Ann M. Nevins, United States Bankruptcy Judge.
The Chapter 13 cases of Marco C. Rumbin and Joseph J. Sabatini, Jr. ("Rumbin",
I note the Debtors have filed motions to avoid liens pursuant to 11 U.S.C. § 522(f), and have indicated their intent to seek relief under 11 U.S.C. § 506.
The United States District Court for the District of Connecticut has jurisdiction over these cases by virtue of 28 U.S.C. § 1334(b). This Court derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(A).
The Chapter 13 Trustee seeks dismissal because presently the outstanding balance on the liens against each of the Debtors' homes exceed the statutory secured debt limit of $1,184,200.00 pursuant to 11 U.S.C. § 109(e).
The Debtors were partners in a business venture for which they granted large mortgages on their homes (the "Business Mortgages") to secure personal guaranties (the "Guaranties") to the Bank of Southern Connecticut (the "Mortgage Holder"). The Debtors previously filed Chapter 7 bankruptcy cases on January 30, 2013, and each received an order of Chapter 7 discharge on April 23, 2013 (the "Chapter 7 Discharge Order(s)"). See, Case Nos. 13-30187 and 13-30189. The Chapter 7 Discharge Orders eliminated any personal liability of the Debtors for any dischargeable debt, including the Guaranties. After entry of the Chapter 7 Discharge Orders, the Business Mortgages remained enforceable in rem claims against the Debtors' real properties that were also nonrecourse as to the Debtors individually.
More than five years later, on August 29, 2018 (the "Petition Date"), the Debtors, commenced these cases by filing voluntary Chapter 13 bankruptcy petitions seeking to reorganize their current indebtedness — including post-discharge priority tax claims and post-discharge non-priority unsecured claims — through Chapter 13. Because more than four years passed after the Debtors received their Chapter 7 Discharge Orders and before the Petition Date for these cases, they each may be eligible for a Chapter 13 discharge upon completion of a confirmed Chapter 13 plan. See 11 U.S.C.§ 1328(f)(1).
Rumbin owns a single-family home located at 95 Tomlinson Road, Seymour, Connecticut ("Rumbin's Property") that he asserts is worth $460,000.00. See Rumbin Case, ECF No. 21. Based on the record here, the encumbrances of record against Rumbin's Property may be summarized as follows:
Type Holder Lien Amount Proof of Claim Filed Mortgage Seterus, Inc. $504,654.17 No Mortgage Bank of Southern Conn. $1,500,000.00 No Mortgage Bank of Southern Conn. $390,000.00 No Mortgage Bank of Southern Conn. $423,960.49 No Mortgage Bank of Southern Conn. $750,000.00 No Judgment Berkshire Energy Depot, LLC $39,617.55 Yes ($32,117.55) LienTotal $3,608,232.21
Sabatini owns a single-family home located at 2 Garfield Avenue, Derby, Connecticut ("Sabatini's Property"), and asserts it is worth $175,000.00. See Sabatini Case, ECF No. 21. Based on the record here, the encumbrances of record against Sabatini's Property may be summarized as follows:
Type Holder Lien Amount Proof of Claim Filed Mortgage PHH Mortgage Servicer $140,135.00 Yes ($137,628.81) Mortgage Bank of Southern Conn. $1,500,000.00 No Mortgage Bank of Southern Conn. $390,000.00 No Mortgage Bank of Southern Conn. $423,960.49 No Mortgage Bank of Southern Conn. $750,000.00 No Judgment Berkshire Energy Depot, LLC $39,617.55 Yes ($32,117.55) LienTotal $3,243,713.04
If the Debtors were successful on their anticipated Motions to Determine Claim Status under Section 506, the value of the property encumbered by the Business Mortgages might be summarized as follows
TABLE SUMMARIZING VALUES
Value of Business
Value of Balance Owed on Mortgages
Case Property as of Senior Liens as of as of Petition Date
Petition Date Petition Date After Anticipated
§ 506 Motion
Rumbin's Case $460,000.00 $504,654.17 $0.00
Sabatini's Case $175,000.00 $140,135.00 $34,865.00
The Debtors' Chapter 13 plans
Cases like these are commonly referred to as "chapter 20" cases since they commence with a Chapter 7 case that is followed by a Chapter 13 case. In a typical chapter 20 case, a debtor utilizes Chapter
Typically, the Chapter 13 case is used to address the repayment of non-dischargeable debt or post-discharge debt, and, sometimes the relief sought includes an order valuing a secured claim as unsecured in whole or part, pursuant to 11 U.S.C. § 506. Here, the Debtors seek to address debt that accumulated after their Chapter 7 cases, including debts to federal and state taxing authorities, and non-priority unsecured debt. If a debtor completes the Chapter 13 plan, then a lien determined to be unsecured under § 506(a) would be of no further effect against the debtor's property.
