Klaus Wimmer and Linda Wimmer

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FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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: 	Chapter 13
In re: 	:
: 	Case No. 13-37533 (cgm)
Klaus and Linda Wimmer, 	:
:
Debtor(s). 	:
:
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MEMORANDUM DECISION DENYING CONFIRMATION AND DISMISSING CASE
A P P E A R A N C E S :
Brian McCaffrey, Esq.
Brian McCaffrey Attorney At Law, P.C
88-18 Sutphin Blvd
1st Floor
Jamaica, NY 11435
Attorney for Debtors
James J. Rufo, Esq.
McCabe, Weisberg & Conway P.C.
145 Huguenot Street, Suite 210
New Rochelle, NY 10801
Attorney for OneWest Bank, FSB
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
Chapter 13 Debtors filed a motion to avoid liens, heard in conjunction with confirmation
of the Debtors’ chapter 13 plan, that sought to bifurcate and cram down a first mortgage while
avoiding a wholly unsecured second mortgage. Debtors proposed to pay the contractual rate of
interest rather than the rate of interest prescribed in Till v. SCS Credit Corp., 541 U.S. 465
(2004). Debtors sought to pay the value of the collateral over the remaining contract term rather
than the applicable commitment period of the chapter 13 plan. Debtors also sought a
determination from the Court that the unsecured portions of the liens should not count toward the
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chapter 13 debt limit due to a prior chapter 7 discharge. The Court denies confirmation of the
Debtors’ chapter 13 plan for failure to properly treat the secured claim of the first mortgage. The
Court also dismisses the case for exceeding the debt limit.
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. §
157(a), and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska
dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. §§ 157(b)(2)(A) (matters
concerning administration of the estate), 157(b)(2)(B) (allowance of claims against the estate),
and 157(b)(2)(L) (confirmation of plans).
Background
Klaus and Linda Wimmer (“Debtors”) filed this chapter 13 case on November 19, 2013.
Vol. Pet., ECF No. 1. In their petition, the Debtors listed their street address as 12 Blueberry Hill
Road in Hopewell Junction, New York (the “Blueberry Hill Property”). Id. at 1. In the Debtors’
Schedule A, which was filed on December 17, 2013, the Debtors listed the Blueberry Hill
Property as their only real property. Scheds. 3, ECF No. 8. The Blueberry Hill Property is
allegedly encumbered by a first mortgage in the amount of $1,223,033.54 in favor of OneWest
Bank, FSB (“Creditor”). Conf. Obj. 1, ECF No. 25. Creditor also purportedly holds a second
mortgage against the property in the amount of $153,981.81. Mot. 5, ECF No. 18.
On January 6, 2014, the Debtors filed an amended petition and amended schedules. Am.
Scheds., ECF No. 11. The Debtors’ amended petition lists their street address as 747 North
Quaker Hill Road in Pawling, New York (the “Quaker Hill Property”). Id. at 1. The Debtors’
Schedule A does not list an interest in the Quaker Hill Property. Id. at 10. In response to
Question 15 of the Debtors’ Statement of Financial Affairs (requesting prior addresses within
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three years of the petition date), the Debtors listed the Blueberry Hill Property as a prior address.
Id. at 32. The column where the Debtors are asked to fill in the dates of occupancy of the
Blueberry Hill Property is left blank. Id.
A. Motion to value collateral and bifurcate claims.
On January 31, 2014, the Debtors filed a motion to determine that the value of the
Blueberry Hill Property is $545,000 pursuant to an appraisal dated October 11, 2013. Mot. 5,
ECF No. 18. With this valuation, the Debtors seek to: (i) bifurcate the first mortgage into a
secured claim for $545,000 and an unsecured claim for the remainder; (ii) avoid the lien securing
the unsecured portion of the first mortgage; (iii) reclassify the junior mortgage to an unsecured
claim; and (iv) avoid the lien securing the junior mortgage. Id. at 5–8. The motion contends that
the bifurcation of the first mortgage claim is not prohibited by the anti-modification provisions of
§ 1322(b)(2),1 as the Debtors no longer claim the Blueberry Hill Property as their principal
residence. Id. at 6.
The motion states that the Debtors fell behind on their mortgage payments on the
Blueberry Hill Property and Creditor initiated foreclosure. Id. at 4. The motion alleges that
Creditor engaged in misconduct in the foreclosure proceeding, stating:
Throughout the course of settlement conferences in the state court action the
Creditor refused to consider the Debtor[s] for loss mitigation because the amount
owed to the Creditor exceeded the loan limits for loss mitigation programs
available through [Creditor].
As a result of the intransigence of [Creditor], the Debtor[s] sought to find a place
to live that would afford [them] a lower monthly payment for rent, while enabling
[them] to rent the [Blueberry Hill] Property to someone who could afford the
payment amount dictated by the mortgage. In September 2013 the Debtor[s] . . .
took up residence at 747 North Quaker Hill Road, Pawling, NY 12564.
1 Unless otherwise noted, all sectional references are to the United States Bankruptcy Code, 11 U.S.C. §§ 101–1532
(2012).
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Id. The motion does not specify what interest, if any, the debtors have in the Quaker Hill
Property. See id.
Debtors attach what appears to be a full interior appraisal of the Blueberry Hill Property
conducted on October 11, 2013. Mot. Ex. A, ECF No. 18.
