In re: Gebhart In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.

In re Wilson, (9th Cir. Ct of Appeals,  11-27-18) The State of Washington’s homestead exemption statute says “the exemption amount shall not exceed the lesser of (1) the total net value of the [homestead] . . . or (2) $125,000 thousand dollars . . . .”  “Net Value” under Washington law is defined as the home’s equity value (just like AZ).

FINDING: The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim. Because Debra Wilson’s amended bankruptcy schedules sought to claim more than Washington law permitted her to claim as of the petition date, we affirm the district court’s decision, limiting her claimed exemption to the amount she was entitled to under Washington law as of the petition date.

In this case, the debtor’s equity value at the time of filing was $3560.  She used that number on Schedule C when filing.  Then after filing, the house appreciated and had increased equity.  The increased equity was still less than $125,000.  Thereafter, debtor amended Schedule C to exempt the house “100% of fair market value, up to any applicable statutory limit” (using Washington State’s homestead exemption).  The intent of the debtor was to allow the exemption to be increased up to $125,000 per the Washington statute to capture the appreciation post-petition.

The court said she could not amend Schedule C to increase the exemption amount after the case was filed.  The court explained that any post-petition appreciation is always for the benefit of the estate, not the debtor.  The Washington homestead statute specified that the exemption is either the lesser of the total equity value or $125,000.  Because exemptions are fixed as of the date of filing, the debtor only gets to exempt what the equity was as of the date of filing.  Any post-petition appreciation is for the benefit of the estate,  not the debtor, even if the appreciation is still below $125,000.

In re Smith, 3:10-bk-19970-MCW, 526 B.R. 343 (Az District Ct. 2015) Turnover of post-petition sale from homestead. On May 16, 2014, the Trustee filed his turnover motion. Id. The bankruptcy court held oral argument on June 9, 2014. Id. at 5. On July 1, 2014 the bankruptcy court issued a preliminary order directing the Trustee to file an affidavit explaining why he did not close the Debtors’ bankruptcy case prior to the expiration of the eighteen-month reinvestment period, nearly four years after the petition date. Id. On August 26, 2014, after accepting the Trustee’s declaration, the bankruptcy court issued an order granting the Trustee’s turnover motion, holding that the proceeds from the post-petition sale were subject to the eighteen-month reinvestment period imposed under § 33-1101(C). Id. On September 9, 2014, Debtors filed notice of their appeal. Affrimed on appeal

In re Jacobson, 676 F.3d 1193 (9th Cir.2012), the Court of Appeals was asked to decide the applicability of California’s homestead exemption reinvestment requirement, which compelled a debtor to turn over proceeds from the sale of her exempt homestead after she failed to reinvest those proceeds within the six months permitted by the statute. In re Jacobson, 676 F.3d at 1198-99. Before Jacobson, California had elected to opt out of the Bankruptcy Code’s list of default property exemptions outlined in § 522(d), and defined their own exemptions as permitted by § 522(b)(2). Id. at 1198. California provided a homestead exemption similar to the exemption provided by many states, including Arizona. Id.; In re White, 377 B.R. 633, 643 (Bankr.D.Ariz. 2007) (recognizing that California’s homestead exemption is similar to A.R.S. § 33-1101).

The debtor in Jacobson argued that the reinvestment requirement should be read out of California’s homestead exemption. In re Jacobson, 676 F.3d at 1200. Jacobson rejected the argument, stating that “nothing in 11 U.S.C. § 522(b) limits California’s power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.” Id. (internal quotations omitted). Jacobson held that bankruptcy exemptions are fixed at the time of the bankruptcy petition’s filing, and the entire state law that is applicable on the petition’s filing date, including the reinvestment requirement, is determinative of whether an exemption applies.

Relying on the analysis of the court in In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002), the Court has previously determined that Arizona law does not preclude a homestead claim in multiple adjoining parcels. In Allman, the court cited to Wuicich v. Solomon-Wickersham Co., 18 Ariz. 164, 166, 157 P. 972 (1916) for the proposition that two adjacent parcels can satisfy the requirement of one compact body for homestead purposes. Allman, 286 B.R. at 405. Ultimately, the court determined that Arizona courts would allow a homestead on contiguous parcels of land, whether purchased at the same time or not, unless there is evidence that a sub-divided portion of the entire parcel is not being used for residential purposes. Allman, 286 at 407; see also Banner Bank v. Johns (In re Johns), 2014 WL 6892744, at *5-7 (BAP 9th
Cir. 2014) (interpreting Idaho law and finding a homestead exists in multiple parcels on which more than one dwelling exists).

Section 522(f) addresses a lien which “impairs” a debtor’s exemption. “[U]nless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning, …” Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979), cited in Sanders, 39 F.3d at 261 and in Pioneer Inv. Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). 13 Webster’s Third New International Dictionary Unabridged (1981), at 1131, provides as one of the definitions of “impair” the meaning “diminish in quantity, value, excellence or strength.” Sanders ruled that because the lien does not fix upon the Utah exemption, the homestead is not impaired. Sanders, 39 F.3d at 262. (Emphasis added.) But there can be little question that not avoiding this lien results in a diminishing of the value of the Debtors’ exemption (and of their discharge and their fresh start). While the Debtors’ homestead exemption is technically and legally “exempt from attachment”, in these days in which a title policy is ordinarily a condition of the transfer of an interest in real property, Debtors may well not be able to convey or refinance their property without (1) further state-court litigation to clarify the “non-attachment” of the judgment lien, (2) paying off or otherwise compromising with the creditor, or (3) convincing a title company to insure the title over the existence of this judgment lien on the *339 record. See also Coats, 232 B.R. at 214 n. 8:

A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property.  Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.  The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00.  In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12.  Also see, ARS 33-1103 (A)(4).  Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101.  See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)

Note:  The recorded judgment lien survives the bankruptcy.  The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead.  522 addresses an “interest” in debtor’s property in support of a lien avoidance.  Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522?  The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.

It appears that the judgment lien and the right to enforce that lien survive a Chapter 7.  If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity.  Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.

Pacific, et al. v. Castleton, et al. December 27, 2018 – 1 CA-CV 17-0667 – Issue:Whether a judgment creditor may attach a judgment lien to homestead property, or whether it may execute on its judgment only by way of a forced sale of the property under Ariz. Rev. Stat. section 33-1105.  Holding: The court holds that a recorded judgment is not a lien on homestead property.

§ 33-964 A RECORDED JUDGMENT DOES NOT BECOME A LIEN ON HOMESTEAD PROPERTY:

Section 33-964 thus establishes the general rule that a recorded judgment does not become a lien on homestead property. See also Union Oil Co. of Ariz. v. Norton Morgan Commercial Co., 23 Ariz. 236, 245 (1922) (holding that “no lien shall be permitted to attach to the real property claimed as a homestead”).

EXCESS EQUITY (consensual secured debts + homestead) IN HOMESTEAD CAN BE JUDICIALLY FORECLOSED UNDER § 33-1105

See In Evans v. Young, 135 Ariz. 447, 453 (App. 1983), and Grand Real Estate, Inc. v. Sirignano, 139 Ariz. 8, 13 (App. 1983); see also In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008) (clarifying that a recorded judgment does not create a lien on property subject to homestead even when the value of the property exceeds the amount of the homestead. “It remains the case that both the homestead statute and the judgment lien statute both conceive of the ‘homestead’ as being the real property, not the equity value of such real property.” 400 B.R. at 754); and In re Glaze, 169 B.R. 956, 966 (Bankr. D. Ariz. 1994)

ONCE A JUDGMENT ATTACHES IT RUNS WITH THE LAND

• 33-964 establishes the general rule that a judgment lien does not attach to homestead property, and that homeowners hold their homestead property free and clear of judgment liens. See A.R.S. § 33-964(B). Although it is true that once a lien has attached, it “runs with the land,”, but in this case the judgment lien never attached to the Home in the first place.

ABANDONMENT OF HOMESTEAD BY CONVEYING TO TRUST A.R.S. § 33-1104(A):

• When a homestead exemption is abandoned by a conveyance of the property, the judgment lien does not re-attach to the property upon the sale. See Sec. Tr. & Sav. Bank, 29 Ariz. 325, 332 (1925).
• 33-1104(A)(3) a homeowner “may remove from the homestead for up to two years” without abandoning the homestead exemption. Sepics’ departure from the Home shortly before its sale did not constitute an abandonment.
• Because of the protection afforded by the homestead statutes, the Judgment never attached as a lien to the Home. Therefore, the Sepics conveyed the Home free and clear of the Judgment.

CONCLUSION: For the foregoing reasons, we affirm the entry of an injunction enjoining a Sheriff’s sale of the Home.

Motion to Reopen Bankruptcy and Motion to Avid Lien on Real Property

In re Awdisho, 2:14-bk-06594-DPC. (2/12/20) IT IS ORDERED denying Debtors’ Motion to Reopen. IT IS FURTHER ORDERED denying Debtors’ Motion to Avoid Lien. The judgment recorded by Midland prior to the Petition Date does not constitute a lien against the homestead property owned by the Debtors. Midland’s claim has been discharged in Debtors’ bankruptcy proceedings. Should Midland refuse to voluntarily remove its judgment from the Recorder’s records, the Debtors may seek relief in State Court under A.R.S. § 33-420.

When is a house a home?  Article from ABI with lots of cases (2/2019)

In re Gilman,16-55436 (9th Circuit, Apr 13,2018)  The court had jurisdiction over the district court’s order affirming the grant of a homestead exemption. The bankruptcy court erred because it did not determine whether the debtor intended to continue to reside in the property in question. The court explained: physical occupancy on the filing date without the requisite intent to live there does not establish residency, which is necessary for a homestead exemption.

Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?

§ 506(a) provides: “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.” The various approaches all prefer their approach as meeting this standard.

For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.]
For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),

Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].

The trustees will require the following (generic list):

1.    A purchase contract

2.    A proposed amendment to schedules I and J

3.    The debtors must be current with all plan requirements (plan payments and turn-over of taxes/refunds)

4.    If there is no title company involved yet, they will require that once a sales offer is made, and escrow opened, Preliminary Closing docs. But, the best practice is to open escrow before going this far.

Once sold, the debtors must file the amended schedules which means they need to be in another property and know the expenses associated with that property.

The letters from the trustee usually take less than a week to process.  More often than not, they do not require a court order assuming the confirmed plan re-vests the home to the debtor(s).

If pre-confirmation will probably need a Motion to sell.  If post-confirmation the sale can be done informally as long as the plan is confirmed.  Make certain the SOC/Plan provides that the property re-vests in the debtor(s) and that they are debtors are free to use the property in anyway (such as sell it or refinance) without further order of the court.  I believe the only reason for the trustee permission letter is the title agency and the trustee needs to know if the house sells for more then $150,000 in equity.

If you have to file a Motion, include the name of the mortgage company, the realtors, their percentage of commission, the proposed sales price, the amount of the debt and the purchaser’s name(s).  If no purchaser, a generic request to allow the sale with the provide that additional information, including amended schedules, can usually be filed.  The motion should allege that based on market prices, and opinions of the realtor, the sale price is reasonable and the sale would not impact on the creditors of the estate.

Ex-parte: see LR 2084-25 (http://www.azb.uscourts.gov/rule-2084-25

If lender is being difficult (debtor cannot get a final payoff for the sale – as evidenced by a history of lender’s failure to respond): consider drafting the motion to not provide for higher and better offers (unless the property could sell for more than secured debts, plus homestead). If the sale could (reasonably) produce non-exempt proceeds, then will need to allow for higher and better offers.

When there is a difficult lender – consider drafting the order to give the option to hold (escrow) out a specified amount of money and sell it free and clear of the mortgage lien.  That will help if later the lender continues to be difficult to work with (obtain payoff).

“Show me the Note”

In re Won Case No: 3:17-bk-01600-DPC (AZ BK Court 6/5/19) Discusses several cases regarding co-mingling of homestead proceeds with non-homestead.  The Court now finds that on December 14, 2018, net homestead proceeds of $73,709.15 from the sale of the Debtors’ homesteaded real property  (the “Property”) were deposited in Debtors’ Chase Bank account which then contained non-homestead proceeds. $50,000 of the homestead proceeds were admittedly spent by the Debtors but they failed to supply any evidence that the $50,000 was spent on acquiring a new homestead property. ORDERS that the homestead exemption asserted by the Debtors in the sale proceeds from the sale of the Property has lapsed to the extent of $58,368 and the sum of $58,368 is no longer exempt.

Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7

Proceeds from the post-petition sale of the chapter 7 debtor’s homestead did not become part of the bankruptcy estate even though the debtor did not reinvest them in another homestead. Lowe v. DeBerry (In re DeBerry), No. 17-50315 (5th Cir. March 7, 2018).

When Curtis DeBerry filed for chapter 7 bankruptcy he exempted his homestead without objection by the trustee. Post-petition he sold the residence and transferred some of the proceeds to his wife and used the rest to pay unrelated criminal attorney fees. The trustee filed an adversary complaint arguing that, because Mr. DeBerry did not reinvest the proceeds in another homestead within six months as required by Texas proceeds law, the proceeds were not exempt. The bankruptcy court found in favor of Mr. DeBerry and the district court reversed.

On appeal, Mr. DeBerry relied on Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017) (blogged here), where the Fifth Circuit held that in chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition under the state proceeds rule. Like the IRA proceeds rule applicable in Hawk, the state homestead proceeds rule, TEX. PROP. CODE § 41.001(c), provides that “proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.”

The circuit court found that the purpose behind the homestead proceeds rule is to allow the homeowner time to reinvest the proceeds in a new homestead without fear of attachment by creditors. In the bankruptcy context, the proceeds rule protects the debtor who no longer owns the homestead at the time of filing, by preventing the proceeds from the sale of homestead within six months of filing from entering the bankruptcy estate. In this case, however, it was not the debtor seeking the protection of the rule, but the trustee seeking to use the rule to bring the proceeds into the estate.

As it did in Hawk, the court relied on the snapshot rule to fix the debtor’s exemption at the time of the petition. To find otherwise, the court cautioned, would leave the issue of exemptions open through the entire course of the bankruptcy, the length of which would be at least partially controlled by the trustee, since a debtor could sell his homestead at any time. The court distinguished In re Zibman, 268 F.3d 298, 301 (5th Cir. 2001), where it held that a homestead exemption for proceeds of a homestead sold before the bankruptcy petition is merely conditional upon reinvestment in a new homestead. In contrast, Mr. DeBerry owned the homestead when he filed for bankruptcy and, therefore, his exemption was unconditional. The court also distinguished In re Frost, 744 F.3d 384, 389 (5th Cir. 2014), where it found that the proceeds from the post-petition sale of the chapter 13 debtor’s homestead were not exempt unless reinvested according to the Texas proceeds rule. The fact that Frost was a chapter 13 case was dispositive because, under section 1306(a)(1), property acquired post-petition is added to the bankruptcy estate. There is no comparable post-petition asset capture provision in chapter 7.

Based on its reasoning in Hawk, the Fifth Circuit reversed the district court and reinstated the order of the bankruptcy court.

9th BAP Holds that Post-Petition Excess Proceeds from sale of exempt or non-exempt real property is not DMI

In re Black, 609 B.R. 518 (9th Cir BAP 2019) “Excess proceeds that Chapter 13 debtor obtained, beyond those necessary to make final balloon payment contemplated in his confirmed plan and to satisfy his obligations thereunder, as result of post-confirmation sale of his real property, were not “disposable income,” such as had to be devoted to payment of unsecured creditors under plan.”

In re Krohn, Arizona Supreme Court No. CV-01-0246-CQ, Bankruptcy Court No. 00-10623-PHX-RTB  (8/27/2002)   Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed.  Shortly after that dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee’s sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: “May a trustee’s sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?”  We answer the certified question in the affirmative.

Whittle Development, Inc. v. Branch Banking & Trust Co. (10/11) It is common practice for mortgagees, such as banks, to foreclose on the collateral securing their loans and, in the absence of a third party purchaser for a reasonable value, to purchase such collateral by credit bidding their debt at the foreclosure sale. Due to the circumstances of foreclosure sales, however, often such sales do not result in as a high a sale price as would a private sale transaction. In the recent case of Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 2011 WL 3268398 (Bankr. N.D. Tex. July 27, 2011), the United States Bankruptcy Court for the Northern District of Texas (the “Court”) held that a bankruptcy trustee can avoid a prepetition foreclosure sale of a debtor’s property as a preferential transfer under section 547 of the Bankruptcy Code despite the fact that the sale was non-collusive and conducted in accordance with applicable state law. Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation. Whittle is significant not only because it calls into question the long-accepted notion that foreclosure sales are final, but also because it represents a departure from Supreme Court precedent in the related area of fraudulent transfers under section 548 of the Bankruptcy Code.

Background In 2007, Whittle Development, Inc. (“Whittle”) borrowed $2.7 million from Colonial Bank, N.A. (“Colonial”). Branch Banking and Trust Company (“BB&T”) later acquired Colonial and became the successor-in-interest to Colonial’s loan to Whittle. In 2010, BB&T declared a default under the loan, accelerated the outstanding payments owed by Whittle and foreclosed on the real property securing the loan. The foreclosure sale complied with all relevant state law requirements. A subsidiary of BB&T purchased the property at the foreclosure sale for $1.22 million.

Within ninety days of the foreclosure sale, Whittle filed a Chapter 11 petition. BB&T subsequently filed a proof of claim, claiming a debt owed of $2,855,243 of which BB&T alleged $1,181,513 represented a deficiency from the foreclosure sale. Thereafter, Whittle brought an action to avoid, as a preferential transfer, the foreclosure sale. Whittle took the position that the approximate value of the property was $3.3 million, that BB&T’s claim on the property at the time of foreclosure was approximately $2.2 million, and thus BB&T had received approximately $1.1 million more that it would have received in a chapter 7 case.

Whittle and BB&T agreed that the foreclosure sale effected a transfer of Whittle’s interest in property and that Whittle stated a “facially plausible” claim as to all the requirements of 11 U.S.C. section 547(b) except subsection (5), which “requires a finding that the creditor received more than it would have under chapter 7.” BB&T argued that the price paid at the foreclosure sale was the fair-market value of the property based on the Supreme Court’s decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Whittle asserted that since the property was worth more than the amount due to BB&T, BB&T received more than it would have received in a chapter 7. Whittle reasoned that BB&T received a total of $3,261,513, comprised of a deficiency claim in the amount of $1,181,513 and the net property value of $2,080,000 (calculated by subtracting the amount paid at foreclosure of $1.22 million from $3.3 million, the value of the property). Whittle argued that BB&T’s maximum recovery in chapter 7 would have been $2.2 million, the amount of BB&T’s claim at the time of foreclosure.

BFP v. Resolution Trust Corp. in BFP, a partnership formed for the purpose of buying a home defaulted on its mortgage payments, resulting in a foreclosure by the bank. A third party purchased the home for $433,000 at a properly noticed foreclosure sale shortly before the partnership filed for bankruptcy. Acting as a debtor in possession, the partnership sued to avoid the transfer as a fraudulent conveyance, alleging that the property had an actual value of $725,000.

In BFP, the Supreme Court addressed whether a foreclosure sale could be avoided as a constructively fraudulent transfer under section 548. The key issue in BFP was whether the foreclosure sale price could qualify as “reasonably equivalent value” or whether the purchaser has to pay fair market value for the property to be insulated from avoidance under section 548. The Supreme Court held that a “fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state’s foreclosure law have been complied with.” To hold otherwise, the Supreme Court stated, would interfere with the essential state interest in ensuring the security of title to real property. This ruling effectively insulated regularly conducted foreclosure sales from avoidance under fraudulent conveyance law. In Whittle, BB&T requested that this result be extended to preference actions.

Holding Despite the differences in the language of sections 547 and 548 of the Bankruptcy Code, the Court in Whittle noted that some courts have simply held that the test for preferences — a transfer which enables a creditor to receive more than in a chapter 7 liquidation — is essentially the same as the Supreme Court’s test for “reasonably equivalent value” in the fraudulent conveyance context. See Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836 (Bankr. W.D. Pa. 2001); Glaser v. Chelec, Inc. (In re Glaser), 2002 WL 32375007 (Bankr. E.D. Va. 2002).

In contrast, other courts analyzing the preference test simply highlight the plain language of the statute and point out that the test for whether a transfer is a preference is fundamentally different than the test used in the fraudulent conveyance statute. In Whittle, the Court sided with this second group of cases, holding that BFP was inapplicable in the preference context based on the clear language of the statute. “[L]ooking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a chapter 7 liquidation . . . .” The Court found BFP’s assessment of “reasonably equivalent value” wholly inapplicable to the preference context.

Conclusion The Whittle court denied BB&T’s motion to dismiss and allowed Whittle’s preference action to proceed. As such, the critical issue remaining is whether the value of the property was the appraised value of $3.3 million or the price paid at the foreclosure sale of $1.2 million. Whittle’s position is sustainable only if it rebuts the claim that the selling price of the property did not reflect its true value of $3.3 million and that the deficiency claim of $1,181,513 is worth its face amount. If Whittle’s position on value is correct, BB&T did receive a preference in the amount of $1.1 million. However, if BB&T’s position on value is correct, then BB&T did not receive a preference because it did not receive more than it would have in a chapter 7. It only received the sum of the amount paid at foreclosure and a deficiency claim.

Although the Whittle decision does not stand for the proposition that all valid prepetition foreclosure sales are susceptible to avoidance as preferential transfers, it does carve out a narrow subset of such sales for which the foreclosure sale may be anything but final. Based on this ruling and others like it, secured creditors and purchasers of foreclosed property who are also creditors of the estate should be cautious. These parties should view this case as a clear warning that, depending on the jurisdiction, the foreclosure sale may not be final. Additionally, purchasers of a foreclosed property must also take into account the risk that the property owner will file bankruptcy and seek to avoid the sale as a transfer under section 547 of the Bankruptcy Code. Purchasers may discount the price they are willing to pay for foreclosed properties to account for this additional risk, a result that is detrimental to the secured creditor, the debtor and its general creditors. If the Whittle opinion gains a widespread following in other jurisdictions and the market reacts to this risk by low bids from third parties, lenders may experience an increased incidence of being required to credit bid and take such assets into its OREO inventory. The determination of the amount of the credit bid may require re-examination as well in light of the risk that the credit bid will be determined to result in the lender receiving a voidable preference.

Hicks v. E.T. Legg & Associates (05/25/01 – No. D034398) Civil Code 2924c(e), and 2924g(d) do not prohibit the postponement of a foreclosure sale for successive periods of five of fewer business days during the period a sale is on hold because of an injunction or bankruptcy stay.

Bankruptcy of Wytch, US BAP 9th, Nos. 97-1089 and 79-1145, 7/1/98: 11 U.S.C. Section 349(b) does reinstate a debtor’s pre-petition property rights by invalidating specified bankruptcy court orders, Section 349(b) does not vacate orders for relief from the automatic stay under 11 U.S.C. Section 362(d). real property sold 2 hours after BK filed (chapter 7) property purchased by third party with no knowledge of bankruptcy, lender brought action to annul stay, no objection , relief granted. Case inadvertently dismissed, then reinstated, debtor’s argued that set aside earlier Order lifting stay – Bankruptcy Court and BAP did not agree – Order lifting stay stands.

Post-Petition attorney fees based on pre-petition contract: In re SNTL Corp., 571 F.3d 826, Bankr. L. Rep. ¶ 81,515 (9th Cir., June 23, 2009), pages 154, 183 (case no. 08-60001) The Ninth Circuit Court of Appeals, in a unanimous panel decision, affirmed, and adopted as its own, In re SNTL Corp., 380 B.R. 204 (9th Cir. B.A.P. 2007), holding that an unsecured creditor may include, as part of its claim, attorney’s fees incurred post-petition but based on a pre-petition contract. The opinion reasoned that (1) Code § 506(b), permitting an over-secured creditor to recover post-petition attorney’s fees, speaks only to the secured status of a claim, and not to its allowability; (2) the claim for attorney’s fees exists on the petition date, although it is contingent and unliquidated, as the “right to payment” exists on the petition date; thus, the claim is not disallowed under Code § 502(b)(1), requiring a bankruptcy court to “determine the amount of such claim … as of the date of the filing of the petition”; and (3) neither United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988) (holding that an undersecured creditor could not receive post-petition interest on the unsecured portion of its debt) nor public policy mandated disallowance of such a claim.

Helvetica Servicing Inc. v. Giraudo, 1 CA-CV 15-0490 2/9/17 The redemption price for a junior lienholder is the sale price of the secured property plus the outstanding value of the senior lienholder’s allowable deficiency judgment. If a property is subject to two deeds of trust and the senior lienholder purchases the property at a foreclosure sale without joining the junior lienholder, the junior lienholder may seek to redeem the property under A.R.S. § 12-1285(B).

