JIMENEZ SALGADO v. LPP MORTGAGE LTD et al

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE:
JOANICE JIMENEZ SALGADO
Debtor(s)
Case No. 09-07166 (MCF)
Chapter 13
FILED & ENTERED ON 03/06/2012
JOANICE JIMENEZ SALGADO
Plaintiff(s),
v.
LPP MORTGAGE, LTD,
Defendant(s)
Adv. No. 10-00100 (MCF)
DECISION AND ORDER
The instant proceeding involves the determination of whether
Defendant, 	LPP 	Mortgage, 	Ltd. 	(hereafter 	referred 	to 	as
"Defendant"), 	incurred 	in 	a 	violation 	of 	the 	Chapter 	7 	discharge
injunction 	against 	Plaintiff/Debtor, 	Joanice 	Jimenez 	Salgado
(hereafter referred to as "Plaintiff").
The case was submitted to the Court as a matter of law for the
preliminary issue of alleged violation of the discharge injunction
by joint agreement of the parties at the Pretrial hearing held on
November 	17, 	2011 	(Docket 	No. 	22). 	The 	issue 	of 	sanctions 	and/or
award of damages, if any, has been held in abeyance subject to the
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Court's 	resolution 	of 	this 	initial 	matter. 	The 	matter 	stands
submitted 	based 	on 	the 	argumentation 	and 	uncontested 	facts
contained at the parties' joint pretrial report (Docket No. 21) and
the Spanish translations of the parties' pretrial exhibits (Docket
No. 25). Consequently, the matter is ripe for Court determination.
I. UNCONTESTED MATERIAL FACTS AND PROCEDURAL HISTORY
The relevant undisputed facts in this case are as follows:
1. Plaintiff and her husband filed a petition for relief under
Chapter 7 of the Bankruptcy Code on February 22, 2002 (Docket No. 1
of Case No. 02-01818 (ESL)).
2. 	On 	March 	12, 	2002, 	Beal 	Bank 	(the 	then 	holder 	of 	the
mortgage 	note 	at 	bar) 	filed 	Proof 	of 	Claim 	No. 	1 	in 	the 	above-
referenced bankruptcy case as a secured creditor for the principal
sum of $53,700.00, plus interest, secured by a second mortgage over
a 	real 	property 	located 	in 	Toa 	Baja, 	Puerto 	Rico 	(Exhibit 	3 	of
Docket No. 25).
3. 	Plaintiff 	and 	her 	husband 	obtained 	a 	discharge 	order 	on
April 15, 2003 (hereinafter referred to as the "Discharge Order"),
which was notified to parties in interest, including Beal Bank, by
first class mail on April 17, 2003 (Exhibit 1 and 2 of Docket No.
25).
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4. 	Defendant, 	the 	current 	holder 	of 	the 	mortgage 	note, 	and
the successor-in-interest of Beal Bank with regards to the note in
question, 	filed 	a 	Complaint 	to 	foreclose 	the 	aforementioned 	note
before 	the 	Commonwealth 	of 	Puerto 	Rico, 	Court 	of 	First 	Instance,
Toa 	Alta 	Section 	on 	September 	12, 	2006, 	Case 	No. 	DC-2006-02670
(hereafter referenced to as the "Local Court Complaint")(Exhibit 7
of Docket No. 25).
5. 	A collection and foreclosure judgment was entered against
Plaintiff 	and 	her 	husband 	on 	November 	27, 	2006 	(hereafter
referenced to as the "Local Court Judgment") (Exhibit 8 of Docket
No. 	25). 	The 	same 	included 	a 	provision 	which 	allows 	Defendant 	to
collect 	from 	Plaintiff 	any 	deficiency 	left 	in 	the 	payment 	of 	the
loan after the judicial sale of the property is completed.
6. 	Plaintiff filed a petition for relief under Chapter 13 of
the 	Bankruptcy 	Code 	on 	August 	28, 	2009 	(Docket 	No. 	1 	of 	Case 	No.
09-07166 (MCF)).
7. Defendant filed Proof of Claim No. 3 in Plaintiff's Chapter
13 	case 	on 	October 	28, 	2009 	(hereafter 	referenced 	to 	as 	"POC 	No.
3"). Defendant's claim was filed as partially secured and partially
unsecured 	for 	the 	amount 	reflected 	in 	the 	Local 	Court 	Judgment
(Exhibit 9 of Docket No. 25).
8. 	Plaintiff 	filed 	the 	instant 	Adversary 	Proceeding 	on 	June
22, 2010 (Docket No. 1).