B. Creditor’s first opposition papers.
On March 11, 2014, Creditor filed opposition to the motion. Opp’n, ECF No. 29.
Creditor raised two issues in its initial opposition. Id. at 3–5. Creditor claims that § 1322(b)(2)
and In re Pond, 252 F.3d 122 (2d Cir. 2001) (“Pond”) allow the Debtors to modify claims
secured by a debtor’s principal residence and not investment property, and since the Debtors no
longer live at the Blueberry Hill Property, they may not modify Creditor’s secured claims. Id. at
3–4. Creditor also alleges that the Debtors’ chapter 13 plan is not feasible, which Creditor
believes to be fatal to the motion. Id. at 4. Creditor believes that if the Debtors bifurcate the first
mortgage claim, the Debtors will be required to pay the secured portion over the 60-month life of
the chapter 13 plan while paying the Creditor interest in accordance with Till v. SCS Credit
Corp., 541 U.S. 465 (2004) (“Till”). Id. According to Creditor, this will result in a payment of
$10,994.13 per month. Id. at 5. Creditor points to the Debtors’ Schedule I, which shows gross
monthly income of $10,792.08, to demonstrate that the Debtors cannot make the required
payment. Id.
C. Prior case.
On June 7, 2012, Mr. Wimmer filed a chapter 7 bankruptcy individually (Case No. 12-
36464). Vol. Pet., In re Wimmer, No. 12-36464-cgm (Bankr. S.D.N.Y. June 7, 2012),2 ECF No. 1.
He received a discharge on September 7, 2012. Order D’chg 1, chapter 7 case, ECF No. 9.
Creditor was listed as a secured creditor on the petition and mailing matrix; Vol. Pet. 12, 45,
2 Mr. Wimmer’s chapter 7 case will be hereinafter short cited as “chapter 7 case.”
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chapter 7 case, ECF No. 1; was mailed notice of the 341 meeting; Not. 341 Mtg. 3, chapter 7
case, ECF No. 5; and was mailed notice of the discharge; Order D’chg 3, chapter 7 case, ECF No.
9.
The promissory note and mortgage for both the first and second mortgages are only
signed by Mr. Wimmer. Opp’n Ex. A, at 7, 24, ECF No. 29 (first mortgage); Proof of Claim Ex.,
at 16, Claim Reg. 1-1 (second mortgage).
D. Debtors’ second motion.
Debtors filed a second motion. 2d Mot., ECF No. 36. This motion objects to claim 14-1,
which is the first mortgage secured claim of Creditor. Id. at 3. Debtors seek complete
reclassification of claim 1-1 to zero and reclassification of claim 14-1 as a secured claim of
$545,000 (based on the appraisal) and an unsecured claim of $678,033.54. Id. at 5.
In the second motion, the Debtors also argue that Mr. Wimmer’s prior chapter 7
discharge renders the unsecured portions of the potentially avoided liens unenforceable. Id. at 4.
E. 	Debtors’ reply to Creditor’s opposition.
Debtors also filed a reply to Creditor’s opposition to the first motion. Reply, ECF No.
38. As to the second mortgage, Debtors argue that Pond and Nobelman v. Am. Sav. Bank, 508
U.S. 324 (1993) (“Nobelman”) do not prohibit bifurcation and reclassification of claims secured
by investment property, and only speak to liens against the debtor’s principal residence. Id. at 3.
As to the first mortgage, Debtors argue that they can de-accelerate the loan while paying
the value of the collateral over a term that is longer than the duration of the five-year chapter 13
plan. Id. at 5–6. Debtors seek to continue the remaining duration of the note (270 months), pay
only the $545,000 value of the property, and pay the contract rate of interest. Id. at 8–11.
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Debtors reiterate their argument that the unsecured portion of the loans should be deemed
void due to the prior chapter 7 discharge. Id. at 12–15. Debtors argue that disallowance would
mean that the debt does not count towards the debt limit of § 109. Under § 109(e), “[o]nly 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” can be a debtor under chapter 13. The debt limits apply equally to married
couples filing jointly. 11 U.S.C. § 109(e). With these two motions, Debtors seek a total
reclassification of $832,015.35 to unsecured, which exceeds the unsecured debt limit by nearly
double. Consequently, Debtors seek a Court determination that these portions do not count
towards the debt limit. Rep. 12, ECF No. 38. Otherwise, by prevailing on these motions, the
Debtors would render themselves ineligible for chapter 13.
F. 	Creditor’s additional response.
Creditor put forth additional briefing in support of its opposition. Cr. Rep., ECF No. 46.
Creditor asserts that the Blueberry Hill Property is actually the Debtors’ principal residence,
meaning the first mortgage claim cannot be bifurcated. Id. at 5. According to Creditor, the
mortgage described the property as a one or two family dwelling only. Id. at 9–10. Creditor also
points out that the property is a one or two family dwelling according to the Dutchess County
property classification, and was maintained as the Debtors’ principal residence from October or
November of 2006 until September of 2013. Id. Creditor also points out that Debtors sought to
obtain a loan modification from Creditor during the foreclosure proceeding and was reviewed for
a loan modification. Id. at 10. Based on these facts, Creditor argues that the Debtors entered
into the loan agreement with the intent to make the Blueberry Hill property their primary
residence. Id.
