Opinion
Case No. 13-55508 SLJ Adv. Proc. No. 20-5050
2021-08-13
IN RE Donna Marie BOWMAN, Debtor. Donna Marie Bowman, Debtor, Plaintiff, v. California Franchise Tax Board, Defendant.
Robert L. Goldstein, Law Offices of Robert L. Goldstein, San Francisco, CA, for Plaintiff. Karen Yiu, Office of the Attorney General, Oakland, CA, for Defendant.
Robert L. Goldstein, Law Offices of Robert L. Goldstein, San Francisco, CA, for Plaintiff.
Karen Yiu, Office of the Attorney General, Oakland, CA, for Defendant.
ORDER GRANTING MOTION FOR JUDGMENT ON THE PLEADINGS
Stephen L. Johnson, United States Bankruptcy Judge Plaintiff's First Amended Complaint for Damages for Violation of Discharge Order, Declaratory Relief, Injunctive Relief and Finding of Civil Contempt Against Defendant Franchise Tax Board ("Complaint") depends on a central idea – that when a creditor holds a claim that is at least partly secured, it must file a secured claim. And, if fails to do so, it can be deemed to have waived its secured claim. I can appreciate that Plaintiff is frustrated that the Franchise Tax Board ("Defendant" or "FTB") filed an unsecured claim. But I cannot find Defendant waived its security by not filing a secured claim without contradicting the law of this circuit. I will grant the Defendant's motion for judgment on the pleadings.
In summary, I conclude that the Defendant did not waive its secured claim by filing an unsecured claim in the bankruptcy case. Simply put, under relevant law, Defendant was not obliged to file a claim for its secured interest. Nothing in Plaintiff's chapter 13 plan touched on the Defendant's lien so, as a matter of settled law in this circuit, that lien rides through the bankruptcy case and discharge. No Ninth Circuit case holds otherwise and Plaintiff's contention that controlling law is not persuasive and unavailing. I will grant Plaintiff leave to amend to replead her claims in a manner that comports with the authority I discuss below.
Unless specified otherwise, all chapter and code references are to the Bankruptcy Code, 11 U.S.C. §§ 101 –1532. All "Civil Rule" references are to the Federal Rules of Civil Procedure and all "Bankruptcy Rule" references are to the Federal Rules of Bankruptcy Procedure. All "Civil L.R." and "B.L.R." references are to the applicable Civil Local Rules and Bankruptcy Local Rules.
Some of these facts are drawn from the documents on file in the main bankruptcy case, as the BK ECF references denote. The Complaint does not include them, but they must be considered to understand the factual premise of the case. I need not weigh this evidence as I am simply repeating what the documents say.
Plaintiff alleges that she filed the underlying chapter 13 case on October 17, 2003. Plaintiff listed in her schedules an unsecured debt she owed to Defendant totaling $13,000.
Defendant filed its proof of claim 4-1 in Plaintiff's case on December 30, 2013. The lien is marked "unsecured" and asserts a claim of $12,422.35. But the proof of claim contained an attachment with more information. It stated, "to the extent it is secured, is secured by all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the debtor(s) and located in this state. (citing Cal. Rev. and Tax Code § 19221 ; Cal. Gov. Code § 7170 ). Should the collateral's value be determined less than the amount of the secured claim, or should the lien be avoided in whole or in part, [Defendant] reserves the right to amend this claim to states its unsecured non-priority claim and its unsecured priority claim."
The attachment also contained this proviso:
FTB's claim related to the 2008 tax year(s) is secured by a Notice of State Tax Lien, as described on the prior page of this proof of claim. However, because the debtor's plan does not provide for the FTB's secured claim, FTB has an unsecured claim in this case. FTB has done so without waiving its lien rights. Accordingly, to the extent that FTB's secured claim related to the 2008 tax year(s) is not paid in full during this case, FTB will continue to assert its lien rights during and after this case.
(emphasis added).
Plaintiff filed an amended chapter 13 plan on November 1, 2014, BK ECF 17 ("Amended Plan"). That document provides that Plaintiff will submit $125 per month to the trustee for 14 months, and thereafter will submit $245 per month. Plaintiff proposed paying a mortgage company, Ocwen, $3,395 over the plan's life on an arrears claim. She proposed to pay the IRS $5,930. The Amended Plan proposed to pay $0 to general unsecured creditors. Plaintiff also proposed to pay a mortgage company, Ocwen, $756 per month directly (e.g., not through the trustee's office). The Amended Plan does not state that any liens are avoided, terminated, or reduced by operation of the Amended Plan. It made no provision for the Defendant's now-claimed secured claim.
