Mission Hen, LLC V. Lee (In re Lee)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
9 months 4 days ago

Case Type:

Consumer

Case Status:

Affirmed

Citation:

No. 23-4220 (9th Circuit, May 22,2025) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Ninth Circuit affirmed a bankruptcy court's order confirming a chapter 13 plan over a creditor's objections. Most notably, the court held, as a matter of first impression within the circuit, that 11 U.S.C. § 1322(c)(2) permits a debtor to bifurcate a claim secured by the debtor's principal residence into secured and unsecured portions if the claim matures during the plan's term, explaining that section "allows for the modification of claims, not merely of payments on the claim."

Procedural context:

On the claim bifurcation issue, the Ninth Circuit joined "[c]ourts across the country—including three of our sister circuits—[that] have held that § 1322(c)(2) permits bifurcation of a short-term claim like" the Appellant's claim, citing appellate decisions from the Fourth Circuit, Eleventh Circuit, Fifth Circuit, and Sixth Circuit Bankruptcy Appellate Panel, as well as opinions from two bankruptcy courts. The Ninth Circuit further found that, even though its prior decision in In re Scovis, 249 F.3d 975, 983 (9th Cir. 2001), states "that 'eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith[,]'” the bankruptcy court's valuation of the debtor's principal residence as of the petition date--and the Appellant's failure to raise chapter 13 eligibility based on Debtors' scheduled unsecured debt until after Debtors' second amended plan was filed, over seven months into the case--created circumstances such "that strict adherence to the generally applicable Scovis rule would result in an inaccurate valuation of the Property and undermine the goals of Chapter 13."

Facts:

Debtors Jason Lee and Janice Chen filed a chapter 13 bankruptcy petition in the U.S. Bankruptcy Court for the Central District of California. Debtors scheduled the value of their residence as $1,045,000. They also scheduled a fully-secured first mortgage on the residence for about $952,000 and a second mortgage for about $466,000, held by Appellee Mission Hen, LLC, as partially secured. Mission Hen objected to the debtor's valuation of the property and to the bifurcation of its claim into secured and unsecured portions and Debtors moved for a valuation hearing on the property. The bankruptcy court valued the property at $1,225,000 as of the petition date. Debtors then filed a first amended plan that increased the value of Mission Hen's secured claim from about $92,000 to about $265,000. Debtors also filed a declaration from a parent who stated she would contribute rent payments during "the full term" of Debtors' plan for $4,900. After Debtors filed a second amended plan treating Mission Hen's claim as partially secured, Mission Hen filed an objection, stating Debtors were not eligible for chapter 13 because, according to the scheduled values of debt and property, Debtors' total unsecured debt exceeded the debt limit set by 11 U.S.C. § 109(e) as of the petition date. Mission Hen objected again to Debtors' third amended plan, now raising eligibility, feasibility (as Debtors did not project they would earn enough income in each month to pay the full plan payment, even with the parent's contribution), and that 11 U.S.C. § 1322(b)(2) and the U.S. Supreme Court's decision in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), prevented Debtors from bifurcating Mission Hen's claim. After a confirmation hearing, the bankruptcy court confirmed Debtors' plan, resolving all of Mission Hen’s objections in Debtors’ favor. Mission Hen took an appeal to the U.S. Bankruptcy Appellate Panel for the Ninth Circuit on all three arguments against confirmation and the B.A.P. affirmed (655 B.R. 340). Mission Hen then timely appealed to the Ninth Circuit.

Judge(s):

Mary M. Schroeder, William A. Fletcher, and Consuelo M. Callahan

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