Sergio V. Garcia

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
SERGIO V. GARCIA, 	Case No. 14-10792 TA
Debtor.
MEMORANDUM OPINION
Before the Court is whether Debtor has too much unsecured debt to be in a Chapter 13
case. 	The answer turns on whether Debtor’s wholly unsecured junior mortgages count as
unsecured debts under § 109(e).1 Because the Court concludes they do, Debtor’s unsecured
debts exceed the $383,175 limit set out in § 109(e).
I. 	FACTS
The Court finds the following facts, taken from the parties’ admissions and judicial notice
of the docket in this bankruptcy case.2
Debtor filed this Chapter 13 case on March 21, 2014. 	He scheduled $332,450 of
noncontingent, liquidated, unsecured debts. He also scheduled the following secured debts:
Creditor 	Claim amount 	Collateral 	Collateral value
Green Tree 	$201,259 	Debtor’s residence (1st
mortgage)
$190,000
Bank of America 	$ 73,482 	Debtor’s residence (2d
mortgage)
$190,000
Homewise 	$ 	7,500 	Debtor’s residence (3d
mortgage)
$190,000
1 All statutory references are to 11 U.S.C.
2 See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir.
1979) (holding that a court may, sua sponte, take judicial notice of its docket); In re Mailman
Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir. 1999) (citing Fed. R. Evid. 201 and
concluding that “[t]he bankruptcy court appropriately took judicial notice of its own docket”); In
re Quade, 496 B.R. 520, 524 (Bankr. N.D. Ill. 2013) (A “bankruptcy court [is authorized] . . . to
take judicial notice of its own docket.”).
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For the purpose of ruling on eligibility, the parties agree that Debtor’s house is worth
$190,000, the amount on Debtor’s Schedule A. 	The parties also agree that Debtor’s house is
encumbered by three mortgages, securing the amounts and in the priority set forth above.
Based on these facts, on May 30, 2014, creditor Consumer Direct Personal Care
(“Consumer Direct”) filed a Motion to Dismiss (the “Motion”), arguing that the Debtor had too
much unsecured debt to qualify under § 109(e). The Chapter 13 trustee raised the same issue in
her objection to Debtor’s Chapter 13 plan, and filed a brief in support of the Motion. The Debtor
filed a brief in opposition. There is no dispute about the critical facts.
II. 	DISCUSSION
A. 	Relevant Bankruptcy Code Sections.
Section 109(e) provides:
Only an individual with regular income that owes, on the date of the filing of the
petition, noncontingent, liquidated, unsecured debts of less than $383,175 and
noncontingent, liquidated, secured debts of less than $1,149,525, or an individual
with regular income and such individual’s spouse, except a stockbroker or a
commodity 	broker, 	that 	owe, 	on 	the 	date 	of 	the 	filing 	of 	the 	petition,
noncontingent, liquidated, unsecured debts that aggregate less than $383,175 and
noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor
under chapter 13 of this title.
Section 506 provides:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the
estate has an interest, or that is subject to setoff under section 553 of this title, is a
secured claim to the extent of the value of such creditor’s interest in the estate’s
interest in such property, or to the extent of the amount subject to setoff, as the
case may be, and is an unsecured claim to the extent that the value of such
creditor’s interest or the amount so subject to setoff is less than the amount of
such allowed claim. Such value shall be determined in light of the purpose of the
valuation and of the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on a plan affecting
such creditor’s interest.
. . .
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(d) To the extent that a lien secures a claim against the debtor that is not an
allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of
this title; or
(2) such claim is not an allowed secured claim due only to the failure of
any entity to file a proof of such claim under section 501 of this title.
The question is whether the undersecured portion of Debtor’s first mortgage, together with the
wholly unsecured second and third mortgage debts, count as “noncontingent, liquidated,
unsecured debts” for § 109(e) purposes. 	If they do, then Debtor would not be eligible to be a
Chapter 13 debtor:
Debt 	Unsecured/Undersecured
Amount
Listed general unsecured debts 	$332,450
Undersecured 	portion 	of
Greentree Mortgage
$ 11,259
Bank of America Mortgage 	$ 73,482
Homewise Mortgage 	$ 	7,500
Total 	$424,691
B. 	Wholly Unsecured Junior Liens. 	Almost all courts ruling on the interplay of
§ 506 and § 109(e) have held that wholly unsecured junior liens should be counted as unsecured
debts for § 109(e) purposes. See Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 983 (9th Cir.
2001); Brown & Co. Secs. Corp. v. Balbus (In re Balbus), 933 F.2d 246, 247 (4th Cir.1991);
Miller v. United States, 907 F.2d 80, 82 (8th Cir. 1990); In re Day, 747 F.2d 405, 406–07 (7th
Cir. 1984); United States v. Dallas, 157 B.R. 912, 913 (S.D. Ala. 1992); United States v.
