Canning, III, et al v. Beneficial Maine, Inc., et al

Filing

OPINION issued by Juan R. Torruella, Appellate Judge; Kenneth F. Ripple and Jeffrey R. Howard, Appellate Judge. Published. [12-9002]

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Date Filed: 02/01/2013

Entry ID: 5708641

United States Court of Appeals
For the First Circuit
No. 12-9002
IN RE: RALPH G. CANNING, III,
MEGAN L. CANNING, f/k/a MEGAN L. OTIS,
Debtors.
RALPH G. CANNING, III and
MEGAN L. CANNING, f/k/a MEGAN L. OTIS,
Plaintiffs, Appellants,
v.
BENEFICIAL MAINE, INC.; HSBC MORTGAGE SERVICES, INC.;
HSBC MORTGAGE CORPORATION,
Defendants, Appellees.
APPEAL FROM THE BANKRUPTCY
APPELLATE PANEL FOR THE FIRST CIRCUIT
Before
Torruella, Ripple,* and Howard,
Circuit Judges.
James F. Molleur, with whom Tanya Sambatakos, were on brief
for appellants.
Peter J. Haley, with whom Sean R. Higgins and Nelson Mullins
Riley & Scarborough LLP, were on brief for appellees.

February 1, 2013

*

Of the Seventh Circuit, sitting by designation.

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TORRUELLA, Circuit Judge.

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Entry ID: 5708641

Plaintiffs-Appellants, Ralph

G. Canning III and Megan L. Canning (the "Cannings"), filed a
Chapter

7

bankruptcy

petition

and

sought

to

surrender

their

residence.

When their mortgage lenders, Defendants-Appellees,

Beneficial

Maine, Inc., HSBC Mortgage Services, Inc., and HSBC

Mortgage

Corporation

(collectively

"Beneficial"),

refused

to

foreclose or otherwise take title to the residence, the Cannings
demanded that the mortgage lien be released.1

Beneficial also

refused to do so, and the Cannings began an adversary proceeding
claiming a discharge injunction violation. On a stipulated record,
the bankruptcy court found no discharge injunction violation in
Beneficial's refusal to either foreclose or release the lien on the
Cannings' residence.

The Cannings appealed to the Bankruptcy

Appellate Panel ("BAP"), with the same result.

This second appeal

followed, the parties reasserting the same arguments presented
below.

Finding no error in the holdings at issue, we affirm.
I. Background
After an unsuccessful attempt to refinance the two-year

old mortgage loan encumbering their residence, defaulting on the
terms of said loan, and with foreclosure proceedings already
underway in state court, the Cannings filed a Chapter 7 bankruptcy

1

Because the loan documents are not part of the record, we cannot
determine the exact role the foregoing entities played in the
original loan transaction. Nevertheless, there is no dispute that
the Cannings' mortgage belongs to those entities, which, hereafter,
we refer to in the singular for convenience.
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petition

on

schedules,

March

the

5,

Page: 3

2009.

mortgage

Date Filed: 02/01/2013

According

loan

had

an

to

their

outstanding

Entry ID: 5708641

bankruptcy
balance

$186,521, while the residence had a market value of $130,000.2

of
The

schedules also indicated that the Cannings intended to surrender
the residence.3
Early in the bankruptcy case, Beneficial voluntarily
dismissed the state court foreclosure proceedings without prejudice
"due to the [Cannings'] filing Chapter 7 bankruptcy." The Cannings
received their bankruptcy discharge on June 3, 2009, and thus were
released

from

mortgage loan.

their

outstanding

personal

obligations

on

the

The exchange of correspondence underlying this

appeal ensued two months thereafter.
Beneficial began the exchange with a letter informing the
Cannings that it would "not initiate and/or complete foreclosure
proceedings on [your residence].

You will retain ownership of the

property" and "we will no longer advance any payments for taxes and
insurances.

You will be solely responsible for the payment of

taxes, insurance, and maintenance of this property."4

2

The Cannings derived the market value of the residence from an
informal appraisal obtained in mid-2008. As of the date of the
bankruptcy petition, Beneficial valued the residence at $86,000.

3

On April 6, 2009, the Chapter 7 trustee filed a notice of
abandonment of the residence.