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II. LEGAL ANALYSIS
One of the mayor cornerstones of our bankruptcy system and the
ultimate 	goal 	for 	any 	individual 	debtor 	in 	bankruptcy 	is 	the
issuance of a discharge injunction by the Court. The discharge is
one of the primordial mechanisms which allows a debtor to obtain a
financial 	"fresh 	start" 	as 	a 	result 	of 	the 	bankruptcy 	process.
Laboy 	v. 	Firstbank 	P.R. 	(In 	re 	Laboy), 	Adv. 	No. 	09-00047 	(ESL),
2010 Bankr. LEXIS 345 (Bankr. D.P.R. Feb. 2, 2010) (Lamoutte, J.);
In re Latanowich, 207 B.R. 326, 334 (Bankr. D. Mass. 1997).
The 	effects 	of 	the 	discharge 	injunction 	are 	outlined 	in
Section 524 of the Bankruptcy Code, 11 U.S.C. § 524. Section 524(a)
states, in relevant part, that:
(a) A discharge in a case under this title--
(1) voids any judgment at any time obtained, to
the extent that such judgment is a determination of
the 	personal 	liability 	of 	the 	debtor 	with 	respect
to 	any 	debt 	discharged 	under 	section 	727, 	944,
1141, 	1228, 	or 	1328 	of 	this 	title, 	whether 	or 	not
discharge of such debt is waived;
(2) 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;
11 U.S.C. § 524(a)(1) & (2).
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While 	the 	bankruptcy 	discharge 	has 	been 	categorized 	as
"extinguishing or releasing" debt, the truth of the matter is that
a 	discharge 	does 	not 	address 	the 	continuing 	validity 	of 	the
discharged 	debt. 	As 	such, 	the 	true 	"effect 	of 	a 	discharge 	is 	to
interpose 	a 	permanent 	prohibition 	against 	debt 	collection 	rather
than to absolve the underlying debt retroactively." 3 Norton Bankr.
L. & Prac. § 58:2 (3d. ed. 2012) (hereinafter "Norton").
Should a creditor whose debt has been discharged in bankruptcy
incur in postdischarge efforts to collect on its debt, it will be
liable 	for 	violation 	of 	the 	discharge 	injunction 	under 	Section
524(a) of the Code.
Section 	524(a) 	ensures 	that 	a 	discharge 	will 	be
completely 	effective 	and 	will 	operate 	as 	an
injunction against the commencement or continuation
of 	an 	action 	or 	the 	employment 	of 	process 	to
collect 	or 	recover 	a 	debt 	as 	a 	personal 	liability
of the debtor. Thus, it protects the debtor from a
subsequent suit in a state court, or any other act
to 	collect, 	by 	a 	creditor 	whose 	claim 	had 	been
discharged in the title 11 case.
4-524 	Collier 	on 	Bankruptcy 	P. 	524.02 	(2011) 	(emphasis 	added)
(hereinafter "Collier").
It 	must 	be 	clarified, 	however, 	that 	Section 	524(a) 	is 	not 	a
blanket 	prohibition 	against 	every 	and 	all 	actions 	undertaken 	by
creditors 	after 	the 	entry 	of 	discharge. 	In 	this 	regard,
"[c]reditors are not prevented from postdischarge enforcement of a
valid 	lien 	on 	property 	of 	the 	debtor 	that 	existed 	at 	the 	time 	of
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the 	entry 	of 	the 	order 	for 	relief, 	if 	the 	lien 	was 	not 	avoided
under the Code." Id.
Particularly, 	unless 	the 	creditor's 	lien 	was 	invalidated
during 	the 	bankruptcy 	proceeding, 	a 	secured 	creditor's 	lien
survives 	and 	is 	unaffected 	by 	the 	discharge 	injunction.
Furthermore, the discharge injunction does not prevent the creditor
from 	enforcing 	its 	lien, 	including 	the 	right 	to 	initiate
foreclosure proceedings. Id.; Johnson v. Home State Bank, 501 U.S.
78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991); Long v. Bullard, 117
U.S. 	617, 	6 	S.Ct. 	917, 	29 	L.Ed. 	1004 	(1886); 	In 	re 	Moscoso
Villaronga, 111 B.R. 13, 17-18 (Bankr. D.P.R. 1989) (de Jesus, J.).
