Attorneys Danny Newman and Eric Levine recap two recent Ninth Circuit case decisions for the Fall 2025 issue of the Oregon State Bar Debtor-Creditor Section Newsletter. You can read their article in full below.
Danny Newman is a partner in Tonkon Torp’s Litigation Department and Co-Chair of the firm’s Bankruptcy & Restructuring Group. Danny’s practice is focused on bankruptcy, reorganization, and insolvency. He has worked on some of the largest chapter 11 cases in the Pacific Northwest and regularly represents debtors, receivers, and creditors of all kinds in state court litigation and out-of-court workouts.
Eric is an associate in Tonkon Torp’s Litigation Department and Bankruptcy & Restructuring Group with experience in appeals, complex civil litigation, and some of the largest bankruptcy and receivership cases in the Pacific Northwest. He has authored briefs filed in state and federal courts, including the U.S. Court of Appeals for the D.C. Circuit and the D.C. Court of Appeals; and he has contributed to amicus briefs filed with the Supreme Court of the United States.
NINTH CIRCUIT CASE NOTES
Section 1322(c)(2) allows modification of primary residence mortgages due before final payment of plan
Mission Hen, LLC v. Lee, 137 F.4th 1008 (9th Cir. 2025)
This appeal presented three questions, which are each addressed in order. The three holdings are: the debtors are eligible, the plan is feasible, and the phrase “payment of the claim as modified” in Section 1322(c)(2) allows modification of the entire “claim,” and not just the “payment.”
The facts involve a few moving parts. Debtors Jason Lee and Janice Chen filed for Chapter 13 bankruptcy, scheduling their residence as collateral. There were two parties secured on it. The first mortgage was fully secured, but the second, held by appellant Mission Hen, LLC (“Mission Hen”), was undersecured by approximately $370,000. Debtors filed a Chapter 13 plan that showed their total unsecured debt exceeded the limit set by 11 U.S.C. § 109(e) by roughly $70,000. In the plan, Debtors sought to bifurcate and cram down Mission Hen’s claim.
To support bifurcation, Debtors moved to value their residence, which caused even more complications. The court fixed the value of the home $200,000 higher than the initial appraisal. That had the effect of moving Debtors’ total unsecured debt below the Section 109(e) threshold.
However, it also raised Debtors’ monthly payments to a level they could not afford. To cure that, one of Debtors’ parents entered a declaration stating that she lived with Debtors and would increase her monthly rent to $4,900 for the duration of the plan, which raised Debtors’ net monthly income to $5,897.74.
Debtors filed an amended plan. It again sought to bifurcate and cram down Mission Hen’s secured claim. It also called for monthly payments of $2,115.99 for the first three months; $2,240.41 for next three months; then one monthly payment of $5,813.03; and finally, and finally, $6,293.10 for the final 51 months.
Mission Hen objected. For the first time, it raised the issue that Debtors were ineligible for Chapter 13 relief because the initial valuation showed Debtors had too much unsecured debt. Mission Hen also challenged feasibility, asserting that Debtors’ monthly payments for the final 51 months exceeded Debtors’ net monthly income. Finally, Mission Hen asserted the plan violated 11 U.S.C. § 1322(b) (2) because it modified Mission Hen’s lien secured only by Debtors’ residence.
The bankruptcy court ruled in Debtors’ favor and confirmed the plan. Both the district court and Bankruptcy Appellate Panel affirmed. All three issues were presented to the Ninth Circuit, which also affirmed.
On eligibility, the Ninth Circuit held that the bankruptcy court reasonably relied on its own valuation of the property. It acknowledged the rule that “normally” eligibility should be determined by the debtors’ originally filed schedules, but the unique posture here warranted departure from the norm. Specifically, Mission Hen had not objected to the original plan, under which Debtors would have been ineligible, but did object to the amended plan as to which Debtors were eligible. The court noted that the circumstances were exceptional because Mission Hen consciously chose not to object to the original plan with the hope that the court’s valuation would come out high enough to fully secure its claim.
For feasibility, the Ninth Circuit rejected Mission Hen’s argument that monthly net income must exceed monthly payments for each month of the plan. Instead, the Ninth Circuit calculated the total net income over all 60 months and showed it would be higher than the total monthly payments. Because the total net income over the life of the plan exceeded the total amount of the payments required by the plan, the plan was feasible.
The cramdown issue was one of first impression for the Ninth Circuit. It turned on whether the phrase “payment of the claim as modified” in Section 1322(c)(2) refers to modifications of “payments” or of the entire “claim.” The court looked at the plain language of the statute to determine whether it modifies the entire claim. First, Section 1322(c)(2) is an exception to subsection (b)(2), and (b)(2) concerns rights of secured claim holders and is not limited to payments. Second, Section 1322(c)(2) refers to Section 1325(a)(5), which is the source of a Chapter 13 debtor’s authority to strip down the value of a claim to the value of collateral. The reference to Section 1325(a)(5) means that Section 1322(c) (2) was intended to allow bifurcation of claims to be paid off before the final payment of the plan.