The redeeming junior lienholder is not required to pay any portion of the senior lien that is unenforceable
against the judgment debtor under the statutes.

12-1282. Time for redemption

1. The judgment debtor or his successors in interest may redeem at any time within thirty days after the date of the sale if the court determined as part of the judgment under which the sale was made that the property was both abandoned and not used primarily for agricultural or grazing purposes.
2. The judgment debtor or his successor in interest may redeem at any time within six months after the date of the sale except when the court has made the determinations as provided in subsection A.
3. If the redemption as provided in subsection A or B is not made, the senior creditor having a lien, legal or equitable, upon the premises sold, or any part thereof, subsequent to the judgment under which the sale was made, may redeem within five days after expiration of the applicable period provided in subsection A or B, and each subsequent creditor having a lien in succession, according to priority of liens, within five days after the time allowed the prior lienholder, respectively, may redeem by paying the amount for which the property was sold and all liens prior to his own held by the person from whom redemption is made, together with the eight per cent added to the amount as provided in section 12-1285.

VERY IMPORTANT TO CHECK STATUS OF CASE LAW:

Bankruptcy related: Most likely fee remains property of the estate until the foreclosure judgment is entered, after which the right to redeem is what remains property of the estate (see ARS § 12-1281 to -1289 (esp. -1282 and -1283(A)), but there’s a pair of older case saying that title doesn’t pass to the purchaser until after the redemption period passes, In re Sapphire Investments, 27 B.R. 56 (Bankr. Ariz. 1983), and that this period can be extended. In re Sapphire Investments, 19 B.R. 492 (Bankr. Ariz. 1982).

Cohen v. Chernushin (In re Chernushin), 18-1068 (10th Cir. Dec. 21, 2018)  At least when joint tenancies with right of survivorship are involved, the common conception of the snapshot test does not apply to fix an interest in property as of the filing date, according to the Tenth Circuit.

Gregory and Andrea Chernushin owned a second home in Colorado in joint tenancy with right of survivorship. Eventually, Mr. Chernushin (but not Ms. Chernushin) filed for bankruptcy. During the bankruptcy proceedings,
Mr. Chernushin died. The bankruptcy trustee, Robertson B. Cohen, then filed an adversary complaint against Ms. Chernushin, seeking to sell the home. Ms. Chernushin argued the bankruptcy estate no longer included any interest in the home because Mr. Chernushin’s joint tenancy interest ended at his death. The bankruptcy court agreed with Ms. Chernushin, as did the district court on appeal. Mr. Cohen now appeals to this court. Because the bankruptcy estate had no more interest in the home than Mr. Chernushin and Mr. Chernushin’s interest extinguished when he died, we affirm.

“Consequently, Section 363(h) confers no power on [the trustee] to sell the second home,” Judge McHugh said. In sum, she said, the estate had “no interest in the second home that extends beyond [the debtor’s] death.”

Madatian v. Goldman (In re Madatian) CC-18-1166-FKuTa 9th Cir BAP, 2/11/19.  This shows how dangerous it can be to assume filing for bankruptcy is under the debtor’s control (I would never allow a client to act in this way).  Trustee filed a Motion for Turnover to compel debtor to vacate her residential property and turn over possession of the property and certain records. Trustee argued that debtor had failed to cooperate with the real estate agent’s efforts to market and sell the property. Specifically, the Trustee argued that debtor had a duty to cooperate and turn over all property of the estate. The Trustee’s real estate agent needed to inspect the interior of the residential property, take photos, and show the property to prospective buyers. The agent twice attempted to make these arrangements with debtor, but debtor did not respond.

At the hearing on the Motion for Turnover, the bankruptcy court ruled that the Trustee was entitled to turnover of the Residential Property and the records associated with certain rental property. Regarding the rental property records, the court required debtor to surrender the requested documents under § 521(a)(4). It also found that debtor was “interfering with the Trustee’s collection of rent from which to pay expenses and refusing to simply provide the documents containing the information necessary to pay the expenses ….” Finally, the court stated that the Trustee “is absolutely entitled to turnover of the residence.”

The court stated that the Trustee can evict an uncooperative debtor under § 542(a), and “there’s ample evidence demonstrating that this Debtor and her family will not cooperate with the [Trustee’s] efforts to market the residence and that turnover is necessary.” The court listed the various facts demonstrating debtor’s failure to cooperate with the Trustee: “(1) Ms. Madatian failed to file chapter 11 monthly operating reports; (2) she failed to file a disclosure statement; (3) she sent the Trustee an e-mail threatening civil and criminal prosecution if the Trustee or her agents “trespassed” on the Rental Property; (4) she stormed out of the § 341(a) meeting and refused to appear thereafter; (5) she refused to provide the Trustee with her tax returns and other requested documents; (6) she appeared to tell the tenants not to pay rent to the Trustee; (7) she did not respond to the real estate agent’s e-mails; and (8) she did not provide any evidence to contravene the declaration testimony offered by the Trustee.

The court concluded that Ms. Madatian’s “obstreperous conduct demonstrates there’s really no practical way for the Trustee and her broker to market this residence and show it to prospective buyers while the Debtor continues to occupy it.” The bankruptcy court issued an order granting the Motion for Turnover but allowed debtor a reasonable time to vacate the residential property.

PMSIs in consumer goods are perfected without any recording (other than vehicles).  See ARS 47-9309(1).  Panels probably are part of the real estate.  However, the attached case says because the air conditioner is a consumer good, no recording was necessary (either UCC-1 or fixture filing).

Also, even assuming a lien is avoidable in BK, perfection is about priority and notice which may not be required to make a security agreement enforceable.  In other words, a security interest is not void by the fact a UCC or fixture filing is not recorded (assuming it is required because the collateral is not a consumer good).  Unless a trustee or DIP avoids it under the BK code.  A non-recorded financing statement/fixture filing cannot be avoided when it wasn’t required under state law to begin with (because they are consumer goods).

See attached case that says no recording was required for an air conditioner, which seems akin to solar panels.  And again, even if a recording were required, the lack of recording doesn’t defeat the lien.

Attached (NOTE: Bankruptcy Court in N. Carolina): UCC not necessary to grant security interest in consumer goods.pdf

Serap v. Idnani (In re Serap)

Ruling : BAP for 9th Circuit affirmed ruling of bankruptcy (D. Nev. May 2, 2019) in 2-1 split, concluding Nevada’s “one-action rule” renders a creditor’s deed of trust void if, prior to the completion of the creditor’s foreclosure sale, the creditor obtained a personal judgment against a guarantor who is unable to waive the protections of the one action rule under state law. The BAP agreed with bankruptcy court that under Nevada law, creditor’s lien was released and discharged once she obtained a personal judgment against the guarantor for full amount of the debt. Dissent disagreed with ruling on Nevada law.

(not bankruptcy case)
U.S. DISTRICT COURT DISMISSES NON-JUDICIAL FORECLOSURE: MERS NOT AUTHORIZED TO FORECLOSE MAY 15 2011

Issues order blocking foreclosure and grants declaratory relief to homeowner

Hooker v. Northwest Trustee Services, Bank of America, MERS District Court District of Oregon case no. 10-3111-PA “Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act by failing to record all assignments of the trust deed.

“While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure.
” … MERS, and its registered bank users, created much of the confusion involved in the foreclosure process. By listing a nominal beneficiary that is clearly described in the trust deed as anything but the actual beneficiary, the MERS system creates confusion as to who has to do what with the trust deed.

“The MERS system raises serious concerns regarding the appropriateness and validity of foreclosure by advertisement and sale outside of any judicial proceeding. “MERS makes it much more difficult for all parties to discover who “owns” the loan. When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification, or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur.”

After an individual debtor receives a bankruptcy discharge, a creditor may not seek to recover the discharged debt. Under section 524(a)(2) of the Bankruptcy Code, a discharge injunction permanently enjoins creditors from trying to collect discharged debts and prohibits a creditor from collecting any debt where the debtor has been discharged of personal liability.

A bankruptcy discharge does not completely extinguish the prepetition debt. While the debtor’s in personam (personal) liability for the debt is discharged, the discharge does not extinguish a creditor’s in rem rights to foreclose on the property against which it holds a lien (see Johnson v. Home State Bank, 501 U.S. 78, 82–83 (1991); Long v. Bullard, 117 U.S. 617, 620–21 (1886)).

When the mortgage against the debtor’s home remains enforceable in rem, and the debtor wants to keep its residence and continues to engage with its mortgage servicer by making monthly payments or participating in a loss mitigation program, the mortgage servicer is in a complicated situation. The mortgage servicer must balance trying to communicate with the discharged debtor about the mortgage without engaging in collection attempts that may violate the discharge injunction or other law. Mortgage servicers can face potential sanctions and damages for engaging with discharged debtor-borrowers and should therefore have clearly outlined policies and protocols for addressing these scenarios based on the servicer’s risk tolerance.

This Note provides guidance to mortgage servicers when servicing the residential mortgage debt of a discharged debtor-borrower, highlights the risks that servicers encounter from this continued relationship, and provides recommended language for post-discharge communications to help servicers mitigate the risk of discharge injunction violations.

Understanding a Residential Mortgage

Residential mortgages involve several key parties. These include:

• The lender, who is the original entity (originator) that lends the money to the borrower.
• The investor, who owns the mortgage loan. Investors can be government-sponsored entities (GSEs) such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or privately owned. Often, the originator sells the loan to an investor.
• A mortgage servicer who manages the loan account. The servicer can be the loan owner or the owner can sell the right to service the loan to another company. The duties of the servicer include:
  • collecting and processing payments;
  • sending monthly billing statements;
  • managing escrow accounts;
  • communicating with borrowers;
  • reviewing borrowers’ loss mitigation applications;
  • managing the property if abandoned by the borrower; and
  • managing foreclosures.

Discharged Debt in Individual Bankruptcy Cases

Debtors in both Chapter 7 and Chapter 13 bankruptcy may seek to retain their primary residence in bankruptcy. While debtors in a Chapter 11 or 12 bankruptcy may also seek to retain their residence, this Note addresses only individual Chapter 7 and 13 bankruptcies because individual Chapter 11 and Chapter 12 cases are less common.

Discharging Debt Under Chapter 7

A Chapter 7 debtor has several options to retain real property encumbered by a loan. A Chapter 7 debtor may:

• Redeem the loan and pay it off.
• Reaffirm the loan and agree under contract to be personally liable for the debt (despite the discharge of other debts) while maintaining ownership and possession of the property.
• If the debtor is current on its loan, convert the mortgage into a non-recourse obligation through a “ride-through” and remain in the property while continuing to make regularly scheduled mortgage payments.

Unless the debt has been reaffirmed, a Chapter 7 discharge relieves an individual debtor from personal liability for mortgage debt and prevents the mortgage servicer from taking any collection actions against the debtor personally.

For more information on Chapter 7 bankruptcy, see Practice Note, Chapter 7 Liquidation: Overview (W-000-6231).

Discharging Debt Under Chapter 13

A Chapter 13 debtor will typically elect to file a Chapter 13 case to keep the family home. Generally, this is done when a Chapter 13 debtor chooses to catch up on past due payments and make go forward payments under the terms of the Chapter 13 plan of repayment.

A Chapter 13 debtor can also elect to surrender the property through the Chapter 13 bankruptcy plan. If the debtor receives a discharge but remains in possession of the property despite an intent to surrender in the confirmed plan, the debtor is discharged of personal liability. However, the security interest survives the discharge.

For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy Timeline (W-019-8355).

Section 24(J) Safe Harbor

Section 524(j) of the Bankruptcy Code provides a limited safe harbor for a creditor holding a secured claim on the debtor’s principal residence that seeks to collect periodic payments from the debtor in the ordinary course in lieu of foreclosure relief. Under particular circumstances, a creditor may take certain actions with respect to the mortgage outside of foreclosure without violating the discharge injunction.

Section 524(j) does not completely protect against allegations of discharge injunction violations that can arise from communications relating to collecting payments on the mortgage debt. If servicers elect to accept payments in lieu of foreclosing on the property post-discharge, it is critical to ensure that all servicing activity, particularly communications:

• Are narrowly tailored to eliminate the risk that they are viewed as coercive.
• Attempt to inform of, rather than demand, payments.

