Canning, III v. Beneficial Maine, Inc.

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.
 TORRUELLA, Circuit Judge. 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 March 5, 2009. According to their bankruptcy

schedules, the mortgage loan had an outstanding balance of

$186,521, while the residence had a market value of $130,000.2 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 their outstanding personal obligations on the

mortgage loan. 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 and initiated an adversary

proceeding against Beneficial. Among other things, they claimed

actual and punitive damages in connection with Beneficial's

"failure or refusal to commence foreclosure or otherwise recover

possession of the [residence]." The Cannings also sought a

declaratory judgment "ordering [Beneficial] to either recover

possession of the Property or deliver unencumbered title to . . .

the[m]." In its responsive pleading, Beneficial denied all

material allegations and raised nine affirmative 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 we held that a secured

5
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 foreclose or release its 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 by suggesting either a

voluntary settlement or a 'short sale.'" Id. Such a proposal, the

bankruptcy court reasoned, "plainly 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 under Pratt, and the BAP

affirmed on the same reasoning. See Canning v. Beneficial Maine,

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

the bankruptcy court, the BAP found dispositive 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 the mere possibility that

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liabilities could arise in the future. Id. 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).

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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. Accordingly, when a debtor

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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. 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. As we stated

at the time: "the legitimate raison d'etre for 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 case-
by-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." 462 B.R.

at 267. 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 downplay the foregoing 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 Second, their reading of

Pratt is overly broad. 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 feasible alternative, without improperly

burdening others. The Cannings, in contrast, invoke the "fresh

start" to indirectly validate the decision to abandon their

residence. They do so without providing any evidence showing that

the residence posed an undue burden upon them after their

bankruptcy discharge. 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. The "fresh start"

does not countenance that result. 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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