I confirmed the Amended Plan on February 13, 2015, BK ECF 34. Plaintiff made the payments required by the plan. And, consistent with its terms, unsecured creditors like Defendant received no payment on their filed claims under the Amended Plan. BK ECF 50, p. 2. Plaintiff received a discharge on May 4, 2019.
II. COMPLAINT
Plaintiff filed this adversary proceeding on November 11, 2020. ECF 1. Plaintiff alleges that, sometime after receiving her discharge, Defendant maintained a lien on Plaintiff's property. She further alleges Defendant re-recorded its lien on January 22, 2020, long after the discharge was entered. ECF 1-3, p. 2. That lien states Plaintiff owes Defendant $15,052.93. Defendant has since refused to release the lien, despite Plaintiff completing her plan and receiving a discharge.
The Notice of State Tax Lien states it was originally recorded on March 1, 2020. ECF 1-3, p. 2.
Based on these facts, Plaintiff asserts four claims. Plaintiff first seeks a declaration that Defendant's "proof of claim and/or statement within its proof of claim are false and misleading and that the Defendant may not rely upon such claim and/or statement for any purpose, including attempting to rely upon its unsecured proof of claim to assert lien rights and/or collect upon its lien post-bankruptcy plan completion." ECF 1 ¶ 37.
Plaintiff's second claim seeks a declaration that a certain condition in Defendant's proof of claim – that it would have the right to continue to assert its lien rights post-plan completion to the extent Plaintiff failed to pay its secured claim – is impossible to satisfy because Defendant filed its claim as an unsecured claim, so it cannot have a secured claim that Plaintiff could pay, which means Defendant's lien rights are null and void.
Plaintiff's third claim seeks damages and a finding of civil contempt, asserting Defendant's continued enforcement of its tax lien violates the discharge injunction and res judicata effect of a completed chapter 13 plan. Finally, Plaintiff's fourth claim seeks to enjoin Defendant from the alleged conduct, not just for Plaintiff, but for all similarly situated debtors. Plaintiff states her intent to seek class certification for this claim.
It is worth flagging that the discharge injunction normally covers enforcement of debts (personal liabilities), not liens.
III. DEFENDANT'S MOTION FOR JUDGMENT ON THE PLEADINGS
Defendant filed this motion on May 18, 2021. ECF 19-1. Defendant argues that Plaintiff's first and second claims fail as a matter of law because neither plan confirmation nor a discharge affect the validity of liens, and because Plaintiff's plan did not notify Defendant that its lien would be impacted by the plan. Defendant further argues that Plaintiff's third and fourth claims fail as a matter of law because neither the discharge injunction nor the res judicata effect of plan confirmation affected Defendant's tax lien. Defendant finally argues Plaintiff's fourth claim fails to adequately allege grounds for class relief, as it only states Plaintiff intends to seek injunctive relief for similarly situated debtors.
IV. LEGAL STANDARD
"After the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings." Civil Rule 12(c) (incorporated by Bankruptcy Rule 7012(b)). Civil "Rule 12(c) is ‘functionally identical’ to [Civil] Rule 12(b)(6) and [ ] ‘the same standard of review’ applies to motions brought under either rule." Cafasso, United States ex rel. v. General Dynamics C4 Sys., Inc. , 637 F.3d 1047, 1054 n.4 (9th Cir. 2011) (citations omitted).
When evaluating a motion for judgment on the pleadings, the court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. Los Angeles , 828 F.2d 556, 561 (9th Cir. 1987). Courts generally "may not consider any material beyond the pleadings" when deciding a motion for judgment on the pleadings. Hal Roach Studios, Inc. v. Richard Feiner & Co. , 896 F.2d 1542, 1555 n.19 (9th Cir. 1989). However, the court may consider material submitted with the complaint or relied upon in it, and may also consider material subject to judicial notice. See Lee v. Los Angeles , 250 F.3d 668, 688–69 (9th Cir.2001).
To state a claim for relief and survive a motion for judgment on the pleadings, the pleading "does not need detailed factual allegations," but the "factual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Mere "labels and conclusions" or a "formulaic recitation of the elements of a cause of action will not do." Id . In other words, the "complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citations omitted). The Ninth Circuit has summarized the governing standard as follows: "[F]or a complaint to survive a motion [for judgment on the pleadings], the nonconclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Serv. , 572 F.3d 962, 969 (9th Cir. 2009).
When a complaint is dismissed by motion, "[l]eave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. When amendment would be futile, however, dismissal may be ordered with prejudice." Romero v. Countrywide Bank, N.A. , 740 F. Supp. 2d 1129, 1135 (N.D. Cal. 2010) (citations omitted).
V. DISCUSSION
A. Chapter 13 Law and Practice
Before addressing Plaintiff's many arguments, I find it helpful to review how chapter 13 works and, in particular, the required treatment for secured and unsecured claims, both of which existed Plaintiff's situation.