Post-Discharge Communication

While it is widely accepted that a mortgage servicer may send informational statements to a discharged debtor (see Best v. Nationstar Mortg. LLC, 540 B.R. 1, 10-11 (B.A.P. 1st Cir. 2015)), statements that attempt to coerce payment violate the discharge injunction. Therefore, servicers must adapt servicing correspondence to avoid a discharge violation through routine correspondence such as:

• Periodic statements.
• Default and foreclosure notices.
• Loss mitigation solicitations. Loss mitigation is generally governed by investor requirements whereby the loan servicer solicits the borrower for information to evaluate it for potential loss mitigation options. This can mitigate or lessen the loss to the investor resulting from a borrower’s default. In some circumstances, loss mitigation can help a borrower keep its home through a loan modification (see Guidelines For Post-Discharge Loan Modification).
• Force-placed insurance notices (where the lender must place an insurance policy on a property when the homeowners’ own property insurance has lapsed or is insufficient).

The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications with debtor-borrowers who receive a discharge. This drastic change in practice is not realistic because:

• Where a debtor-borrower still lives in the home and pays on the loan, the debtor-borrower may seek additional information about the loan, including how much the debtor borrower must pay to avoid foreclosure. Additionally, the discharge injunction does not absolve the servicer of sending escrow statements as required by the Real Estate Settlement Procedures Act (12 U.S.C. §§ 2601–2617).
• Other non-bankruptcy laws may require certain communications. For example, the servicer may have a statutory requirement to send the debtor-borrower pre-foreclosure notices and information (see In re Kirby, 589 B.R. 456 (Bankr. D. Me. 2018) (post-discharge default letter sent by mortgagee to Chapter 7 debtors that included information required under Maine law to preserve mortgagee’s in rem right to foreclose, contained bankruptcy disclaimer in bold type and indicated that it was not attempt to collect a debt that might have been discharged in bankruptcy, did not violate the discharge injunction)).

Servicers must balance between providing statutorily mandated correspondence to debtor-borrowers and avoiding allegations that the correspondence violates the discharge injunction. In these cases, a carefully worded, narrowly tailored disclaimer is advisable.

Bankruptcy Disclaimer Wording

To determine whether a post-discharge communication violates the discharge injunction, courts conduct a fact-intensive inquiry into whether the communication was an attempt to collect the debt from the debtor-borrower personally. Courts heavily scrutinize the existence of and language within bankruptcy disclaimers on debtor-borrower communications. As part of this scrutiny, courts view these communications from the perspective of the unsophisticated consumer.

Courts have found discharge violations where correspondence with a debtor-borrower following the debtor’s discharge included:

• Due dates.
• Amounts owed.
• A statement that a late fee would be charged for untimely payment.

Where courts have found violations for correspondence containing these items, the correspondence has typically been coupled with other conduct that could be viewed as coercive or harassing (see In re Forson, 583 B.R. 704 (Bankr. S.D. Ohio 2018); In re Sharak, 571 B.R. 13 (Bankr. N.D. N.Y. 2017); In re Vanamann, 561 B.R. 106 (Bankr. D. Nev. 2016); In re Brown, 481 B.R. 351 (Bankr. W.D. Pa. 2012); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).

Courts are less likely to find a violation if the statement:

• Is for informational purposes only.
• Has a proper disclaimer that includes a statement:
  • acknowledging the effect of the discharge;
  • that the creditor is not attempting to collect discharged debt against the debtor-borrower personally; and
  • that any payments would be voluntary.
• (See In re McConnie Navarro, 563 B.R. 127 (Bankr. D. P.R. 2017) (monthly statements to debtor indicated, in multiple places and in all capital letters, that they were being sent for informational purposes only); In re Best, 2015 WL 6643649 (B.A.P. 1st Cir. 2015) (correspondence containing language stating that, if the debtor had received a discharge in bankruptcy, the communication was not an attempt to collect a debt and was provided for informational purposes only); In re Lemieux, 520 B.R. 361 (Bankr. D. Mass. 2014) (mortgagee’s notice of change in interest rate mailed to Chapter 7 debtor post-discharge did not violate discharge injunction because notice indicated that, if debtor had received a bankruptcy discharge, then notice was not intended to collect a debt, and mortgagee would “only exercise rights as against the property”).)

Mortgage servicers should be mindful that there is no language that has been deemed an absolute shield for a bankruptcy disclaimer. Even innocuous statements under the right facts may be found to violate the discharge injunction.

Circumstances of Communication

The specific circumstances of the borrower-servicer relationship, and the facts presented by the debtor-borrower, weigh heavily in a court’s analysis of whether the servicer has violated the discharge injunction. For example, if:

• A servicer sends a large quantity of letters offering alternatives to foreclosure in a short period of time, it will look more like coercive behavior than sending similar correspondence once (see In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (lender sent 24 letters over ten-month period in post-discharge communication); In re Nibbelink, 403 B.R. 113 (Bankr. M.D. Fla. 2009) (mortgagee violated the discharge injunction by making numerous telephone calls and sending numerous letters to debtors post discharge, demanding that they become current or face foreclosure)).
• The debtor-borrower indicated an intent to surrender the property, that fact will often weights in favor of a finding of a discharge injunction violation during a review of the servicer’s correspondence with the debtor-borrower (see In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).
• The debtor-borrower previously requested that the servicer cease sending post-discharge correspondence, the court is more likely to find a violation (see In re Szenes, 515 B.R. 1 (Bankr. E.D. N.Y. 2014) (bank’s conduct of sending two letters to debtor inquiring about payment of debt, the second of which was mailed after debtors’ counsel had contacted bank and pointed out that the first letter violated discharge injunction, violated the discharge injunction); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (debtors had requested that communications cease and had filed contempt motion against lender for excessive post-discharge communications)).

FDCPA Disclaimer

Under the Fair Debt Collection Practices Act (FDCPA), when a third-party debt collector makes any communication with a debtor, they must include a disclaimer that the correspondence:

• Is a communication from a debt collector.
• Is for collecting a debt.
• Will use information obtained from the communication only for that purpose.

(15 USC § 1692e(11)).

Crafting correspondence to discharged debtor-borrowers is complicated when both an FDCPA disclaimer and a bankruptcy disclaimer are necessary. The servicer can appear to tell the debtor-borrower that it intends to collect the debt (under the FDCPA disclaimer) while also recognizing that they cannot do so (under the bankruptcy disclaimer). This has led some courts to find this type of double disclaimer misleading to the least sophisticated consumer.

Some courts find it permissible to include both FDCPA disclaimers and significant and prominent bankruptcy disclaimers (see Whalen v. Specialized Loan Servicing, LLC, 155 F.Supp.3d 905, 908 (W.D. Wis. 2016) (where the notice contained both FDCPA and bankruptcy discharge disclaimer language as follows: “Bankruptcy notice—if you are a customer in bankruptcy or a customer who has received a bankruptcy discharge of this debt, please be advised that this notice is sent to comply with the requirements of the Fair Debt Collection Practices Act (’FDCPA’). This notice constitutes neither a demand for payment nor a notice of personal liability to any recipient hereof, who might have received a discharge of such debt in accordance with applicable bankruptcy laws or who might be subject to the automatic stay of section 362 of the United States Bankruptcy Code. However, it is being sent to you as the lien against the collateral property has not been discharged in your bankruptcy.”)).

For more information on the FDCPA, see Practice Note, FDCPA Litigation: Key Issues and Considerations (W-007-2315).

Drafting a Disclaimer: Practice Pointers

To help mitigate the risk of discharge injunction violation allegations, mortgage servicers should ensure that all communications to discharged debtor-borrowers:

• Acknowledge the bankruptcy discharge.
• State the voluntary nature of continued payments.
• Confirm that the debtor-borrower has no personal obligation to pay the servicer.
• Prominently display any disclaimer, rather than include it as a part of the fine print.
• Are specific and personalized, not generic or hypothetical.
• Include repeated disclaimers on correspondence related to payments of any type.

Servicers should also consider the totality of the communications with debtor-borrowers, including quantity and frequency of the following:

• All letters.
• Loss mitigation overtures.
• Monthly statements.
• Escrow statements.
• Phone calls.

Servicers should avoid sending any unnecessary letters to discharged debtor-borrowers, including letters not otherwise required by non-bankruptcy law.

Guidelines for Post-Discharge Loan Modification

A bankruptcy discharge of personal liability does not preclude a debtor-borrower from seeking a loan modification.

Loan Modification Generally

A loan modification permanently restructures the terms of a mortgage, which often provides a more affordable payment to the borrower. A loan modification can reduce monthly payments by:

• Reducing the borrower’s interest rate.
• Converting a variable interest rate to a fixed interest rate.
• Extending the term of the loan.

There are many different loan modification programs available. While debtors may seek a loan modification following discharge, a servicer is not required by law to modify the loan. Instead, the servicer is directed through the modification process by investor guidelines such as the Department of the Treasury’s Home Affordable Modifications Program (HAMP) or a servicer’s own policies.

HAMP Guidelines for Loan Modifications

The now expired HAMP program provided clear and consistent loan modification guidelines when the debtor-borrower had discharged its personal liability.

The HAMP guidelines encouraged loan modification language to include:

• A disclaimer that all payments are voluntary.
• An acknowledgment that the servicer cannot seek to collect against the debtor-borrower personally.

Fannie Mae and Freddie Mac have both given guidance that loan modification documents include similar suggested language.

Servicer Guidelines for Loan Modifications

Where a debtor has received a discharge of personal liability, servicers are often wary of violating the discharge injunction and offering loan modifications in general. To protect themselves, servicers that offer loan modifications to post-discharge debtors should:

• Tailor the loan modification offerings to only those debtor-borrowers who have indicated an intent to retain the property. Discharge violations are often found where a debtor-borrower surrenders the property and a servicer solicits that debtor-borrower for loss mitigation. Upon surrender, the debtor-borrower indicates intent to sever the relationship with the servicer, and the servicer should not offer loss mitigation to that borrower.
• Carefully consider which products are offered to borrowers who have discharged personal liability. Investors, particularly GSEs, offer partial claim modification, which involves the borrower entering into a separate note, with a second lien position, in favor of the Department of Housing and Urban Development (HUD). When considered within the context of a bankruptcy discharge, the second lien note may be viewed as an impermissible post-discharge reaffirmation if it lacks language acknowledging the bankruptcy discharge. The standard subordinate note provided by HUD does not currently contain this acknowledgement language.
• Take care when deciding whether, and how, to modify a discharged debtor-borrower’s loan. Servicers should ensure the loan modification process is tailored to mitigate risk of other discharge injunction violations.

Best Practices for Offering Loss Mitigation to Discharged Debtor-Borrowers

As a practical matter, regulators, investors, and bankruptcy courts expect lenders and servicers to evaluate debtor-borrowers for possible loan modifications post-discharge. Notwithstanding this expectation, lenders and servicers should proceed with caution when processing post-discharge requests for loss mitigation assistance, as courts are unlikely to accept widespread industry practice as a defense to discharge injunction violations.

Be Cautious When Using Templates

Investors often provide templates or required language to document loan modification agreements. Some specifically include language to reflect a bankruptcy discharge. For example, the Fannie Mae loan modification agreement (Fannie Mae Form 3179) provides:

Notwithstanding anything to the contrary contained in this Agreement, Borrower and Lender acknowledge the effect of a discharge in bankruptcy that has been granted to Borrower prior to the execution of this Agreement and that Lender may not pursue Borrower for personal liability. However, Borrower acknowledges that Lender retains certain rights, including but not limited to the right to foreclose its lien evidenced by the Security Instrument under appropriate circumstances. The parties agree that the consideration for this Agreement is Lender’s forbearance from presently exercising its rights and pursuing its remedies under the Security Instrument as a result of Borrower’s default thereunder. Nothing in this Agreement shall be construed to be an attempt to collect against Borrower personally or an attempt to revive personal liability.

If templates do not include similar disclaimers:

• Servicers should consider discussing and seeking approval from the investor to incorporate these disclaimers.
• Servicers can send separate correspondence to the debtor-borrower confirming that personal liability has been extinguished by the bankruptcy discharge and including an acknowledgement to be signed by both parties.

Evaluate Treatment of Debtor-Borrowers Who Have Surrendered

Courts generally view a debtor-borrower’s statement of intention to surrender property under Chapter 7 or intent to surrender property in a confirmed plan under Chapter 13 as evidence that the debtor-borrower no longer wants to continue the relationship with the servicer or stay in the property. To eliminate risk, servicers should avoid soliciting and entering into loan modifications following a debtor-borrower’s stated intent to surrender the property. These broad prohibitions are likely impractical because:

• Many discharged debtor-borrowers who have surrendered property continue to make voluntary payments and may even seek loan modifications.
• Some states such as California and Nevada have statutory pre-foreclosure requirements that include loss mitigation solicitation (see Practice Notes, Residential Foreclosures (CA): Pre-Foreclosure Requirements and Considerations (W-013-8580), Residential Foreclosures (Nonjudicial) (NV): Pre-Foreclosure Requirements and Considerations (W-010 1072), and Residential Foreclosures (Judicial) (NV): Pre-Foreclosure Requirements and Considerations (W-019-0178)).