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In the event the Court finds this to be investment property, the Creditor believes it must
be paid the secured portion of its claim in full over the life of the chapter 13 plan with Till
interest. Id. Creditor argues that the 270-month repayment proposed by the Debtors exceeds the
60-month applicable commitment period for the chapter 13 plan. Id. at 12. According to
Creditor, the current prime rate is 3.25% and a risk adjustment of 3% is appropriate given Mr.
Wimmer’s prior chapter 7 filing, which indicates he is a credit risk. Id. If paid over the life of
the plan, the total monthly payment, assuming a Till interest rate of 6.25%, would be $11,340.59
per month. Id. at 12–13. Creditor asserts that the plan is entirely infeasible where Debtors’ gross
monthly income on the petition is $10,792.08 per month. Id. at 13.
G. Creditor’s objection to confirmation.
Creditor also objects to confirmation of the Debtors’ plan on the grounds that the plan
does not propose to repay any arrears on account of the first mortgage, and on the grounds that
the Creditor objects to the motion to avoid liens. Obj. Conf. 1, ECF No. 25. Arrears are
allegedly $207,990.03. Id.
Discussion
I. 	Matters relevant to the motions to avoid liens.
For the reasons set forth below, the Court dismisses the case, thereby mooting the
motions to avoid liens. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239–241 (1937).
Nonetheless, two issues were raised in the papers that merit some discussion.
I. 	Liens may still be avoided where the property is not a principal residence.
Creditor contends that § 1322(b)(2) and Pond only allow the Debtors to avoid liens
against their principal residence, not against investment property. Creditor misreads the law.
Section 1322(b) states that a chapter 13 plan may, among other things, “modify the rights of
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holders of secured claims, other than a claim secured only by a security interest in real property
that is the debtor’s principal residence . . . .”
The “anti-modification” exception of § 1322(b)(2) prohibits the debtors from modifying
certain secured claims against their principal residence. Nobelman, 508 U.S. at 328. However,
there is no restriction on the debtor’s ability to “modify the rights” of holders whose claims are
not secured by a principal residence. See In re Moore, 441 B.R. 732, 741 (Bankr. N.D.N.Y.
2010) (allowing “strip down” of mortgage lien against investment property).
This is consistent with Pond. In that case, the Second Circuit held that a debtor could
avoid a junior mortgage holder’s liens. Id. at 127. The Second Circuit held that creditors
holding an entirely underwater lien against a debtor’s principal residence “are not ‘holders of . . .
a claim secured only by a security interest in . . . the [plaintiffs’] principal residence,’ and,
therefore, their rights in the lien are not protected under the anti-modification exception of §
1322(b)(2).” Id.
The same is true here. Creditor is not the holder of 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).
Creditor’s “rights in [its] lien are not protected by the anti-modification exception of §
1322(b)(2)” and may be modified. Pond, 252 F.2d at 127; see also Moore, 441 B.R. at 741.
II. 	The liens may still be avoided if the plan is infeasible.
Creditor next contends that the motion should be denied as the Debtors have not proposed
a feasible plan for confirmation. Creditor’s opposition is based on Debtors’ insufficient income
to propose a confirmable plan that will pay the full amount of Creditor’s secured claim plus
interest over the life of the plan. Presumably, Creditor objects to the avoidance of its lien in the
event that the Debtors’ chapter 13 plan is not confirmed.
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Proof that the debtor will ultimately be able to confirm a plan is not required before the
Court may entertain a motion to avoid a lien. “[T]he proper mechanic to value the mortgage lien
under § 506(a) in chapter 13 cases is to bring a motion pursuant to Rules 3012, 9013, and 9014.”
In re Miller, 462 B.R. 421, 433 (Bankr. E.D.N.Y. 2011). Rule 3012 states that “[t]he court may
determine the value of a claim secured by a lien on property in which the estate has an interest on
motion of any party in interest and after a hearing on notice to the holder of the secured
claim . . . .” Fed. R. Bankr. P. 3012. Debtors have brought such a motion. There is no
prerequisite that the Court determine the feasibility of the plan.
If Creditor is correct that the debtors’ plan is unconfirmable, its lien will be reinstated.
Failure to confirm a plan will lead to dismissal or conversion of the case. 11 U.S.C. §
1307(c)(5). Upon dismissal, the liens will be restored. In re Wapshare, 492 B.R. 211, 217
(Bankr. S.D.N.Y. 2013) (citing TD Bank, N.A. v. Davis (In re Davis), 716 F.3d 331, 338 (4th Cir.
2013)); 11 U.S.C. § 349(b)(1)(C).
II. 	Confirmation of the Debtors’ chapter 13 plan is denied.
A. Debtors cannot cure and maintain payments while also electing cram down.
Section 1325 sets forth the requirements for chapter 13 plan confirmation. One of the
provisions, § 1325(a)(5), provides three options for dealing with a secured claim. The plan can
provide for surrender of the collateral that secures the claim, provide a treatment the creditor will
accept, or pay the claim in an amount “not less than the allowed amount of such claim.” In re
Morales, 506 B.R. 213, 217–18 (Bankr. S.D.N.Y. 2014) (citing Assocs. Commercial Corp. v.
