JOSEPH G. ROSANIA, Jr. Bankruptcy Judge.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") draws a critical distinction between whether the debts of a particular debtor are primarily consumer debts or primarily business debts in a Chapter 7 case. If the debts are primarily consumer debts in a Chapter 7 case, the court may dismiss such a case if the granting of Chapter 7 relief would be an "abuse" of the Bankruptcy Code. If the debts are primarily business debts, the abuse analysis is not applicable.
The threshold issue presented in this case is whether a mortgage encumbering a debtor's 50% interest in a home, for which the debtor is not personally liable, is still a "debt" for the purpose of calculating whether the debtor has primarily consumer debts.
The Bankruptcy Code defines "debt" and "claim." Generally, the debtor owes a debt to the creditor and the creditor holds a claim against the debtor. Are the words "debt" and "claim" as used in the Bankruptcy Code synonymous?
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This matter is a core proceeding under 28 U.S.C. § 157 (b)(2)(A) and O). Venue is proper in this District pursuant to 28 U.S.C.§ 1409(a).
Andre Reed, a medical doctor ("Dr. Reed") filed for relief under Chapter 7 on September 9, 2016. On Schedule A, he identified a fifty percent interest in certain real property, 917 S. Josephine Street, Denver, Colorado (the "Property"), valued at $1,774,000, with the value of the fifty percent portion he owned as $887,000. On Schedule D, he identified the amount of the mortgage on the Property as $1,858.681.
The United States Trustee ("UST") moved to dismiss Dr. Reed's case as an abusive case under §§ 707(b)(1), (2) and (3)
In response, Dr. Reed argues the mortgage is a "claim" but not a "debt," because in § 101(12), the Bankruptcy Code defines a "debt" as "liability on a claim," and Dr. Reed was not personally liable for the mortgage. Dr. Reed acknowledges the mortgage is a "claim" against the estate, but contends that because he is not personally liable for the mortgage, the mortgage is not a "debt" within the plain language of the Bankruptcy Code. Dr. Reed reasons: "Under the plain language of the statute, § 707(b) looks to the nature and amount of debts for which the debtor is liable, not to claims against the debtor's estate. Accordingly, because the debtor is not personally liable for the mortgage on his residence, and his business debt therefore outweighs his consumer debt, the debtor is a business debtor, and the `abuse' provisions of §707(b) are not applicable."
Dr. Reed further contends other sections of the Bankruptcy Code support the argument that a `debt' is intended to refer to in personam liability on a claim, citing to § 727(b) as referring to the discharge of "debts" and any "liability on a claim that is determined under section 502." Because a discharge, under § 727(a), discharges only in personam liability, Debtor asserts "it is evident that `debt' is intended to refer to personal liability, not a claim against property." Dr. Reed also argues the absence of the word "debt" in 11 U.S.C. § 506 is indicative that "debt" and "claim" are not interchangeable terms.
Finally, Dr. Reed relies on statutory construction, noting:
According to Dr. Reed, the plain language of § 707(b)(l) is clear and unambiguous. Section 707(b)(l) provides that the court "may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts." The Bankruptcy Code defines a "debt" as "liability on claim." § 101(12). "Accordingly, under the plain meaning of § 707(b), the operative measure of whether the debtor has primarily consumer debts is those claims for which the debtor is personally liable."
The Court set the matter for hearing, and, after hearing argument, requested further briefing on the issue. The Court has reviewed the recording of the hearing, the briefs and the record.
Dr. Reed claimed his debts were primarily consumer debts in his Petition. In his initial filing, Dr. Reed scheduled assets in the total amount of $1,019,945, of which $887,000 was the value of his fifty percent interest in the Property. He listed liabilities in the total amount of $2,336,056, of which $1,858,681 was the amount of the mortgage encumbering the Property. After the UST moved to dismiss his case, Dr. Reed amended his Petition and Schedules A and B to show the value of the Property as "zero," with the current value of the portion he owned as "zero," and noted: "Debtor owns 50% interest: Property valued at $1,774,000; Property is over-encumbered by mortgage in the amount of $1,858,681, for which the Debtor is not personally liable."
Prior to the bankruptcy filing, Dr. Reed experienced certain business losses necessitating the closure of two former medical practices. Dr. Reed has joined a new medical practice but has a substantial buy-in expense and has to wait for the insurance reimbursement stream to flow. These circumstances negatively impact his current income.
