In re: Michael Paul Free Hak Suk Free ( 2015 )

  •                                                              FILED
                                                                  DEC 17 2015
     1                          ORDERED PUBLISHED
     2                                                        SUSAN M. SPRAUL, CLERK
                                                                U.S. BKCY. APP. PANEL
                                                                OF THE NINTH CIRCUIT
     4                            OF THE NINTH CIRCUIT
     5   In re:                        )       BAP No.      WW-14-1395-JuKiF
     6   MICHAEL PAUL FREE and HAK SUK )       Bk. No.      3:14-bk-41876-PBS
         FREE,                         )
     7                                 )
                        Debtors.       )
     8   ______________________________)
         FREE,                         )
    10                                 )
                        Appellants,    )
    11                                 )
         v.                            )       O P I N I O N
    12                                 )
         MICHAEL G. MALAIER, Chapter 13)
    13   Trustee,*                     )
    14                  Appellee.      )
                       Argued and Submitted on September 25, 2015
    16                           at Seattle, Washington
    17                          Filed - December 17, 2015
    18               Appeal from the United States Bankruptcy Court
                         for the Western District of Washington
                  Honorable Paul B. Snyder, Bankruptcy Judge, Presiding
    20                          _________________________
    21   Appearances:      Dorothy A. Bartholomew argued for appellants
                           Michael Paul Free and Hak Suk Free; Samuel J. Dart
    22                     argued for appellee K. Michael Fitzgerald.
         Before:     JURY, KIRSCHER, and FARIS, Bankruptcy Judges.
                On May 15, 2015, the BAP Clerk’s Office entered an order
         substituting K. Michael Fitzgerald as the successor chapter 13
    27   trustee in place of the former chapter 13 trustee, David M. Howe.
         After the appeal was heard and submitted, Michael G. Malaier was
    28   appointed the successor chapter 13 trustee to Fitzgerald.
     1   JURY, Bankruptcy Judge:
     3        Appellants Michael Paul Free and Hak Suk Free (Debtors)
     4   filed a chapter 71 petition and received their § 727 discharge.
     5   The discharge released them from personal liability on two
     6   wholly-unsecured junior liens that encumbered their real
     7   property.   Before their chapter 7 case was closed, Debtors filed
     8   this chapter 13 case intending to strip off the two junior liens
     9   from their real property through their chapter 13 plan.     The
    10   chapter 13 trustee, David M. Howe (Trustee), moved to dismiss
    11   their case, arguing that Debtors were ineligible for chapter 13
    12   relief because their unsecured debt, which included the two
    13   wholly-unsecured junior liens, exceeded the statutory limit for
    14   eligibility under § 109(e).   The bankruptcy court agreed and
    15   entered an order dismissing Debtors’ case.     This appeal followed.
    16   For the reasons set forth below, we REVERSE and REMAND.
    17                                 I.    FACTS
    18        The facts are undisputed.     Debtors filed a chapter 7
    19   bankruptcy petition on December 23, 2013.     Debtors scheduled
    20   their real property located on Taylor Street in Milton,
    21   Washington as having a current value of $425,000.     Such real
    22   property is encumbered by three liens: first deed of trust in the
    23   amount of $438,621.93 held by Deutsche Bank Trust Company
    24   Americas, as Trustee for Residential Accredit Loans, Inc.,
    26        1
                Unless otherwise indicated, all chapter and section
    27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 and
         “Rule” references are to the Federal Rules of Bankruptcy
    28   Procedure.
     1   Mortgage Asset-backed Pass-through Certificates, Series 2003-QS9
     2   (Deutsche); second deed of trust in the amount of $348,481.01
     3   held by Timberland Savings Bank (Timberland); and third deed of
     4   trust in the amount of $186,705.68 held by Boeing Employees
     5   Credit Union (BECU).   Debtors received their § 727 discharge on
     6   April 1, 2014.
     7        Before their chapter 7 case was closed, Debtors filed this
     8   joint chapter 13 case on April 3, 2014, intending to strip off
     9   the wholly-unsecured junior liens of Timberland and BECU
    10   (collectively, Junior Lienholders) through their chapter 13 plan.