Rash, 520 U.S. 953, 956–57 (1997)). The “allowed amount of such claim” under §
1325(a)(5)(B) is defined with reference to § 506(a), which provides, in relevant part:
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
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interest in the estate’s interest in such property . . . 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.
11 U.S.C. § 506(a); see also Rash, 520 U.S. at 956–57. When the plan utilizes § 506(a)
and § 1325(a)(5)(B),
the debtor is permitted to keep the property over the objection of the creditor; the
creditor retains the lien securing the claim, see § 1325(a)(5)(B)(i), and the debtor
is required to provide the creditor with payments, over the life of the plan, that
will total the present value of the allowed secured claim, i.e., the present value of
the collateral, see § 1325(a)(5)(B)(ii). The value of the allowed secured claim is
governed by § 506(a) of the Code.
Id. at 957.
The duration of a chapter 13 plan is defined by reference to the “applicable commitment
period” of § 1322(d) and § 1325(b)(4). Sections 1322(d) and 1325(b)(4) both provide that plans
may be three or five years. If the debtor’s current monthly income, when multiplied by 12, is
less than the median income of the state for a family of the debtor’s family’s size, the applicable
commitment period is three years. 11 U.S.C. § 1325(b)(4)(A)(i). If the debtor’s household
income is greater than the state median, the applicable commitment period is “not less than 5
years . . . .” 11 U.S.C. § 1325(b)(4)(A)(ii). In either case, “the court may not approve a period
that is longer than 5 years.” 11 U.S.C. § 1322(d).
When combined with § 1325(a)(5)(B), the applicable commitment period of §§ 1322(d)
and 1325(b)(4) appears to mandate that the debtor pay the entire amount of all secured claims
over a maximum of five years. This result would make it impossible for many chapter 13
debtors to retain their homes. The debtor would be forced to pay the entire balance of their home
mortgage over five years regardless of the remaining term of the note.
The solution lies in § 1322(b)(5), which states that the plan may
notwithstanding paragraph (2) of this subsection, provide for the curing of any
default within a reasonable time and maintenance of payments while the case is
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pending on any unsecured claim or secured claim on which the last payment is
due after the date on which the final payment under the plan is due . . . .
Under § 1322(b)(5), the plan may cure arrears on account of a secured claim, such as a home
mortgage, through the chapter 13 plan. Aside from curing the default through the plan, the
debtor also maintains the contractual monthly payment. 11 U.S.C. § 1322(b)(5). Section
1322(e) expressly excludes the § 506(a) valuation from the calculation of the amount necessary
to cure the default under § 1322(b)(5), and mandates that the cure amount be determined in
accordance with the applicable agreement and nonbankruptcy law. Moreover, § 1322(b)(5)
expressly states that the debtor can cure and maintain “notwithstanding paragraph (2) of this
subsection,” meaning that the anti-modification provision is not violated where the debtor seeks
to cure and maintain a loan secured in his or her principal residence. “The effect of 1322(b)(2)
and (5) is to potentially split the treatment of mortgagee’s secured claim by the plan—one
secured claim for the mortgage going forward and one secured claim for the arrearage—but it
does not compromise the amount of the aggregate secured claim or the rights of the secured
creditor to recover the arrearage.” Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331
F.3d 821, 826 n. 5 (11th Cir. 2003) (citing Nobelman, 508 U.S. at 331–32).
Where the claim is allegedly secured in investment property, cram down is not prohibited
by the antimodification provision, and the debtor also has the ability to cure and maintain. The
issue presented in this case is whether the debtor can use both in the same plan.
In In re Tavella, 191 B.R. 637 (Bankr. E.D. Pa. 1996), the debtor owned several parcels
of real property and proposed to modify the interest rate on the mortgages securing them. Id. at
638. The debtor also proposed that the contractual interest rates would be reinstated upon
completion of the plan. Id. at 639. The court found that “[i]n the cramdown scenario, a Chapter
13 plan must provide that the secured creditor receive the present value of his secured claim
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within the life of the plan, or else an objection to confirmation must be sustained.” Id. at 640.
The court looked to section 1322(b)(5) and found it inapplicable due to the modification of
interest rate. Id. The court stated plainly that “[u]nder [section] 1322(b)(5), all of the provisions
of a note or contract remain in full force and effect.” Id. (citations omitted). According to the
court, “[a] change in the monthly payments does not constitute the ‘maintenance of payments’
for these purposes.” Id. (citations omitted).
The same reasoning has been followed in this Circuit. In In re Koper, 284 B.R. 747, 756
(Bankr. D. Conn. 2002), the court found that a plan that did not pay the balance of bifurcated
mortgage claims in full during the plan had “no license under the Bankruptcy Code.” The court
noted that “[a] secured claim that is modified by a plan is plainly ‘provided for’ by that plan, as
contemplated by section 1325(a)(5). Consequently, in order for such a plan to be confirmed, it
must provide for payment thereunder of the present value of any such modified secured claim.”
Id. at 752 (citing 11 U.S.C. § 1325(a)(5)(B)(ii)).