4

The letter also stated that the Cannings still had "a financial
obligation to repay [Beneficial] for the money borrowed.
This
financial obligation . . . remains intact . . . ." The bankruptcy
court held that that portion of Beneficial's initial letter
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In response, the Cannings reminded Beneficial of the
bankruptcy discharge injunction and demanded that it either "(1)
immediately commence foreclosure proceedings or (2) immediately
discharge the mortgage on the property."

With no answer from

Beneficial, on October 1, 2009, the Cannings sent it another letter
to follow up on their demand.
Beneficial responded by letter dated October 19, 2009.
As relevant here, Beneficial's letter stated: "we are unable to
honor your request to release the lien until the lien balance is
satisfied in the amount of $186,324.15. However, we could consider
a settlement option or a short sale."

Beneficial also explained

that the Cannings' account had been charged off, that they had no
personal obligation to pay the lien balance, and that its letter
was not an attempt to collect from them personally.
Despite this disclaimer from Beneficial, the Cannings
interpreted the letter as a further violation of the discharge
injunction.

The next letter they sent to Beneficial emphatically

indicated so and warned that a bankruptcy adversary proceeding
would be filed if Beneficial failed to either foreclose or release
its lien.

But Beneficial did not budge, reiterating, instead, its

prior response.

The Cannings subsequently informed Beneficial

that: (1) the residence had been vacated; (2) the utilities had

violated the discharge injunction and ordered Beneficial to pay
$7,000 in sanctions.
That order is not part of this appeal;
therefore, we do not discuss it further.
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been turned off; and (3) the municipal authorities, as well as the
sewerage

company,

had

been

notified

that

Beneficial

was

the

responsible party for any obligations pertaining to the residence.
True to their word, on December 21, 2009, the Cannings
reopened

their

bankruptcy

case

proceeding against Beneficial.
actual

and

punitive

and

initiated

an

adversary

Among other things, they claimed

damages

in

connection

with

Beneficial's

"failure or refusal to commence foreclosure or otherwise recover
possession

of

[residence]."

judgment

declaratory

the

"ordering

The Cannings
[Beneficial] to

also

sought a

either

recover

possession of the Property or deliver unencumbered title to . . .
the[m]."
material

In

its

responsive

allegations

and

pleading,

raised

nine

Beneficial
affirmative

denied

all

defenses,

including lack of intent to violate the discharge injunction.

At

that time, Beneficial estimated the market value of the residence
to be $75,000.
After preliminary procedural nuances, the parties agreed
to submit the issue of liability on the basis of a jointly filed
"Stipulation and Exhibits" containing the facts just described.5
In

their

submission,

the

Cannings

exclusively

relied

on

our

decision in Pratt v. General Motors Acceptance Corp. (In re Pratt),
462

F.3d

14

(1st

Cir.

2006),

where

5

we

held

that

a

secured

The parties agreed to reserve evidence and arguments regarding
sanctions for a later hearing, which was to take place only if the
Cannings prevailed on their contentions regarding liability.
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creditor's

refusal

to

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Date Filed: 02/01/2013

foreclose

or

release

its

Entry ID: 5708641

lien

on

an

inoperable, worthless car was intended to objectively coerce the
debtor into paying a discharged debt, in violation of the discharge
injunction.

According to the Cannings, "[t]he material facts . .

. considered in Pratt mirror the facts in this case so closely,
that they dictate the . . . determination that [Beneficial] acted
in

an

objectively

coercive

manner."

Beneficial

disagreed,

advancing purported fundamental factual differences between the
Cannings'

case

and

Pratt--mainly,

that

the

Cannings'

plight

revolved around valuable real estate property while Pratt involved
a worthless car.
The bankruptcy court ruled in favor of Beneficial.

See

Canning v. Beneficial Maine, Inc. (In re Canning), 442 B.R. 165
(Bankr. D. Me. 2011).

In so doing, it first noted that "[t]he

Cannings' demand of 'foreclose or release, now' ignore[d] the
prospect that real estate values change (up, as well as down) over
time" and that "[a] critical component of Pratt's holding was the
collateral's worthlessness and the fact that, unlike real estate,
'vehicles rarely appreciate in value over time.'" Id. at 172. The
court

similarly

observed

that,

"unlike

the

Pratts'

secured

creditor, [Beneficial] did not simply require that the Cannings
'pay

in

full.'