To conclude, the court rejected Mission Hen’s argument that its holding violated Nobelman v. American Savings Bank, 508 U.S. 324 (1993). In Nobelman, the Supreme Court held that Section 1322(b)(2) prevents debtors from bifurcating claims secured by the debtor’s primary residence. However, Section 1322(c)(2) was enacted after Nobelman as an exception to subsection (b)(2). Thus, Congress created an exception to Nobelman, which the Ninth Circuit simply applied.
Costs and fees associated with State Bar discipline are dischargeable
In re Wike, 145 F.4th 1221 (9th Cir. 2025)
This case presented the question of whether costs and fees associated with State Bar discipline are dischargeable. The Ninth Circuit held that they are in this circumstance.
Debtor Terry Wike was suspended from the practice of law. The Nevada State Bar initiated two separate disciplinary proceedings, and the Nevada Supreme Court ultimately ruled in the Bar’s favor. The court ordered Wike to pay fees and costs to the Bar and suspended Wike’s license for two years.
Ten days after Wike became eligible for reinstatement, he filed for Chapter 7 bankruptcy and listed his debt to the Nevada State Bar. While his petition was pending, Wike applied for reinstatement to the Nevada State Bar. Then, while Wike’s application for reinstatement was pending, he received a discharge in his Chapter 7 case. Finally, the Nevada Supreme Court conditionally reinstated Wike, pending his payment of debts owed to the Bar, notwithstanding that the debts had now been discharged, because attorney discipline was to promote attorney rehabilitation, deter misconduct, and protect the public.
Wike reopened his bankruptcy and moved for sanctions against the Bar. He argued that his conditional reinstatement was premised on the incorrect view that his fees and costs were excepted from discharge under Section 523(a) (7). Moreover, because the exception did not apply, the Bar discriminated against him solely because he had not paid a debt discharged in bankruptcy, thereby violating Section 525(a). The bankruptcy court denied the motion for sanctions and held that Section 523(a)(7) applied. It alternatively held that the Rooker-Feldman doctrine precluded it from reviewing the opinion of the Nevada Supreme Court. The BAP reversed, and the case proceeded to the Ninth Circuit.
The Ninth Circuit first addressed the Rooker-Feldman doctrine. The court held it did not apply because the legal question before it was the applicability of Section 523(a)(7) to a specific debt. Dischargeability is a core proceeding and therefore within the exclusive jurisdiction of the bankruptcy court. As such, the federal courts were free to collaterally review the state supreme court’s opinion. Under Section 523(a)(7), a debt is not dischargeable if it (1) is a fine, penalty, or forfeiture; (2) is payable to and for the benefit of a governmental unit; and (3) does not constitute compensation for actual pecuniary loss. The Nevada State Bar is a governmental unit, so the question turned on whether the fees and costs were a “fine, penalty, or forfeiture,” and not “compensation for actual pecuniary loss.”
The Ninth Circuit surveyed five cases interpreting California bar disciplinary actions for guidance. In In re Taggart, 249 F.3d 987 (9th Cir. 2001), the court held that fees imposed were actually to reimburse actual and reasonable expenses and thus dischargeable. In response, California amended its statute to state that such fees were “in addition to other monetary sanctions” and “to promote rehabilitation and to protect the public.” In In re Findley, 593 F.3d 1048 (9th Cir. 2010), the court held the amendment was sufficient to make the fees nondischargeable under Section 523(a)(7).
Next, in In re Scheer, 819 F.3d 1206 (9th Cir. 2016), the court held that an arbitration award was dischargeable because it was purely compensatory for the Bar’s expenses. Then, in In re Albert-Sheridan, 960 F.3d 1188 (9th Cir. 2020), the court held discovery sanctions were dischargeable because they were (again) compensatory. Finally, in Kassas v. State Bar of California, 49 F.4th 1158 (9th Cir. 2023), fees payable to the State Bar’s Client Security Fund were dischargeable because they were effectively compensatory payments to clients.
The Ninth Circuit turned to the relevant Nevada statute and determined Wike’s fees were dischargeable. It noted that the fees are “commensurate” with the costs of the disciplinary proceeding and described the relationship as a “very strong indication” fees are compensation for actual pecuniary loses. The court likened Nevada’s rule to California’s rule in Taggart, before California changed its rule to state the fees were monetary sanctions. In the absence of such connection, Nevada’s scheme created payments that were compensation, not penalties, and therefore Section 523(a)(7) did not exempt them from discharge. The court remanded with instructions to sanction the Nevada State Bar
This article was originally published in the Fall 2025 issue of the Oregon State Bar Debtor-Creditor Newsletter.
