Opinion
BK. No. 08-09707-JM13.
5-7-2009
In re: Lane Mitsuo Manriki and Sue Valerie Manriki, Debtor.
Chapter 13 debtors, Lane and Sue Manriki, seek a court order establishing the value of their residence (the "Property") as of the petition date pursuant to their motions filed under section 506(a) of the Bankruptcy Code. If the Property is appropriately valued at $470,000, which has not been disputed, and the holder of the first mortgage is owed $ 480,000, which also has not been disputed, then the second and third mortgages, both held by Wells Fargo Bank ("Creditor"), are wholly unsecured. Because Creditor's two liens are wholly unsecured, the Manrikis also seek a court order avoiding the liens. The Manrikis argue that the avoidance flows naturally from the section 506(a) valuation; is authorized by section 506(d); and automatically results in treatment of Creditor's claims as general unsecured claims under paragraph 13 of their confirmed chapter 13 plan.
Unless otherwise indicated, all references to sections herein are to Title 11 of the United States Code, also referred to as the "Bankruptcy Code".
The Manrikis' plan is a zero percent plan.
The Manrikis gave timely and proper notice of their motions to value the Property and avoid Creditor's two junior liens (hereinafter, the "Motions"). Creditor did not file opposition, nor did the chapter 13 trustee. After the time to oppose had fully run, but before the hearing on the Motions could be held, the order confirming the Manrikis' chapter 13 plan was entered. Although the Manrikis gave notice to Creditor before the plan was confirmed of the Manrikis' intent to strip the two junior liens and to classify Creditor's claims as general unsecured claims, the plan itself did not contain any reference to the pending Motions.
Initially the trustee objected to the Manrikis' proposed plan, however, the trustee withdrew his objection prior to the scheduled hearing, all issues having been resolved by an earlier filed amended plan.
Creditor filed proofs of claim with respect to its two junior mortgages prior to the service of the Motions. On both proofs of claim Creditor annotated the amount of the secured claim with "or as allowed under Section 506(a)." Both claims also estimated the value of the Property collateral as $460,000, whereas the Manrikis' scheduled value is $470,000.
At the hearing on the Motions, the Court questioned counsel for the Manrikis and the chapter 13 trustee about the propriety of stripping the liens, which is authorized in conjunction with chapter 13 plans under section 1322(b)(2), where the plan failed to specifically refer to or incorporate the pending Motions.
The Court gave Manrikis' counsel authority to file a supplemental brief and also invited the chapter 13 trustee, who had not opposed the Motions, to file a brief. After briefing was completed, the Court heard oral argument.
The trustee had in progress a brief in another chapter 13 case with similar issues (a decision on which was mooted when the case converted to chapter 7).
The trustee argues primarily that the confirmed plan is binding on the Manrikis, should be given res judicata effect as to Creditor's junior liens, and may not be modified post-confirmation to change the classification of Creditor's claims. Manrikis' counsel argued that modification of the plan is not necessary because the Motions were fully and properly noticed pre-confirmation and unopposed after the full period of time to oppose had run — prior to plan confirmation — and, implicitly, were thus part of the Manrikis' unopposed plan.
The confirmed plan, in fact, contains no mention of Creditor or classification of its claims. The chapter 13 trustee sent out one notice classifying one of Creditor's claims as "outside the plan."
As discussed more fully below, under the totality of circumstances in this case and with particular focus on the lack of any opposition by Creditor to either the plan or the Motions despite full and adequate notice, the Court views the Manrikis' plan and the Motions together as one cohesive proposal for the treatment of Creditor's claims as wholly unsecured claims in the Manrikis' chapter 13 case and, contingent on a clarifying plan modification as discussed herein and satisfactory completion of the confirmed plan and the Manrikis' resultant discharges, will grant the Motions, value the Property at $470,000, and order avoidance of Creditor's two junior liens in conjunction with the Manrikis' chapter 13 plan.