Rather

it

responded

voluntary settlement or a 'short sale.'"
bankruptcy

court

reasoned,

"plainly

-6-

by
Id.

suggesting

either

a

Such a proposal, the

reveals

that

[Beneficial]

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sought to collect no more than the value securing its lien."

Id.

As a postlude, the court then added:
Of course, [Beneficial's] chosen course
of action, or inaction, did not make things
easy for the Cannings.
Forces remained at
work that could make their continued ownership
of the real estate uncomfortable--forces like
accruing
real
estate
taxes
and
the
desirability
of
maintaining
liability
insurance for the premises. But those forces
are incidents of ownership. Though the Code
provides debtors with a surrender option, it
does not force creditors to assume ownership
or take possession of collateral.
And
although the Code provides a discharge of
personal liability for debt, it does not
discharge the ongoing burdens of owning
property.
Id.
The Cannings timely appealed to the BAP, where both
parties

reasserted

their

arguments

affirmed on the same reasoning.

under

Pratt,

and

the

See Canning v. Beneficial Maine,

Inc. (In re Canning), 462 B.R. 258 (B.A.P. 1st Cir. 2011).
the

bankruptcy

court,

the

BAP

BAP

found

dispositive

Like

distinctions

between the Cannings' case and Pratt, including that the Cannings'
residence had significant value and that Beneficial had not simply
required full payment on the loan to release its lien. Id. at 268.
The BAP also noted that Pratt's holding had been supported in part
by evidence of actual expenses arising from the continued ownership
of the collateral at issue.

Id. at 267.

It then established that

the Cannings had failed to introduce evidence of similar expenses
and

instead

rested

their

case

on

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the

mere

possibility

that

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liabilities could arise in the future.

Id.

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Accordingly, "[b]ased

upon the facts presented to and considered by the bankruptcy
court," the BAP found itself unable to conclude "that there was a
particular confluence of circumstances that renders Beneficial's
refusal to discharge its mortgage tantamount to coercing the
payment of a discharged prepetition debt."

Id. at 268.

This

second appeal followed.
II. Discussion
When an appeal comes to us by way of the BAP, we
independently scrutinize the underlying bankruptcy court decision,
reviewing factual findings for clear error and legal conclusions de
novo.

Brandt v. Repco Printers & Lithographics, Inc. (In re

Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997).

In

reviewing for clear error, we "ought not to upset findings of fact
or conclusions drawn therefrom unless, on the whole of the record,
we form a strong, unyielding belief that a mistake has been made."
Cumpiano v. Banco Santander Puerto Rico, 902 F.2d 148, 152 (1st
Cir. 1990); see also In re Healthco Int'l, Inc., 132 F.3d at 108
("This familiar standard is not diluted merely because parties
proceed on a stipulated record.").

In contrast, "[u]nder the de

novo standard of review, we do not defer to the lower court's
ruling but freely consider the matter anew, as if no decision had
been rendered below."

United States v. Silverman, 861 F.2d 571,

576 (9th Cir. 1988).

-8-

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In this case, the Cannings pose no challenge to the
bankruptcy court's findings of fact, and we find that no mistake
was made as to them.6

The Cannings do, however, challenge the

bankruptcy court's legal conclusions, reasserting their contention
that the facts in this case mirror the ones in Pratt so closely
that the same result should follow.

Both the bankruptcy court and

the BAP correctly rejected this argument in well-reasoned, thorough
opinions.

Our

discussion

here

is

therefore

limited

to

the

essentials.

See Holders Capital Corp. v. Cal. Union Ins. Co (In re

San Juan Dupont Plaza Hotel Fire Litig.), 989 F.2d 36, 38 (1st Cir.
1993) ("Where, as here, a trial court has produced a first-rate
work

product,

a

reviewing

tribunal

should

hesitate

to

wax

longiloquence simply to hear its own words resonate.").
The Cannings' complaint is premised on 11 U.S.C. §
524(a), which sets forth an automatic injunction against efforts
intended to collect an already discharged debt.