    11   In Schedule A, Debtors listed the value of their real property on
    12   Taylor Street as $425,000 encumbered with secured claims in the
    13   amount of $990,069.03.   In Schedule D, Debtors listed creditors
    14   holding secured claims in the amount of $1,018,280.54.   In
    15   Schedule E, Debtors listed $3,204.76 in unsecured business taxes
    16   and in Schedule F listed a student loan creditor holding an
    17   unsecured claim in the amount of $4,000.   BECU filed a proof of
    18   claim asserting a secured claim in the amount of $180,187.80.
    19        Trustee moved to dismiss Debtors’ case, arguing that the
    20   unsecured debt, including the wholly-unsecured Junior
    21   Lienholders’ debt totaling $535,186.69, exceeded the unsecured
    22   debt limit of $383,175 for chapter 13 eligibility under § 109(e).
    23   Relying on In re Shenas, 
    2011 WL 3236182
     (Bankr. N.D. Cal.
    24   July 28, 2011), Debtors asserted that the unsecured junior liens
    25   should not be included in the unsecured debt calculation of
    26   § 109(e) when the claims were unenforceable against Debtors due
    27   to their chapter 7 discharge.
    28        At the July 31, 2014 hearing on the matter, the bankruptcy
     1   court ruled that Debtors were ineligible to be debtors under
     2   chapter 13 since their unsecured debts exceeded the statutory
     3   limit.    The court invited Debtors to submit additional authority
     4   supporting their position.    The court continued the matter to
     5   August 7, 2014, for the purpose of entering a dismissal order.
     6   On August 6, 2014, Debtors filed a motion for reconsideration of
     7   the July 31, 2014 oral ruling.    Because the bankruptcy court had
     8   not yet entered an order on Trustee’s motion to dismiss, the
     9   court construed Debtors’ motion for reconsideration as a
    10   supplemental memorandum in opposition to Trustee’s motion.
    11        On August 14, 2014, the bankruptcy court entered the order
    12   dismissing Debtors’ case.    The court noted that there were cases
    13   within the Ninth Circuit that addressed components of the issue
    14   before it, but acknowledged that there was no controlling case
    15   directly on point.    Relying on the holdings in Johnson v. Home
    16   State Bank, 
    501 U.S. 78
     (1991), and Quintana v. Commissioner
    17   (In re Quintana) (Quintana II), 
    915 F.2d 513
     (9th Cir. 1990),
    18   aff’g (Quintana I), 
    107 B.R. 234
     (9th Cir. BAP 1989), and the
    19   analysis set forth in Davis v. Bank of America (In re Davis)
    20   (Davis I), 
    2012 WL 3205431
     (9th Cir. BAP Aug. 3, 2012)2
    21   (Quintana I, Quintana II, and Davis I were all chapter 12 cases),
    22   and In re DiClemente, 
    2012 WL 3314840
     (D.N.J. Aug. 13, 2012), the
    23   bankruptcy court included the Junior Lienholders’ unsecured debt
    24   in its eligibility calculation despite Debtors’ chapter 7
    25   discharge.    Therefore, because Debtors were not eligible for
    26   chapter 13 due to their unsecured debt exceeding the statutory
    28        2
                  Aff’d (Davis II), 
    778 F.3d 809
     (9th Cir. 2015).
     1   limit under § 109(e), the bankruptcy court granted Trustee’s
     2   motion to dismiss their case.         Debtors filed a notice of appeal
     3   from the order on the same day.
     4        Debtors subsequently filed a motion to vacate the order of
     5   dismissal and impose a stay pending appeal.              The bankruptcy court
     6   denied their motion.
     7                                II.    JURISDICTION
     8        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
     9   §§ 1334 and 157(b)(2)(A) and (O).               We have jurisdiction under 28
    10   U.S.C. § 158.
    11                                      III.    ISSUE
    12        Did the bankruptcy court err when it counted the wholly-
    13   unsecured Junior Lienholders’ debt as unsecured debt for purposes
    14   of determining chapter 13 eligibility under § 109(e)?
    15                          IV.     STANDARD OF REVIEW
    16        Eligibility determinations under § 109 involve issues of
    17   statutory construction and conclusions of law, including
    18   interpretation of Bankruptcy Code provisions, which we review de
    19   novo.   Smith v. Rojas (In re Smith), 
    435 B.R. 637
    , 642 (9th Cir.
    20   BAP 2010).
    21                                 V.     DISCUSSION
    22   A.   The bankruptcy court erred in relying upon inapplicable and
              distinguishable case law.