DISCUSSION
The Manrikis' purpose in seeking a section 506(a) valuation is to strip off Creditor's 2nd and 3rd trust deed liens against the Property. Thus: "[the] valuation under section 506(a), [] appears to be linked to its identified purpose — e.g., a plan of reorganization. Section 506(a) instructs the bankruptcy court to value the property `in light of the purpose of the valuation and of the proposed disposition or use of such property.'" Gold Coast Asset Acquisition, L.P. v. 1441 Veteran Street Co. (In re 1441 Veteran Street Co.), 144 F.3d 1288, 1291-92 (9th Cir. 1998). Further, the valuation shall be determined "in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest." 11 U.S.C. § 506(a).
Before addressing valuation, however, the Court must determine whether the Manrikis may strip this Creditor's liens under the circumstances of this case, as otherwise valuation would serve no purpose.
1. Section 506(d) Does Not Provide Stand Alone Lien Stripping Authority.
The Bankruptcy Code expressly provides that a chapter 13 plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence,..." 11 U.S.C. § 1322(b)(2). The United States Supreme Court, in Nobleman v. American Savings Bank et al, 508 U.S. 324 (1993), focusing on the "rights" of mortgagees, affirmed the lower court's disallowance of section 1322(b)(2) modification where the lender's claim against the debtor's principal residence was determined to be partially secured based on valuation of the property as provided for in section 506(a). After Nobleman, however, the Ninth Circuit Court of Appeals, along with the majority of other circuit courts, held that the anti-modification protection in section 1322(b)(2) does not prohibit modification of the rights of a creditor whose lien on a debtor's primary residence is wholly unsecured (commonly referred to as "lien stripping"). Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002).
The Manrikis' brief acknowledged the restriction contained in section 1322(b)(2) on modification of the rights of partially unsecured mortgage lienholders and, thus, focused on section 506(d). As clearly settled by the Supreme Court in Dewsnup v. Timm, 502 U.S. 410, 415-16 (1992), the function of section 506(d) is to void "a lien whenever a claim secured by the lien itself has not been allowed." The Supreme Court held that "§ 506(d) does not allow [debtor/]petitioner to `strip down' [creditor/Jrespondent's lien, because respondents' claim is secured by a lien and has been fully allowed pursuant to § 502." Dewsnup, 502 U.S. at 417. Thus, in Dewsnup, the Supreme Court majority narrowly construed section 506(d). While Dewsnup arose in a chapter 7 case, section 506 is a statute generally applicable to all chapters of Title 11. Thus, the Dewsnup holding applies squarely and its narrow interpretation does not support a lien strip under section 506(d) in this case.
Here, Creditor filed proofs of claim, and no one filed any objection thereto. The claims are thus deemed allowed claims, secured by the liens, and pursuant to Dewsnup, section 506(d) does not apply.
The Manrikis are correct that Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002) and Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (9th Cir. BAP 1997) support a lien strip where the creditor is wholly unsecured notwithstanding the prohibition in section 1322(b)(2) against the modification of claims secured by a debtor's residence. Lam and Zimmer, however, reach this result without reliance on or even mention of section 506(d). Instead, both opining courts relied upon section 1322(b)(2) for lien stripping authority.
The Manrikis also rely heavily on a few words in In re Geyer, where the Court, after careful discussion and analysis of section 1322(b)(2) lien stripping, concluded that "[a] chapter 13 debtor may `strip-off a lien on his or her primary residence under the plan or under section 506(d) when the lienholder's interest is totally unsecured." In re Geyer, 203 B.R. 726, 729-30 (Bankr. S.D. Cal. 1996) (emphasis added). Contrary to the Manrikis' argument, however, the reference in this sentence to section 506(d), does not follow directly from the court's detailed analysis which involved only section 1322(b)(2) and was not necessary to the Geyer decision. The statement merely correctly notes, consistent with Dewsnup, that section 506(d) would also apply in chapter 13 cases under the right circumstance (when the claim itself has been disallowed). The decision does not analyze section 506(d)'s applicability under the facts of Geyer and does not support application of section 506(d) as argued by the Manrikis.
Recognizing that the Manrikis' reliance on section 506(d) is misplaced, the Court, notwithstanding, has discretion and may yet grant the requested relief under other relevant authority.