Eligibility to be a Chapter 13 debtor stems from 11 U.S.C. § 109(e), and the debtor bears the burden to establish the conditions are met. In re Shukla, 550 B.R. 204, 210 (Bankr. E.D.N.Y. 2016). In contrast to the provisions involving Chapter 7 debtors, Chapter 13 debtors "cannot owe debts in too large an amount and still expect to take advantage of the streamlined rehabilitative scheme provided in chapter 13." 2 Collier on Bankruptcy ¶ 109.06 (16th 2019). "Thus, the core of subsection (e) is its monetary limitation on eligibility for chapter 13 relief." 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019).
"The monetary limitations of [§ 109(e)] reflect Congress's recognition that a chapter 11 reorganization might be too cumbersome a procedure for a sole proprietor or individual with a small amount of debt." 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019). At the same time, the debt limits "ensure that chapter 13 is not used by individuals with large businesses in which the creditor protections of chapter 11, such as voting and the disclosure statement, are more important." 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019).
While a § 109(e) analysis generally begins with a review of the debtor's schedules, a court may also consider materials outside of the debtor's schedules. Shukla, 550 B.R. at 211 (Bankr. E.D.N.Y. 2016)(citing In re Moore, 2012 WL 1192776, at *5 (Bankr. N.D.N.Y. 2012)(finding debtor may be ineligible under Chapter 13 after a review of debtor's schedules, the proof of claim, and other readily ascertainable information); Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 305 (2d Cir.1997) (finding debt to be easily ascertained from statutory provisions and tax returns)); see also, Stebbins v. Artificial Horizon, Ltd., No., 2016 WL 1069077, at * 4 (E.D.N.Y. Mar. 17, 2016). Here, it is appropriate to consider not only the Debtors' bankruptcy schedules but also their Chapter 13 plans, their stated intentions to seek relief pursuant to § 506, and the stated purpose of the Chapter 13 plans (to address post-discharge debt) to determine whether the Debtors are eligible for relief under Chapter 13.
The Bankruptcy Code limits the eligibility to be a Chapter 13 debtor to, "an individual with regular income that owes, on the date of the filing of the petition, non-contingent, liquidated, unsecured debts of less than $394,725 and noncontingent, liquidated, secured debts of less than
A "claim" is defined in the Bankruptcy Code as a "right to payment" or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment," but the term liability is not used. 11 U.S.C. § 101(5). Claims may be determined to be unenforceable, after objection, and such determinations are part of the administration of a bankruptcy estate that has assets to distribute.
For purposes of § 109(e), then, a claim must be evaluated for enforceability against the individual to determine if it is also a debt since, "not all claims are debts of the debtor." 2 COLLIER ON BANKRUPTCY ¶ 101.12 (16th 2019). Here, the Court must apply a debt limit, not a claim limit. Congress could have used the word "claim" in § 109(e) but chose to use the defined term "debt" instead.
Regarding the availability of Chapter 11 relief for these Debtors, I note that while the Debtors are individuals who appear to have run small business(es), their creditors have not appeared in the case seeking the protections ensured by a Chapter 11 process, such as the right to the disclosure statement process or the plan voting rights afforded to Chapter 11 creditors. One purpose of Chapter 13 is to provide owners of small businesses — who cannot afford the higher attorney's fees and expenses of seeking relief under Chapter 11 — a way to address their debt. During the Chapter 13 plan process, any creditor or party in interest may object to the confirmation of a Chapter 13 plan, so creditors here would still be heard. In the absence of creditors clamoring for the heightened protections of Chapter 11 in what would undoubtedly be a more expensive process (for all the parties), it is reasonable to conclude a Chapter 13 process would not prejudice creditors or parties in interest in these cases.
A "mortgage interest that survives the discharge of a debtor's personal liability is a `claim' within the terms of § 101(5)", since even 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." Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991). This distinction is often discussed using the term "in rem" for a right to enforce a claim against property, and the term "in personam" for right to enforce a claim against a person.