Recently, the court in In re Bullard, 494 B.R. 92 (B.A.P. 1st Cir. 2013) added an
additional point to the analysis, noting that § 1325(a)(5)(B)(i)(I) requires that the creditor retain
the lien until the earlier of payment of the “underlying debt determined under nonbankruptcy
law” or discharge. Id. at 100. The underlying debt is distinct from the bifurcated claim amount,
as an “allowed secured claim” is a bankruptcy concept. Id. Section 1328(a)(1) excepts debts
“provided for” under § 1325(b)(5) from discharge. If the debtor could cram down and maintain
the term of the note, there would be no discharge of the debt by virtue of § 1328(a)(1), and no
payment of the underlying debt by virtue of the cram down. Id. Section 1325(a)(5)(B)(i)(I)
would be rendered a nullity. Id.
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The Court agrees with the foregoing cases and finds that the Debtors cannot cram down a
secured claim while also maintaining the repayment term of the original contract. The Debtors
have made no provision for the secured claim in the amended plan, making the plan
unconfirmable as it stands. See 11 U.S.C. § 1325(a)(5). Confirmation is denied, and the request
to utilize both §§ 1325(a)(5)(B)(ii) and 1322(b)(5) is denied.
B. Debtors must pay Till interest.
If utilizing § 1325(a)(5)(B)(ii), the debtor must pay “the value, as of the effective date of
the plan” of the allowed amount of the secured claim. As noted above, the secured claim is
determined with reference to § 506(a). “In Till, a pre-BAPCPA case, the Supreme Court
addressed the appropriate method for determining the interest rate on the secured portion of a
claim that was bifurcated under section 506.” In re Velez, 431 B.R. 567, 571 (Bankr. S.D.N.Y.
2010). In Till, the Court decided that a formulaic approach to determining the cram down
interest rate is appropriate, and established the national risk-free prime rate plus an additional
risk adjustment rate as the proper calculation. Id. (citing Till, 541 U.S. at 479). Since Till,
“courts generally have approved a risk adjustment rate of 1% to 3%.” Velez, 431 B.R. at 571
(citing In re Martinez, 409 B.R. 35, 40 (Bankr. S.D.N.Y. 2009)).
Debtors propose to use the contractual interest rate that varies from the Till rate. This
treatment was rejected in Chrysler Fin. Co., LLC v. Taranto (In re Taranto), 365 B.R. 85 (B.A.P.
6th Cir. 2007). In Taranto, the debtors proposed to pay the contractual 0% interest on account of
a bifurcated secured claim, arguing that Till interest would provide a windfall to the creditor. Id.
at 90. The court found that the required “value” in § 1325(a)(5)(B)(ii) meant, under Till, that
“interest must be paid to achieve the present value of the claim.” Id. at 90 (emphasis in original)
(citing Till, 541 U.S. at 474).
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The Court agrees with the analysis in Taranto. “The requirement that the ‘value’ of the
property to be distributed be determined ‘as of the effective date of the plan’ incorporates the
principle of the time value of money.” Till, 541 U.S. at 486–87. The Creditor is entitled to the
“value” of the claim under § 506(a), which the Supreme Court has defined as the present value of
the collateral using the prime interest rate plus a risk premium. Id. at 487. The entitlement to
interest flows from § 506(a) and the time value of money, not the contract. Taranto, 365 B.R. at
90; see also Rake v. Wade, 508 U.S. 464, 472 n. 8 (1993) (“When a claim is paid off pursuant to
a stream of future payments, a creditor receives the ‘present value’ of its claim only if the total
amount of the deferred payments includes the amount of the underlying claim plus an
appropriate amount of interest to compensate the creditor for the decreased value of the claim
caused by the delayed payments.”). Otherwise, the “value” of the collateral is not paid. Till, 541
U.S. at 486–87.
In deciding the appropriate risk adjustment, the court should consider “evidence included
in the debtor’s bankruptcy filings, such as work history, job stability, cash flow, disposable
income, the existence or absence of prior bankruptcy filings, and the contents of the Chapter 13
plan.” In re Martinez, 409 B.R. 35, 41 (Bankr. S.D.N.Y. 2009) (quoting In re Bivens, 317 B.R.
755, 764 (Bankr. N.D. Ill. 2004)). A 3% risk adjustment would be appropriate in this case. Even
without interest, the monthly payment would be $9,083.33. Debtors show monthly income of
$10,792.08 on Schedule I. Am. Scheds. 24, ECF No. 11. The cram down payment would
comprise a significant portion of the Debtors’ income, especially with interest. The risk of
default here is substantial.
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In any event, the proposed plan provides for no payments on account of the secured
claim. Confirmation is denied. The request to set an interest rate other than the Till rate is
denied.
III. 	Debtors’ case is dismissed due to ineligibility for chapter 13 relief.
Debtors ask the Court to determine that the potential deficiency claims of the Creditor are
not part of the “debt limit” of § 109(e). 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.
Also relevant is § 101(12), which defines “debt” as “liability on a claim.” Claim is a broad term,
defined in § 101(5)(A) to be 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.”
This case is a “chapter 20” bankruptcy in which the debtor files a chapter 7, receives a
chapter 7 discharge, and then files a subsequent chapter 13. Where a chapter 7 discharge was
issued within four years of the debtor’s chapter 13 petition date, § 1328(f)(1) renders the debtor
ineligible for a chapter 13 discharge. While this provision eliminates a significant motivation for
filing a chapter 13 case, the debtor can still utilize the chapter 13 plan to, among other things,
avoid liens. See, e.g., In re Wapshare, 492 B.R. 211, 214–15 (Bankr. S.D.N.Y. 2013) (“The
Court finds that the plain language of the Bankruptcy Code does not prohibit the use of §
1322(b)(2) in a chapter 20 case, and the Court is bound to follow the Second Circuit's decision in
Pond . . . .”) (citations omitted).
