In a case of first impression, the Ninth Circuit held that the unsecured portion of a secured debt, for which the debtor’s liability has been discharged in a prior chapter 7 proceeding, is still a debt for determining the debtor’s eligibility to be a debtor under chapter 12 of the Bankruptcy Code.  Davis v. U.S. Bank (In re Carolyn Davis), 2015 WL 662001 (9th Cir. 2015).  Carolyn Davis owned three parcels of real property on which she created a vineyard.  The appraised value of the three parcels totaled $1,600,000, and Davis owed debts secured by the properties totaling $4,100,000.  When her vineyard venture failed, Davis filed a personal chapter 7 case and received a discharge of her liability on the three loans.  She then filed a chapter 12 petition seeking to restructure the secured debt.  At the time, the statutory limit for debt in order to be eligible to file a chapter 12 petition was $3,792,650.  Although the loans secured by her real property totaled $4,100,000, Davis contended she was eligible to file a chapter 12 petition because the value of the collateral securing these loans was below the statutory limit and she had received a discharge of her liability on these loans in her chapter 7 case.

The bankruptcy court dismissed her chapter 12 petition concluding her “aggregate debts” exceeded the statutory limit of $3,792,650 in effect at the time under 11 U.S.C. § 101(18)(A).  The Ninth Circuit BAP affirmed, holding that the term “aggregate debts” in § 101(18)(A) included the unsecured portion of the debts secured by her real property even though her personal liability for the debts had been discharged.  The Ninth Circuit affirmed.

In concluding the bankruptcy court and BAP had reached the correct conclusion, the Ninth Circuit began with viewing the plain language of the statute.  First it noted that a “debt” is a “liability on a claim.”  11 U.S.C. § 101(12).  Next, it noted that the Code defined the term “claim” as a “right to payment . . . or right to an equitable remedy for breach of performance.”  11 U.S.C. § 101(5).  Citing the U.S. Supreme Court’s opinion in Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990), the Ninth Circuit stated “the plain meaning of a ‘right to payment’ is nothing more nor less than an enforceable obligation, regardless of the objectives [sought] in imposing the obligation,” and that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.”  Further, the Ninth Circuit noted the opinion of the U.S. Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991), where the Court held that a debtor must include a mortgage lien in a chapter 13 plan even though the obligation secured by the mortgage was discharged in an earlier chapter case.  As a result, the Ninth Circuit concluded that the word “claim” in § 101(5) is to be given the “broadest definition available.” 

The Ninth Circuit held that the creditors’ right to foreclose in rem against the debtor’s properties constituted a “debt” and a “claim” even though the debtor’s personal liability had been previously discharged.  As a result, the debtor’s “aggregate debts” for purposes of determining eligibility exceeded the statutory limit, and the dismissal of the debtor’s chapter 12 case was affirmed.