Dr. Reed is married. His wife is also a medical doctor. His wife did not file for bankruptcy relief. Dr. Reed and his non-filing spouse ("Spouse") purchased the Property in 2003. He, his Spouse, and two minor children live in the Property. The warranty deed is not in the record, but Dr. Reed represents the Property is "jointly owned."
The Wintrust Mortgage Deed of Trust on the Property provides:
Thus, the Wintrust note is secured by Dr. Reed's interest and his Spouse's interest in the Property. However, only the Spouse is personally liable on the Wintrust note.
The UST has the burden to prove that more than half of Dr. Reed's debts are consumer debts. In re Cribbs, 387 B.R. 324, 332-33 (Bankr. S.D. Ga. 2008). The issue presented is dispositive of the UST's Motion to Dismiss under § 707(b)(l), which provides:
If the mortgage is not considered a "debt," it is also not a "consumer debt" for purposes of § 707(b)(1), leaving Dr. Reed with primarily business, rather than consumer, debts.
The Bankruptcy Code defines the words in question. The term "primarily consumer debts" means a "debt incurred by an individual primarily for a personal, family, or household purpose."
A home mortgage is a "consumer debt." In re Inghilterra, 2012 WL 1137008 (Bankr. D. Colo. 2012); In re Cohen, 246 B.R. 658, 662 (Bankr. D. Colo. 2000); Maynard v. Cannon, 401 Fed Appx. 389, 394 (10th Cir. 2010). Dr. Reed has not asserted the mortgage encumbering the Property is not a consumer debt.
In Johnson v. Home State Bank, 501 U.S. 78 (1991), the Supreme Court held that Congress intended the broadest definition of the word claim available. It ruled that since § 101(5) defines claim as a "right to payment" and a "right to an equitable remedy" the word means, "nothing more than an enforceable obligation." Id. at 83. The Court recognized the concepts of in personam liability and in rem liability and stated that even after in personam liability has been extinguished by a bankruptcy discharge, the creditor still retains a "right to payment" from the proceeds of the sale of the debtor's property. Id. at 84. This is the reason debtors receive a discharge of "debts" in a bankruptcy case, meaning in personam or personal liability on a claim is discharged. Thus, Johnson stands for the principle that a nonrecourse debt secured by the debtor's property is a claim if it is enforceable against either the debtor or the debtor's property. Since a debt is a liability on a claim, a non-recourse loan secured by the debtor's property is a debt to the extent of the creditors' interest in the encumbered property. In re Sandrin, 536 B.R. 309, 313-14 (Bankr. D. Colo. 2015).
In Johnson, the debtor filed a successful Chapter 7 case and received a discharge of his personal liability on certain notes secured by his farm. When the bank sought to foreclose on the farm after the Chapter 7 case was concluded, the debtor filed a Chapter 13 case. The bankruptcy court confirmed the debtor's plan to pay the bank's debt in installments but the district court reversed, ruling that the Bankruptcy Code does not allow a debtor to include in a Chapter 13 plan a mortgage used to secure an obligation for which personal liability has been discharged in a prior Chapter 7 case. The Supreme Court held that the mortgage lien survived the debtor's chapter 7 discharge of his personal liability (in personam) and was a "claim" subject to inclusion in the Chapter 13 plan. It reasoned that the term "debt" has a meaning coextensive with that of "claim" citing the clear and unambiguous legislative history. See id. at 83, n. 5.
The Tenth Circuit followed Johnson and held a debt arose when a nonrecourse deed of trust was executed in the case of In re Perma Pacific Prop., 983 F. 2d. 964, 967 (10th Cir. 1992). Perma Pacific specifically states the terms "debt" and "claim" are coextensive, a debtor owes a debt to a creditor and a creditor holds a claim against the debtor. In that case, the Tenth Circuit held: "[t]he Bankruptcy Code definitions express congressional intent that the terms `debt' and `claim' are "coextensive, a creditor has a claim against the debtor; the debtor owes a debt to the creditor." Id. at 967 (citing Davenport, 495 U.S. at 559).
The issue in Perma Pacific was whether a deed of trust given by a Chapter 11 debtor to a creditor of the debtor's parent, was on account of "antecedent debt" of the debtor, and could be avoided as a preferential transfer. Thus, although the debtor had no personal lability for the underlying obligation, the Tenth Circuit Court of Appeals found the security interest was an enforceable obligation of the debtor and created a right to payment, and therefore the deed of trust was on account of "antecedent debt" of the debtor. The Tenth Circuit found the deed of trust was a debt measured by the extent of the value of the security.