The injunction

affords honest but unfortunate debtors with a "fresh start" from
the burdens of personal liability for unsecured prepetition debts
and thus advances the overarching purpose of the Bankruptcy Code.
In re Pratt, 462 F.3d at 17-18; see also Marrama v. Citizens Bank

6

As alluded to above, the relevant findings of fact are: (1) that
the collateral at issue is real estate with an estimated value of
$75,000, as of the time the adversary proceeding was initiated; (2)
that the value of said collateral could change up as well as down;
and (3) that Beneficial provided alternatives--that is, a
settlement or a short sale--indicating that it sought to be paid no
more than the value securing its lien.
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of Mass., 549 U.S. 365, 367 (2007) ("The principal purpose of the
Bankruptcy Code is to grant a 'fresh start' to the 'honest but
unfortunate debtor.'"(quoting Grogan v. Garner, 498 U.S. 279, 286
(1991))).

For that reason, the scope of the injunction is broad,

and bankruptcy courts may enforce it through 11 U.S.C. § 105, any
sanctions imposed for violations being in the nature of civil
contempt.

In re Pratt, 462 F.3d at 17, 21.
Despite its broad scope, the discharge injunction does

not enjoin a secured creditor from recovering on valid prepetition
liens, which, unless modified or avoided, ride through bankruptcy
unaffected and are enforceable in accordance with state law.

Id.

at 17. One of the ways through which debtors might free themselves
from

a

prepetition

lien

is

by

surrendering

the

encumbered

collateral to the secured creditor under 11 U.S.C. § 521(a)(2).
Id. at 17-18.

"Surrendering" in this context means "that the

debtor agree[s] to make the collateral available to the secured
creditor--viz., to cede his possessory rights in the collateral .
. . ."

Id. at 19.

The secured creditor, however, has the

prerogative to decide whether to accept or reject the surrendered
collateral,

since

"nothing

in

subsection

521(a)(2)

remotely

suggests that the secured creditor is required to accept possession
of the [collateral]."

Id.

But the creditor's decision in this

respect must not constitute a subterfuge intended to coerce payment
of a discharged debt.

Id. at 19-20.

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satisfies his burden of showing that the creditor's reluctance is
intended as a subterfuge to coerce such payment, a matter courts
determine in the context of the particular facts, the discharge
injunction applies with full force and effect.

Id.; see also

ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th
Cir. 2006) (stating that the debtor bears the burden of proof in
claims of discharge injunction violations).7
We set forth and applied the foregoing requirements in
Pratt, hence the Cannings' steadfast reliance on that case.

As

previewed above, Pratt revolved around a secured creditor's refusal
to either repossess or release a lien on an inoperable, worthless
car that Chapter 7 debtors moved to surrender in bankruptcy.
Finding the value of the car insufficient to satisfy foreclosure
expenses, the secured creditor wrote off the balance of its loan,
and left the debtors in possession of the encumbered collateral.
Upon receiving their bankruptcy discharge, the debtors promptly
sought to dispose of the car at a salvage dealer.

But because

under applicable state law a dealer could receive a junk car only
if free from all liens, the debtors were unsuccessful in their

7

In its brief in opposition, Beneficial raised the issue of
whether the creditor's coercive intent must be proved under either
the "preponderance of the evidence" or "clear and convincing
evidence" standard. Because the Cannings complaint fails under
either standard, we need not reach the issue here. All the same,
the Cannings waived the issue by failing to raise it in their
opening brief. Evans Cabinet Corp. v. Kitchen Int'l, Inc., 593
F.3d 135, 148 n.20 (1st Cir. 2010) ("Because this argument was not
raised in its opening brief, it is waived.").
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attempt to transfer possession of the car.

Entry ID: 5708641

And when the debtors

asked the secured creditor to either repossess the car or release
its lien, it repeatedly refused, informing the debtors that the
lien would be released only upon full satisfaction of the unpaid
loan amount.
After reopening their bankruptcy case, the debtors filed
an

adversary

complaint,

alleging

that

the

secured

creditor's

posture was intended to coerce payment on a discharged debt, in
violation of the discharge injunction. In reversing the bankruptcy
court's judgment for the secured creditor, we zeroed in on the
following facts: (1) the secured creditor refused to repossess the
car, but conditioned release of its lien upon full payment of the
loan balance; (2) the debtors could not dispose of the car while
encumbered and thus would have to keep it indefinitely (together
with the accompanying costs) unless they "paid in full"; and (3)
there were no reasonable prospects that the car would generate sale
proceeds for the secured creditor to attach, as it was essentially
worthless with limited possibilities of appreciation over time.
Based on those facts, we held that the secured creditor's
posture in exclusively conditioning release of its lien on full
payment of the loan balance amounted to a reaffirmation of debt
demand that contravened "the stringent 'anti-coercion' requirements
of [the] Bankruptcy Code . . . ."