When 	faced 	with 	this 	type 	of 	scenario, 	it 	is 	extremely
important 	to 	define 	which 	enforcement 	rights 	are 	retained 	by 	the
secured creditors postdischarge, and which actions are prohibited
as 	a 	result 	of 	the 	entry 	of 	the 	discharge 	injunction. 	In 	the
context 	of 	a 	secured 	creditor's 	postdischarge 	remedies 	for
enforcement 	of 	its 	liens, 	the 	"[a]ctions 	to 	collect 	against 	the
debtor personally are enjoined. The creditor's action in enforcing
a 	lien 	is 	against 	the 	property 	and 	is 	an 	action 	in 	rem 	with 	no
recourse available against the debtor for any deficiency." Norton,
supra, § 58:4 (emphasis added). See also In re Smiley, 26 B.R. 680,
684 	(Bankr. 	D. 	Kan. 	1982)(Section 	524(a)(2) 	does 	not 	preclude
creditors 	holding 	unavoided 	liens 	from 	exercising 	their 	in 	rem
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rights postdischarge); In re Cassi, 24 B.R. 619, 626 (Bankr. N.D.
Ind. 	1982)(a 	valid, 	pre-filed 	lien 	that 	is 	not 	otherwise 	avoided
during 	the 	bankruptcy 	proceedings 	is 	not 	extinguished 	by 	the
discharge and remains enforceable in rem).
Based on the foregoing, in those cases where creditors retain
a valid lien postdischarge, the discharge injunction under Section
542(a) 	estopps 	collection 	efforts 	against 	debtor's 	"personal
liability" 	in 	the 	secured 	debt. 	As 	such, 	the 	creditor 	will 	only
retain 	in 	rem 	remedies 	to 	enforce 	its 	lien 	postdischarge 	and 	may
not 	be 	able 	to 	collect 	on 	the 	debt 	as 	a 	personal 	liability. 	This
includes a prohibition for creditors to collect on any deficiency
amount 	after 	exhaustion 	of 	their 	in 	rem 	rights. 	11 	U.S.C. 	§
524(a)(1); 	Collier, 	supra, 	P. 	524.02; 	Norton, 	supra, 	§ 	58:4;
Johnson, 501 U.S. 83; Cassi, 24 B.R. 619; Smiley, 26 B.R. 680. To
pursue such in personam actions against a debtor will constitute a
violation 	of 	the 	discharge 	injunction 	under 	Section 	542(a)(2) 	of
the Bankruptcy Code.
III. DISCUSSION
According to the joint uncontested facts in this case, it is
clear 	that 	Plaintiff 	obtained 	a 	Discharge 	Order 	in 	her 	Chapter 	7
case on April 15, 2003. It is further admitted and uncontested that
Beal Bank, the holder at the time of the mortgage note encumbering
the real property in question, was notified of said Discharge Order
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by 	first 	class 	mail 	on 	April 	17, 	2003 	(Exhibit 	1 	and 	2 	of 	Docket
No. 	25). 	It 	is 	also 	uncontested 	that 	Defendant 	is 	the 	current
holder of the referenced note and, thus, a successor-in-interest of
Beal Bank with regards to said note.
Pursuant to the records of the Court, it appears that the lien
covering the Toa Baja property was never contested nor objected to
by Plaintiff as part of her Chapter 7 proceedings. Therefore, it is
unquestioned that Defendant's lien remained valid after the entry
of 	the 	Discharge 	Order. 	In 	accordance 	with 	the 	legal 	framework
discussed at above, this entails that Defendant could have enforced
its in rem postdischarge remedies in the mortgage covering the Toa
Baja 	property 	after 	entry 	of 	the 	discharge 	order 	in 	the 	first
bankruptcy case. Defendant is currently stayed from continuing with
its Local Court action as a result of the second bankruptcy filing.
Plaintiff 	asserts 	that 	Defendant 	violated 	the 	discharge
injunction in the following manners: (1) through the initiation of
a 	local 	court 	collection 	and 	foreclosure 	complaint; 	(2) 	the
obtention 	of 	a 	collection 	and 	foreclosure 	judgment; 	and 	(3) 	the
subsequent 	filing 	of 	a 	proof 	of 	claim 	for 	the 	judgment 	amount 	in
this recent Chapter 13 bankruptcy case
A) 	Violation 	of 	the 	discharge 	injunction 	through 	the 	filing
of 	the 	Local 	Court 	Complaint 	and 	obtaining 	the 	Local 	Court
Judgment
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Plaintiff's first and second allegations for violation of the
discharge 	injunction 	under 	11 	U.S.C. 	§ 	524(a)(2) 	stems 	from
Defendant's 	filing 	of 	the 	Local 	Court 	action 	and 	obtaining 	the
Local 	Court 	Judgment, 	wherein 	Defendant 	sought 	to 	collect 	on
Plaintiff's in personam liability of the discharged debt.
