Ramierz v. River Flow Funding LLC (In re Ramirez)
Ramierz v. River Flow Funding LLC (In re Ramirez), 25-1000 (B.A.P. 9th Cir. March 17, 2026) An order disallowing a claim didn’t mean the lien securing the claim was disallowed; only meant debtor’s in personam liability was discharged.
To avoid an inequitable result, the Ninth Circuit Bankruptcy Appellate Panel relied on fundamental principles about secured claims in chapter 7 to conclude that an order declaring a secured claim to have been “disallowed” didn’t really mean it was disallowed.
Believing that “the bankruptcy court’s use of the word ‘disallowed’ in the claim disallowance order was unfortunately imprecise,” the BAP interpreted the order to mean that the debtor’s personal liability was discharged in chapter 7 but that the lien on the debtor’s home survived discharge because there had been no objection to the validity of the lien or the debt.
One Home, Two Liens, Two Bankruptcies
In 2006, a homeowner filed a chapter 7 petition with two liens on her home. The first lien mortgage was for about $270,000, and the second mortgage secured a debt for another $70,000. The lender filed a secured claim for both debts.
The lender obtained an order modifying the automatic stay as to the first lien debt that had been accelerated. The lender evidently never foreclosed.
The chapter 7 trustee objected to allowance of the second lien debt. According to the March 17 BAP opinion by Bankruptcy Judge Gary A. Spraker, the trustee aimed to compel the lender to look only to the collateral for satisfaction of the second mortgage debt and to preclude the holder of the junior mortgage from participating in the meager distribution to unsecured creditors.
When the junior lender did not oppose the claim objection, the bankruptcy court entered an order in the chapter 7 case declaring that the claim was “disallowed.”
In 2023, the same debtor filed a chapter 13 petition, again scheduling both loans as secured by her home. She listed the debt on the second lien as “$0.00.”
The lender filed a proof of claim for the second lien debt, declaring that the loan was fully matured. The debtor objected to allowance of the claim on the second lien, alleging that the claim and lien on the second mortgage had been disallowed in the prior chapter 7 case.
In the new chapter 13 case, Bankruptcy Judge Daniel P. Collins overruled the objection, recognizing that the trustee in the prior chapter 7 case had never challenged the allowance of the claim as secured. The debtor appealed to the BAP.
Literal Meaning Wasn’t the Intended Meaning
The debtor took the position in the BAP that the use of the word “disallowed” in the chapter 7 case meant that the bankruptcy court in the prior case had fully and finally adjudicated the validity of the second lien debt and mortgage.
Judge Spraker responded by saying that the debtor “ignored the well-established differences between in personam and in rem claims held by secured creditors in bankruptcy.” Furthermore, “A bankruptcy discharge affects only the in personam claim; it does not eliminate the underlying debt . . . . [T]he bankruptcy discharge merely bars creditors from pursuing debtor’s ‘personal liability’ on discharged debts.”
“Despite the discharge of the in personam claim, secured creditors may still foreclose on their collateral to satisfy the underlying debt,” Judge Spraker said.
Although the order in the chapter 7 case declared that the claim was “disallowed,” Judge Spraker emphasized how “the underlying objection never challenged the validity of the debt or the lien securing the debt.” [Emphasis in original.] To buttress his interpretation, Judge Spraker quoted the claim objection in the prior case, which said that the lender “‘should have looked to said property for payment of the debt thereby secured.’”
In short, the objection “merely sought to prevent [the lender] from sharing in the trustee’s chapter 7 distribution to unsecured creditors,” Judge Spraker said. “In summary,” he said, “the imprecise use of the term ‘disallowed’ in the context of the underlying chapter 7 case is understandable but unfortunate — as it has spawned needless claims litigation in the subsequent chapter 13 case.”
“At most,” Judge Spraker said, “the claim disallowance order ‘disallowed’ the secured creditor’s in personam claim and its participation in the subsequent bankruptcy distribution [but] implicitly recognized the validity of the secured creditor’s in rem claim, which survived the chapter 7 discharge.”
“[D]espite the terminology used in the claim disallowance order,” Judge Spraker upheld the bankruptcy court’s order overruling the debtor’s claim objection because “the secured claim . . . was allowed for purposes of § 506(d).”