1. Tax Liens Arise Under State Law
This dispute emanates from Defendant's claimed tax lien. To understand Defendant's right to secured status, we examine California law. The law provides: "If any taxpayer or person fails to pay any liability imposed under Part 10" of the California Revenue and Taxation Code – the Part dealing with personal income tax, see Cal. Rev and Tax. Code § 17041(a)(1) – "at the time that it becomes due and payable, the amount thereof, (including any interest, additional amount, addition to tax, or penalty, together with any costs that may accrue in addition thereto) shall thereupon be a perfected and enforceable state tax lien." Cal. Rev. and Tax. Code § 19221(a). The lien covers a broad range of property: "A state tax lien attaches to all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the taxpayer and located in this state." Cal. Gov. Code § 7170(a). The State is authorized by law to record this interest in the following manner: "With respect to real property, at any time after creation of a state tax lien, the agency may record in the office of the county recorder of the county in which the real property is located a notice of state tax lien." Cal. Gov. Code § 7171(a). "With respect to personal property, at any time after creation of a state tax lien, the agency may file a notice of state tax lien with the Secretary of State ...." Id. (b). State tax liens are not valid against the rights, titles and interests of persons who acquire or perfect such interests in real or personal property otherwise subject to the lien before Defendant records its notice of such lien, though. See Cal. Gov. Code § 717(b), (c).
Obviously, the State's lien is not specific to particular property as a UCC-1 filing might be for personal property or a deed of trust might be for realty. The lien is a blanket lien for the simple reason that the State will not necessarily know the nature and extent of a taxpayer's property as a conventional creditor like a commercial lender or bank might.
I note that Plaintiff has not contended that Defendant's lien is improper or not justified under California law. The argument here is that the lien is not enforceable given the way the chapter 13 plan operated.
2. Unsecured and Secured Claims in Chapter 13 Plans
In bankruptcy cases, creditors are those parties holding "claims," a term that means parties with a right to payment. § 101(5). Outside bankruptcy creditors who have access to collateral by virtue of a security agreement are referred to as secured creditors. But in bankruptcy, secured claims are a subset of claims against the estate. Whether a creditor holds a "secured claim" depends entirely on the application of § 506(a), rather the simple existence of a mortgage or security interest. See, e.g., Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330–31, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). " ‘Secured Claim’ is a term of art within the Bankruptcy Code and means something different than it does for a creditor to have a security interest or lien outside of bankruptcy." In re Okosisi , 451 B.R. 90, 93 (Bankr. D. Nev. 2011). The treatment of secured and unsecured claims in chapter 13 cases is different. Unsecured claims are paid only what the Code requires, rather than a specific amount. In chapter 13, the minimum that unsecured claims are paid is set by § 1325(a)(4). That section says unsecured claimholders must be paid at least as much as they would receive if the case were liquidated under chapter 7. Whether creditors will receive more than that is controlled by a different section, § 1325(b)(2)(B). That section says debtors must pay their projected disposable income to creditors. § 1325(b)(1)(B). When a chapter 13 plan addresses payments to unsecured claims, the plan is said to "provide for" that claim.
Secured creditors are treated differently. A chapter 13 debtor has the ability to modify secured claims under the right circumstances. In a typical chapter 13 case, a debtor may ask the court to make a determination under § 506(a) as to whether a creditor's claim is secured or unsecured. This is done to bifurcate the creditor's claim into secured and unsecured portions. Future liability for the unsecured claim can be discharged under a completed plan. In re Okosisi , 451 B.R. 90, 95 (Bankr. D. Nev. 2011).
B. Defendant was not Required by Statute or Rule to File a Secured Claim
Plaintiff's argument centers on her contention that Defendant was required by law to file a proof of claim and to assert a security interest in that claim. Plaintiff's contention is incorrect insofar as the statutory law and the Bankruptcy Rules are concerned.
A proof of claim is provided for in § 501, which says that a "creditor or indenture trustee may file a proof of claim." (emphasis added). Filing is not a requirement; it is simply authorized. Under § 502(a), any claim that is timely filed is presumptively allowed or, as the statute says, "deemed allowed."
These statutory provisions have enabling rules, specifically, Rule 3001, which provides, "A proof of claim is a written statement setting forth a creditor's claim." Rule 3001(a). When a claim is filed, and it reflects a security interest, proof of that security interest also must be filed. Bankruptcy Rule 3001(d). Critical to Plaintiff's argument here is Rule 3002(a). It provides that "a secured creditor, unsecured creditor, or equity security holder must file a proof of claim, or interest, for the claim or interest to be allowed."
It is worth remembering that the rules also address secured claims that are not filed : Rule 3002(a) provides that the secured interest of a lender is not terminated solely by failing to file a claim: "A lien that secures a claim against the debtor is not void due only to the failure of any entity to file a proof of claim." Id .