Because of these situations, servicers should mitigate risk by developing robust procedures regarding solicitation of discharged debtor-borrowers for loss mitigation to avoid soliciting debtor-borrowers who have surrendered. This will allow servicers to:

• Outline their process for credit pulls (even soft credit pulls) for debtor-borrowers who have indicated an intent to surrender. Under the Fair Credit Reporting Act, credit pulls are only permissible where there is a “legitimate business need for the information.” If the debtor-borrower has indicated it does not want the property anymore, there is arguably no legitimate business need for the mortgage servicer to pull that borrower’s credit.
• Tailor communications to minimize the risk of violating the discharge injunction by drafting and reviewing these communications on a one-off basis rather than relying on forms to ensure all of the debtor-borrower’s specific circumstances are considered.

Personalized, individual analysis and communication decreases the likelihood of complaints or litigation by the debtor-borrower for post-discharge conduct relating to loan modification outreach.

Beware of Court-Specific Loss Mitigation Requirements

Among the nearly 100 bankruptcy courts across the country, approximately only two dozen courts or individual bankruptcy judges have programs permitting debtors and creditors to engage in loss-mitigation negotiations under court supervision. These have been published as:

• Local rules.
• Administrative orders.
• Published formal guidelines.

These bankruptcy loss-mitigation programs share some common traits, such as the entry of an order setting deadlines and establishing certain ground rules for the process. However, many variations exist, including the use of an electronic portal for all communications related to the loss-mitigation process and the appointment of a mediator.

While many post-discharge loss mitigation efforts occur after a bankruptcy case has closed, servicers should stay apprised of all local court requirements related to loan modifications.

For more information on the local bankruptcy rules in bankruptcy courts across the jurisdictions, see Local Bankruptcy Rules Toolkit (W-001-4018).

Conduct Specialized Training for Customer-Facing Employees

To mitigate risk, lenders and servicers must develop and conduct cross-department training to educate employees on the complexity and risks of solicitation and loan modifications for discharged debtor-borrowers. Key concepts can also be memorialized in an FAQ or talking points, particularly for employees handling customer calls or complaints.

The original article, “Servicing Post-Discharge Residential Mortgage Debt,” first appeared in Practical Law on June 5, 2019.

Bradley Arant Boult Cummings LLP – Alexandra Dugan and Karlene A. Archer

California Homestead Works in Other States, Too article by Cathy Moran, California bankruptcy attorney.

Do Arizona exemptions have an extraterritorial effect?

730-day rule for the use of exemptions in bankruptcy: First, if there is a state “in which the debtor’s domicile has been located for the 730 days immediately
preceding the [anticipated] date of the filing of the petition,” that is the state whose law is applicable. 11 USC § 522(b)(3)(A). (Note that the rule requires the debtor to have been domiciled in that state for every one of those 730 days.) (“Days” means calendar days and the counting begins on the calendar day before the day the petition was filed. In re Dufva, 2008 WL 2065198 (Bankr.W.D.Mo.2008).)”

Arizona exemptions might have an extraterritorial effect,but there are competing opinions and case law is constantly developing. There is an argument that Arizona’s homestead statute is not limited to property located in Arizona, it is limited to the debtor’s “dwelling.” See In re Jarski, 301 B.R. 342, 346 (Bankr. D. Ariz. 2003) (RJH- a debtor may have several residences under A.R.S. 33-1102(a), but only one domicile.). Determining a debtor’s domicile is an issue of fact and requires i) residence and ii) a present intent to remain. See Colliers. Sounds like the debtors reside in Rocky Point and Arizona and maybe intend to make Rocky Point their permanent domicile?  Second, a state’s exemption laws may be used for out of state property to the extent allowed by the state exemption statutes. See In re Fernandez, 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011) (attached, finding that NV exemption statutes allowed a claimed exemption of property located in TX.). AZ’s homestead exemption statute, like the NV statue, is really broad. It would costly to litigate, but for a house that is owned free and clear, it might be worthwhile, and such a claim could give you leverage with the Mexican trustee.

in In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012) by judge Marlar:

“As in Cole, Arizona’s opt-out statute is also an “exemption” statute that limits the availability of the state’s exemption scheme to its residents. See also Camp, 631 F.3d at 761; Battle, 366 B.R. at 636–37. Moreover, neither party to this dispute has presented any Arizona authority for the extraterritorial effect of its personal property exemptions. Even assuming that A.R.S. § 33–1125 has extraterritorial effect, the exemption is limited to Arizona residents.

As an illustration, in In re Jarski, 301 B.R. 342 (Bankr.D.Ariz.2003), a debtor resided in a home in Arizona, filed bankruptcy in Arizona, and also owned a residence in California. This being a lien avoidance case, the court did not adjudicate which state’s exemption laws actually applied, but it nonetheless opined that Arizona’s homestead exemption statute “expressly contemplates that a debtor might have more than one residence that could qualify for the exemption because it creates a procedure for the debtor to choose which to claim as exempt.” Id. at 346; A.R.S. § 33–1102(A). The Jarski court also stated that § 522(b)(3)(A) (formerly § 522(b)(2)(A)) “determines whose law governs the exemptions, but not whether the property claimed exempt must exist in that same state.” Id. (emphasis added).

While the logic of Jarski and Arrol could require the Court to review the extraterritorial effect of Arizona’s personal property exemption in the event that Arizona law was “applicable,” 11 U.S.C. § 522(b)(3)(A), here, Arizona law is not applicable. Arizona’s opt-out statute limits the state exemptions to residents of Arizona.

33-1807(F) (and its counterpart in the Condo statutes) was amended last year such that the HOA lien for an unpaid assessment is extinguished unless proceedings to enforce the lien are instituted within 6 years after the full amount became due. It used to be 3 years. That means that any HOA claim filed in a Chapter 13 must be paid in full as a secured claim so long as the amount related to unpaid assessments from the last 6 years.

Even though the pre-petition obligations are discharged in the chapter 7, the HOA most likely (check the CC&Rs) has a statutory lien for unpaid dues.  Therefore the lien is not extinguished in a Chapter 7 even if the personal liability is discharged.   But, there is a 3 year statute of limitations on the lien itself.  ARS 33-1807(F) establishes a 3 year statute of limitations on each particular assessment, during which time the HOA must foreclose on that particular assessment, or the assessment is removed from the lien.  So to the extent there is pre-petition unpaid HOA assessments that are older than 3 years old, then they are not a lien anymore.  You will only need to take care of those that are less than 3 years old.  But see Section 108 (c) (tolling during chapter 7) (c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—

1. the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
2. 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

1) Statutory – Under Arizona planned community and condominium law (Title 33), an HOA has a statutory lien for unpaid assessments on the property which is subject to the CC&R’s. The statutory lien is subordinate only to property taxes and the first mortgage or deed of trust.  Arizona law specifically gives an HOA the right to foreclose its statutory lien.

2) Judicial – Any judgment lien that an HOA obtains through a lawsuit would be subject to the same requirements and restrictions that any other judicial lien has, and is potentially voidable in a bankruptcy case.

Limitation Based on Length and Amount of Delinquency
The HOA/COA cannot foreclose unless:
• the owner has been delinquent in paying the amounts secured by the lien (excluding collection fees, attorney fees, charges for late payments, and costs incurred with respect to the assessments) for a period of one year, or
• the delinquent amount is $1,200 or more, whichever occurs first (Ariz. Rev. Stat. § 33-1807(A), § 33-1256(A)).

No Foreclosure for Penalties and Fees Only
Fines, in contrast to assessments, are the penalties that an HOA or COA imposes if you violate the CC&R’s or other governing documents. For example, letting your lawn become overgrown, leaving trash cans outside, and parking in forbidden areas can result in fines and associated fees.  The HOA or COA can get a lien for penalties, fines, and related fees after the entry of a judgment in a civil suit, but it cannot foreclose that lien (Ariz. Rev. Stat. § 33-1807(A), §33-1256(A)). Basically, Arizona law makes a distinction between assessments and fines, and allows foreclosure actions only based on liens for unpaid assessments and related charges, but not for fines.

In re Foster sides with the HOA basically stating that the assessments are a liability that runs with the land. I do not know where that leaves Congress’ leaving out 1328(a) as one of the exceptions to 523(a)(16), – basically it makes no difference even though Congress specifically excluded 1328(a). (L. Karandreas briefed 9/11)

NOTE -BANKRUPTCY AND HOAs: HOAs have a statutory lien (usually in the CC&Rs) for unpaid assessments for the last 6 years. ARS 33-1256(F) and 33-1807(F). Used to be only 3 years, but the legislature quietly amended it to 6 years in 2019. So even though the personal liability of the pre-petition HOA assessments are discharged, the lien and the HOA’s foreclosure lien rights survive.

A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property.  Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.  The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00.  In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12.  Also see, ARS 33-1103 (A)(4).  Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101.  See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)

Note:  The recorded judgment lien survives the bankruptcy.  The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead.  522 addresses an “interest” in debtor’s property in support of a lien avoidance.  Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522?  The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.

It appears that the judgment lien and the right to enforce that lien survive a Chapter 7.  If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity.  Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.

Pacific, et al. v. Castleton, et al. December 27, 2018 – 1 CA-CV 17-0667 – Issue:Whether a judgment creditor may attach a judgment lien to homestead property, or whether it may execute on its judgment only by way of a forced sale of the property under Ariz. Rev. Stat. section 33-1105.  Holding: The court holds that a recorded judgment is not a lien on homestead property.

§ 33-964 A RECORDED JUDGMENT DOES NOT BECOME A LIEN ON HOMESTEAD PROPERTY:

Section 33-964 thus establishes the general rule that a recorded judgment does not become a lien on homestead property. See also Union Oil Co. of Ariz. v. Norton Morgan Commercial Co., 23 Ariz. 236, 245 (1922) (holding that “no lien shall be permitted to attach to the real property claimed as a homestead”).

EXCESS EQUITY (consensual secured debts + homestead) IN HOMESTEAD CAN BE JUDICIALLY FORECLOSED UNDER § 33-1105

See In Evans v. Young, 135 Ariz. 447, 453 (App. 1983), and Grand Real Estate, Inc. v. Sirignano, 139 Ariz. 8, 13 (App. 1983); see also In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008) (clarifying that a recorded judgment does not create a lien on property subject to homestead even when the value of the property exceeds the amount of the homestead. “It remains the case that both the homestead statute and the judgment lien statute both conceive of the ‘homestead’ as being the real property, not the equity value of such real property.” 400 B.R. at 754); and In re Glaze, 169 B.R. 956, 966 (Bankr. D. Ariz. 1994)

ONCE A JUDGMENT ATTACHES IT RUNS WITH THE LAND

• 33-964 establishes the general rule that a judgment lien does not attach to homestead property, and that homeowners hold their homestead property free and clear of judgment liens. See A.R.S. § 33-964(B). Although it is true that once a lien has attached, it “runs with the land,”, but in this case the judgment lien never attached to the Home in the first place.

ABANDONMENT OF HOMESTEAD BY CONVEYING TO TRUST A.R.S. § 33-1104(A):

• When a homestead exemption is abandoned by a conveyance of the property, the judgment lien does not re-attach to the property upon the sale. See Sec. Tr. & Sav. Bank, 29 Ariz. 325, 332 (1925).
• 33-1104(A)(3) a homeowner “may remove from the homestead for up to two years” without abandoning the homestead exemption. Sepics’ departure from the Home shortly before its sale did not constitute an abandonment.
• Because of the protection afforded by the homestead statutes, the Judgment never attached as a lien to the Home. Therefore, the Sepics conveyed the Home free and clear of the Judgment.

CONCLUSION: For the foregoing reasons, we affirm the entry of an injunction enjoining a Sheriff’s sale of the Home.  Read opinion

Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?
§ 506(a) provides: “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.” The various approaches all prefer their approach as meeting this standard.

For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.]
For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),

Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].

In re Krohn, Arizona Supreme Court No. CV-01-0246-CQ, Bankruptcy Court No. 00-10623-PHX-RTB  (8/27/2002)   Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed.  Shortly after that dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee’s sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: “May a trustee’s sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?”  We answer the certified question in the affirmative.