    24        Section 109(e) limits eligibility for chapter 13 relief to
    25   those individuals with regular income who owe on the date of the
    26   filing of the petition, noncontingent, liquidated, unsecured
    27   debts of less than $383,175 and noncontingent, liquidated,
     1   secured debts of less than $1,149,525.3    Eligibility debt limits
     2   are strictly construed.    Soderlund v. Cohen (In re Soderlund),
    236 B.R. 271
    , 274 (9th Cir. BAP 1999).
     4        On appeal, Debtors ask the Panel to hold that wholly-
     5   unsecured liens are not “unsecured debts” for eligibility
     6   purposes in a so-called chapter 20 case (a chapter 13 case filed
     7   after the debtor receives a chapter 7 discharge).    Debtors assert
     8   that they do not “owe” Timberland or BECU unsecured “debt” for
     9   the purpose of establishing chapter 13 eligibility under § 109(e)
    10   because any unsecured debts Debtors owed to their creditors were
    11   discharged.
    12        We begin with the relevant words of § 109(e), “unsecured
    13   debts.”    “The term ‘debt’ means liability on a claim.”
    14   § 101(12).    “The term ‘claim’ means . . . right to payment
    15   . . . .”    § 101(5)(A).   Thus, there is no “unsecured debt” unless
    16   the creditor has a “right to payment” on an unsecured basis.
    17        Next, we turn to the relatively simple analysis of what
    18   occurred in Debtors’ prior chapter 7 case.    Debtors discharged
    19   their personal liability to Timberland and BECU in that case when
    20   they received their § 727 discharge.    Under applicable law,
    21   § 524(a)(2), the discharge “operates as an injunction against the
    22   commencement or continuation of an action, the employment of
    23   process, or an act, to collect, recover or offset any such debt
    24   as a personal liability of the debtor.”    The discharge injunction
    25   “provides for a broad injunction against not only legal
                Under § 104, these monetary limits are periodically
    28   adjusted for inflation.
     1   proceedings, but also any other acts to collect a discharged debt
     2   as a personal liability of the debtor . . . .    It extends to all
     3   forms of collection activity . . . .”    4 Collier on Bankruptcy,
     4   ¶ 524.02[2] (Alan N. Resnick and Henry J. Sommer, eds. 16th ed.
     5   2010).   Simply put, no creditor can demand payment on a
     6   discharged debt, and the debtors have no personal liability to
     7   pay such a debt.
     8        The references to “personal liability” in § 524(a) preserve
     9   any in rem rights a creditor might have in the debtor’s property.
    10   This is the source of the dogma that liens “ride through”
    11   bankruptcy.    But the discharge bars any claims that are not
    12   secured.   Thus, applying the statutory definitions to the words
    13   of § 109(e), debts that were discharged in chapter 7 are not
    14   “unsecured debts.”
    15        The analysis of Shenas, which Debtors cited to the
    16   bankruptcy court, is persuasive.    In Shenas, chapter 13 debtors
    17   who had previously received a chapter 7 discharge sought to strip
    18   off a wholly unsecured junior lien against their primary
    19   residence.    The creditor argued that treating its claim as
    20   unsecured rendered debtors ineligible for relief because the
    21   debtors’ unsecured claims would then exceed the § 109(e)
    22   limitation.    The bankruptcy court disagreed, ruling that the
    23   discharge operated to render the debtors’ debt to the creditor
    24   unenforceable as a personal liability.
    25        Being unenforceable as a personal liability, the debt
              is not allowable as an unsecured claim in this case.
    26        Sections 502(b) and 506(a). It follows that the
              [d]ebtors do not owe any unsecured debt to Green Tree
    27        for purposes of the unsecured debt limitation of
              § 109(e).
     1   In re Shenas, 
    2011 WL 3236182
    , at *1.
     2        The bankruptcy court here rejected Debtors’ contentions and
     3   found that Shenas was not persuasive.     Instead, it stated that
     4   its decision on this issue of first impression was controlled by
     5   the Supreme Court’s ruling in Johnson, the Ninth Circuit’s
     6   decision in Quintana II, and this Panel’s rulings in Quintana I
     7   and Davis I.     We disagree that those cases control the outcome of
     8   the question before us for the reasons stated below and hold that
     9   debts for which the in personam liability was discharged in a
    10   prior chapter 7 should not be counted toward the unsecured debt
    11   limit for eligibility under § 109(e).
    12        1.      Johnson’s limited holding does not support the
                      bankruptcy court’s ruling.