Defendant's proof of claim precisely followed the statutes and rules. The proof of claim states that Defendant's claim is "secured by a Notice of Tax Lien." It further states that Plaintiff's plan makes no provision for Defendant's secured claim. In filing its unsecured claim, Defendant disclaims any waiver of its secured claim, and expressly asserts that it will continue to press its lien rights post-bankruptcy. Nothing in this contradicts bankruptcy law.
C. Section 506 Did not Serve to Terminate Defendant's Lien
Plaintiff contends that under § 506, a secured creditor who fails to protect its lien in the chapter 13 case lose its security. Specifically, Plaintiff argues:
Under § 506(a), then, what is required in order for a creditor with a lien to have "an interest in the estate's interest," before the property reverts back to the debtor upon confirmation or completion of the plan subject only to those claims made against the estate's interest, is to file a claim and assert a secured "value" in the estate's interest. Making such assertion is done by completing the "secured claim" portion of the claim form.
That is not correct for two reasons.
First, Plaintiff never invoked § 506(a)’s claims determination process. That section states:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.
But § 506 is not a self-executing statute. To invoke its application, a party has to request relief and seek a court determination. Defendant contends it had rights as a secured. Plaintiff never invoked her right under § 506(a) to address Defendant's claim of a lien, so that section does not apply.
Second, it is understood that a secured creditor has multiple options in relation to a bankruptcy case, including the right not to assert its claim. U.S. Nat'l Bank in Johnstown v. Chase Nat'l Bank of N.Y.C., 331 U.S. 28, 67 S.Ct. 1041, 91 L.Ed. 1320 (1947).
Under these provisions, there are several avenues of action open to a secured creditor of a bankrupt. See 3 Collier on Bankruptcy (14th Ed.) pp. 149—157, 255—259. (1) He may disregard the bankruptcy proceeding, decline to file a claim and rely sole upon his security if that security is properly and solely in his possession. (2) He must file a secured claim, however, if the security is within the jurisdiction of the bankruptcy court and if he wishes to retain his secured status, inasmuch as that court has exclusive jurisdiction over the liquidation of the security. (3) He may surrender or waive his security and prove his entire claim as an unsecured one. (4) He may avail himself of his security and share in the general assets as to the unsecured balance.
Id. at 33-34, 67 S.Ct. 1041. This case dates from 1947 but continues to have substantial validity. See In re Bailey , 664 F.3d 1026, 1029 (6th Cir. 2011). The only penalty attached to not filing a claim is that the creditor takes no payments from the plan. But its lien is unaffected. In re Jimenez , 492 B.R. 373, 376 (Bkrtcy.S.D.N.Y. 2013) ("In order to be entitled to plan distributions, a secured creditor must obtain an allowed claim. The claim allowance process does not affect the validity of any purported lien held by [the creditor]; allowance only affects [the creditor's] entitlement to distributions from the chapter 13 plan.")
Indeed, § 506(d) is the statutory embodiment of this principal. It states that to the extent a lien secures a claim that is not an allowed secured claim, that lien is void, unless "such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title." The legislative history of the section explains that the purpose of the § 506(d) is to permit "liens to pass through the bankruptcy case unaffected." H.R.Rep. No. 595, 95th Cong., 1st Sess. 357 (1977). Defendant did not submit a secured claim or a request a determination that its claim be deemed a secured claim but this did not serve to terminate the lien it now claims, at least under § 506(d).
D. Case Law does not Require that Defendant's Lien be Avoided
1. Ninth Circuit Precedents
Plaintiff's contentions in this case bear substantial similarities to the arguments in a Ninth Circuit case, In re Brawders , 503 F.3d 856, 867–68 (9th Cir. 2007). Plaintiff repeatedly seeks to distinguish Brawders and other Ninth Circuit precedent because the creditors in those cases either never filed a claim, or designated their claim as secured, unlike Defendant. But Plaintiff fails to explain why I am not bound by Brawders ’ explicit statement that liens pass through the bankruptcy unaffected even where the creditor files an unsecured claim when they meant to file a secured claim.
In Brawders , debtors filed a chapter 13 case and accompanying plan. Part II of that plan provided that provided for Ventura County in class II. The plan stated that the debtors were in default on their tax obligation to the tune of $9,350 and proposed to pay Ventura County $11,109.21, with the extra accounting for interest. Specifically, it provided:
2. CLASS TWO -- Claims secured by Real Property that is the debtor's PRINCIPAL RESIDENCE. The value as of the effective date of the Plan, of the series of payments to be distributed under the Plan on account of each secured claim provided for by the Plan, is equal to the allowed amount of such claim. ... Each creditor shall retain its lien."