Edmonston, 99 B.R. 995, 999 (E.D. Cal. 1989); In re Griffey, 335 B.R. 166, 170 (10th Cir. BAP
2005); Soderlund v. Cohen (In re Soderlund), 236 B.R. 271, 274–75 (9th Cir. BAP 1999); In re
Thompson, 2011 WL 5520963 (Bankr. D. Kan. 2011); In re Bernick, 440 B.R. 449, 450–51
(Bankr. E.D. Va. 2010); In re Smith, 419 B.R. 826, 831–32 (Bankr. C.D. Cal. 2009); In re Werts,
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410 B.R. 677, 684–85 (Bankr. D. Kan. 2009); In re Groh, 405 B.R. 674, 675–76 (Bankr. S.D.
Cal. 2009); In re Weiser, 391 B.R. 902, 908 (Bankr. S.D. Fla. 2008); In re Grenchik, 386 B.R.
915, 917–19 (Bankr. S.D. Ga. 2007); In re Buis, 337 B.R. 243, 248 (Bankr. N.D. Fla. 2006); In
re Lower, 311 B.R. 888, 892 (Bankr. D. Colo. 2004); In re Harrold, 257 B.R. 916, 916–17
(Bankr. W.D. Ark. 2000); In re Prosper, 168 B.R. 274, 278 (Bankr. D. Conn. 1994); In re
Mason, 133 B.R. 877, 878–79 (Bankr. N.D. Ohio 1991); In re Rifkin, 124 B.R. 626, 627–29
(Bankr. E.D.N.Y. 1991); In re Jerome, 112 B.R. 740, 741–42 (Bankr. S.D.N.Y. 1990); In re
Smith, 419 B.R. 826 (Bankr. C.D. Calif. 2009); In re Bos, 108 B.R. 740, 741–42 (Bankr. D.
Mont. 1989); In re Clark, 91 B.R. 570, 573 (Bankr. D. Colo. 1988); In re McClaskie, 92 B.R.
285, 286–87 (Bankr. S.D. Ohio 1988); In re Martin, 78 B.R. 928, 929–30 (Bankr. S.D. Iowa
1987); In re Potenza, 75 B.R. 17, 19 (Bankr. D. Nev. 1987); In re Bobroff, 32 B.R. 933, 935–36
(Bankr. E.D. Pa. 1983); In re Ballard, 4 B.R. 271, 274–75 (Bankr. E.D. Va. 1980).
The rule holds even where the collateral is the debtor’s principal residence. 	In re
Schmidt, __ F.3d __, 2014 WL 4243251 (8th Cir. 2014); In re Davis, 716 F.3d 331, 334–39 (4th
Cir. 2013); Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663, 669 (6th Cir. 2002); In re
Zimmer, 313 F.3d 1220, 1222–27 (9th Cir. 2002); In re Pond, 252 F.3d 122, 124–27 (2d Cir.
2001); In re Tanner, 217 F.3d 1357, 1358–60 (11th Cir. 2000); In re Bartee, 212 F.3d 277, 284–
95 (5th Cir. 2000); In re McDonald, 205 F.3d 606, 609–15 (3d Cir. 2000); In re Griffey, 335
B.R. 166, 170 (10th Cir. BAP 2005) (following In re Lane). 	See also In re Woolsey, 696 F.3d
1266, 1279 (10th Cir. 2012) (implying that § 1322(b)(2) could be used to strip a wholly
unsecured lien on debtor’s residence).
A few courts have taken the opposite view. 	In In re Morton, 43 B.R. 215, 218–20
(Bankr. E.D.N.Y. 1984), the bankruptcy court ruled that claims deemed unsecured under § 506
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should not be counted under § 109(e) because § 506 deals with allowed claims, while § 109(e)
concerns claims on the filing date. The court reasoned that claim allowance happens long after
the petition date, so § 109(e) eligibility could not be determined at the outset of a case if § 506
bifurcated claims were counted. 43 B.R. at 218–220.3 In In re Edmonston, 99 B.R. 993, 993–95
(Bankr. E.D. Cal. 1988), abrogated by U.S. v. Edmonston, 99 B.R. 995, 999 (E.D. Cal. 1988), the
bankruptcy court agreed that claims deemed unsecured under § 506 nevertheless should be
excluded from the § 109(e) eligibility calculation:
It is an approach which allows inquiry into the debtor's good faith, it avoids the
undue delays which extended hearings on valuation issues could cause (especially
in cases where it was not the secured creditor in question who was contesting
eligibility but rather an unsecured creditor trying to force the debtor into chapter
11 rather than 13), it preserves the Congressional intent of putting chapter 13
beyond the use of large businesses because there is still the $350,000.00 cap on
secured debt, and it encourages resort to and availability of chapter 13 as opposed
to chapter 7 liquidation. 	It also allows the debtor to be more forthright and
accurate in the preparation of schedules; a contrary rule could well benefit the less
scrupulous debtor and penalize the debtor following the honorable path of full and
honest disclosure.