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Mr. Wimmer’s personal liability to Creditor was discharged in the chapter 7 case. 11
U.S.C. § 727(b); Johnson v. Home State Bank, 501 U.S. 78, 80 (1991). Mrs. Wimmer has no
personal liability to Creditor for these claims as she did not sign either note. See generally In re
Rutledge, 208 B.R. 624, 627 (Bankr. E.D.N.Y. 1997); In re Smith, 469 B.R. 198 (Bankr.
S.D.N.Y. 2012); In re Cady, 440 B.R. 16 (Bankr. N.D.N.Y. 2010); Smith v. Fitzsimmons, 584
N.Y.S.2d 692, 695 (App. Div. 1992) (4th Dep’t) (“As a general rule, privity or its equivalent
remains the predicate for imposing liability for nonperformance of contractual obligations.”).
The issue is whether the unsecured portions of these liens count towards the debt limit
despite unenforceability against the Debtors personally. The Court concludes that those portions
must be included in the calculation.
A. The underwater portions of the liens are unsecured claims despite the chapter 7
discharge.
Notwithstanding Mr. Wimmer’s discharge, the Creditor still holds a bankruptcy claim for
the unsecured deficiency. The Court agrees with the reasoning in In re Miller, 462 B.R. 421, 431
(Bankr. E.D.N.Y. 2011):
This treatment of an unsecured mortgage debt as an unsecured claim, even though
the debtor has no personal liability, is consistent with 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), which held that a mortgage lien for which the debtor no longer
has personal liability as the result of a chapter 7 discharge is a claim as defined
under the Bankruptcy Code, and is a claim which may be treated in a chapter 13
plan.
Under Johnson, the in rem rights of the Creditor against the property create a secured claim in
the bankruptcy case notwithstanding the discharge of personal liability. 501 U.S. at 84.
Secured claims are also valued pursuant to § 506(a), which only leaves only two possible
results: a secured portion to the extent of the value of the collateral and an unsecured portion to
the extent of the deficiency. There is no provision in § 506(a) to eliminate a portion of the claim
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altogether. Based on this reading of § 506(a) and the Supreme Court’s decision in Johnson, the
Court concludes that the Creditor holds unsecured claims for its mortgage deficiencies. See
Wapshare, 492 B.R. at 218 (reclassification of a wholly underwater junior mortgage claim to an
unsecured claim was appropriate in chapter 20 case).
B. Unsecured portions of liens count towards the debt limit in chapter 13 cases where
there is not a prior chapter 7 discharge.
In the ordinary chapter 13 case, where there is no prior chapter 7 discharge during the
four years preceding the petition date, the unsecured portions of avoided liens count towards the
debt limit even if the claims were originally filed as secured. See Scovis v. Henrichsen (In re
Scovis), 249 F.3d 975, 983 (9th Cir. 2001) (“Through the inclusion of a § 506(a) analysis to
define “secured” and “unsecured” in the § 109(e) context, a vast majority of courts, and all
circuit courts that have considered the issue, have held that the unsecured portion of
undersecured debt is counted as unsecured for § 109(e) eligibility purposes.”) (collecting cases).
The reason is that “[i]t is patently unfair for the debtor to be permitted to treat a claim as
unsecured for the purposes of distribution . . . and yet treat the same claim as fully secured for
the purpose of evading the unsecured debt limitation of § 109(e).” In re Prosper, 168 B.R. 274,
280 (Bankr. D. Conn. 1994); see also In re Rifkin, 124 B.R. 626, 629 (Bankr. E.D.N.Y. 1991)
(“The majority view is preferable since it avoids elevation of form over substance.”).
C. The chapter 7 discharge does not remove the deficiency claims from the eligibility
analysis.
The issue is whether the chapter 7 discharge affects the analysis under § 109(e) by
rendering the now-unenforceable unsecured portions irrelevant. The analysis must begin with
the language of § 109(e). U. S. v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (“The task of
resolving the dispute over the meaning of [a statute] begins where all such inquiries must begin:
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with the language of the statute itself.”). Section 109(e) applies to “debts” that the individual
“owes.” “Debt” is defined in § 101(12) to mean “liability on a claim.” At first glance, this
definition would seem to indicate that the debtor must have “liability on” the claim for there to
be a “debt,” liability that would have been extinguished by the chapter 7 discharge. There are
two problems with this interpretation. First, nothing in § 101(12) indicates that “liability” is the
same as the “personal liability” of the debtor. As illustrated in Johnson, collateral may be liable
in rem for a claim even if the debtor is not. 501 U.S. at 80. Section 524(a), governing the effect
of discharge, confirms this suspicion. Under § 524(a)(1), a discharge “voids any judgment . . . to
the extent that such judgment is a determination of the personal liability of the debtor . . . .”