In 1997, after debtors’ plan was confirmed but before their real property had revested, Ventura County issued a Notice of Impending Tax Collector's Power to Sell, a version of a tax lien notice, indicating that debtors owed more than $30,000 in taxes, secured by their residence. It sent that notice to debtor's home mortgage lender and the lender promptly paid the amount due and demanded reimbursement for its payment. This, among other things, led to debtors filing a second bankruptcy case. In that second bankruptcy case, debtors filed a lawsuit against Ventura County contending that it violated the automatic stay by issuing the tax lien notice and, apparently, that under the terms of their confirmed plan in the first case, Ventura County had no lien on debtors’ residence. The bankruptcy court found for debtors on both claims. The Ninth Circuit, though, reversed the lien decision.
To reach that conclusion, the Ninth Circuit acknowledged the time-honored rule that liens survive bankruptcy cases: "Absent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected, regardless whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed." In re Brawders , 503 F.3d 856, 867–68 (9th Cir. 2007) (citing In re Bisch , 159 B.R. 546, 550 (B.A.P. 9th Cir. 1993) ). Adhering to that rule made sense in Brawders because, as the court observed, the debtors’ plan did not purport to limit or disallow any part of Ventura County's claim. To the contrary, the plan explicitly said that liens were preserved.
2. Out of Circuit Cases -- Not Binding and Not Persuasive
Plaintiff instead relies on a phalanx of out-of-circuit cases to argue Defendant had a duty to file a secured claim if it claimed a secured interest. Assuming they are correctly decided under existing law, none of them are controlling. But careful examination shows they are necessarily incorrect under existing law.
The first case Plaintiff cites is In re O'Gara Coal Company , 12 F.2d 426, 429 (7th Cir. 1926). In O'Gara , the Seventh Circuit held that "that the consequence of filing a secured claim as an unsecured debt is the waiver of the security." Id. I am not bound by this decision. It is also in conflict with Brawders , which I am bound by. I also note that O'Gara was decided under § 57 of the Bankruptcy Act, a section that is no longer effective. Its continuing relevance is doubtful.
I am not persuaded by Plaintiff's citation to Rumsey Manufacturing Corporation v. United States , 206 F.2d 565 (2d Cir. 1953), which referenced O'Gara Coal , because Plaintiff has not analyzed the case properly. Plaintiff misstates Rumsey ’s reasoning. As stated in Rumsey : "The principal question presented by both appeals is whether the United States by originally filing its claim as unsecured had estopped itself from claiming" a judgment as security for its claim. 206 F.2d at 567. That claim contained the following provision: "That the filing of this claim is not to be construed as a waiver of the right of the United States, or of any agency or instrumentality thereof, to follow any of the debtor's property or the proceeds thereof, into the hands of whomsoever the same may be, including the receiver or trustee in bankruptcy, o[r] as a waiver of any other claim or right of action or set-off or any other right whatsoever that the United States or any agency or instrumentality thereof has or may have against the debtor, the receiver, the trustee, or any other person." Id. at 567 n.6. The United States amended the claim three times, but only the third mentioned the assignment of the judgment as securing its claim.
Plaintiff first says that the holding in O'Gara is confirmed by Rumsey . This is not accurate, as Rumsey said explicitly that it had previously recognized O'Gara as exceptional. The court went further, stating O'Gara was distinguishable; more specifically, that "no similar factual situation is presented here." Rumsey , 206 F.2d at 568.
Plaintiff then asserts that Rumsey held that the United States’ original filing of its claim as unsecured operated as a waiver or surrender of its collateral, which was only cured by its amended claim. That is not an accurate summary of the case. Rumsey says this:
That the United States did not actually intend the filing of its claim as unsecured to operate as a waiver or surrender of its collateral security is made apparent in paragraph 10 of the proof of claim set out in note 6, supra. But assuming arguendo that the attempted reservation in paragraph 10 of ‘any other right whatsoever’ would not be effective to preclude persons interested in the bankrupt estate from acting in reliance on the denial in paragraph 6 that the United States held any security, we pass to a consideration of the question whether the United States should be estopped to assert its security.
Id. at 568. That is, Rumsey found it apparent from the face of the United States’ claim that the United States did not intend its decision to file the claim as unsecured to waive or surrender the security it in fact had on the claim. Rumsey chose to assume—for the sake of argument—that the reservation language in the claim was insufficient so the court could answer a different question, whether estoppel otherwise barred the United States’ amended claims.