A bankruptcy discharge eliminates in personam liability, while a creditor's in rem rights embodied by a lien or mortgage survive. I recognize that some courts rely on the Johnson decision to support various conclusions about the import of in rem rights that remain after a Chapter 7 discharge
In litigation around the country to resolve how a court, should determine the amount of secured debt for the purposes of § 109(e), "[m]ost courts, including the Courts of Appeals for the Fourth, Seventh and Eighth Circuits, have held that the valuation test of section 506(a) should be used in making a determination as to whether there is an unsecured deficiency." 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019). Section 506(a)(1) provides that 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 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 is less than the amount of such allowed claim. 11 U.S.C. § 506(a)(1). "Although [§ 506(a)] speaks of `allowed claims,' and a secured claim typically is not `allowed' at the time eligibility is usually determined, most courts have concluded that section 506(a) should be applied to bifurcate the undersecured claim of a secured creditor into secured and unsecured portions for purposes of determining eligibility under section 109(e)." 4 COLLIER ON BANKRUPTCY ¶ 506.03 (16th 2019), citing In re Scovis, 249 F.3d 975, 983 (9th Cir. 2001); In re Balbus, 933 F.2d 246, 247 (4th Cir. 1991); Miller v. United States, 907 F.2d 80, 81 (8th Cir. 1990); In re Day, 747 F.2d 405, 407 (7th Cir. 1984); In Re Toronto, 165 B.R. 746, 754 (Bankr.D.Conn 1994); In Re Winder, 171 B.R. 728, 730-31 (Bankr. D.Conn. 1994).
Here, because the Debtors do not have motions pursuant to § 506 pending, I will set a deadline for the Debtors to seek such relief, and, will reconsider their eligibility for Chapter 13 should the secured debts ultimately be determined to be valued at amounts exceeding the limit established by § 109(e).
Here, if the secured debts were to be bifurcated as suggested in the tables above, and then were required to be treated as unsecured debts, the cases would have to be dismissed because the unsecured debt limit would then be exceeded. The bankruptcy treatise, Collier on Bankruptcy, concludes that after application of § 506(a), only the secured portion of a debt is counted towards the limit on secured debt, and the unsecured portion is added to the debtor's other unsecured obligations and would count towards the limit on unsecured indebtedness. 4 COLLIER
While the parties here disagree as to whether the Business Mortgages should be included as secured debt for purposes of § 109(e), they appear to agree that any unsecured portion of the debts are non-recourse as to the Debtors since the Chapter 13 Trustee does not seek dismissal based on an analysis of unsecured debt limits. When a secured claim is non-recourse, although the lien holder may have a claim against the debtor's property, as defined by §§ 101(5) and 102(2), the individual debtor, as opposed to his or her property, does not have any liability on the underlying debt and has no unsecured "debt" to the creditor as defined by § 101(12). See, 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019). "Because section 109(e) speaks of the debtor's unsecured debts, a nonrecourse claim against only the debtor's property should not be counted as an unsecured debt, even if the collateral is worth less than the claim." 2 COLLIER ON BANKRUPTCY ¶ 109.06 (16th 2019); see also, In re Free, 542 B.R. at 496 (holding that "debts that were discharged in chapter 7 are not `unsecured debts'" for purposes of § 109(e)).
As part of a consideration of Chapter 13 eligibility under § 109(e), it is reasonable to also consider whether the Debtors here could propose a confirmable plan. The secured debt totals millions of dollars, which is beyond the debt limitation for Chapter 13 whether secured or unsecured. The Chapter 13 Trustee's Motion implies that the unsecured portion of the Business Mortgages would need to be paid through a Chapter 13 plan as unsecured claims (relying on Wimmer), although the only ground on which the Chapter 13 Trustee moved to dismiss the cases was the secured debt limit of § 109(e) (and the memoranda filed is a bit unclear on the movant's position on this last point: whether any unsecured debt attributable to the liens in issue here must be paid through a plan).
To the extent the Chapter 13 Trustee adopts the reasoning of several courts that conclude that a Chapter 13 debtor must treat the unsecured amount of a lien for which in personam liability was discharged in a prior Chapter 7 case as an unsecured claim for Chapter 13 plan purposes, I disagree. While many courts would resurrect in personam liability and require such treatment, I find a rationale recently articulated by the Bankruptcy Appellate Panel for the Ninth Circuit ("9th Circuit BAP") to be more persuasive. Considering the effect of the discharge injunction under § 524 of the Bankruptcy Code, the 9th Circuit BAP adopted another bankruptcy court's decision and concluded, "the chapter 7 discharge enjoins enforcement of the claim against the debtor personally,
Here, I conclude the Debtors are eligible to be Chapter 13 debtors pursuant to 11 U.S.C. § 109(e), subject to further review. The Motions to Dismiss will be denied, without prejudice to reconsideration after a ruling pursuant to 11 U.S.C. § 506.
For the foregoing reasons, it is hereby
