Opinion
ORDER AFTER HEARING IN CHAPTER 13 TRUSTEE'S OBJECTION TO CONFIRMATION OF PLAN
PETER W. BOWIE, Chief Judge
The Chapter 13 Trustee objected to confirmation of debtor's Chapter 13 plan contending that debtors are not eligible for Chapter 13 under 11 U.S.C. § 109 because the total of their general unsecured debt exceeds the statutory ceiling when the undersecured and unsecured portions of erstwhile secured debt is included in the total.
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
DISCUSSION
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 $336,900... may be a debtor under chapter 13 of this title.
The central issue before the Court is whether a claim scheduled as secured by property of the estate, but which, based upon Debtors' schedules, is undersecured or wholly unsecured, is to be included as "unsecured debts" under § 109 (e).
Debtors' Schedule F, filed with the Court on January 9, 2009, listed unsecured debts totaling $223,260.20, none of which were identified as contingent, unliquidated, or disputed. Their Schedule D listed a total of $828,636 in secured debts, while indicating that $133,426 was unsecured because the value of the collateral purportedly securing it was insufficient to fully secure the claims of certain creditors. Among those were the car creditor and the creditors secured by the first and second position mortgage holders. As is readily seen, adding $133,426 of undersecured debt to $223,260.20 of Schedule F unsecured debt yields total unsecured debt of $356,686.20, which exceeds the statutory ceiling of § 109 by almost $20,000. So the critical question is whether it is correct to include in the eligibility calculation a wholly unsecured second position mortgage (which debtors announced in their plan they intended to strip off, making it an unsecured claim for purposes of the plan); and whether it is correct to include the undersecured portion of the first position mortgage, all as listed by debtors in their Schedule D. For the reasons set out hereafter, the Court finds and concludes that it is correct to add both amounts to the Schedule F unsecured debt to determine debtors' eligibility under 11 U.S.C. § 109. When that is done, as already noted, debtors' total unsecured debt as of the time of filing of their petition exceeds the ceiling fixed by statute, making debtors ineligible for Chapter 13 relief. Accordingly, the Chapter 13 Trustee's objection to confirmation on eligibility grounds must be sustained.
In In re Scovis , 249 F.3d 975, 982 (9th Cir. 2001) the Ninth Circuit held that, absent an indication of bad faith, Chapter 13 eligibility should normally be determined by reference to a debtor's originally filed schedules:
We now simply and explicitly state the rule for determining Chapter 13 eligibility under § 109(e) to be that eligibility should normally be determined by the debtor's original schedules, checking only to see if the schedules were made in good faith.
249 F.3d at 982. In the case at hand, there is no suggestion that debtors' schedules were not made in good faith. Accordingly, the analysis begins and ends with a review of debtors' schedules.
In Scovis, the Ninth Circuit went on to hold that the unsecured portion of a judgment creditor's undersecured judgment lien on the debtor's residence is to be counted as unsecured debt under § 109(e) for Chapter 13 eligibility purposes. Id. at 983.
There is a question of whether a first position secured claim can be bifurcated into secured and unsecured claims as of the time of filing of the debtor's petition. However, in Scovis, the Ninth Circuit held that the undersecured portion of the judgment creditor's claim was to be "counted as unsecured for eligibility purposes, " though no actual bifurcation under § 506 had yet occurred. 249 F.3d at 983. The court in Scovis followed what it deemed the majority view:
[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.
Id. The court went on to hold that the remainder of the judgment lien, which was avoidable under § 522(f) as it impaired debtor's homestead exemption, would be counted under § 109(e) even though no avoidance action had even been commenced:
Even though the lien was not judicially avoided until after the Chapter 13 petition was filed, the fact that Debtors listed both the homestead exemption and the lien on the schedules provides the bankruptcy court with a sufficient degree of certainty to regard the judgment lien as unsecured for eligibility purposes.
Id. at 984.
Thus, based upon debtors' schedules, $37,000 of the debt secured by the first position deed of trust is to be counted as unsecured debt, as is the entire $89,000 which would otherwise be secured by the second position deed of trust. In addition, according to Schedule D, there is also $2,435 of undersecured debt for a refrigerator and $4,990 on a vehicle, plus a nominal $1.00 in property tax. When those amounts are added to the $223,260.20 listed on Schedule F, the total is $356,685.20, which exceeds the ceiling of § 109 and makes debtors ineligible for Chapter 13 relief.
In reaching the foregoing conclusion, the Court has considered whether the first petition mortgage can properly be bifurcated for eligibility purposes if the mortgage is a purchase money mortgage and applicable state law makes such an obligation nonrecourse because of a state's anti-deficiency laws. The parties in this case have not raised, briefed or argued the issue, so its resolution may not be necessary to deciding the Chapter 13 Trustee's objection to confirmation.
Many states have adopted anti-deficiency legislation over the years, intending to protect consumers from deficiencies arising from foreclosure on their principal residences. If such a deficiency were nonrecourse as to the debtors, then the question was whether such a nonrecourse claim should be counted in calculating the debtors' eligibility under § 109(e). Among other materials, the Court considered two cases which appear to answer the question: Johnson v. Home State Bank , 501 U.S. 78 (1991) and In the Matter of Lindsey, Stephenson & Lindsey , 995 F.2d 626 (5th Cir. 1993).
Johnson involved a Chapter 13 case filed after the debtor had discharged his personal liability on the debt secured by-real property in Chapter 7. The bank's lien against the collateral remained after discharge, and the debtor proposed to pay it through a Chapter 13 plan. The issue addressed by the Supreme Court was whether the bank's mortgage interest after the Chapter 7 discharge was a "claim" amenable "to inclusion in a Chapter 13...." 501 U.S. at 83. The Court found it was such a claim because the bank still had a right to payment from the proceeds of sale of the property or "[a]lternatively, the creditor's surviving right to foreclose on the mortgage can be viewed as a right to an equitable remedy'", which is part of the definition of "claim" in 11 U.S.C. § 101(5).
In support of its conclusion, the Court looked in part to 11 U.S.C. § 102(2) which, as a rule of construction, states: "claim against the debtor' includes claim against property of the debtor;...." The correlative legislative history states:
Paragraph (2) specifies that "claim against the debtor" includes claim against property of the debtor. This paragraph is intended to cover nonrecourse loan agreements where the creditor's only rights are against property of the debtor, and not against the debtor personally.
In the Matter of Lindsey, Stephenson & Lindsey , 995 F.2d 626 (5th Cir. 1993) involved a nonrecourse loan that expressly recited that the obligor had no personal liability on the note. The issue came up in a Chapter 12 case and involved whether the obligation was a claim against the debtor notwithstanding its nonrecourse nature for purposes of calculating debtor's eligibility in Chapter 12, which has similar ceilings on debt. The Fifth Circuit applied the same approach as Johnson and concluded the nonrecourse note was a "claim" under the Bankruptcy Code. Further, the court concluded that the "note composes part of the partnership's aggregate debt and disqualifies it from Chapter 12 relief." 995 F.2d at 629.
To the extent it is necessary to answer the question about nonrecourse purchase money debt and whether it should be counted nonetheless in determining a debtor's eligibility for Chapter 13, the Court believes the foregoing authorities provide the answer and indicate that nonrecourse debt is to be counted for § 109 eligibility purposes.
Since the debtors' total unsecured debt exceeds the $336,900 ceiling, debtors are not eligible to participate in Chapter 13. Since they are not eligible, their Chapter 13 case should be, and hereby is dismissed. In re Slack , 187 F.3d 1070 (9th Cir. 1999).
IT IS SO ORDERED.