The first appellate case in this district that Plaintiff cites is In re Boukatch , 533 B.R. 292 (B.A.P. 9th Cir. 2015). In that case, the debtors obtained a chapter 7 discharge, then one year later filed a Chapter 13, which included a plan that provided for stripping off a junior lien on their home that was entirely underwater. Boukatch held as follows: "Because the no-discharge case is closed without discharge, rather than dismissed, the code sections that reverse any lien avoidance actions contained within a chapter 13 plan upon conversion or dismissal are not implicated, and, thus, do not act to prevent the permanence of the lien avoidance." The effect of this holding was that a debtor could file a chapter 7, obtain a discharge to relieve themselves of personal liability for secured debt, then file a chapter 13 and move to strip underwater liens through a § 506(a) motion.
The problem for Plaintiff is that, unlike the debtors in Boukatch , she did not take any action against Defendant's lien. Unlike the Boukatch debtors, who made clear in their plan they believed the junior lienholder's claim was entirely unsecured, and that they intended to strip said lien under § 506(a), Plaintiff's plan does not mention Defendant at all. BK ECF 17. Nothing in Boukatch conflicts with Brawder ’s statement that, "[a]bsent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected." 503 F.3d at 867. Plaintiff, the representative of the bankruptcy estate, took no action against Defendant's lien during her bankruptcy case, which she admits was a valid lien at the time of filing. ECF 27, p. 8. Accordingly, it rode through the bankruptcy.
While not essential to my decision, I note that Plaintiff did provide for stripping a different lien in her plan, showing she was aware of the proper procedure for doing so. BK ECF 17 at 2.
This conclusion is confirmed by In re Shook , 278 B.R. 815 (B.A.P. 9th Cir. 2002), which Plaintiff cites. In Shook , the debtors listed a judgment creditor as an unsecured creditor, but that creditor later timely filed a proof of claim asserting its claim was secured. The debtors proposed a plan, which was confirmed, that made no acknowledgment of the judgment creditor's claim, secured or otherwise. Four and a half years later, the debtors objected to the judgment creditor's proof of claim, arguing it was unsecured because the debtors’ property securing the claim was over-encumbered. Id. at 818–19. The bankruptcy court overruled the debtors’ objection on grounds of laches, and the BAP affirmed.
The BAP began "with the longstanding principle that a secured creditor may bypass a debtor's bankruptcy proceedings and enforce its lien in the usual way, because unchallenged liens pass through bankruptcy unaffected." Id. at 821. (emphasis added). The BAP then rejected the debtors’ argument "that the plan provisions, together with their bankruptcy schedules, determined [the judgment creditor's] secured claim to be unsecured and thereby stripped off its lien," because the judgment creditor's claim "was ‘deemed allowed’ and the plan did not ‘provide for’ CBIC's secured claim and lien." Id. at 823 (citing Dewsnup v. Timm , 502 U.S. 410, 415, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ). This was because it was procedurally improper for the debtors to list the claim as unsecured in their schedules. Next, the BAP held that "a plan can effectively determine value and/or avoid a lien[, but] only if the creditor receives clear notice that the plan will do so. A plan that is silent about the fate of a secured claim provides no notice of what will happen to the secured claim and therefore cannot effectively avoid a lien or determine its value." Shook , 278 B.R. at 824. A plan that fails to provide such notice as to a secured claim does not "provide for" such claim under § 1327. Shook , 278 B.R. at 823–24. The BAP went further: "When a plan is ambiguous, the Ninth Circuit's approach puts the risk of challenging the claim upon the debtor-drafter. Thus, it was not incumbent upon [the judgment debtor] to object to the chapter 13 plan when the plan did not address, nor in any way attempt to value, its secured claim." Id. at 826 (cleaned up).
So under Shook , a plan cannot avoid a lien unless the creditor receives clear notice that the plan intends to do so. Plaintiff's plan does not mention Defendant's claim at any point. And to the extent Plaintiff argues this is because she relied on the proof of claim's statement that Defendant's claim was unsecured, I conclude this argument fails because Plaintiff admits Defendant had a valid, recorded tax lien prior to the bankruptcy case, which means Plaintiff had at least record notice of the lien securing Defendant's claim.
E. § 1327 Does not Serve to Eliminate Defendant's Lien
Plaintiff's invocation of claim preclusion fails for the reasons identified above. Plaintiff is correct that, under § 1327(a), "The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." But as I have said before, the Plan here made no provision whatever for Defendant's tax lien.
To apply claim preclusion a court must decide: "(1) whether the two suits arise out of the same transactional nucleus of facts; (2) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (3) whether the two suits involve infringement of the same right; and (4) whether substantially the same evidence is presented in the two actions." Mpoyo v. Litton Electro-Optical Sys. , 430 F.3d 985, 987 (9th Cir. 2005). The problem here is that in confirming Plaintiff's chapter 13 plan, I did not adjudicate the status of Defendant's secured claim. The plan is in fact entirely silent on that point. To briefly restate what I said above, Defendant filed a proof of claim, which was deemed allowed because Plaintiff never objected to it. And because Defendant already had a valid tax lien against Plaintiff's property, which Plaintiff did not seek to avoid, modify or change in her plan, that lien passed through the bankruptcy case without alteration.