Upon 	analyzing 	the 	contents 	of 	Defendant's 	Local 	Court
Complaint, it is uncontested that the remedies sought by Defendant
in the same were: (a) the collection of the amounts owed under the
loan and the mortgage note; (b) the foreclosure and judicial sale
of 	Plaintiff's 	real 	estate 	property; 	(c) 	the 	satisfaction 	of 	the
outstanding amounts from the proceeds generated form the judicial
sale; 	and 	(d) 	should 	the 	proceeds 	of 	the 	judicial 	sale 	not 	be
sufficient to cover the totality of the outstanding amounts under
the loan, the collection of any deficiency from any other personal
or real property held by Plaintiff (Exhibit 7 of Docket No. 25).
As previously explained, Defendant falls within the category
of creditors who can enforce in rem remedies of their liens after
the 	entry 	of 	the 	discharge 	injunction. 	These 	in 	rem 	acts 	include
the 	right 	to 	initiate 	foreclosure 	proceedings, 	as 	well 	as 	other
collorary acts in lieu of foreclosure. Collier, supra, P. 524.02;
Norton, 	supra, 	§ 	58:4; 	Johnson, 	501 	U.S. 	83; 	Cassi, 	24 	B.R. 	619;
Smiley, 26 B.R. 680.
According to Defendant's Local Court Complaint (Exhibit 7 of
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Docket 	No. 	25), 	it 	is 	clear 	that 	Defendant 	indeed 	initiated
enforcement actions of its postdischarge in rem remedies over the
lien encumbering the Toa Baja property. However, Defendant did not
limit 	its 	request 	exclusively 	to 	the 	enforcement 	of 	its 	in 	rem
remedies. 	Specifically, 	Defendant's 	fifth 	cause 	of 	action 	sought
collection mechanisms against Plaintiff personally to recover any
deficiency amount that may be left over from the underlying debt of
the 	loan 	once 	the 	judicial 	sale 	of 	the 	Toa 	Baja 	property 	was
completed (Pages 5 and 6 at ¶ (e) of Exhibit 7 of Docket No. 25).
This cause of action constitutes an in personam collection of the
discharged debt.
Defendant 	incurred 	in 	an 	impermissible 	action 	prohibited 	by
the discharge injunction by having initiating collection actions of
its 	in 	personam 	claim 	against 	Plaintiff. 	As 	such, 	Defendant
incurred in a violation of the discharge injunction prohibited by
11 	U.S.C. 	§ 	524(a)(2), 	by 	and 	through 	the 	commencement 	and
continuation of the Local Court Complaint against Plaintiff.
Consequently, 	the 	Judgment 	entered 	by 	the 	Local 	Court 	on
November 	27, 	2006 	(Exhibit 	8 	of 	Docket 	No. 	25), 	is 	null 	and 	void
with regards to the provision for collection against Plaintiff on
any 	deficiency 	left 	in 	the 	payment 	of 	the 	loan 	(the 	in 	personam
liability), 	in 	accordance 	with 	the 	clear 	language 	of 	11 	U.S.C.
§524(a)(1).
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B) 	Violation 	of 	the 	discharge 	injunction 	through 	the 	filing
of 	a 	Proof 	of 	Claim 	in 	Plaintiff's 	recent 	Chapter 	13
proceedings
Plaintiff's 	third 	grounds 	for 	violation 	of 	the 	discharge
injunction 	is 	based 	on 	Defendant's 	filing 	of 	POC 	No. 	3 	in
Plaintiff's 	Chapter 	13 	case 	on 	October 	28, 	2009 	(Exhibit 	9 	of
Docket No. 25). Plaintiff argues that, by having included in said
claim 	the 	prohibited 	amounts 	incorporated 	in 	the 	Local 	Court
Judgment 	(i.e., 	the 	deficiency 	claim), 	Defendant 	is 	once 	again
reasserting 	the 	validity 	of 	said 	amount 	in 	violation 	of 	the
discharge 	injunction, 	as 	well 	as 	constitutes 	another 	collection
effort by Defendant of the in personam liability of Plaintiff.
We 	begin 	our 	analysis 	by 	mentioning 	that 	Plaintiff 	does 	not
provide 	any 	legal 	support 	in 	favor 	of 	this 	particular 	position.