Whittle Development, Inc. v. Branch Banking & Trust Co. (10/11) It is common practice for mortgagees, such as banks, to foreclose on the collateral securing their loans and, in the absence of a third party purchaser for a reasonable value, to purchase such collateral by credit bidding their debt at the foreclosure sale. Due to the circumstances of foreclosure sales, however, often such sales do not result in as a high a sale price as would a private sale transaction. In the recent case of Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 2011 WL 3268398 (Bankr. N.D. Tex. July 27, 2011), the United States Bankruptcy Court for the Northern District of Texas (the “Court”) held that a bankruptcy trustee can avoid a prepetition foreclosure sale of a debtor’s property as a preferential transfer under section 547 of the Bankruptcy Code despite the fact that the sale was non-collusive and conducted in accordance with applicable state law. Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation. Whittle is significant not only because it calls into question the long-accepted notion that foreclosure sales are final, but also because it represents a departure from Supreme Court precedent in the related area of fraudulent transfers under section 548 of the Bankruptcy Code.

Background In 2007, Whittle Development, Inc. (“Whittle”) borrowed $2.7 million from Colonial Bank, N.A. (“Colonial”). Branch Banking and Trust Company (“BB&T”) later acquired Colonial and became the successor-in-interest to Colonial’s loan to Whittle. In 2010, BB&T declared a default under the loan, accelerated the outstanding payments owed by Whittle and foreclosed on the real property securing the loan. The foreclosure sale complied with all relevant state law requirements. A subsidiary of BB&T purchased the property at the foreclosure sale for $1.22 million.

Within ninety days of the foreclosure sale, Whittle filed a Chapter 11 petition. BB&T subsequently filed a proof of claim, claiming a debt owed of $2,855,243 of which BB&T alleged $1,181,513 represented a deficiency from the foreclosure sale. Thereafter, Whittle brought an action to avoid, as a preferential transfer, the foreclosure sale. Whittle took the position that the approximate value of the property was $3.3 million, that BB&T’s claim on the property at the time of foreclosure was approximately $2.2 million, and thus BB&T had received approximately $1.1 million more that it would have received in a chapter 7 case.

Whittle and BB&T agreed that the foreclosure sale effected a transfer of Whittle’s interest in property and that Whittle stated a “facially plausible” claim as to all the requirements of 11 U.S.C. section 547(b) except subsection (5), which “requires a finding that the creditor received more than it would have under chapter 7.” BB&T argued that the price paid at the foreclosure sale was the fair-market value of the property based on the Supreme Court’s decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Whittle asserted that since the property was worth more than the amount due to BB&T, BB&T received more than it would have received in a chapter 7. Whittle reasoned that BB&T received a total of $3,261,513, comprised of a deficiency claim in the amount of $1,181,513 and the net property value of $2,080,000 (calculated by subtracting the amount paid at foreclosure of $1.22 million from $3.3 million, the value of the property). Whittle argued that BB&T’s maximum recovery in chapter 7 would have been $2.2 million, the amount of BB&T’s claim at the time of foreclosure.

BFP v. Resolution Trust Corp. in BFP, a partnership formed for the purpose of buying a home defaulted on its mortgage payments, resulting in a foreclosure by the bank. A third party purchased the home for $433,000 at a properly noticed foreclosure sale shortly before the partnership filed for bankruptcy. Acting as a debtor in possession, the partnership sued to avoid the transfer as a fraudulent conveyance, alleging that the property had an actual value of $725,000.

In BFP, the Supreme Court addressed whether a foreclosure sale could be avoided as a constructively fraudulent transfer under section 548. The key issue in BFP was whether the foreclosure sale price could qualify as “reasonably equivalent value” or whether the purchaser has to pay fair market value for the property to be insulated from avoidance under section 548. The Supreme Court held that a “fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state’s foreclosure law have been complied with.” To hold otherwise, the Supreme Court stated, would interfere with the essential state interest in ensuring the security of title to real property. This ruling effectively insulated regularly conducted foreclosure sales from avoidance under fraudulent conveyance law. In Whittle, BB&T requested that this result be extended to preference actions.

Holding Despite the differences in the language of sections 547 and 548 of the Bankruptcy Code, the Court in Whittle noted that some courts have simply held that the test for preferences — a transfer which enables a creditor to receive more than in a chapter 7 liquidation — is essentially the same as the Supreme Court’s test for “reasonably equivalent value” in the fraudulent conveyance context. See Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836 (Bankr. W.D. Pa. 2001); Glaser v. Chelec, Inc. (In re Glaser), 2002 WL 32375007 (Bankr. E.D. Va. 2002).

In contrast, other courts analyzing the preference test simply highlight the plain language of the statute and point out that the test for whether a transfer is a preference is fundamentally different than the test used in the fraudulent conveyance statute. In Whittle, the Court sided with this second group of cases, holding that BFP was inapplicable in the preference context based on the clear language of the statute. “[L]ooking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a chapter 7 liquidation . . . .” The Court found BFP’s assessment of “reasonably equivalent value” wholly inapplicable to the preference context.

Conclusion The Whittle court denied BB&T’s motion to dismiss and allowed Whittle’s preference action to proceed. As such, the critical issue remaining is whether the value of the property was the appraised value of $3.3 million or the price paid at the foreclosure sale of $1.2 million. Whittle’s position is sustainable only if it rebuts the claim that the selling price of the property did not reflect its true value of $3.3 million and that the deficiency claim of $1,181,513 is worth its face amount. If Whittle’s position on value is correct, BB&T did receive a preference in the amount of $1.1 million. However, if BB&T’s position on value is correct, then BB&T did not receive a preference because it did not receive more than it would have in a chapter 7. It only received the sum of the amount paid at foreclosure and a deficiency claim.

Although the Whittle decision does not stand for the proposition that all valid prepetition foreclosure sales are susceptible to avoidance as preferential transfers, it does carve out a narrow subset of such sales for which the foreclosure sale may be anything but final. Based on this ruling and others like it, secured creditors and purchasers of foreclosed property who are also creditors of the estate should be cautious. These parties should view this case as a clear warning that, depending on the jurisdiction, the foreclosure sale may not be final. Additionally, purchasers of a foreclosed property must also take into account the risk that the property owner will file bankruptcy and seek to avoid the sale as a transfer under section 547 of the Bankruptcy Code. Purchasers may discount the price they are willing to pay for foreclosed properties to account for this additional risk, a result that is detrimental to the secured creditor, the debtor and its general creditors. If the Whittle opinion gains a widespread following in other jurisdictions and the market reacts to this risk by low bids from third parties, lenders may experience an increased incidence of being required to credit bid and take such assets into its OREO inventory. The determination of the amount of the credit bid may require re-examination as well in light of the risk that the credit bid will be determined to result in the lender receiving a voidable preference.

Hicks v. E.T. Legg & Associates (05/25/01 – No. D034398) Civil Code 2924c(e), and 2924g(d) do not prohibit the postponement of a foreclosure sale for successive periods of five of fewer business days during the period a sale is on hold because of an injunction or bankruptcy stay.

Bankruptcy of Wytch, US BAP 9th, Nos. 97-1089 and 79-1145, 7/1/98: 11 U.S.C. Section 349(b) does reinstate a debtor’s pre-petition property rights by invalidating specified bankruptcy court orders, Section 349(b) does not vacate orders for relief from the automatic stay under 11 U.S.C. Section 362(d). real property sold 2 hours after BK filed (chapter 7) property purchased by third party with no knowledge of bankruptcy, lender brought action to annul stay, no objection , relief granted. Case inadvertently dismissed, then reinstated, debtor’s argued that set aside earlier Order lifting stay – Bankruptcy Court and BAP did not agree – Order lifting stay stands.

Post-Petition attorney fees based on pre-petition contract: In re SNTL Corp., 571 F.3d 826, Bankr. L. Rep. ¶ 81,515 (9th Cir., June 23, 2009), pages 154, 183 (case no. 08-60001) The Ninth Circuit Court of Appeals, in a unanimous panel decision, affirmed, and adopted as its own, In re SNTL Corp., 380 B.R. 204 (9th Cir. B.A.P. 2007), holding that an unsecured creditor may include, as part of its claim, attorney’s fees incurred post-petition but based on a pre-petition contract. The opinion reasoned that (1) Code § 506(b), permitting an over-secured creditor to recover post-petition attorney’s fees, speaks only to the secured status of a claim, and not to its allowability; (2) the claim for attorney’s fees exists on the petition date, although it is contingent and unliquidated, as the “right to payment” exists on the petition date; thus, the claim is not disallowed under Code § 502(b)(1), requiring a bankruptcy court to “determine the amount of such claim … as of the date of the filing of the petition”; and (3) neither United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988) (holding that an undersecured creditor could not receive post-petition interest on the unsecured portion of its debt) nor public policy mandated disallowance of such a claim.

In re Goudelock, (9th Cir Ct Appeals, July 10, 2018)   The panel reversed the district court’s decision affirming the bankruptcy court’s summary judgment in favor of a condominium association, which sought in an adversary proceeding to determine the dischargeability of a debtor’s personal obligation to pay condominium association assessments that accrued between the date the debtor filed her Chapter 13 bankruptcy petition and the date the condominium unit was foreclosed upon.

Agreeing with the reasoning of the Seventh Circuit in a Chapter 7 case, the panel held that condominium association assessments that become due after a debtor has filed for bankruptcy under Chapter 13 are dischargeable under 11 U.S.C. § 1328(a). The panel concluded that the debt arose prepetition and was not among exceptions listed in § 1328(a). The panel held that the Takings Clause was not implicated because the condominium association retained its in rem interest. The panel also concluded that equitable arguments did not override the express provisions of the Bankruptcy Code.

The trustees will require the following (generic list):

1.    A purchase contract

2.    A proposed amendment to schedules I and J

3.    The debtors must be current with all plan requirements (plan payments and turn-over of taxes/refunds)

4.    If there is no title company involved yet, they will require that once a sales offer is made, and escrow opened, Preliminary Closing docs. But, the best practice is to open escrow before going this far.

Once sold, the debtors must file the amended schedules which means they need to be in another property and know the expenses associated with that property.

The letters from the trustee usually take less than a week to process.  More often than not, they do not require a court order assuming the confirmed plan re-vests the home to the debtor(s).

If pre-confirmation will probably need a Motion to sell.  If post-confirmation the sale can be done informally as long as the plan is confirmed.  Make certain the SOC/Plan provides that the property re-vests in the debtor(s) and that they are debtors are free to use the property in anyway (such as sell it or refinance) without further order of the court.  I believe the only reason for the trustee permission letter is the title agency and the trustee needs to know if the house sells for more then $150,000 in equity.

If you have to file a Motion, include the name of the mortgage company, the realtors, their percentage of commission, the proposed sales price, the amount of the debt and the purchaser’s name(s).  If no purchaser, a generic request to allow the sale with the provide that additional information, including amended schedules, can usually be filed.  The motion should allege that based on market prices, and opinions of the realtor, the sale price is reasonable and the sale would not impact on the creditors of the estate.

Ex-parte: see LR 2084-25 (http://www.azb.uscourts.gov/rule-2084-25

If lender is being difficult (debtor cannot get a final payoff for the sale – as evidenced by a history of lender’s failure to respond): consider drafting the motion to not provide for higher and better offers (unless the property could sell for more than secured debts, plus homestead). If the sale could (reasonably) produce non-exempt proceeds, then will need to allow for higher and better offers.

When there is a difficult lender – consider drafting the order to give the option to hold (escrow) out a specified amount of money and sell it free and clear of the mortgage lien.  That will help if later the lender continues to be difficult to work with (obtain payoff).

In re De Guillen, BAP No. CC-18-1248-LSTa and BAP No. CC-18-1242-LSTa (9th Circuit, Aug 26,2019) The homeowner’s association lien for unpaid assessments on the debtor’s condominium was limited to the amount of the HOA’s recorded pre-petition state court judgment, and the remainder of its claim was unsecured.  Highland Greens Homeowners Association (“Highland Greens”) appeals the bankruptcy court’s order sustaining in part Debtor Maria Basave de Guillen’s objection to Highland Greens’ proof of claim. The bankruptcy court found that, under California law, Highland Greens’ recorded notice of lien for delinquent homeowners assessments on Debtor’s condominium did not secure amounts accruing after the recordation of the lien. Accordingly, the bankruptcy court limited Highland Greens’ secured claim to the amount of its recorded pre-petition state court judgment, classifying the remainder of the claim as unsecured. We AFFIRM. 