    14        We think the bankruptcy court (and other courts reaching a
    15   similar conclusion) erred partly because it misread Johnson, so
    16   we begin with that Supreme Court case.     If anything, we find the
    17   words of the Supreme Court supportive of our position that the
    18   prior discharge means these “stripped” mortgages do not revert to
    19   unsecured debt for eligibility purposes.
    20        In Johnson, the debtor, who had previously discharged his in
    21   personam liability on his mortgage in a chapter 7 case, filed a
    22   subsequent chapter 13 case with the intent to pay an in rem
    23   judgment based on foreclosure litigation through the terms of the
    24   plan.     Although the bankruptcy court found such use of chapter 13
    25   proper, the district and circuit courts both held otherwise,
    26   ruling that because the in personam liability for the lien had
    27   been discharged, no “claim” remained to be reorganized through
    28   the chapter 13 plan.     Based on a circuit split, the Supreme Court
     1   granted certiorari and framed the issue before it: “The issue in
     2   this case is whether a mortgage lien that secures an obligation
     3   for which a debtor’s personal liability has been discharged in a
     4   Chapter 7 liquidation is a ‘claim’ subject to inclusion in an
     5   approved Chapter 13 reorganization plan.”      Id. at 82 (emphasis
     6   added).   Following rules of statutory construction, the Court
     7   determined that the mortgage lien was a claim within the terms of
     8   § 101(5) because the mortgage lien holder retained a “right to
     9   payment” in the form of its right to the proceeds from the sale
    10   of the debtor’s property.     Id. at 84.   In observing that this
    11   holding was consistent with other parts of the Code, including
    12   § 502(b)(1), the Court stated: “In other words, the court must
    13   allow the claim if it is enforceable against either the debtor or
    14   his property.”   Id. at 85 (emphasis in the original).
    15         In sum, the Court reached the conclusion that the in rem
    16   right to proceeds from a sale of its collateral meant the secured
    17   creditor held a claim which could be addressed in a chapter 13
    18   plan.   That is the only determination the Court made.     In fact,
    19   the Court reinforced the effect of the chapter 7 discharge with
    20   regard to an unsecured liability of the debtor: “The Court of
    21   Appeals thus erred in concluding that the discharge of
    22   petitioner’s personal liability on his promissory notes
    23   constituted the complete termination of the Bank’s claim against
    24   petitioner.   Rather, a bankruptcy discharge extinguishes only one
    25   mode of enforcing a claim - namely, an action against the debtor
    26   in personam - while leaving intact another - namely, an action
    27   against the debtor in rem.”    Id. at 84 (last emphasis added).
    28   ///
     1        2.   The Quintana and Davis line of cases concerning
                   chapter 12 are distinguishable and do not control
     2             the current case.
     3        The Ninth Circuit and BAP cases relied on by the bankruptcy
     4   court, two before Johnson and two after, reach similar
     5   conclusions that, because of the “right to payment” based on a
     6   secured lien, a claim - and therefore a debt - exists even though
     7   in personam liability is unenforceable.    However, they apply that
     8   holding in the context of determining whether a chapter 12
     9   debtor’s “aggregate debts” exceeded the statutory limitation as
    10   set by §§ 109(f) and 101(18).4    We find that Quintana I,
    11   Quintana II, Davis I, and Davis II, which speak of “aggregate
    12   debts,” are distinguishable from the separately calculated
    13   secured and unsecured debt limits for a chapter 13 case.
    14        In Quintana I and Quintana II, as pertinent here, a judgment
    15   creditor of the debtors had agreed to waive any right to a
    16   deficiency judgment against the debtors after sale of the real
    17   property subject to its judgment lien, which property was
    18   purportedly worth far less than the amount of the judgment.   In
    19   seeking relief in chapter 12, the debtors asserted that because
    20   any personal liability had been waived by the judgment creditor,
    21   making it a nonrecourse obligation, only the secured value of the
    23          Section 109(f) provides: “Only a family farmer or family
         fisherman with regular annual income may be a debtor under
    24   chapter 12 of this title.”
    25        “Family farmer” is defined by § 101(18)(A) as an “individual
    26   or individual and spouse engaged in a farming operation whose
         aggregate debts do not exceed $4,031,575 . . . .” (This debt
    27   limit is as currently effective and has been adjusted
         periodically under § 104. Also, § 101(18) was § 101(17) prior to
    28   2005.)