Specifically, Plaintiff does not discuss whether the mere filing of
a 	proof 	of 	claim 	of 	a 	previously 	discharged 	debt 	constitutes 	a
violation of the discharge injunction.
Notwithstanding this, the issue was discussed in the case of
Clayton v. Roundup Funding, LLC (In re Clayton), Adv. No. 09-80167
(FLK), 	2010 	Bankr. 	LEXIS 	3596 	(Bankr. 	E.D. 	Wash. 	Oct. 	12,
2010)(Kurtz, J.). In the Clayton case, a creditor filed a proof of
claim 	in 	a 	debtor's 	Chapter 	13 	case, 	which 	consisted 	of 	a 	credit
card 	debt 	that 	was 	discharged 	in 	debtor's 	prior 	bankruptcy
proceeding. 	The 	Bankruptcy 	Court 	for 	the 	Eastern 	District 	of
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Washington 	considered 	whether 	the 	filing 	of 	this 	proof 	of 	claim
constituted a violation of the discharge injunction under Section
524(a) 	of 	the 	Code. 	The 	creditor 	argued 	that 	the 	discharge
injunction 	only 	prohibits 	activities 	outside 	of 	the 	bankruptcy
court, 	and 	that 	"the 	Bankruptcy 	Code 	permits 	creditors 	to 	file
claims that are disputed and unenforceable claims for any reason,
because 	the 	debtors 	have 	the 	affirmative 	duty 	to 	decide 	which
claims to present to the bankruptcy court in an objection to claim
proceeding." Clayton, 2010 Bankr. LEXIS 3596 at 14.
In considering the controversy, the Clayton court determined
as follows:
In 	order 	for 	the 	court 	to 	find 	that 	there 	was 	a
violation 	of 	the 	injunction, 	the 	[debtors] 	must
establish the violation of a specific court 	order.
Like the section 362(a) injunction, the language of
the 	section 	524(a) 	injunction 	does 	not 	encompass
the 	act 	of 	filing 	a 	claim 	against 	a 	bankruptcy
estate. 	Additionally, 	if 	a 	creditor 	files 	a
disputed 	and 	unenforceable 	claim, 	the 	Bankruptcy
Code authorizes the debtor to object to the claim.
If 	a 	creditor 	files 	a 	claim 	that 	abuses 	the
judicial 	process, 	bankruptcy 	courts 	have 	both
statutory 	and 	inherent 	authority 	to 	sanction 	the
conduct. 	For 	the 	same 	reasons 	stated 	in 	the
previous 	section, 	the 	court 	concludes 	[that 	the
creditor] did not violate the discharge injunction
of 	section 	524(a) 	by 	filing 	a 	proof 	of 	claim 	in
[the debtor's] Chapter 13 bankruptcy case.
Id. at 14-15.
We agree with the rationale of the Clayton decision and apply
it 	to 	the 	instant 	case. 	As 	such, 	the 	Court 	hereby 	finds 	that
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Defendant did not incur in a violation of the discharge injunction
under Section 524(a) of the Bankruptcy Code through the mere filing
of POC No. 3 in Plaintiff's recent Chapter 13 case.
ORDER
WHEREFORE, THE COURT HEREBY determines that:
1) This Decision and Order constitutes the Court's findings of
fact and conclusions of law;
2) 	Defendant 	incurred 	in 	a 	violation 	of 	the 	discharge
injunction 	under 	11 	U.S.C. 	§ 	524(a)(2), 	by, 	and 	through, 	the
commencement and continuation of the Local Court Complaint against
Plaintiff;
3) The Local Court Judgment is null and void with regards to
Plaintiff's 	in 	personam 	liability 	of 	the 	loan, 	pursuant 	to 	the
provisions of 11 U.S.C. § 524(a)(1);
4) 	Defendant 	did 	not 	incur 	in 	a 	violation 	of 	the 	discharge
injunction through the filing of Proof of Claim No. 3.
As 	a 	result 	of 	the 	Court's 	determination 	that 	Defendant
violated the discharge order, the Court hereby schedules a Pretrial
Hearing 	on 	the 	issue 	of 	award 	of 	sanctions 	and/or 	damages 	for
violation 	of 	the 	discharge 	injunction 	for 	May 	30, 	2012 	at 	10:00
a.m. A separate order will be issued to this effect.
SO ORDERED.
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San Juan, Puerto Rico, this 6th day of March, 2012.
Mildred Caban Flores
U.S. Bankruptcy Judge
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