2017 Bankruptcy Rule Changes Do Not Allow Lien Avoidance Through Chapter 13 Plan | Smith Debnam Narron Drake Saintsing & Myers, LLP
The U.S. Bankruptcy Court for the Eastern District of North Carolina recently rejected a debtor’s argument that the 2017 amendments to Rules 3012 and 3015 of the Federal Rules of Bankruptcy Procedure allowed him to avoid the privilege of a creditor through their confirmed Chapter 13 plan. In re Sherrell, no. 19-05254-5-DMW, 2021 Bankr. LEXIS 3378, at *7â8 (Bankr. EDNC December 10, 2021).
The debtor financed the purchase of a vehicle from the bank and then filed a voluntary request for Chapter 13 relief. She scheduled the bank as holding a secured debt, estimating that approximately $2,000 of equity in the vehicle above the bank’s lien. Identifier. at 2 o’clock. In its amended Chapter 13 plan, it proposed to treat the bank’s receivable as fully secured and to repay it over the term of the plan with interest. The plan was eventually confirmed and the bank did not object to the confirmation. However, since the bank never filed a proof of claim, the trustee made no disbursements to it under the plan. Just over two years after the plan was confirmed, the debtor sold her residence and the court approved a consent order between the debtor and the Chapter 13 trustee, in which “the debtor made a lump sum payment to the trustee, presumably from the proceeds of the sale of his residence and paid in full all permitted claims. Identifier. to 3. The court then registered the discharge of the debtor and closed the file. Shortly thereafter, the debtor decided to reopen its case in order to file a motion against the bank seeking sanctions in the form of a cancellation of the bank’s lien as well as damages for alleged breaches of the confirmed plan and of the landfill. Identifier. to *3-4. According to the Debtor, the bank had contacted her following the registration of her discharge “about the repossession of the Vehicle and refused to release her lien on the Vehicle”. Identifier. at 3.
2017 Amendments to the Federal Bankruptcy Rules of Procedure
On December 1, 2017, several amendments to the Federal Bankruptcy Rules came into effect. The centerpiece of these amendments was the mandate for a nationwide Chapter 13 form plan, with districts being allowed to replace the national form with a local form. See Fed. R.Banker. P.3015(c); 3015.1. The rules were also changed to allow the valuation of claims secured under 11 USC Â§ 506(a) to be determined through a Chapter 13 plan. R.Banker. P.3012(b). In addition, any assessment of a secured claim determined through a Chapter 13 plan is “binding on the holder of the claim, even if the holder files proof of claim to the contrary or the debtor attaches that claim, and regardless of whether an objection to the claim has been filed. Â» Feed. R.Banker. P.3015(g)(1).
General rule: liens pass through bankruptcy unaffected
The debtor argued that the terms of its confirmed Chapter 13 plan were binding on the bank, regardless of its lack of involvement in its case, and that as a result, the bank’s lien on the vehicle was invalidated when the property from his Virginia bankruptcy laws had been reinvested. in its subsequent confirmation of the plan, citing 11 USC Â§ 1327. The Court observed that the debtor’s argument was estopped by “the sound reasoning and precedent” of the Fourth Circuit’s decision in Cen-Pen Corp. vs. Hanson, 58 F.3d 89 (4th Cir. 1995).
The Chapter 13 debtors’ plan provided that if a secured creditor failed to file a proof of claim, their lien would be terminated upon entry of the debtors’ discharge. Cen-Pen, 58 F.3d at 93. The debtors classified a creditor with a lien on their home as having an unsecured claim, and the creditor did not file a proof of claim or oppose their plan. Identifier. at 91â92. Following confirmation of the plan and registration of the debtors’ discharge, the creditor initiated adversarial proceedings to determine the validity of its lien at the debtor’s domicile. Identifier. at 92. The bankruptcy court ruled in favor of the debtors, holding that “the confirmation of the plan vested the residence in the [debtors] free and clear” of the creditor’s privilege. Identifier. The district court quashed, finding that any interest in the Debtors’ residence acquired under their confirmed plan was subject to the creditor’s pre-existing lien. The Fourth Circuit asserted, first noting that the debtors’ argument “ignores the general rule that liens pass through bankruptcy unaffected.” Identifier. at 92 (quoting Dewsnup vs. Timm, 502 US 410, 418 (1992)). If a debtor wishes to “extinguish or modify a lien during the bankruptcy process, affirmative action must be taken to that end”. Identifier. In this case, the affirmative step required was the initiation of adversarial proceedings to determine the validity, priority or extent of the creditor’s privilege. Identifier. (citing Fed. R. Bankr. P. 7001(2)). Further, the Court observed that a confirmed Chapter 13 plan is not res judicata âas to matters which may be raised under the less formal procedure for contested matters. . . .â Identifier. at 93. Thus, the creditor’s lien remained valid and enforceable notwithstanding the wording of the debtors’ Chapter 13 plan because the debtors did not initiate adversarial proceedings to challenge the validity of the creditor’s lien.
The Court determined that the Debtor’s arguments under Â§ 1327 were identical to those presented (and rejected by) the Fourth Circuit in Cen-Pen. Similarly, the debtor had not initiated adversarial proceedings to challenge the validity of the banking lien on the vehicle. sherrell, 2021 Banking. LEXIS 3378, at *6. Further, the Court found that the debtor’s reliance on the 2017 Bankruptcy Rules Amendments was “misplaced.” Identifier. at 7 O’clock. Notes from the Rule 3012 Advisory Committee clarified the interplay between assessing a claim secured under a Chapter 13 plan (Rule 3012(b)) and challenging the underlying lien itself through an adversarial procedure (rule 7001):
Adversarial proceedings are initiated when the validity, priority or extent of a lien is in issue, as prescribed by rule 7001. This procedure is relevant to the basis of the lien itself, while assessment under Rule 3012 would be for the purposes stated above.
Identifier. to *8 (emphasis in original). Finally, the Court noted that if the debtor had wanted to ensure that the bank received payment of its claim under the plan, it could have filed proof of claim on behalf of the bank. Identifier. at *6â7 (quoting Fed. R. Bankr. P. 3004). Since she did not and she had reason to know that the claim had not been paid when she “determined the lump sum amount that would be required to pay all permitted claims”, identifier. at *7, the Court ruled that the debtor could not “rely on the proposed, but unfulfilled, repayment provision in the plan to seek the bargain of an unencumbered vehicle after the trustee had made no payment to [the bank].â Identifier. at 7 O’clock. Thus, the Court held that the Confirmed Plan only discharged the debtor’s debt in person liability on the loan to the bank, but did not void or otherwise affect the bank’s lien on the vehicle. Since the bank remained entitled to look to the vehicle for payment of its debt, it did not violate the Order confirming the Plan or the debtor’s release by seeking to repossess the vehicle, and the debtor was rejected. Identifier. at 8.
Secured creditors are generally only required to file a proof of claim in a Chapter 13 matter if they wish to receive distributions under the debtor’s plan. However, this process is purely voluntary and a secured creditor has the right to opt out of the debtor’s plan and rely solely on their security for payment of their claim. Although the 2017 amendments to the Bankruptcy Rules simplified and streamlined the requirements for filing a Chapter 13 plan, they did not repeal pre-existing procedural requirements for avoidance of lien. Thus, a debtor cannot take advantage of a secured creditor’s lack of participation in a case by drafting a plan that would allow the debtor to circumvent the requirements of Rule 7001 to void a creditor’s lien without initiating proceedings. contradictory to do so.