     1   judgment lien, as measured by the value of the property, should
     2   count toward the aggregate debt limit for a family farmer.      By
     3   measuring its debt against only this secured value, debtors
     4   contended they were under the debt limit.    After the bankruptcy
     5   court disagreed and found the debtors ineligible, debtors
     6   appealed to the BAP.    Observing that the term “aggregate debts”
     7   includes “all types of debts,” the BAP looked to the definitions
     8   of debt and claim in § 101 and determined that “debt” had the
     9   same broad meaning as “claim.”    Quintana I, 107 B.R. at 237.    It
    10   then observed that under the provisions of § 102(2), a claim
    11   against property of the debtor is treated as a claim against the
    12   debtor.5    It follows that
    13        [b]ecause the term claim is coextensive with the term
              debt, this obligation is a debt of the debtors which is
    14        defined by the amount of the claim against the
              property. Connecticut General’s claim against the
    15        property is approximately $1.528 million because it has
              the right to payment of that amount from the property
    16        or from the proceeds of the sale of the property.
    17   Id. at 239.    The Panel limited its reasoning to the secured
    18   nature of the debt; nowhere does it state that any portion
    19   survives as an unsecured liability.     Quintana I does not suggest
    20   the deficiency claim is an unsecured obligation, nor did it need
    21   to, since it was looking at only “aggregate debts.”
    22        In affirming the BAP, the Ninth Circuit took a more limited
    23   approach.    After determining that debt and claim were equivalent,
    24   it looked to Idaho law to determine the effect of Connecticut
    25   General’s waiver of deficiency and found that “there had not yet
    27          The BAP’s reasoning in Quintana I is similar to the
         Supreme Court’s in Johnson but it should be noted that this
    28   decision in 1989 predated Johnson which was issued in 1991.
     1   been any determination of a deficiency, as the property had not
     2   yet been sold.”    Quintana II, 915 F.2d at 516.   Therefore, only
     3   after an actual sale would the waiver have any relevance.
     4   Debtors were not released from any liability and the entire claim
     5   counted against the aggregate debt limit.    Id. at 517.   Like our
     6   Panel in Quintana I, the appellate court did not address what
     7   would happen to any remaining claim after the in rem liability
     8   was exhausted.
     9        The Davis cases are similarly distinguishable.    After
    10   discharging her personal liability in a chapter 7, Ms. Davis
    11   filed a chapter 12 case in which she scheduled secured debt which
    12   exceeded the § 101(18) aggregate debt limit.    In her amended
    13   plan, she proposed to pay her secured creditors only the value of
    14   their collateral, which collectively was substantially less than
    15   the debt limit.6   This plan drew an objection from secured
    16   creditor Bank of America, arguing among other things that the
    17   debtor was ineligible based on the scheduled debt.    Ms. Davis
    18   countered that because her personal liability had been
    19   discharged, the aggregate debt was only that secured by the
    20   property as valued, substantially less than the debt limit.      The
    21   bankruptcy court agreed with Bank of America and debtor appealed
    22   to the BAP, Davis I.    The BAP looked to the prior holdings in
    23   Quintana I and Quintana II and reasoned that because the entire
    24   amount of the debt was part of the secured liens:
    25        the full amount owed continues to be a claim against
              the collateral, and hence a ‘debt’ under the Bankruptcy
                Because of her prior chapter 7 discharge, she scheduled no
    28   unsecured debt.
     1        Code, unless and until the collateral is sold.
              Furthermore, as stated in Johnson, a prior chapter 7
     2        discharge only extinguishes one ‘mode of enforcing’ the
              claim but does not extinguish the claim itself (or any
     3        portion thereof).
     4   Davis I, 
    2012 WL 3205431
    , at *5.   Davis I looked only at the
     5   aggregate debt, not an unsecured deficiency.
     6        The Ninth Circuit in Davis II focused the inquiry: “whether
     7   the term ‘aggregate debts’ in § 101(18)(A) includes the unsecured
     8   portion of a creditor’s claim from which the debtor has been
     9   discharged in an earlier chapter 7 bankruptcy proceeding.”