Plaintiff then turns to § 1327(c), which says: "Except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan." Plaintiff argues this means that claims or interests need not be provided for under the plan, but only creditors. Plaintiff is again wrong. "The phrase provided for in the plan, means that a plan makes a provision for, deals with, or even refers to a claim." Shook , 278 B.R. at 823 (quoting Rake v. Wade , 508 U.S. 464, 474, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) ). "Although a secured creditor is bound by the plan, this does not mean that a debtor can void or otherwise extinguish a creditor's lien without addressing the lien in the plan." Shook , 278 B.R. at 824 (emphasis added).
This point was addressed by the Ninth Circuit in Brawders . In chapter 13 plans, the claim that is being paid is actually the amount that the plan is providing payment for. "[W]hen the Plan states that its distributions to class two (the distributions on the "amount in default" will be equal in value to the allowed amount of the creditor's "claim," it is using common chapter 13 parlance to refer to the arrearage not the total amount of the debt." In re Brawders, 503 F.3d at 868. Here, Plaintiff's plan at least implicitly "provided for" Defendant's "claim" – that is, Plaintiff's personal liability for the tax debt secured by Defendant's tax lien. But because the plan did not address Defendant's lien in any way, the plan did not "provide for" the lien, so by its terms § 1327(c) did not free Plaintiff's property from the lien on confirmation.
It is worth noting that Plaintiff also argues that Brawders is wrong as a matter of law because of the Supreme Court's decision in Johnson v. Home State Bank , 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). The Johnson Court held that a mortgage lien remains a claim for purposes of § 101(5) that can be scheduled in a chapter 13 case, even after the personal liability secured by the property was discharged in a chapter 7 case. Id. at 80, 111 S.Ct. 2150. Plaintiff then points to Brawders ’ distinction between "claim" and "interest" as used in § 1327(c), and says it is erroneous in light of Johnson ’s interpretation of § 101(5). The bankruptcy court in Work already explained why Plaintiff is mistaken. The definition of claim used in § 101(5) – both a right to payment and a right to an equitable remedy – includes rights against both persons and property. But § 1327(c) speaks of both claims and interests. To give both terms independent meaning within that subsection, the Work court found that a "claim" in § 1327(c) meant something less than a claim under § 101(5) ; otherwise, the § 101(5) definition would swallow both, as it includes rights to both legal and equitable relief. The Work court's solution was to make a "claim" under § 1327(c) mean a debt that a debtor is personally liable for, and an "interest" mean a right of a creditor to property of the debtor. In re Work , 58 B.R. 868, 870–71 (Bkrtcy.D.Or. 1986). What Plaintiff construes as a failure to respect the Johnson court's rule is in fact an interpretation of a completely different provision.
The Work court's interpretation of "claim" and "interest" in § 1327(c) was adopted by the BAP in Brawders , which was in turn adopted in full by the Ninth Circuit. 503 F.3d at 859, 872. So even if Plaintiff is correct that Brawders is wrong, a conclusion I do not support, I am still bound by it. The Ninth Circuit "may overrule prior circuit authority without taking the case en banc when an intervening Supreme Court decision undermines an existing precedent of the Ninth Circuit, and both cases are closely on point." Miller v. Gammie , 335 F.3d 889, 899 (9th Cir. 2003) (citation and internal quotation marks omitted). I cannot. Having explained why Plaintiff's reasoning is contradicted by binding authority in this circuit, I turn to Plaintiff's claims individually, and briefly discuss why the above analysis shows they must be dismissed.
VI. DISMISSAL OF CLAIMS
A. Plaintiff's First Claim Must be Dismissed
Plaintiff's first claim asserts that a secured creditor must state in their proof of claim that their claim is secured, otherwise the proof of claim is false and misleading, meaning Defendant is not entitled to rely on such proof of claim to assert its lien rights after Plaintiff has completed her plan and received a discharge. But as discussed above, § 506 determines the extent to which an allowed claim is secured, not the proof of claim. As Brawders put it: "Absent some action by the representative of the bankruptcy estate, liens ordinarily pass through bankruptcy unaffected, regardless whether the creditor holding that lien ignores the bankruptcy case, or files an unsecured claim when it meant to file a secured claim, or files an untimely claim after the bar date has passed." 503 F.3d at 867–68. Plaintiff took no action against the lien, either by motion or in her plan, so Defendant's lien passed through the bankruptcy case and remains valid. This claim must be dismissed.