NOTE -BANKRUPTCY AND HOAs: HOAs have a statutory lien (usually in the CC&Rs) for unpaid assessments for the last 6 years. ARS 33-1256(F) and 33-1807(F). Used to be only 3 years, but the legislature quietly amended it to 6 years in 2019. So even though the personal liability of the pre-petition HOA assessments are discharged, the lien and the HOA’s foreclosure lien rights survive.

Some Arizona bankruptcy courts are reluctant to enter an order avoiding a judicial lien on an Arizona homestead citing Arizona law that specifically protects homesteads from a judicial lien attaching to the property (ARS §33-964 B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.)  The challenge is that many title companies will require the debtor to pay the judgment despite the entry of discharge.  In re CASEY D. O’SULLIVAN, Case No. 15-30173- a Missouri court addresses this issue:

CRP thus did not have a judgment lien against the Debtor under Missouri law when the Debtor filed his chapter 7 bankruptcy case. But that does not, however, end the inquiry. As the Eighth Circuit points out, the Bankruptcy Code in§ 101(36) defines a judicial lien as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”

Likewise, the Bankruptcy Code defines what a “lien” is: “[t]he term ‘lien’ means charge against or interest in property to secure payment of a debt or performance of an obligation.”  And with the filtering lens of these definitions, the court then looks to applicable state law to see if a particular judgment constitutes a “judgment lien” within the meaning of the Bankruptcy Code. There is no question that a judgment, even against entirely exempt TBE property, may constitute a “cloud” against title. The question is whether a “cloud” may constitute an “interest in property” under Missouri law such that the “cloud” may be considered a “lien” and thus avoided as a “judicial lien” for purposes of overriding bankruptcy law.

Although other states may treat “clouds” differently, under Missouri law, a judgment against TBE property is a cloud that gives rise to an “interest in property” such that it may be avoided under § 522(f)(1).

Culver, L.L.C. v. Chiu, No. 01-56578 (9th Cir. September 18, 2002) The lien-avoidance provision of the Bankruptcy Code, 11 U.S.C. section 522(f)(1), allows that a debtor need not have an interest in property to avoid a judicial lien on that property.

Posted by NCBRC – July 24, 2017  In re Pace, No.16-8036 (B.A.P. 6th Cir. June 20, 2017).  Section 522(f)(2)(C) does not create an exception to lien avoidance for mortgage deficiency judgment liens.

In re Watt, Case No. 14-31295-tmb13, (D. Or 10/15/14) Bankruptcy judge decided there were no prohibitions to allowing the Debtors to both surrender the Property and vest it in BONY Mellon. Nor is there any indication that Debtors plan was filed in bad faith. Accordingly, Court confirmed the Second Amended Plan over the objection of BONY Mellon. However, the Order Confirming Plan should amend the plan by interlineation to make clear that the Debtors are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property.

See also In re Rose, 512 B.R. 790 (Bankr. W.D. N.C.July 8, 2014) (case no. 4:12-bk-40743)Chapter 13—Treatment of secured claims— Transfer of collateral to creditor: No provision of the Bankruptcy Code permits a Chapter 13 debtor to force a secured creditor to accept a conveyance of the property serving as collateral for the debt. Nor does Florida law permit a debtor to compel a secured creditor to foreclose on the property or take title to the property. However, the court would permit the Chapter 13 debtors to tender a deed to the property to the first-priority lienholder for its consideration, and if the creditor did not accept or reject the deed within 60 days, the debtors would be permitted to record the quitclaim deed in the applicable Florida registry and thereby transfer the property to the creditor.

Corvello v. Wells Fargo Bank, No. 11-16234  (9th Cir, August 8, 2013) Dismissals of actions challenging defendant-bank’s decision not to offer permanent mortgage modification to plaintiff-borrowers is reversed and remanded, where: 1) under the Home Affordable Modification Program the bank was contractually required to offer the plaintiffs a permanent mortgage modification after they complied with the requirements of a trial period plan (TPP); and 2) the district court should not have dismissed the plaintiffs’ complaints when the record before it showed that the bank had accepted and retained the payments demanded by the TPP, but neither offered a permanent modification, nor notified plaintiffs they were not entitled to one, as required by the terms of the TPP.

In re Sagendorph, 14-bk-41675 (C.D. MA) using chapter 13 plan to vest property in secured lender’s name.  Wells Fargo objected, court approved plan.

Only Cramdown Left? Section 506 Lien Stripping & Valuation, Article from Tucker, Bullock, Bredow, ABI

See attached article on process.

In re Lukaszka et al., No. 17-242, 2017 WL 3381815 (Bankr. N.D. Iowa Aug. 4, 2017).  Debtors had a second position mortgage with First Federal.  After the Debtors’ defaulted the lender determined there was no equity to cover the debt.  The lender stopped collection efforts in 2013 and issued an IRS Form 1099-C “canceling” the debt. The Debtors disclosed the $60,000 as income on their next tax return and paid taxes on it.

The bankruptcy judge found the debt was legally “canceled” with the filing of a 1099-C and the creditor no longer had an enforceable mortgage, therefore the  chapter 13 plan was confirmable over the creditor’s objection that the plan violated the anti-modification provision of Section 1322(b)(2) of the Bankruptcy Code, 11 U.S.C.A. § 1322(b)(2).

Most courts have held that the 1099-C alone is not  sufficient evidence that the debt is canceled, but a minority have found it is. In this case the Debtors incurred and paid tax debt. The lender did not  amend or withdraw the Form 1099-C.

Therefore, judge Collins said. “The court concludes that the debt was canceled and that it would be inequitable to find otherwise.” and that  Section 1322(b)(2) does not apply.

Side bar note re 1099-C in Arizona:  Amtrust Bank v. Fossett, 233 Ariz. 438  (Ct. App. 209).  The AZ Court of appeals (unlike most courts around the country) held that the issuance by lender of Internal Revenue Service (IRS) Form 1099–C to borrower is prima facie evidence that it had discharged their debt.

§ 1322(b)(2) In re Rones, 2015 Bankr. LEXIS 1936 (Bankr. D.N.J. June 11, 2015) (Gravelle, B.J.). Unsecured balance of condominium association lien could be stripped off.

BAPCPA did not render Chapter 20 debtors ineligible to void liens permanently.

In re Blendheim D.C. No. 2:11-cv-02004-MJP Washington (9th Cir Ct Appeals, 10/1/15)  Affirming in part and vacating in part the district court’s judgment, the panel held that an amendment to the
Bankruptcy Code¯barring debtors from receiving a discharge at the conclusion of their Chapter 13 reorganization if they received a Chapter 7 discharge within four years of filing for Chapter 13 relief¯does not render such “Chapter 20” debtors ineligible for Chapter 13’s lien-avoidance mechanism, which allows a debtor to void or modify certain creditor liens on the debtor’s property, permanently barring the creditor from foreclosing on that property.

The panel held that the bankruptcy court properly voided a creditor’s lien under § 506(d) of the Bankruptcy Code. The panel held that under § 506(d), if a creditor’s claim has not been “allowed” in the bankruptcy proceeding, then a lien securing the claim is void. The panel held that the voiding of the creditor’s lien was permanent such that the lien would not be resurrected upon the completion of the debtors’ Chapter 13 plan. Agreeing with the Fourth and Eleventh Circuits, the panel held that 11
U.S.C. § 1328(f), enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, did not render Chapter 20 debtors ineligible to void liens permanently.

In re Burboa (Bankr. D. Ariz. September 29, 2014) Judge Ballinger.  Debtor could not strip off valueless lien on home in “chapter 20” case.  BAP overturned similar decision: In re Boukatch,  2:14-bk-04721-EPB, BAP AZ-14-1483 (July 9, 2015) We conclude that § 1328(f)(1) does not prevent Debtors’ ability to strip off MidFirst’s wholly unsecured junior lien in heir chapter 13 plan, because nothing in the Bankruptcy Code prevents chapter 20 debtors from stripping such liens off their principal residence under §§ 506(a)(1) and 1322(b)(2). We further conclude that plan completion is the appropriate end to Debtors’ chapter 20 case. Unlike a typical chapter 13 case, the lien avoidance will become permanent not upon a discharge, but rather upon completion of all payments as required under the plan. In re Davis, 716 F.3d at 338; In re Frazier, 469 B.R. at 900; In re Blendheim, 2011 WL 6779709, at *6; In re Okosisi, 451 B.R. at 99-100; In re Frazier, 448 B.R. at 810; In re Tran, 431 B.R. at 235.
We conclude that the bankruptcy court erred when it denied the Lien Strip Motion on the basis that Debtors were not eligible for a chapter 13 discharge.
VI. CONCLUSION
For the foregoing reasons, we REVERSE the decision of the bankruptcy court and REMAND for further proceedings consistent with this opinion.

Boukatch v. Midfirst (In re Boukatch) The Boukatch panel “join[ed] the growing consensus of courts” that follow the third approach.  The panel held that nothing in the Bankruptcy Code prevented the debtors from stripping off a wholly underwater lien against their principal residence, notwithstanding that the debtors were not eligible for a discharge.  The panel made a distinction between discharge—which would have enjoined the creditor from enforcing the debt against the debtor personally, but would not have released the lien from the debtor’s property—from avoiding the lien.  The panel concluded that the Bankruptcy Code does not prevent individual debtors from stripping off a wholly underwater lien in their chapter 13 plan.  The only way the lien would not be avoided would be if the debtors failed to complete all of the payments required under their chapter 13 plan and the case was subsequently converted or dismissed.  Accordingly, the panel reversed the bankruptcy court’s decision to deny the lien stripping motion.

Branigan v. Davis, No. 12-1184 (4th Cir. 05/10/2013) Confirmation orders entered by the bankruptcy court stripping off junior liens against debtors’ residences in so-called “Chapter 20 cases”, is affirmed, where: 1) the Bankruptcy Abuse Prevention and Consumer Protection Act does not bar the orders entered by the bankruptcy court; and 2) the stripping off of valueless liens is otherwise consistent with the Bankruptcy Code. There is a dissent.

In re Hill, 440 BR 176 (2010, S.D.Cal) debtors’ ability to use plan in order to “strip off” wholly unsecured junior mortgage lien was not conditioned on their eligibility for discharge, but solely upon their obtaining confirmation of, and performing under, Chapter 13 plan that complied with requirements of the Code. 11 U.S.C.A. §§ 506, 1322, 1325, 1328(f).

In Re: Mansaray-Ruffin, No. 05-4790 (U.S. 3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure.

Bank of America, NA v. Caulkett, 135 S. Ct. 674 – 2014 – ‎Supreme Court (5/2014) A debtor in a chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of the Bankruptcy Code.

In Re: Lorraine McNeal, D. C. Docket Nos. 1:10-cv-01612-TCB; 09-BKC-78173-PWB (11th Cir US Ct App 5/11/12) – very limited decision, lien stripping in chapter 7. “But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured — just as GMAC’s claim is here — was voidable under the plain language of section 506(d).3 862 F.2d at 1538-39.” “Because Dewsnup disallowed only a “strip down” of a partially secured mortgage lien and did not address a “strip off” of a wholly unsecured lien, it is not “clearly on point” with the facts in Folendore or with the facts at issue in this appeal.”

In re Caliguri, (Bkrtcy.E.D.N.Y.) July 20, 2010: Avoidance – Chapter 7 debtor cannot avoid lien of wholly undersecured, consensual mortgage lien holder. A Chapter 7 debtor may not avoid or “strip off” the lien of a wholly undersecured, consensual mortgage lien holder, a New York bankruptcy court has held. In so ruling, the court adopted the analysis of the court in In re Pomilio, 425 B.R. 11 (Bankr.E.D.N.Y. 2010), which, in turn, relied on 506(a) and (d) of the Bankruptcy Code and the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). The bankruptcy court distinguished In re Lavelle, 2009 WL 4043089 (Bankr.E.D.N.Y. 2009.

In re Winitzky 1-80-bk-19337 Motion to strip fully unsecured lien on residence (Central District of CA, June 9, 2009) at issue in this case is whether the Bankruptcy Code allows Chapter 13 debtors who previously received chapter 7 discharges within the last 4 years could strip a completely unsecured consensual lien off their primary residence. This Court concluded that the Code does not allow this because a discharge is required to lien strip in a Chapter 13 case.