Section 524(a)(2) similarly provides that the discharge “operates as an injunction against the
commencement or continuation of an action . . . to collect . . . any such debt as a personal
liability of the debtor . . . .” Both provisions provide that the discharge affects the “personal
liability” of the debtor, whereas § 101(12) only references the broader term “liability.” The
result is that some form of liability, presumably in rem liability, can remain after “personal
liability” is discharged. Similarly, § 524(f) provides that the discharge does not prevent the
debtor from voluntarily repaying any “debt.” The implication is that a “debt” can survive
discharge and be voluntarily repaid.
Second, the legislative history to § 101(12) makes clear that the word “debt” is merely a
different way to say “claim.” The House and Senate Reports state that “the terms are
coextensive: a creditor has a ‘Claim’ against the debtor; the debtor owes a ‘Debt’ to the
creditor.” H.R. Rep. No. 95-595, at 310 (1977); S. Rep. No. 95-989, at 23 (1978). While the
court should look to the text of a statute first and foremost, legislative history can be used to
“shed a reliable light on the enacting Legislature’s understanding of otherwise ambiguous
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terms.” Exxon Mobil Corp. v. Allapattah Svcs., Inc., 545 U.S. 546, 568–69 (2005). In this
instance, the legislative history is helpful to confirm that the term “debt” in § 109(e) should not
be interpreted to have any significance other than another way of saying “claim.” See Darby
Bank & Trust v. Grenchik (In re Genchik), 386 B.R. 915, 917 (Bankr. S.D. Ga. 2007) (looking to
the legislative history and finding that “debt” and “claim” can be used interchangeably in the §
109(e) context).
Another possible interpretation is that the debt is not “owed” under § 109(e) by virtue of
the discharge. At least one court has reached this conclusion. Peoples Bank v. Winder (In re
Winder), 171 B.R. 728, 731 n. 5 (Bankr. D. Conn. 1994). This Court believes that such a reading
does not comport with “decades of jurisprudence on the subject of bankruptcy discharge [that
place] it beyond cavil that discharge does not extinguish the debt, but only the remedy . . . .” In
re Bruno, 356 B.R. 89, 92 (Bankr. W.D.N.Y. 2006). “It is true, of course, that a bankruptcy
discharge does not send a debt into the equivalent of 1984’s ‘memory hole.’” Torres v. Chase
Bank USA, N.A. (In re Torres), 367 B.R. 478, 487 (Bankr. S.D.N.Y. 2007); see also Irby v.
Fashion Bug (In re Irby), 337 B.R. 293, 295 (Bankr. N.D. Ohio 2005) (“The effect of a creditor
being legally enjoined from pursuing recourse against a debtor will, in large percentage of
instances, forever bar the creditor from seeing payment on their debt; thus, such creditor will be
provided scant comfort in the knowledge that, from a legal standpoint, their debt remains
technically in existence.”).
The case In re Dabrowski, 257 B.R. 394 (Bankr. S.D.N.Y. 2001) illustrates the difference
between discharging a debt and its elimination. The debtor in Dabrowski received a discharge of
prepetition outstanding rents. Id. at 410–11. While the landlord could not “recover the
obligation from the discharged debtor,” the discharge “did not extinguish the underlying debt.”
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Id. at 413. The landlord was free to “avail herself of the consequences of the nonpayment of the
rental, and of the fact that the unpaid rent obligation was not extinguished, so long as she does
not attempt to recover the unpaid rent.” Id. (emphasis in original).
The debt is still “owed” notwithstanding the discharge; it is merely unrecoverable from
the debtor personally. If it is not paid, the landlord (or, as in this case, the secured lender) can
exercise other state law remedies. See In re Scotto-DiClemente, 463 B.R. 308, 314 (Bankr.
D.N.J. 2012), aff’d, 2012 U.S. Dist. LEXIS 113799 (D.N.J. Aug. 13, 2012) (“[W]hen a creditor
possesses a claim against a debtor, that debtor owes a debt to the creditor.”).
This does not mean that every debt discharged in chapter 7 will count towards the debt
limit in a subsequent chapter 20 case. To be a “debt” for purposes of § 109(e), there must be a
“claim.” 11 U.S.C. § 101(12). Here, the secured debts constitute “claims” by virtue of the
Johnson decision, as they are enforceable against property of the estate. 501 U.S. at 84. If the
debts were originally unsecured and discharged in the chapter 7, there would be neither in rem
enforceability nor enforceability against the Debtors. This would render the claims disallowable
under § 502(b)(1).
In reaching the same conclusion, the bankruptcy court in Scotto-DiClemente also focused
on the in rem nature of discharged secured claims. The court stated that
the U.S. Supreme Court in Johnson, supra, reaffirmed that the undischarged in
rem claim remaining after a Chapter 7 discharge is subject to the treatment in a
subsequent Chapter 13 case. As a result, the Court must also include the
unsecured in rem claim when determining a debtor's eligibility for relief under §
109(e).
Id. at 570–71.
The Court disagrees with the case cited by Debtors, Cavaliere v. Sapir, 208 B.R. 784 (D.