99 B.R. at 995. The district court affirmed the bankruptcy court on other grounds but criticized
the court’s reasoning on the § 505/§ 109(e) issue:
The court does not agree with the Bankruptcy Court that the Morton test is the
proper one for Chapter 13 eligibility because section 506 clearly indicates that the
unsecured portion of a secured debt should be treated as an unsecured claim. The
court is unconvinced that the section 506 approach will cause excessive delays in
chapter 13 proceedings. 	However, the Bankruptcy Court's order denying the
motion to dismiss is affirmed because the SBA waived its right to challenge
Chapter 13 eligibility by failing to oppose the confirmation.
99 B.R. at 999.
3 This argument is not persuasive. Disputed claims count toward the § 109(e) cap. See, e.g., In re Rottiers, 450 B.R
208, 215 (Bankr. D.N.M. 2011), citing Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 304–05 (2d Cir.
1997). On the petition date, the unsecured portion of a claim bifurcated pursuant to 506 is either allowed (§ 502(b));
temporarily allowed (Bankruptcy Rule 3018); deemed allowed (§ 502(a)), or disputed. Regardless of the status, the
claim should be counted under § 109(e) if it is unsecured. The key issues are not allowance or disallowance but
collateral value and claim amount. Those issues are discussed in Section II(D) below.
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The Court believes the majority view is correct. 	Policy considerations aside, it seems
clear that an “unsecured claim” referred to in § 506 should be considered an “unsecured debt” in
§ 109(e). 	After all, the Bankruptcy Code defines “debt” as “liability on a claim.” 	Section
101(12). 	Junior mortgages that are “out of the money” based on the value of the collateral are
treated as unsecured in Chapter 13 cases, see, e.g. In re Garn, 2013 WL 5723746 (Bankr. D.
Utah 2013) (wholly underwater junior mortgage is treated as a general unsecured claim), and can
have their liens “stripped off.” 	Woolsey, 969 F.3d at 1279 (citing cases); Garn, 2013 WL
5723746, at *2. 	Such claims are not secured claims. 	The eligibility test in § 109(e) is “on the
date of filing,” so the fact that perhaps, someday, the collateral might increase in value enough to
partially secure the claim is not a reason to view the claim as secured on the petition date. There
is no reason to suspect Congress intended a different result, and in any event the statutory
language is clear. See In re Taylor, 737 F.3d 670, 678 (10th Cir. 2013) (where “the words of the
statute are unambiguous, the judicial inquiry is complete”). 	Junior liens that are behind
undersecured first mortgages are “unsecured debts” as defined in § 109(e).
C. 	Unsecured Portion of Undersecured Claims.
In addition to wholly unsecured junior liens, almost all courts include the undersecured
portion of partially secured claims in the § 109(e) debt calculation. 	See In re Scovis, 249 F.3d
975, 983 (9th Cir. 2001); In re Balbus, 933 F.2d 246, 247 (4th Cir. 1991); Miller v. U.S. Through
Farmers Home Admin., 907 F.2d 80 (8th Cir. 1990) (farm land); In re Day, 747 F.2d at 406
(accounts receivable); In re Claro-Lopez, 2010 WL 2787621, at *2 (Bankr. S.D. Fla. 2010)
(rental property); In re Grenchik, 386 B.R. 915 (Bankr. S.D. Ga. 2007) (restaurant equipment);
In re Lower, 311 B.R. 888, 891 (Bankr. D. Colo. 2004) (business real property).
Where the collateral is the debtors’ principal residence, a few courts have held that the
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undersecured portion of the partially secured mortgage should not be counted as unsecured debt,
since § 1322(b)(2) prevents the Court from modifying the lien. See In re Munoz, 428 B.R. 516,
519 (Bankr. S.D. Cal. 2010); In re Tropper, 2010 WL 9012919, at *7 (Bankr. N.D. Ga. 2010); In
re Smith, 419 B.R. 826, 832 (Bankr. C.D. Cal. 2009). See also In re Soderlund, 236 B.R. at 275
(the § 506(d) analysis may be different if the partially secured claim encumbers the debtor’s
primary residence); In re Winder, 171 B.R. 728, 731 (Bankr. D. Conn. 1994) (acknowledging
that a good faith argument could be made to treat such liens differently). 	This view has been
rejected by several courts. 	See In re Werts, 410 B.R. 677 (Bankr. D. Kan. 2009) (ruled that
undersecured portion of home mortgage could be counted under §109(e) despite the § 1322(b)(2)
limitations on plan treatment); In re Brammer, 431 B.R. 522, 525 (Bankr. D.D.C. 2009) (same).