In re Laskin, 222 B.R. 872 (9th Cir. BAP 1998). no lien stripping in chapter 7 case (2nd DOT totally unsecured by FMV. Cannot strip liens by motion, must use reorganizations in order to use 506(d) to strip. Rule 4003(d) only applies to lien avoidance actions under 522(f). Debtors argued Dewsnup v. Timm did not apply in that this was not an attempt to strip a lien in a chapter 7 where the lien is PARTIALLY secured, but was completed unsecured. (Dewsnup would not permitting the stripping of a partially secured lien in chapter 7).

In re Trevor M. Jarvis, Debtor. No. 07-72281 2008 WL 2682514— B.R. —-, 2008 WL 2682514 (Bankr.C.D.Ill.) United States Bankruptcy Court, C.D. Illinois. July 9, 2008.
Holdings: The Bankruptcy Court, Mary P. Gorman, J., held that: (1) debtor who, due to his receipt of discharge in prior Chapter 7 case, was ineligible to receive Chapter 13 discharge even if he successfully completed his payments under plan could not use his successive Chapter 13 filing to “strip off” a wholly unsecured junior mortgage lien; and (2) even assuming that debtor’s earlier Chapter 7 discharge, shortly prior to commencement of his current Chapter 13 case, had not rendered him ineligible for discharge in Chapter 13, plan proposed by debtor could not be confirmed. Cases such as King which helped to develop the theory of lien stripping of fully unsecured claims involved debtors who had previously received a Chapter 7 discharge and did not need the Chapter 13 discharge to extinguish personal liability. Rather, those cases hold that the use of Chapter 13 to modify rights not discharged in the prior case requires a second discharge to be fully effective. Courts have consistently held that, because a portion–the in rem portion–of a creditor’s claim against a debtor remains after the Chapter 7 discharge, the permanent modification of that claim can only be effected by completing the terms of the Chapter 13 and receiving a discharge notwithstanding the discharge of personal liability in the prior case. King, 290 B.R. at 651; In re Akram, 259 B.R. 371, 378-79 (Bankr.C.D.Cal.2001). Nothing in the limited legislative history of BAPCPA suggests that Congress intended to change that result. Confirmation denied.

Subject: [NACBA-BK] Re: Bankr CD ILL: Strip-off plan could not be confirmed in no-discharge Chapter 13 case commenced by repeat filer.

David: Dan, you’re half right. The mortgage debt was discharged in the chapter 7 case, but the mortgage lien was NOT discharged. See Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)). A debtor can’t eliminate or “strip down” the mortgage lien in a chapter 7 case, Dewsnup v. Timm 502 US 410 (SCOTUS, 1992), but you can do that in a chapter 13 case if you follow Max’s mantra: “notice, notice and more notice” and make it clear in the plan that you’re doing that. This is the technique I used in In re Curtis, 322 BR 470 (Bkrtcy.D.Mass. 2005). That was a chapter 20 in which the 2nd mortgage was stripped off and no payments made because the debt was discharged in the 7. When the 2nd mortgagee violated the discharge injunction after my client completed her plan, we had a lovely Adversary Proceeding in which the 2nd mortgagee wound up paying my client $53,220, including my fee, its lien having been voided by the discharge order in the chapter 13 case. David Baker (Boston)

Dan: No, I’m confident that I’m 100% right. Unless the 2nd mortgagee SUED on the debt (or otherwise attempted to collect it as a personal liability), it was not the DISCHARGE injunction that was violated. It was the order avoiding the lien. That’s still a judicial order, and it’s still enforceable, and it can be recorded in land records to remove the 2nd from the chain of title. We don’t do this through the plan – an AP or motion is necessary, and no discharge in the 13 should be necessary for that order to be effective. Dan Press, Chung & Press, P.C. dpress@chung-press.com

In re Goswami (9th Cir. BAP 2003) NO DEADLINE FOR AMENDED EXEMPTIONS OR JUDICIAL LIEN AVOIDANCE A debtor’s ability to amend his or her claim of exemptions does not terminate upon case closure. A debtor’s standing to move to avoid a judicial lien is based on the circumstances in existence at the time the lien attached, and not when the debtor moves to avoid it (debtor moved to avoid a judicial lien on his residence five years after case was closed; debtor was unaware of lien at time he filed bankruptcy).

Motions to Value Undersecured Claims, By: Louis J. Esbin esbinlaw@sbcglobal.net (1/2009)

A simple, but common fact scenario: Home purchased on January 1, 2003, at a price of $450,000, with a 80/10/10 loan; i.e., a first of $360,000, a second of $45,000, and $45,000 down. On August 31, 2007, a refinance takes place, with an appraised value of $700,000, and the advancing of a first of $500,000, and HELOC of $200,000. Chapter 13 Bankruptcy case is filed on December 31, 2008, with $55,000 in auto leases, and $210,000 in credit card and other unsecured debt, including a corporate guaranty of $50,000.

The issues are as follows: Does the debtor qualify under Chapter 13 if the HELOC is determined be a wholly undersecured claim? Is it a motion to value, a motion to avoid liens, an adversary, or some combination of all three?

There are three steps in the analysis: (1) First, a motion (not an adversary proceeding) is filed under Section 506 so that the bankruptcy obligation to make adequate protection payments is relieved, citing as authority In re Timbers of Inwood, 484 U.S. 365 (1988). Evidence includes a preliminary title report to establish priority of liens and the original amount of the debt secured, filed claims or loan documents, and an appraisal, each supported by admissible attestations; (2) Second, under state law, California Civil Code Section 2909, provides in summary that once the underlying trust purpose is extinguished, the deed of trust is extinguished (See, Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 1235 (1995); Trowbridge v. Love, 58 Cal.App.2d 746, 751 (1943)); i.e., once the underlying debt has been discharged through a chapter 13 or 11, as a matter of law, the deed of trust must be avoided by the trustee or beneficiary. Until such time as the trust purpose is extinguished the trust (deed of trust) must remain secured by the real property. Therefore, the lien remaining and the interest of the creditor is as either a partially undersecured or wholly undersecured creditor. But, the holder of a lien secured by a deed of trust is at all times secured. The terminology “undersecured” is important because it defines the creditor as having a lien against real property, but whose underlying trust purpose is not secured entirely by equity in the real property. The creditor is not unsecured, because the lien remains enforceable against the real property until the trust purpose is extinguished. Remember that if the Chapter 13 plan is not finished and a discharge entered, the lien is enforceable, confirming the application of state law as to the relationship between the Trustor (debtor) and trustee-beneficiary (lender); and (3) Third, and accordingly, contrary to the split of authority in our district, there is no need for an adversary proceeding to avoid a lien in a Chapter 13 or Chapter 11 situation until the underlying trust purpose is extinguished, and only if the trustee (of the deed of trust) does not voluntarily remove the lien. And, as a practical note, if the lien is avoided before the trust obligation is discharged (or extinguished), at the time of the filing, the now adjudged unsecured obligation (because the lien is removed) would be added to the amount of the general unsecured claims at the time of the filing, thereby resulting in the jurisdiction of the court for chapter 13 to be exceeded. Section 109(e) would thereby be violated, not as a matter of law, but because of a misinterpretation and misapplication of the law and procedure.

The case of In re Scovis, 249 F.3d 975 (9th Cir. 2001), is quite disturbing and potentially could render hundreds, if not thousands of Chapter 13 debtors ineligible for filing under Chapter 13, forcing them into more complicated and expensive Chapter 11 cases. Scovis speaks to the issue of good faith determined at the time of the filing, based upon the filed schedules. Citing, Scovis, the BAP in In re Guastella, 341 B.R. 908 (9th BAP 2006) broadened the analysis of a totality of circumstances, allowing the court to look beyond the schedules to determine the debtors good faith intent where the tentative decision of a state court had found liability and the amount of liability. Importantly for our analysis, Scovis was a judicial lien that impaired a statutory homestead exemption. The HELOC is a consensual lien, a deed of trust that is not subject to the homestead exemption; a critical factual distinction when it comes to the timing of whether or when a lien is deemed undersecured versus unsecured.

In Scovis, the Ninth Circuit discussed the form over substance issue. In Scovis, however, California mortgage and deed of trust law was not considered. But, California law must be considered in determining the reality of the substance of the rights impaired with regards to, in our example, the HELOC. In the above scenario, as in most, the creditor is deemed “wholly undersecured,” and there­fore, no adequate protection payments are made under Timbers. The term undersecured claim, rather than unsecured claim is an essential distinction, because if the case is converted, the lien “rides through,” and the creditor retains all remedies of a secured creditor, rather than losing the right to exercise nonjudicial remedies, as if an unsecured creditor, and as with the creditor in Scovis. Application of 11 U.S.C. § 506(a) results in a bifurcation of previously secured claims, but 11 U.S.C. § 506(d) does not allow the “stripping off” of the wholly undersecured lien in a Chapter 7 case. In re Dewsnup, 908 F.2d 588, 593 (10th Cir. 1990), aff’d, 502 U.S. 410 (1992); see also H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 5, reprinted in 1978 U.S. Code Cong. & Admin.News 5963, 6312.

Under In re Zimmer, 313 F.3d 1220 (9th Cir. 2002), and In re Lam, 211 B.R. 36 (9th Cir.BAP 1997), only through a Chapter 13 (or Chapter 11) can the lien ultimately be avoided upon entry of discharge, as the purpose is to further the effectuation of a plan in prospect. The 9th Circuit BAP adopted the reasoning in Dewsnup. Therefore, it is essential to apply Bankruptcy and California law together. Not until the discharge is entered will the underlying trust purpose be extinguished or discharged, and therefore, only at that time, will the deed of trust will be subject to avoidance. This is so as a matter of law without the need for an adversary proceeding, unless the trustee of the deed of trust fails to avoid the deed of trust whose trust purpose has been discharged.

Scovis is just wrongly applied in the above fact scenario, both under California law, as well as under Zimmer and Lam. Moreover, the creditor is scheduled at the time of filing in Schedule D as a secured creditor, and not in Schedule F as an unsecured creditor, and therefore, at the time the case is filed the creditor is “undersecured,” and not unsecured. As to the issue of good faith in filing as a Chapter 13, rather than a Chapter 11, again, the application of Bankruptcy law in concert with California law will lead to the correct result.

The recent iteration of the proposed Amendments also supports the above analysis, providing in pertinent part that Section 109 of title 11, United States Code, is amended—

“(1) by adding at the end of subsection (e) the following: ‘’For purposes of this subsection, the computation of debts shall not include the secured or unsecured portions of—

‘(1) debts secured by the debtor’s principal residence if the current value of that residence is less than the secured debt limit; or . . . ‘”

It is evident that Congress intends to deal with the interpretation of Scovis and the application of Zimmer. The proposed Amendment seems to address the wrong application of Scovis and the issue arising there from issue where the wholly undersecured creditor’s claim would cause the secured portion of the Chapter 13 jurisdiction to be exceeded. Therefore, it seems that the proposed Amend­ment would provide the treble benefit of: (1) reducing the secured portion only to that amount of the secured claims that are actually secured by the value in the residence; (2) not adding to the unsecured portion that portion of the secured claims that are either partially undersecured, or wholly undersecured (see discussion below on the definition of undersecured); and (3) raising the secured jurisdiction of Chapter 13 to the extent of the value of the residence, regardless of the face amount of the underlying debt secured by the undersecured liens.

As the largest district in the country, we must recognize the use of the terminology wholly undersecured versus wholly unsecured when speaking of deeds of trust to the extent to which their security interest is determined through a “Motion to Value,” rather than a “Motion to Avoid Lien,” and, further, only requiring an adversary proceeding following entry of a discharge, if necessary. However, such a Motion to Value must be supported by competent and admissible evidence of priority of liens, amount of original and outstanding debt secured.

First Southern National Bank v. Sunnyslope Housing LP (In re Sunnyslope Housing LP), 859 F.3d 637 (9th Cir. May 26, 2017).  Reversing a three-judge panel, the Ninth Circuit sat en banc and held in May that a secured creditor in a cramdown is only entitled to the replacement value of collateral used as the debtor intends, not the price that would be realized after foreclosure in those rare cases where foreclosure value is higher than replacement value.

Wigod v. Wells Fargo Bank NA 7th Circuit Opinion upholding homeowners’ state law rights when bank fails to keep agreement to grant a mortgage modification agreement. Homeowners who have trial mortgage loan modification agreements with servicers under the federal Home Affordable Modification Program can sue for breach of contract and other state law claims, the Seventh Circuit said Wednesday, reviving a putative class action claiming Wells Fargo & Co. improperly refused to modify loans.