    10   Davis II, 778 F.3d at 812.   Relying on Johnson and an earlier
    11   Supreme Court decision, Pennsylvania Department of Public Welfare
    12   v. Davenport, 
    495 U.S. 552
     (1990), it concluded:
    13        Johnson and Davenport teach that the meaning of “debt”
              is coextensive with the meaning of “claim” and, in
    14        turn, that “claim” is broadly defined to include any
              right to payment or any right to an equitable remedy
    15        giving rise to a right of payment. A creditor retains
              a right to payment, enforceable in rem, on the
    16        unsecured portion of a loan for which in personam
              liability may have been discharged. We therefore agree
    17        with the BAP that Davis’ “aggregate debts” include the
              unsecured portions of the undersecured mortgage loans
    18        that remain enforceable against Davis’ property, even
              though the loans are not enforceable against Davis
    19        personally.
    20   Davis II, 778 F.3d at 813.   The court of appeals very carefully
    21   distinguished between the available in rem relief and the
    22   unavailable in personam liability, so to stretch its holding to
    23   mean the debt revives as an unsecured claim is inconsistent with
    24   the decision.
    25        In sum, because these four cases are chapter 12 cases that
    26   consider only the aggregate debt limit, and none of them speak to
    27   reviving discharged in personam liability, they are not
    28   controlling here.
     1        3.   Scovis and Smith are also distinguishable and would
                   lead to an inequitable result.
     3        Under the holding of Scovis v. Henrichsen (In re Scovis),
    249 F.3d 975
     (9th Cir. 2001), and Smith v. Rojas (In re Smith),
    435 B.R. 637
     (9th Cir. BAP 2010), when determining a debtor’s
     6   chapter 13 eligibility, the undersecured portion of a secured
     7   creditor’s claim should be counted as unsecured debt.   In re
     8   Scovis, 249 F.3d at 983.   Although Scovis was speaking about the
     9   unsecured portion of a partially secured obligation, its holding
    10   was extended to wholly unsecured junior trust deeds in Smith.    In
    11   re Smith, 435 B.R. at 648-49.   However, in both of these cases,
    12   the chapter 13 case was not preceded by a prior chapter 7 where
    13   the in personam liability had been discharged;7 the obligation of
    14   the debtor to pay the undersecured or wholly unsecured claims in
    15   pari passu with other unsecured creditors through the plan was
    16   intact.   If one makes that reclassification of debt in the
    17   chapter 20 context, one is reviving the liability which has been
    18   discharged.   It makes no sense that a creditor whose in personam
    19   claim is unenforceable in any other context due to the § 727
    20   discharge should fare better in the subsequent chapter 13 case.8
    22          Although the chapter 13 proceeding in Scovis had been
         preceded by a chapter 7, the debt at issue had been found
    23   nondischargeable and therefore the effect of the discharge
         injunction was not in play.
                The Ninth Circuit’s recent decision by which it confirmed
    25   the ability of a chapter 20 debtor to strip wholly unsecured
    26   junior liens, HSBC Bank USA v. Blendheim (In re Blendheim), 
    803 F.3d 477
     (9th Cir. 2015), carefully distinguishes a discharge
    27   from in rem voidance provisions: a strip off of a lien is not the
         same as receiving a discharge because the discharge releases in
    28                                                      (continued...)
     1   B.   Debts for which the in personam liability was discharged in
              a prior chapter 7 cannot be counted toward the unsecured
     2        debt limit for eligibility under § 109(e).
     3        Although in a slightly different context - that of the
     4   allowability of an unsecured claim filed by a creditor with a
     5   stripped off second where personal liability had been previously
     6   discharged in a chapter 7 - the well-reasoned decision of the
     7   bankruptcy court in In re Rosa, 
    521 B.R. 337
     (Bankr. N.D. Cal.
     8   2014), supports our opinion.   In Rosa, the chapter 20 debtor,
     9   similar to the debtors here, used § 506(a) to value her residence
    10   to determine whether EMC Mortgage, LLC (EMC) had an allowed
    11   secured claim in her chapter 13 case.   After the court determined
    12   that, based on its valuation, the EMC claim was not supported by
    13   an equity in the property, the debtor objected to EMC’s unsecured
    14   claim in conjunction with plan confirmation.   She argued that her
    15   chapter 7 discharge terminated her personal liability and that
    16   the claim should be disallowed.   The chapter 13 trustee objected
    17   to plan confirmation, asserting that the unsecured claim was
    18   resurrected after the valuation motion found the secured claim
    19   wholly unsecured.
