The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a debtor’s Chapter 12 bankruptcy petition, where the debtor’s aggregate debts exceeded the statutory limitation for Chapter 12 eligibility.
In so ruling, the Ninth Circuit determined that “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the debtor’s property, even though the loans are not enforceable against the debtor personally.
A copy of this opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2015/02/17/12-60069.pdf
As you may recall, “[o]nly a family farmer . . . with regular annual income may be a debtor under chapter 12.” 11 U.S.C. §109(f). In addition, Section 101(18)(A) further limits eligibility to be a chapter 12 debtor by mandating that the debtor’s aggregate debts not exceed a statutory maximum and that those debts arise mostly out of the farming operation. 11 U.S.C. § 101(18)(A).
In 1997, the Debtor attempted to establish a vineyard on her ranch. In 2006, however, her efforts failed, and she defaulted on three loans.
In July 2010, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code. Thereafter she received a discharge, which released her from personal liability for the unsecured claims associated with the properties. See 11 U.S.C. § 727(b). But the creditors retained the “right to enforce a valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy.”
In March 2011, the Debtor filed a second voluntary petition, this time under chapter 12 of the Code, which contains special provisions for family farmers whose “aggregate debts” do not exceed a statutory dollar amount. See 11 U.S.C. §§ 101(18)(A), 109(f).
At the time of the second petition, the statutory limit was $3,792,650, and the appraised value of the Debtor's properties totaled about $1.6 million, but the amount of the liens encumbering the properties totaled about $4.1 million. Thus, on the schedules that she attached to her petition, the Debtor listed debts of $4.1 million; of that amount, $2.5 million was unsecured.
The bankruptcy court dismissed the Debtor's petition on the ground that she had “aggregate debts” of $4.1 million, exceeding the statutory limitation for chapter 12 eligibility.
The Debtor appealed to the Bankruptcy Appellate Panel. The Debtor contended that the unsecured portion of her secured creditor's claims should not be included in her “aggregate debts” and, therefore, should not bar chapter 12 eligibility, because her personal liability for those claims had been discharged in her earlier chapter 7 case. The Debtor argued that because the secured portions of her creditors’ claims were limited to the value of the secured collateral, the value of her “aggregate debts” fell well below the statutory limitation for chapter 12 eligibility.
The Bankruptcy Appellate Panel rejected the Debtor’s arguments and affirmed the bankruptcy court. The Bankruptcy Appellate Panel concluded that “obligations enforceable against the debtor's property but for which the debtor has no personal liability are nonetheless ‘claims’ and ‘debts’ within the meaning of the Bankruptcy Code.” In re Davis, 2012 Bankr. LEXIS 3631, 2012 WL 3205431, *5.
As you may recall, the bankruptcy code defines a “debt” as “liability on a claim.” 11 U.S.C. § 101(12). In turn, the bankruptcy code defines “claim” to mean:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. § 101(5).
On appeal, the Ninth Circuit noted that the Supreme Court had found that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.” Pa. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S. Ct. 2126, 109 L. Ed. 2d 588 (1990).
The Ninth Circuit also noted the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), wherein the Supreme Court determined that a “claim” can be an enforceable obligation against either the debtor or the debtor's property. In Johnson, the Supreme Court had considered the related question of whether a debtor must include a mortgage lien in a chapter 13 reorganization plan after the obligation secured by the mortgage had been discharged in an earlier chapter 7 proceeding.
The Supreme Court reasoned that “[e]ven after the debtor's personal obligations have been extinguished, the mortgage holder still retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor's property. Alternatively, the creditor's surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation. Either way, there can be no doubt that the surviving mortgage interest corresponds to an ‘enforceable obligation’ of the debtor.”
The Ninth Circuit determined that “claim” is broadly defined to include any right to payment or any right to an equitable remedy giving rise to a right of payment. The Ninth Circuit found that a creditor’s claim remains a “debt” so long as it is enforceable against either the debtor or the debtor's property.
Accordingly, the Ninth Circuit held that Debtor's “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the Debtor’s property, even though the loans are not enforceable against the Debtor personally.
In so ruling, the Ninth Circuit also relied upon its decision in Quintana v. Commissioner, 107 B.R. 234, 235-36 (B.A.P. 9th Cir. 1989), aff’d, Quintana II, 915 F.2d 513. In Quintana, the debtors had borrowed $1 million, which was secured by real property valued at $600,000. The debtors defaulted on the loan, so the creditor brought an action in Idaho state court for a decree of foreclosure and an order of sale. Id., 235. In that action, the creditor waived its right to seek a post-sale deficiency judgment. Id., 236.
On appeal, the Ninth Circuit determined that the creditor's decision to waive its right to seek a deficiency judgment did not limit the value of the debtors’ “aggregate debts” to the value of the secured collateral.
The Ninth Circuit in Quintana observed that “[a]lthough, as a practical matter, [the creditor] will only be able to collect the value of the property, it has the right to payment of the entire obligation if under some circumstance, the property is sold for more than its present value.” Id., 239.
Accordingly, the Ninth Circuit affirmed the dismissal of the Debtor’s Chapter 12 bankruptcy petition.
Ralph T. Wutscher
McGinnis Wutscher LLP
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Chicago, Illinois 60602
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