2. The Unopposed Requested Lien Stripping Is Appropriate In Conjunction With And As Part Of The Confirmed Plan Pursuant To Section 1322(b)(2).
The chapter 13 trustee correctly notes that the Manrikis are bound by the terms of their confirmed plan (the "Plan"). He also argues that modification of the Plan would be barred by res judicata. This Court does not view the Motions as the Manrikis' attempt to evade the binding effect of the Plan nor as an improper post-confirmation modification that should be barred under the preclusion doctrine.
The Court acknowledges and agrees with the trustee's well-taken point that section 1329 does not permit post-confirmation modifications for other than the purposes specifically stated therein which purposes do not include modification of claim classification.
Pursuant to section 1327(a), "[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,..." 11 U.S.C. §1327(a); and see Espinosa v. United Student Aid Funds, Inc., 545 F.3d 1113 (9th Cir. 2008). Further, it is a "bedrock principle of bankruptcy law in the Ninth Circuit" that confirmation orders are final. Great Lakes Higher Education Corp. v. Pardee (In re Pardee), 218 B.R. 916, 925 (9th Cir. BAP 1998). Thus, res judicata precludes raising of issues which could or should have been raised during the pendency of the case and prohibits a post-confirmation collateral attack on such issues. Id.
A plan, however, "can have no preclusive effect on matters that have been specifically reserved for resolution by way of an ongoing adversary proceeding" or that are not addressed in the plan. Espinosa, 545 F.3d at 1119; and see Alonso v. Summerville (In re Summerville), 361 B.R. 133, 137 (9th Cir. BAP 2007) ("chapter 13 plan and confirmation order did not bar the debtor from contesting an obligation based on a debt being paid outside the plan"). Here, the doctrine of preclusion does not prevent the Manrikis from seeking final resolution of their pre-confirmation Motions; Motions that are integral to the treatment of Creditor's claims under the Plan. The Motions are not disguised post-confirmation modifications to the Plan and, having been fully and adequately noticed pre-confirmation, are, by no means, "lien stripping by ambush." Further, the proposed lien strip is not inconsistent with any express provision of the Plan as the Plan does not provide for any specific treatment of Creditor's claims.
Although lien stripping may be provided for by inclusion within a proposed chapter 13 plan, it may also be accomplished procedurally by noticed motion. In re Pereira 394 B.R. 501, 504 (Bank, SD Cal. 2008). A creditor's non-objection to plan confirmation ' is an implied acceptance of the plan terms. In re Pardee, 218 B.R. at 926; and Andrews v. Loheit (In re Andrews), 49 F.3d 1404, 1409 (9th Cir. 1995). In addition, a creditor's non-opposition to a lien strip motion may be deemed by the court to be consent to the granting of the motion. BLR 9014-4(f).
In this case, the Manrikis gave notice of their treatment of claims under the Plan first by service of the Plan. And the Plan did not treat Creditor as a secured creditor. Before the Plan was confirmed, the Manrikis also gave notice to Creditor of their specific intent to strip Creditor's two liens in the chapter 13 case. Creditor chose not to oppose either Plan confirmation or the Motions. In fact, the Creditor's proofs of claim indicate that Creditor was aware that its claims might be deemed unsecured under section 506(a).
Thus, under the narrow facts of this case, the Plan and the Motions can and should be taken together as the operative Plan document in the Manrikis' chapter 13 case.
The Court finds critical to this ruling the combination of pre-confirmation filing and notice of the Motions, full opportunity for the Creditor to file opposition, the fact that the plain did not provide any treatment of Creditor's secured claims, and the fact that Creditor filed proofs of claim with a dual classification.
When the Motions and the Plan are viewed as an integrated whole and given the requirement of clarifying modification discussed below, the result here does not run afoul of the pre-confirmation responsibility of the trustee and the Court to verify that the chapter 13 Plan complies with Bankruptcy Code provisions. The Motions were duly noticed, drew no objection (other than the Court's initial concerns relative to timing and lack of specific provision in the Plan or confirmation order regarding lien stripping), and are granted in conjunction with and pursuant to section 1322(b)(2) as an allowed feature of the Plan. The Court also is convinced after review that the Court's initial confirmation decision under section 1325 was and is appropriate.
