the bankruptcy court explained, Bowman admitted that there was a valid lien at the time her Chapter 13 bankruptcy was filed and that Bowman, as the representative of the bankruptcy estate, failed to take action against the lien, including invoking section 506(a) to address the FTB's claim of a lien. Thus, the lien passed through bankruptcy unaffected and the FTB's characterization of the proof of claim as unsecured, with a reservation of its rights to assert its lien rights after the case, does not change the result.

By way of background, the Ninth Circuit adopted the Bankruptcy Appellate Panel's "thorough and well-reasoned opinion" as its own. Brawders v. County of Ventura (In re Brawders), 503 F.3d 856, 859 (9th Cir. 2007). While the analysis of In re Bisch was not adopted and is not binding as a practical matter, it is persuasive for the proposition that the Ninth Circuit did adopt from the BAP in In re Brawders.

Bowman contends that any argument that a lien passes through bankruptcy unaffected is derivative entirely of Chapter 7. This ignores the fact that In re Brawders and In re Bisch are Chapter 13 cases, based upon the specific sections applicable in Chapter 13, and that the Chapter 13 plan failed to otherwise provide for the lien in anyway.

Nonetheless, Bowman challenges this conclusion arguing "every court that has ever addressed this issue, going back almost 100 years, has found that when a creditor like the FTB files an unsecured claim such creditor has waived its lien." (Dkt No. 22 at 10 (emphasis in original).) The argument fails for several reasons.

First , Bowman relies extensively on the Seventh Circuit pronouncement that "the consequence of filing a secured claim as an unsecured debt is the waiver of the security." In re O'Gara Coal Co., 12 F.2d 426, 429 (7th Cir. 1926). There, the creditor had full knowledge that the security at issue was worthless, filed an unsecured claim, and then sought to amend it to a secured claim years later after it became valuable. Id. However, as the bankruptcy court noted, O'Gara was decided under section 57 of the Bankruptcy Act, a section that is no longer effective. Thus, it ignores the current rules and statutory provisions identified above, as well as the law in this circuit.

Second , Bowman suggests that the Second Circuit confirmed this rule in Rumsey Mfg. Corp. v. United States, 206 F.2d 565 (2d Cir. 1953), demonstrating a consensus amongst circuits. This is inaccurate and borders on a Rule 11 violation for misrepresenting the law. The issue before the court was "whether the United States by originally filing its claim as unsecured had estopped itself from claiming the . . . judgment as a security for the bankrupt's unpaid notes." Id. at 567. Thus, the case principally focused on estoppel as opposed to waiver, and found no evidence of reliance to justify estoppel. Furthermore, the Second Circuit noted that O'Gara was an "exceptional" case and did not find a waiver in Rumsey where "the United States did not actually intend the filing of its claim as unsecured to operate as a waiver or surrender of its collateral security [as] made apparent" by its reservation of rights in its proof of claim. Id. at 568. This is not far removed from the circumstances here.

It does not appear that Bowman relied on an estoppel theory below. However, there is no dispute that Bowman characterized the FTB's claim as unsecured in her schedule prior to any action by the FTB. Accordingly, the FTB appeared in the bankruptcy consistent with Bowman's own conduct, and subject to a clear reservation of its lien in light of that conduct.

Third , Bowman's extensive reliance on In re Taylor, 280 B.R. 711 (Bankr. S.D. Ala. 2001) does not persuade. There, the bankruptcy court, relying upon O'Gara, found that the mortgage company had waived its right to assert a secured claim because the claim was filed as an unsecured claim by counsel, the confirmed plan expressly accounted for the claim, and payments had been paid for several years under the plan without objection. Thus, the court found the effort to amend the proof of claim was untimely. Id. at 715-17. By contrast, while the claim here was filed as an unsecured claim, Bowman knew there was a valid lien, there was an express and unambiguous reservation of rights, the plan did not provide for the FTB's lien, no payments were made on the FTB's claim, and there was otherwise no conduct that was inconsistent with the FTB's lien rights. Taylor does not bind this Court, is plainly distinguishable, and does not account for section 506(a).

Curiously, Bowman's opening brief indicated that she wished to challenge the terms of the reservation as fraudulent in her reply brief. However, it is well established that courts do not consider argument raised for the first time in reply.