    20        The court observed that although § 101(5)(A) defines a claim
    21   and § 506(a) prescribes how a secured claim is to be treated,
    22   neither determined whether such claim was allowed for payment
    23   purposes.   That determination was to be made if an objection was
    24   filed under § 502(b), as the debtor filed here.   Because the
    26        8
    27   personam liability but does not affect the in rem rights of the
         lien. Id. at 494. The Circuit says nothing about resurrecting
    28   unsecured liability after the lien strip.
     1   personal liability had been discharged in the prior chapter 7,
     2   the court applied the discharge injunction provided by
     3   § 524(a)(2) to come to the unremarkable conclusion that no
     4   allowed claim remained for payment purposes in the chapter 13.
     5   In arriving at this conclusion, the bankruptcy court found that
     6   its analysis did not run afoul of Johnson: “The Supreme Court did
     7   not hold nor suggest that this allowed secured claim would, by
     8   definition, be an allowed, unsecured claim if a § 506(a)(1)
     9   motion renders the secured claim valueless.”    In re Rosa, 521
    10   B.R. at 342.
    11        We recognize that Dewsnup v. Timm, 
    502 U.S. 410
     (1992), held
    12   that a chapter 7 debtor could not “strip down” - or reduce - a
    13   partially underwater lien under § 506(d) to the value of the
    14   collateral.    Id. at 412-13, 417.   This prohibition was recently
    15   extended to a wholly unsecured junior lien by the Supreme Court
    16   in Bank of America v. Caulkett, 
    135 S. Ct. 1995
    , 1999 (2015).
    17   Parties have argued against allowing a chapter 20 debtor to “two-
    18   step” around the Dewsnup/Caulkett restrictions - i.e., first
    19   filing a chapter 7 to discharge the personal liability, then
    20   following it with a chapter 13 to value the property and strip
    21   the remaining in rem claim - as bad faith.    And it well may be,
    22   but that argument is better addressed by filing an objection to
    23   confirmation based on bad faith rather than eligibility.    If such
    24   an objection is made, then the bankruptcy court must consider on
    25   a case-by-case basis the totality of the circumstances standard,
    26   as directed in Leavitt v. Soto (In re Leavitt), 
    171 F.3d 1219
    27   1224 (9th Cir. 1999), and Drummond v. Welsh (In re Welsh), 711
    28 F.3d 1120
    , 1127-30 (9th Cir. 2013), in determining whether such
     1   bad faith exists.
     2        That serial filings are not per se bad faith was first
     3   addressed by the Supreme Court in Johnson where the creditor
     4   maintained that such filings evaded the limits that Congress
     5   intended to place on these remedies.   The Court disagreed:
     6   “Congress has expressly prohibited various forms of serial
     7   filings. . . .   The absence of a like prohibition on serial
     8   filings of Chapter 7 and Chapter 13 petitions, combined with the
     9   evident care with which Congress fashioned these express
    10   prohibitions, convinces us that Congress did not intend
    11   categorically to foreclose the benefit of Chapter 13
    12   reorganization to a debtor who previously has filed for Chapter 7
    13   relief.”   Johnson, 501 U.S. at 87.
    14        The Ninth Circuit earlier embraced the substance of this
    15   holding in Downey Savings and Loan Association v. Metz (In re
    16   Metz), 
    820 F.2d 1495
    , 1497 (9th Cir. 1987), and recently
    17   reiterated it in In re Blendheim, 
    803 F.3d 477
    , where the court
    18   went so far as to find no per se bad faith even if a chapter 13
    19   petition was filed while the chapter 7 was still pending.     There,
    20   the court recognized that a debtor should be allowed to use the
    21   tools in the tool box if done so with a good-faith purpose.    803
    22   F.3d at 500.
    23        Finally, we do not see how the purposes of a chapter 13
    24   reorganization are met by counting the discharged unsecured
    25   obligations of the chapter 20 debtor in the eligibility
    26   calculation.   Assuming the case is filed in good faith and proper
    27   chapter 13 purposes – such as curing an arrearage on a first
    28   mortgage or paying priority tax debt - are present, it makes no
     1   sense to include in the debt limit calculation a claim for which
     2   the right to payment has been discharged.     Neither the Code nor
     3   case law compels inclusion of the discharged in personam
     4   liability in such calculation.
     5                            VI.     CONCLUSION
     6        For the reasons stated above, we REVERSE the decision of the
     7   bankruptcy court dismissing the chapter 13 for ineligibility and
     8   REMAND with instructions to vacate the dismissal and reinstate
     9   the case.