In particular, the Court finds the Motions to be proposed in good faith as part of the Plan. The Manrikis value the Property as of the petition date and consistent with their schedules. Thus, they are not improperly taking advantage of market value decline since filing bankruptcy. In addition, the Manrikis' valuation is not inconsistent with the Creditor's estimation of value. Further, the Motions were duly noticed and the Creditor received a full and fair opportunity to object before the Plan was confirmed. The Court, hence, expressly finds that the Manrikis acted in good faith in this chapter 13 case.
Notwithstanding this conclusion, the Manrikis must take one additional step prior to finalizing the lien strip pursuant to the Plan. This Court generally requires resolution of lien strip issues prior to confirmation. Otherwise, it is difficult and in some cases impossible to properly determine a plan's compliance with section 1325. Because the Manrikis' Motions were not resolved before confirmation, they must modify the Plan to expressly integrate the Motions into their Plan and obtain a modified confirmation order that clarifies that lien stripping occurred pursuant to the Plan. These modifications are consistent with this Court's practice requiring that lien stripping language be specifically included in a confirmation order. They are also ministerial and clarifying — not substantive.
In fact, the trustee now regularly files objections to chapter 13 plan confirmation solely for purposes of delaying entry of confirmation orders until such time as pending motions to value and lien strip have been determined by the Court, and the Court has attempted to accommodate the parties by continuing the hearings on valuation and lien stripping to coincide with plan confirmation.
3. The Manrikis' Property Is Properly Valued Under Section 506(a) In Conjunction With The Confirmed Plan.
The Manrikis properly served their Motions and all related documents to support their valuation of the Property at $470,000 as of the petition date. Notwithstanding proper service, Creditor failed to timely respond and oppose. The Motions provide clear and appropriate notice that failure to oppose will result in valuation of the Property at $470,000 and the loss of Creditor's liens as a result thereof. The Motions also are supported by adequate evidence.
As previously mentioned, Creditor's estimate of value in its filed proofs of claim is $10,000 less than Debtors' value.
The Court therefore values the Property at $470,000 as of the petition date, determines that Creditor's claims are entirely unsecured under section 506(a) given the value of the Property and the amount of the lien senior to Creditor's liens secured thereby, and, accordingly as discussed above, will avoid Creditor's liens under section 1322(b)(2) as part of and in conjunction with the Manrikis' confirmed Plan contingent on appropriate clarifying modification to the Plan, entry of a modified confirmation order on the modified plan, and completion of the modified Plan and Debtors' resultant discharge. The Plan must be modified to expressly incorporate the Motions into the Plan by Docket Number reference. The modified confirmation order, must include the following (completed with the relevant data):
Consistent with this Court's Memorandum Decision dated May 7, 2009 (Docket No. ____) (a) the value of Debtors' residence located at _________________ _____________________ (the "Home") is $470,000.00; (b) the balance owing to the holder of the first trust deed against the Home is greater than $470,000.00; (c) the Second and Third Trust Deeds of Wells Fargo Bank ("Creditor") [recorded with the ________ County Recorder on _____________ as Document No. __________ and on ______________ as Document No. _______________] (the "Junior Trust Deeds") are each wholly unsecured as a result; (d) as a result and pursuant to section 1322(b)(2) the Creditor's liens may be modified and stripped by this Plan; (e) under the Plan the Creditor will be treated and paid as an unsecured creditor; and (f) upon completion of the Plan and Debtors' discharge, the debt to Creditor secured by the Junior Trust Deeds shall be deemed fully satisfied and Creditor shall take all steps necessary and appropriate to reconvey and release the Junior Trust Deeds against the Home.
The Manrikis are directed to: (1) promptly file and serve documents providing for a clarifying modification to the Plan; and (2) to promptly submit an order confirming the Plan as so modified and containing the language set forth herein.