Conn. 1997). That case held that a chapter 7 discharge rendered the unsecured portion of
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avoided liens unenforceable against the debtor and therefore disallowed under § 502(b)(1). Id. at
786. In support, the Cavaliere court cited Liona Corp., Inc. v. PCH Assoc. (In re PCH Assoc.),
949 F.2d 585, 604 (2d Cir. 1991), which held that the unsecured portion of a non-recourse debt
constitutes a disallowed unsecured claim. Id. As noted above, the Court believes that the
Johnson case and § 506(a) mandate that the deficiency claims be treated as unsecured claims
notwithstanding the chapter 7 discharge of the debtor’s personal liability. See In re Diclemente,
2012 U.S. Dist. LEXIS 113799, at *13 (D.N.J. Aug. 13, 2012) (“This Court agrees with the
Bankruptcy Court's analysis and also ‘takes issue with the conclusions reached in Shenas [In re
Shenas, 2011 Bankr. LEXIS 2907 (Bankr. N.D. Cal. July 28, 2011)] and Cavaliere, wherein the
courts summarily posited that the surviving in rem claims are not enforceable under § 506(a).’”)
(quoting Scotto-DiClemente, 463 B.R. at 312)).
D. Dismissal is appropriate.
Section 1307(c) provides that the court may dismiss or convert a chapter 13 case “for
cause” upon request of a “party in interest.” Section 1307(c) also requires “notice and a
hearing.” Notwithstanding the request, notice, and hearing requirements in § 1307(c), courts
have held that § 105(a) empowers the court to dismiss a case sua sponte if the debtor is ineligible
for relief. In re Moore, 2012 WL 1192776, at *4 (Bankr. N.D.N.Y. Apr. 10, 2012) (citing
Hammers v. IRS (In re Hammers), 988 F.2d 32, 34–35 (5th Cir. 1993); Kestell v. Kestell (In re
Kestell), 99 F.3d 146, 149 (4th Cir. 1996)).
Section 105(a), which allows the court to “issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this title,” was recently construed by the
Supreme Court in Law v. Siegel, ___ U.S. ___, 134 S. Ct. 1188 (2014). The Court found that “in
exercising those statutory and inherent powers, a bankruptcy court may not contravene specific
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statutory provisions.” Id. at 1194. The Court noted that it would be impossible to “carry out”
the provisions of the Bankruptcy Code by contravening an express provision. Id. This Court has
also consistently held that the use of § 105(a) is only appropriate where “necessary to preserve an
identifiable right conferred elsewhere in the Bankruptcy Code.” In re Schuessler, 386 B.R. 458,
492 (Bankr. S.D.N.Y. 2008) (quoting Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283
F.3d 392, 403 (1st Cir. 2002)).
The Court does not believe that sua sponte dismissal for non-eligibility contravenes the
request, notice, and hearing requirements in § 1307(c), as the Court does not believe that reliance
on § 1307(c) is necessary. Dismissal can be accomplished through §§ 109(e) and 105(a) without
§ 1307(c). Sections 1307(c) and 109(e) deal with different scenarios. Section 1307(c) “sets out
the standard (‘cause’) that a bankruptcy court must apply in deciding whether, in its discretion,
an already filed Chapter 13 case should be dismissed or converted to Chapter 7.” Marrama v.
Citizens Bank of Mass., 549 U.S. 365, 380 (2007). Section 1307(c) sets forth several examples
of cause, none of which include ineligibility to be a debtor. All of the examples deal with
conduct taking place after the case is filed. The § 109(e) determination, however, is made “on
the date of filing of the petition.” In re Pearson, 773 F.2d 751, 757 (6th Cir. 1985). Its purpose
is to “ensure that the excess monthly incomes of Chapter 13 debtors [are] not wildly out of
proportion to the debts they seek to repay.” In re Brown, 7 B.R. 529, 532 (Bankr. S.D.N.Y.
1980). Its original role was that of “gatekeeper, determining which proprietors was small enough
to reorganize under Chapter 13 and which had to file for Chapter 11 relief, where they would
have to comply with more exacting requirements.” In re Rios, 476 B.R. 685, 688 (Bankr. D.
Mass. 2012) (citing H.R. Rep. No. 95-595, at 119 (1977)). Given this gatekeeper function, it
makes little sense to tie § 109(e) to § 1307(c). “The matter of eligibility is one that must be
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determined at the outset.” In re Marrama, 345 B.R. 458, 473 (Bankr. D. Mass. 2006) (citing In
re Berenato, 226 B.R. 819, 823 (Bankr. E.D. Pa. 1998)). Sua sponte dismissal may be
appropriate to “preserve the use of . . . resources to cases involving debtors eligible to file under
[chapter 13].” Berenato, 226 B.R. at 823. The requirements of § 1307(c) are not contravened by
sua sponte dismissal pursuant to §§ 105(a) and 109(e), and the principals laid out in Law v.
Siegal are not infringed.
The uncontroverted valuation in this case shows that the Blueberry Hill Property is worth
$545,000. If it is not a principal residence, and is therefore subject to bifurcation under § 506(a),
the unsecured portion is $678,033.54. This exceeds the unsecured debt limit. If it is a principal
residence, the uncontested secured claim is $1,223,033.54, which exceeds the secured debt limit.
Under either scenario, the Debtors are ineligible for chapter 13, and judicial resources would be
preserved by dismissal of the case.
Conclusion
For the foregoing reasons, the Court denies confirmation and dismisses the case. The
Creditor should submit an order consistent with this decision.
Dated: Poughkeepsie, New York
June 30, 2014 	/s/ Cecelia G. Morris 	.
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
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