Bowman's citation to In re Krahn, 124 B.R. 78 (Bankr. D. Minn. 1990) is also not binding and is not persuasive as applied to the facts here. In Krahn, the Internal Revenue Service ("IRS") initially filed a secured claim in connection with Chapter 13 proceedings. Id. at 79. After participating with its secured claim, the IRS then proceeded to amend its claim to assert only unsecured claims. Id. The bankruptcy court found that by treating its claim as entirely unsecured, which was inconsistent with its prior treatment of its rights, the IRS waived its secured status. Id. at 80. Even if the claim was not waived, the bankruptcy court found that it was voidable under section 506(d) of the Bankruptcy Code because the IRS conceded that the lien had no collateral value since the value of the liens exceeded the value of the property at issue. Id. at 82. Here, the FTB filed an unsecured claim with a reservation of rights. It never filed a secured claim in the bankruptcy proceedings and was not required to do so. There is no indication in the record that the FTB engaged in conduct that was otherwise inconsistent with its rights, which Bowman was aware of at the commencement of her bankruptcy proceedings, and throughout the duration of those proceedings.
The Court also notes that Krahn undermines Bowman's argument that the FTB needed to invoke section 506(a). "Under 11 U.S.C. § 506(a), debtors or creditors may obtain a determination of the allowed amount of a particular secured claim." Id. at 81. As noted by the bankruptcy court below, section 506 is not self-executing, and Bowman never sought a determination even though she admitted that the lien was valid at the time the bankruptcy commenced. Bowman cites to no persuasive authority that she was prevented from seeking the appropriate determination due to the FTB's participation with respect to filing an unsecured proof of claim.

Fourth , Bowman argues that the FTB should not be treated as a nonparticipating creditor within the Chapter 13 proceedings because it voluntarily participated in those proceedings by filing an unsecured claim. However, filing an unsecured claim, even where a creditor meant to file a secured claim, does not result in a waiver of the lien in Chapter 13 proceedings. In re Bisch, 159 B.R. at 550. For all of the reasons discussed in connection with the cases that Bowman relies upon, the FTB never engaged in any conduct that was inconsistent with its lien rights. In fact, the record shows that the FTB filed its unsecured claim consistent with Bowman's schedules, reserved its rights, and did not intend its participation in the Chapter 13 proceedings to waive its lien rights in any way. Indeed, her opening brief concedes that "a 'creditor with a lien' who files a claim will not automatically possess a secured claim, i.e., 'creditor with a lien' is not exclusive to a 'creditor with a secured claim.' " (Dkt. No. 13 at 6-7.) Nevertheless, Bowman, who was represented by counsel, now seeks to distance herself from the record and her own conduct (or lack of conduct), without justification or legal support.

Finally, Bowman's suggestions that the confirmed plan stripped the FTB of its lien, or that the confirmed plan precludes the FTB from asserting its lien, lack legal foundation. Bowman is correct that "[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). However, as authority invoked by Bowman acknowledges, "[a]lthough a secured creditor is bound by the plan, this does not mean that a debtor can void or otherwise extinguish a creditor's lien without addressing the lien in the plan." Shook v. CBIC (In re Shook), 278 B.R. 815, 824 (B.A.P. 9th Cir. 2002). Furthermore, "a plan that is silent about the fate of a secured claim provides no notice of what will happen to the secured claim and therefore cannot effectively avoid a lien or determine its value." Id. Again, this is consistent with the rule adopted in this circuit, that "[a]bsent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected, regardless [of] whether the creditor . . . files an unsecured claim when it meant to file a secured claim[.]" In re Brawders, 325 B.R. at 411. Below, the plan implicitly provided for the FTB's claim (i.e., personal liability for the tax debt secured by the lien), however, the plan made no reference to the FTB's lien and the status of the FTB's secured claim was never adjudicated. Bowman fails to seriously dispute this. Thus, the lien was not provided for and passed through the bankruptcy unaffected.

Section 1327(c) provides "[e]xcept as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan." 11 U.S.C. § 1327(c). Thus, the code distinguishes between claims and interests. "Under this reasoning, a plan that provides for a claim but does not provide for an interest in property securing that claim does not affect the interest of the creditor in the property." In re Brawders, 325 B.R. at 416 (adopting Work v. County of Douglas (In re Work), 58 B.R. 868, 869-71 (Bankr. D. Or. 1986)).

IV. CONCLUSION

Based upon the foregoing, the Court finds that the bankruptcy court did not err and AFFIRMS the bankruptcy court's order granting the motion for judgment on the pleadings.

The Clerk of the Court shall issue a judgment consistent with this Opinion.

IT IS SO ORDERED.


Summaries of

Bowman v. Cal. Franchise Tax Bd. (In re Bowman)

United States District Court, N.D. California
Sep 27, 2022
630 F. Supp. 3d 1216 (N.D. Cal. 2022)
Case details for

Bowman v. Cal. Franchise Tax Bd. (In re Bowman)

Case Details

Full title:IN RE: Donna Marie BOWMAN, Debtor. Donna Marie Bowman, Appellant, v…

Court:United States District Court, N.D. California

Date published: Sep 27, 2022

Citations

630 F. Supp. 3d 1216 (N.D. Cal. 2022)