The amount of the claim in a nonrecourse mortgage scenario is limited to the value of the estate's interest in the property securing the mortgage. Here, since Dr. Reed's half-interest in the Property is valued at approximately $825,000, half of the estimated value of the Property, the secured claim is $825,000. This amount, classified as a consumer debt, is enough to make this case one involving "primarily consumer debt" since Dr. Reed's business debts are approximately $400,000.
This view is shared in other jurisdictions. The Fifth Circuit Court of Appeals held that a nonrecourse obligation was a "debt" under the Bankruptcy Code to determine the debtor's eligibility for Chapter 12 in the case of In re Lindsey, 995 F.2d 626 (5th Cir. 1993). The court followed Johnson and stated the creditor's right to act against collateral is a "right to an equitable remedy" for the debtor's breach of obligation. Lindsey also cited the legislative history that the words debt and claim are coextensive and also found support in § 102(2), holding that the Bankruptcy Code explicitly incorporates nonrecourse loans as claims in that section.
In Lindsey, the debtor made the same argument Dr. Reed makes here: that because § 101(12) defines "debt" as "liability on a claim," and the debtor had no personal liability on a note, the note should be considered a "claim" but not a "debt" under the Bankruptcy Code. The Fifth Circuit disagreed, noting as follows:
Id.
Lindsey involved a family partnership engaged in farming. Its partners executed a non-recourse obligation to the bank. The Federal Deposit Insurance Corporation ("FDIC") took over the bank and foreclosed. Lindsey filed a Chapter 12 bankruptcy case. The FDIC moved for relief from stay and to dismiss the case contending that Lindsey was not eligible for Chapter 12 because he had debt in excess of $1,500,000. If the FDIC note was a debt, then Lindsey would not be eligible for Chapter 12 relief. The Fifth Circuit included the nonrecourse obligation as a debt and affirmed dismissal of the case due to ineligibility.
The Lindsey holding does not appear to be limited to Chapter 12 cases, as the court also noted as follows:
Id. at 628-629.
The bankruptcy court for the District of Kansas ruled that a nonrecourse mortgage was a consumer debt in the case of In re Bryson, 2007 WL 2219114 (Bankr. D. Kan. 2007). In Bryson, the Kansas bankruptcy court was faced with the same issue presented here; i.e., "the narrow issue . . . [of] whether, even though Debtor has no personal liability on a note secured by her residence, the lien against the Debtor's residence is included in calculating the Debtor's aggregate `consumer debt' for purposes of the United States Trustee's Motion to Dismiss pursuant to § 707(b)."
The court answered that question in the affirmative:
Bryson at *5.
The Eighth Circuit Bankruptcy Appellate Panel held that funds obtained by a debtor to finance a home constituted consumer debt even though the debtor did not sign two promissory notes evidencing the debt in In re Lapke, 428 B.R. 839 (8th Cir. BAP 2010). In Lapke, the court held that funds obtained by debtor to finance or refinance his home constituted "consumer debt" within the meaning of the Bankruptcy Code, even though debtor did not sign two promissory notes and one associated deed of trust evidencing the debt. The Lapke court specifically noted:
Dr. Reed's argument is creative, but finds little, if any, support in the statute, legislative history or case law. This Court is bound by Supreme Court and Tenth Circuit precedent holding that the terms "debt" and "claim" are "coextensive." The term "coextensive" means "equal or coincident in space, time or scope." The Random House College Dictionary 260 (Rev. Ed. 1980). The Court does recognize Dr. Reed's precise argument does not directly contradict this precedent, because Debtor's argument is that "debt" equals "liability on a claim," pursuant to the plain language of § 101(12) (emphasis added). However, in Lindsey, the Fifth Circuit reasoned as follows:
Lindsey, 995 F.2d at 629.
This Court agrees with this reasoning, and the analysis in the Bryson and Lapke cases, which are factually on point. The approach is also consistent with a case from this Court construing nonrecourse debt under § 109(e). In the case of In re Lower, 311 B.R. 888 (Bankr. D. Colo. 2004), the court determined the eligibility analysis for Chapter 13 eligibility under § 109(e) included the value of a debtor's interest in property, even where an affiliate had the liability on the debt.
In this case, therefore, the Court finds that the mortgage on the Property is a "debt" for the purposes of determining whether Dr. Reed has primarily consumer debts under 11 U.S.C. § 707(b).
For the foregoing reasons, it is ORDERED that this case is subject to the dismissal provisions of §707(b).
