By holding creditors to account for violating the discharge injunction, a decision from the Ninth Circuit Bankruptcy Appellate Panel demonstrates the significance of the Supreme Court’s Taggart decision.
The chapter 13 debtor owned rental property whose value was disputed. The lender filed a secured proof of claim for more than the debtor believed that the property was worth.
The debtor filed a plan bifurcating the lien into a secured claim and an unsecured claim. After courtroom battles, the two sides reached agreement to peg the property’s value at about $170,000 and bifurcate the lender’s claim, with the portion of the claim above $170,000 to be treated as an unsecured claim. As revised after the settlement, the plan was to pay the lender’s $170,000 secured claim in full during the life of the five-year plan, with interest at 6.75%.
About one year after confirmation, the debtor filed a motion for authorization to refinance the property, amend the plan, and immediately pay off the lender’s secured claim in full. The bankruptcy court approved the refinancing in an order authorizing the debtor to pay off the “entire plan.”
The order approving the refinancing recited how the debtor could shorten and amend the plan to provide one final payment of 1% to unsecured creditors and about $124,000 to the lender, representing the remaining balance of the secured claim at that time. The order said that the lender’s secured claim would be “deemed satisfied in accordance with the modified plan.”
The court entered the debtor’s discharge once he made the payments.
When the lender initiated foreclosure proceedings several months later, the debtor reopened his case and filed a motion to hold the lender in contempt of the discharge injunction. In the midst of the contempt proceedings, the lender evidently recognized the error of its ways, halted foreclosure, and cancelled the mortgage on the property. However, the debtor persisted with the motion for the imposition of sanctions.
The bankruptcy court denied the motion for sanctions because neither the plan nor various court orders specifically said that the lien was discharged. The debtor appealed and won a reversal and remand in an opinion on October 29 by Bankruptcy Judge Laura S. Taylor.
The record in the bankruptcy court, the BAP said, created “confusion and uncertainty” regarding the survival of the mortgage lien. The BAP intimated that the bankruptcy court properly denied the contempt motion under Ninth Circuit law as it existed at the time.
Taggart
Before the Supreme Court reversed Taggart, the Ninth Circuit had held that a creditor could not be held in contempt of the discharge injunction if the creditor had a subjective belief that the injunction did not apply, even if the creditor’s belief was “unreasonable.” Taggart v. Lorenzen (In re Taggart), 888 F.3d 438 (9th Cir. 2018). In other words, the bankruptcy court had properly held under then-governing Ninth Circuit law that there was no contempt because the muddled record about survival of the lien absolved the lender of contempt. To read ABI’s report on the Ninth Circuit’s Taggart decision, click here.
The Supreme Court overruled the Ninth Circuit. Taggart v. Lorenzen, 139 S. Ct. 1795 (June 3, 2019). The high court changed the test from subjective to objective and adopted a tougher standard. The Court held that a creditor cannot be in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Id. at 1801. For ABI’s report on Taggart in the Supreme Court, click here.
The BAP said that the Ninth Circuit’s standard had been “forgiving to creditors,” but the objective standard laid down by the Supreme Court required the BAP to reverse the order denying the motion for contempt. On remand, the BAP directed the bankruptcy court to apply the new Taggart standard.
The Error of Law
The lender may have tough sledding on remand, because the BAP identified a critical error of law in the analysis by the bankruptcy court.
In addition to following the Ninth Circuit’s forgiving Taggart standard, the bankruptcy court rested its decision in part on the belief that the plan did not explicitly provide for terminating the lien following payment in full under the plan.
The BAP agreed that the plan did not expressly require satisfaction of the mortgage on the completion of plan payments. “But,” the BAP went on to say, “the legal effect of the payment in full of the [lender’s] secured claim as established by the plan had this effect.” The BAP rested its conclusion on the Bankruptcy Code and state law.
Section 1328(a) requires the court to enter a discharge after the payment “of all debts provided for by the plan . . . .” Because the bankruptcy court’s order called for payment of the secured claim in full, the debtor was entitled to discharge the secured claim.
Under California law, no lien exists “independently of the underlying debt,” the BAP said. In other words, “satisfaction of the underlying debt satisfies the lien,” making the lien void.
The BAP buttressed its conclusion by alluding to Section 506(d), which provides that a lien is void to the extent that the underlying claim “is not an allowed secured claim.” Once the secured claim was paid in full, the claim was no longer an allowed claim, and the lien became void.
Under the rubric of the Supreme Court’s Taggart formulation, the BAP appeared to imply that there was “no objectively reasonable” basis for believing that the lien survived the final payment under the plan.
The BAP remanded “for further determinations consistent with this decision.” Will the lender be able to argue successfully on remand that the bankruptcy court’s mistaken belief about the survival of the lien gave rise to an “objectively reasonable” belief about the continuing enforceability of the mortgage?
The answer may be buried in the details. The bankruptcy court said that the debtor would have been entitled to an order terminating the mortgage if the debtor had initiated further proceedings. For the lender to foreclose on what amounts to technicalities may not be “reasonable.”
Beyond this particular case, here’s the interesting question raised by the BAP’s opinion: Does a legal argument lose its objectively reasonable basis if there is a contrary decision in the trial court or on appeal?
By holding creditors to account for violating the discharge injunction, a decision from the Ninth Circuit Bankruptcy Appellate Panel demonstrates the significance of the Supreme Court’s Taggart decision.
The chapter 13 debtor owned rental property whose value was disputed. The lender filed a secured proof of claim for more than the debtor believed that the property was worth.
The debtor filed a plan bifurcating the lien into a secured claim and an unsecured claim. After courtroom battles, the two sides reached agreement to peg the property’s value at about $170,000 and bifurcate the lender’s claim, with the portion of the claim above $170,000 to be treated as an unsecured claim. As revised after the settlement, the plan was to pay the lender’s $170,000 secured claim in full during the life of the five-year plan, with interest at 6.75%.
About one year after confirmation, the debtor filed a motion for authorization to refinance the property, amend the plan, and immediately pay off the lender’s secured claim in full. The bankruptcy court approved the refinancing in an order authorizing the debtor to pay off the “entire plan.”