In re Pratt, 462 F.3d at 20.

Similarly, we noted that the secured creditor's refusal to release
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its lien "had the practical effect of eliminating the [debtors']
'surrender' option under § 521(a)(2)."

Id.

But given the secured creditor's prerogative to insist on
its state-law in rem rights, we did not stop our analysis there.
Rather, we set out to determine whether the secured creditor had
articulated any reasons to explain away its posture.

Since the

secured creditor only proffered its state-law rights as a defense,
we analyzed the creditor's underlying conduct to see whether it
could be legitimized as a valid pursuit of those rights.

We found

that it could not, underscoring both the minimal value of the
collateral and the lack of reasonable prospects that the collateral
would ever be converted to attachable sale proceeds.
at

the

time:

"the

legitimate raison

d'etre

for

As we stated
the

[secured

creditor's] lien no longer obtained[;] the federal bankruptcy-law
interest in according debtors a fresh start, free from objectively
coercive reaffirmation demands, must be accorded supremacy."

462

F.3d at 20.8

8

The BAP appears to have interpreted the preceding language to
mean that "a finding of significant value is sufficient to justify
[a secured creditor's] refusal to discharge its mortgage." 462
B.R. at 267. Such an interpretation is at odds with Pratt's caseby-case, factually-specific inquiry; therefore, we disavow the
same.
The value of the underlying collateral is of course an
important factor to consider when adjudicating controversies in
these types of cases. Final adjudication, however, is a holistic
process, where the conduct of the parties and their particular
circumstances also play pivotal roles.
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In this case, contrary to the Cannings' contentions, the
factual scenario is much different than that in Pratt. Absent from
this case is the exclusive "pay in full" conditional release
presented in Pratt.

Rather, in this case, Beneficial offered to

release its lien through either a settlement offer or a short sale.
This not only indicates the intent to collect no more than the
value secured by the underlying lien, as the bankruptcy court
observed, but also denotes a willingness to negotiate a palatable
solution for all involved.
By like token, this case is missing the quandary the
debtors in Pratt faced, where they were required to either yield to
the secured creditor's "pay in full" demand or indefinitely remain
in possession of inoperable, worthless and burdensome collateral.
The BAP's opinion was right on point in this respect: "there is
nothing in the record . . . to evidence any expenses related to
[the Cannings' continued] equitable ownership other than the . . .
reference in their brief to being exposed to liability."
at 267.

462 B.R.

And to that we add that the appellate record also lacks

evidence to show that the Cannings' residence was "inoperable" or
unlivable when it was abandoned.9

9

The Cannings never argued, and nothing in the record shows, that
they lacked the means to satisfy the incidental costs of owning a
house--e.g., utilities, routine upkeep, liability insurance, etc.
The Cannings did mention being unable to afford their monthly
mortgage payments, but their bankruptcy discharge freed them from
that obligation.
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Furthermore, the record here does not paint a picture in
which a secured creditor cornered the debtors between a rock and
hard place. The record before us contains no evidence showing that
the alternatives Beneficial proposed were unfeasible--that is, the
Cannings never explained to the court exactly why a short sale or
a settlement was out of the question for them.

The record is also

devoid of any other indicia of coercion, such as, for example,
Beneficial's refusal to negotiate with the Cannings a compromise
different to the one originally proposed. In fact, from the record
available to us, it seems that the Cannings employed a "take it or
leave it" approach in negotiating with their mortgage lender, who,
given its state-law rights over the collateral, did not have to
accept

the

two

choices

presented.

Bankruptcy

law,

we

must

emphasize, cannot alter a secured creditor's state-law rights,
unless it is shown that those rights are relied upon to coerce
payment of a discharged debt.

The record before us simply lacks

that evidence.
Last but not least, unlike the collateral in Pratt, the
collateral involved here is far from worthless, and its value may
increase over time.