B. Plaintiff's Second Claim Must be Dismissed
Plaintiff's second claim asserts that because Defendant only filed a proof of claim asserting an unsecured claim in her case, Defendant's secured claim never existed, so Plaintiff could not have paid Defendant's secured claim, and its lien rights must accordingly be voided. My analysis of the first claim applies here as well. The only thing to add is that Plaintiff again misunderstands the difference between a claim under § 101(5) and a claim under § 1327(c). A claim under § 1327(c) refers only to a debt the debtor is personally liable for, while § 101(5) ’s definition of claim includes both that and equitable claims such as rights solely to a debtor's property. So when Defendant's proof of claim discussed its "secured claim," it meant the § 101(5) definition, which includes both Plaintiff's personal liability for the tax debt that was discharged when she completed the plan, as well as the Defendant's lien, which passed through Plaintiff's bankruptcy, as I discussed above. Nothing prevented Plaintiff from paying Defendant through the plan the value of its lien, so Plaintiff's second claim fails as a matter of law and must be dismissed.
C. Plaintiff's Third Claim Must be Dismissed
Plaintiff's third claim asserts that Defendant violated both the discharge injunction and the res judicata effect of plan confirmation under § 1327(a) by continuing to assert its lien rights after Plaintiff confirmed her plan, completed it, and obtained a discharge. Starting with the discharge, in chapter 13 cases § 1328 provides that, upon plan completion, "the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under [§] 502," with exceptions not applicable here. (emphasis added). But "a bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam —while leaving intact another—namely, an action against the debtor in rem. " Johnson , 501 U.S. at 84, 111 S.Ct. 2150 ; see § 524(a)(2) ("A discharge" under the Code "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]"). Plaintiff's chapter 13 discharge did not extinguish Defendant's lien rights, so its assertion of those rights post-discharge did not violate the discharge injunction.
The res judicata effect of plan confirmation similarly failed to bar Defendant from enforcing its lien rights. The provisions of the plan bound Defendant, but the only provision that could be construed to even apply to Defendant is the plan's intent to pay nothing to unsecured creditors. Even if true, that result had no effect on Defendant's lien. As discussed above, § 1327(c) did not strip Defendant's tax lien from Plaintiff's property because the plan did not "provide for" Defendant's "interest" – that is, it's lien. This claim also fails as a matter of law and must be dismissed.
D. Plaintiff's Fourth Claim Must be Dismissed
Finally, Plaintiff seeks injunctive relief for both herself and all similarly situated debtors who have been affected by Defendant's alleged practice of filing proofs of claim that list its tax claims as unsecured, when in fact such claims are secured by tax liens. To prevail on a request for an injunction, the moving party must show "that an injunction would be in the public interest, that without an injunction irreparable harm is likely, that the balance of equities tips in its favor, and that it is likely to succeed on the merits." DISH Network Corp. v. FCC , 653 F.3d 771, 776 (9th Cir. 2011) (citing Winter v. NRDC , 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008) ). The Ninth Circuit applies a sliding scale approach where, for instance, "a stronger showing of irreparable harm to plaintiff might offset a lesser showing of likelihood of success on the merits." Alliance for the Wild Rockies v. Cottrell , 632 F.3d 1127, 1131 (9th Cir. 2011). What the above analysis shows is that, under binding Ninth Circuit precedent, Plaintiff cannot succeed on the merits because such precedent already rejects Plaintiff's underlying legal theory. Since the merits of Plaintiff's injunction claim are so fatally flawed, I conclude it is unnecessary to consider the other factors and dismiss this claim as well. Given this disposition, I also find it unnecessary to decide whether Defendant adequately pleads a class claim, as the claim cannot survive individually.
VII. LEAVE TO AMEND
Ordinarily, cases are dismissed with leave to amend. Under the applicable law, it might be futile to grant Plaintiff leave to amend might. Even under Plaintiff's version events, the only controlling fact is that Defendant chose to file a claim and describe it as unsecured. I have already explained why this fact does not add anything to Plaintiff's legal theory. And Plaintiff cannot allege facts showing she in fact did challenge Defendant's claim or lien, because I can take judicial notice of the docket in the bankruptcy case and confirm this did not happen. But because this decision clarifies the standards and, I hope, Plaintiff's analysis of the case, I conclude that Plaintiff should have a chance to reformulate and refile the complaint, if she chooses to do.
VIII. CONCLUSION
Defendant's tax lien rode through Plaintiff's bankruptcy case, notwithstanding the proof of claim stating Defendant's claim was unsecured. As Plaintiff's claims all depend on this not being the case, it is hereby ordered that Defendant's motion for judgment on the pleadings is granted in full.
Plaintiff may file an amended complaint by September 3, 2021. If Plaintiff does not file an amended complaint by that date, I will enter a final judgment and the clerk will be instructed to close the file.
IT IS SO ORDERED.