Because it would not change the result, the Court will not rule on the issue of whether the
unsecured portion of Greentree’s first mortgage is counted under § 109(e).
D. 	Evidence. There has been discussion in the case law about what evidence courts
should consider when weighing § 109(e) eligibility disputes. 	Many courts have held that they
should limit their review to the debtors’ bankruptcy schedules, unless bad faith is shown. In re
Scovis, 249 F.3d 975 (9th Cir. 2001); In re Lybrook, 951 F.2d 136, 138–39 (7th Cir.1991); In re
Pearson, 773 F.2d 751, 756–57 (6th Cir. 1985) (court should rely on debtor’s schedules if made
in good faith), citing In re King, 9 B.R. 376 (Bankr. D. Or. 1981); In re Redburn, 193 B.R. 249,
254–56 (Bankr. W.D. Mich. 1996); In re Rigdon, 94 B.R. 602, 604 (Bankr. W.D. Mo. 1988); In
re Robertson, 84 B.R. 109, 112 (Bankr. S.D. Ohio 1988); In re Koehler, 62 B.R. 70, 72 (Bankr.
D. Neb. 1986). 	See also 2 Collier on Bankruptcy ¶ 109.06[3] (Alan N. Resnick & Henry J.
Sommer, eds.-in-chief, 16th ed. 2011.
Other courts have rejected this rule as too restrictive and giving debtor too much control
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over the issue. See e.g., In re Pennypacker, 115 B.R. 504, 506 (Bankr. E.D. Pa. 1990) (declined
to give undue weight to debtor’s schedules because doing so would allow the debtor “unbridled
authority to determine his eligibility for chapter 13 relief”).
In Barcal v. Laughlin (In re Barcal), 213 B.R. 1008, 1015 (8th Cir. BAP 1997), the
bankruptcy appellate panel stated:
Rather than making final determinations on disputed liabilities, it is appropriate
for a court considering eligibility to rely primarily upon a debtor's schedules and
proofs of claim, checking only to see if these documents were filed in good
faith. . . . In so doing, however, the court should neither place total reliance upon a
debtor's characterization of a debt nor rely unquestionably on a creditor's proof of
claim, for to do so would place eligibility in control of either the debtor or the
creditor. . . . At a hearing on eligibility, the court should thus, canvass and review
the debtor's schedules and proofs of claim, as well as other evidence offered by a
debtor or the creditor to decide only whether the good faith, facial amount of the
debtor's liquidated and non-contingent debts exceed statutory limits.
213 B.R. at 1015. 	See also In re Salazar, 348 B.R. 559 (Bankr. D. Colo. 2006) (quoting and
following Barcal).
The Court agrees with the approach taken in Pennypacker, Salazar, and Barcal that,
while a debtor’s bankruptcy schedules are an important part of the § 109(e) eligibility analysis,
the Court is not bound by them, even if they were submitted in good faith. 	Rather, the Court
should be able to consider all readily available evidence, including claims filed, any liens that are
obviously avoidable, and the like. 	The Court agrees that the eligibility inquiry should be
summary, without the need for extensive evidence, Salazar, 348 B.R. at 564, but holds that
taking some evidence beyond the schedules and claims file may be appropriate depending on the
size and complexity of the case.
Furthermore, regardless of the scope of the review, it seems fair to take the Debtor at his
word if the scheduled value of his property indicates unsecured debts sufficient to put him over
§ 109(e)’s debt limits. See, e.g., In re Scovis, 249 F.3d at 982–83 (court used debtors’ scheduled
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value of their house to determine § 109(e) eligibility).
III. 	CONCLUSION
Considering the wholly unsecured junior liens on the Debtor’s house, which total almost
$90,000, Debtor’s total unsecured debt is about $413,432, well over the $383,175 limit imposed
under § 109(e). 	The Motion therefore will be granted. 	The Court will enter a separate order
consistent with this opinion.
______________________________
Honorable David T. Thuma
United States Bankruptcy Judge
Entered: October 3, 2014
Copies to:
Kelley Skehen
625 Silver, SW, Ste. 350
Albuquerque, NM 87102
Ronald Holmes
112 Edith, NE
Albuquerque, NM 87102
Dan Behles
3800 Osuna Road, NE, Ste. 2
Albuquerque, NM 87109
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