It’s never too late to value a lien and avoid it in bankruptcy.
Even after the Chapter 13 case is done and closed.
So says the 9th Circuit Bankruptcy Appellate Panel in Chagolla, decided February 9, 2016.
In the absence of prejudicial delay, we find that a motion to value and avoid the lien of a junior lienholder may be brought after discharge if the confirmed plan called for its avoidance and treated it as unsecured and if no prejudice to the junior lienholder will occur
And it’s a welcome decision in Northern California, where a number of courts have held that failure to value a lien in advance of confirmation of a Chapter 13 prevents subsequent avoidance of the lien.
Lien slips through cracks
Here’s what happened to Lucio and Maria when they filed Chapter 13 in 2008.
Chase held a junior mortgage on the their home which was way underwater at filing. The debtors’ plan proposed that the debtor would bring an adversary proceeding to strip off the lien.
For reasons not explained, the adversary was never brought, the Chase lien was treated as an unsecured claim in the bankruptcy, and the plan completed five years from filing.
With the Chase lien still on title.
A year after the bankruptcy was done and the case closed, the debtors realized the oversight. They reopened the case, brought a motion to value the lien and served Chase.
Although Chase did not contest the motion, the judge declined to grant the unopposed motion, holding that it was untimely and he lacked jurisdiction.
Law provides no time limits
The appeals court shot down the trial judge’s reasons for refusing to avoid the lien after the plan was done.
The debtors’ intention to avoid the lien as utterly unsecured was clear on the face of the plan.
The plan was confirmed without objection from Chase.
Absent a showing that the delay between confirmation and the motion to avoid the lien six years later caused prejudice to the lien holder, there was no barrier to stripping off the lien after plan completion when the plan clearly contemplated that the lien would be stripped.
The values in play in the motion to value, though, are those that existed as of the filing of the case originally.
Make it so
The teaching of Chagolla is welcome news to my ears. I have not been alone among bankruptcy lawyers in the Bay Area feeling as if I’m caught in an ex post facto world.
The practice of Chapter 13, in the hands of a number of new judges, has become more like Chapter 11, less goal oriented, and more focused on rules, procedures, and making a record.
The only thing really wrong with that is that it adds expense to Chapter 13 that is difficult for the individual debtor to pay for.
The part that I do object to is the application of new judicial attitudes and interpretations to actions taken 5 years ago that were in conformance with the practices of the time.
In our Northern District bankruptcy courtrooms today, Chagolla would not have been confirmed until the motion to value the lien was decided. Not so when Chagolla was filed back in 2008.
And the lien strip in Chagolla clearly just fell off someone’s to-do list. No prejudice, no problem, says the BAP, in making it so.
Bravo to the BAP for looking through the procedure to the underlying law.
And hurrah for some certainty in the ever-changing world of Chapter 13.