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In re Chagolla

United States Bankruptcy Appellate Panel of the Ninth Circuit

February 9, 2016

In re: LUCIO CHAGOLLA AND MARIA D. HERNANDEZ MURUETA, Debtors.
v.
JP MORGAN CHASE BANK, N.A., [1] Appellee LUCIO CHAGOLLA; MARIA D. HERNANDEZ MURUETA, Appellants,

Argued and Submitted at San Francisco, California, January 21, 2016,

As Corrected February 24, 2016.

Page 677

Appeal from the United States Bankruptcy Court, Northern District of California, San Jose Division. Bk. No. 08-57523. Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding.

David Boone for appellants Lucio Chagolla and Maria D. Hernandez Murueta.

Before: JURY, KURTZ, and WANSLEE, Bankruptcy Judges.

OPINION

Page 678

JURY, Bankruptcy Judge

Appellants Lucio Chagolla and Maria D. Hernandez Murueta (" Debtors" ) appeal the bankruptcy court's order denying their unopposed valuation motion under 11 U.S.C. § 506(a) and (d) and Federal Rule of Bankruptcy Procedure (" FRBP" ) 3012, seeking to value real property upon which the junior lienholder, JP Morgan Chase Bank, N.A. (" JP Morgan" ), is secured.[3] Although the valuation motion was brought after Debtors completed their plan and received a discharge, Debtors assert that the bankruptcy court erred in denying the motion as untimely. We agree with Debtors. 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. Accordingly, for the reasons stated below, we REVERSE the bankruptcy court's order and REMAND the matter to the bankruptcy court for further proceedings consistent with this opinion.

I. FACTS

The facts are not in dispute. Debtors owe more money on their home than it is worth. The fair market value of their home on the confirmation date was much less than the amount due on the first mortgage, let alone what is owed on the second. The second mortgage held by JP Morgan is the subject of the instant appeal.

Debtors filed a petition and Chapter 13 plan on December 23, 2008. Pursuant to the plan, Debtors would pay zero percent to unsecured creditors and would file an adversary proceeding to avoid the junior lien of JP Morgan within ninety days of the commencement of the case. The plan was confirmed at a hearing on February 19, 2009, with the order entered on March 2, 2009. JP Morgan did not object to its treatment at confirmation. The confirmation hearing was held prior to the end of the ninety-day period provided in the plan to file the adversary to avoid JP Morgan's lien. However, no adversary proceeding was ever commenced by Debtors. On March 12, 2014, after completing all payments required by the plan, Debtors obtained a discharge. The case was closed on April 11, 2014.

Nearly a year after the case was closed and six years after the plan was confirmed, Debtors filed a motion to reopen the case for the sole purpose of filing a lien avoidance

Page 679

motion. After the court reopened the case, on February 23, 2015, Debtors filed their lien avoidance motion, which provided: (1) the fair market value of their home at confirmation was $550,000.00; (2) Countrywide Home Loans Servicing, L.P. holds a senior deed of trust with a principal balance of $628,804.83; and (3) JP Morgan holds a junior lien with a principal balance of $130,686.22. Relying on the holding of Zimmer v. PSB Lending Corporation(In re Zimmer), 313 F.3d 1220 (9th Cir. 2002), Debtors argued that based on the property valuation, the wholly unsecured second lien of JP Morgan should be avoided. Although the motion was properly served, JP Morgan did not file an opposition or participate in the proceeding.

On April 21, 2015, the bankruptcy court entered an order denying the motion. Although recognizing that there is not a time limitation in the Bankruptcy Code or Rules which would prevent Debtors from bringing their valuation motion after the case was closed, the court held that (1) it lacked jurisdiction to grant the motion, (2) the motion was untimely based on case law the court reviewed, and (3) the motion was not heard in conjunction with the hearing on the plan as required by § 506(a). This timely appeal followed.

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. § § 1334 and 157(b). We have ...


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