A reasonable possibility that the collateral

could be converted to attachable sale proceeds therefore exists,
and, unlike Pratt's secured creditor, Beneficial can point to its
state-law rights as one of the factors supporting its posture.

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The

Cannings

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downplay

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the

foregoing

Entry ID: 5708641

differences

and

instead invite us to focus on the fact that their residence
plummeted in value to little more than 38% of its original market
price.

According to the Cannings, that fact invites the inference

that "Beneficial decided not to foreclose on the property [because]
it would not be cost effective."

Such a business decision, the

Cannings continue, "clearly put into question [their] fresh start,
which is what the First Circuit in Pratt specifically prohibited a
creditor

from

doing."

There

are

several

problems

with

the

Cannings' contentions.
First, the record contains no evidence to support the
inference the Cannings urge us to draw.10
Pratt is overly broad.

Second, their reading of

Under the Cannings' reading, we would have

to find a discharge injunction violation every time a secured
creditor opposes a debtor's "foreclose or release" demand based on
the business determination that repossession is not cost effective.
But, on one hand, Pratt unequivocally held that the applicable
inquiry revolves around the particular facts of each case, with the
value of the underlying collateral being only one of several
factors to be considered.

On the other, Pratt sought to strike a

10

To support their inference, the Cannings refer us to evidence
that is not part of the record on appeal, and "[i]t is elementary
that evidence cannot be submitted for the first time on appeal."
United States v. Rosario-Peralta, 175 F.3d 48, 56 (1st Cir. 1999).
In any event, were we to draw the Cannings' proposed inference, our
decision would remain unchanged for the reasons discussed below.
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balance between the competing state-law rights of secured creditors
and the bankruptcy rights of debtors, and the reading the Cannings
advance improperly skews that balance against secured creditors.
Third, and perhaps most importantly, Pratt does not
support the conception that the Cannings appear to have of the
Bankruptcy Code's "fresh start."

The debtors in Pratt sought to

disentangle themselves from an unduly burdensome situation by
following

a

legally

burdening others.
start"

to

residence.
the

feasible

alternative,

without

improperly

The Cannings, in contrast, invoke the "fresh

indirectly

validate

the

decision

to

abandon

their

They do so without providing any evidence showing that

residence

posed

bankruptcy discharge.

an

undue

burden

upon

them

after

their

The Cannings also fail to advance any legal

authority, and we are not aware of any, to support the proposition
that a homeowner may walk away, with no strings attached, from
their legally owned residence.

But even worse, in vacating their

residence, the Cannings placed many of the burdens of dealing with
an abandoned property on their neighbors, their town, and their
city -- in other words, on everyone but them.
does not countenance that result.

The "fresh start"

Cf. In re Hermoyian, 435 B.R.

456, 466 (Bankr. E.D. Mich. 2010) ("A fresh start does not mean
debtors are free from all of the consequence of every decision that
they have made, which in hindsight, might have been ill-advised.").
Nor does it generally "discharge the ongoing burdens of owning
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property," as the bankruptcy court aptly noted. See In re Canning,
442 B.R. at 172;

cf. River Place E. Hous. Corp. v. Rosenfeld (In

re Rosenfeld), 23 F.3d 833, 837 (4th Cir. 1994) (finding an
obligation to pay postpetition assessments nondischargable because
it arose from the debtor's continuing ownership of property, not
from a prepetition obligation).
A coda is necessary before we conclude.

Today, where

both lenders and homeowners strive to recuperate from hard economic
times, this opinion should not be relied upon to leverage a way out
of the bargaining table.

It is one thing to insist upon state-law

rights in refusing a recalcitrant "foreclose or release" demand by
a debtor, and completely another to refuse negotiating with a
debtor willing to compromise. Put differently, while this case may
provide some guidance on the dos and don'ts applicable to the
bargaining

dynamics

between

secured

creditors

and

bankruptcy

debtors, our remarks in Pratt still control: "the line between
forceful negotiation and improper coercion is not always easy to
delineate, and each case must therefore be assessed in the context
of its particular facts."

462 F.3d at 19.

III. Conclusion
For the reasons discussed above, we affirm the bankruptcy
court’s judgment, each party bearing their own costs.
Affirmed.

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