The U.S. Eastern District of North Carolina Bankruptcy Court recently rejected a debtor’s argument that the 2017 changes to rules 3012 and 3015 of the Federal Bankruptcy Rules of Procedure allowed it to avoid the privilege of a creditor through its confirmed Chapter 13 plan. In the case of Sherrell, n ° 19-05254-5-DMW, 2021 Bankr. LEXIS 3378, at * 7–8 (Bankr. EDNC December 10, 2021).
The debtor financed the purchase of a vehicle from the bank and then filed a voluntary Chapter 13 repair claim. She predicted that the bank had a secured debt, estimating that approximately $ 2,000 in capital own in the vehicle above the privilege of the bank. Identifier. at 2 hours. In its plan, amended in Chapter 13, it proposed to treat the bank’s claim as fully secured and to repay it over the life of the plan with interest. The plan was eventually confirmed and the bank did not object to the confirmation. However, as the bank never filed a proof of claim, the trustee made no disbursements to it under the plan. A little 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 paid a lump sum to the trustee, presumably from the proceeds of the sale of his residence and paid in full all admitted debts. Identifier. to 3. The Court then entered the discharge of the debtor and closed the case. Shortly thereafter, the debtor requested the reopening of her case in order to file a petition against the bank seeking penalties in the form of a reversal of the bank’s lien as well as damages for alleged violations of the confirmed plan. and the receipt. Identifier. to * 3-4. According to the Debtor, the bank had contacted her following the entry of her receipt “concerning the repossession of the Vehicle and refused to release her lien on the Vehicle”. Identifier. to 3.
2017 Changes to the Federal Bankruptcy Rules
On December 1, 2017, several changes to the Federal Bankruptcy Rules came into effect. The centerpiece of these changes was the mandate for a national Chapter 13 form plan, with districts being allowed to substitute the national form for a local form. See Fed. R. Bankr. P. 3015 (c); 3015.1. The rules were also changed to allow the valuation of secured receivables under 11 USC § 506 (a) to be determined through a Chapter 13 plan. Fed. R. Bankr. P. 3012 (b). In addition, any valuation of a secured claim determined through a Chapter 13 plan “binds the holder of the claim, even if the holder files evidence to the contrary of the claim or the debtor registers this claim, and independently from the fact that an objection to the claim has been filed. Fed. R. Bankr. P. 3015 (g) (1).
General rule: privileges going through bankruptcy are not affected
The debtor argued that the terms of her confirmed Chapter 13 plan were binding on the bank, regardless of her lack of involvement in her case, and that as a result, the bank’s lien on the vehicle was invalidated when the property of its bankruptcy estate were reinvested. in its subsequent confirmation of the plan, citing 11 USC § 1327. The Court observed that the debtor’s argument was excluded by “good reasoning and precedent” from the Fourth Circuit 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 voided upon registration of the debtors discharge. Cen-Pen, 58 F.3d at 93. Debtors classified a creditor with a lien on their home as having an unsecured debt, and the creditor neither filed a proof of claim nor opposed their plan. Identifier. at 91-92. Following the confirmation of the plan and the registration of the debtors’ discharge, the creditor initiated an adversarial procedure to determine the validity of his lien at the debtor’s domicile. Identifier. to 92. The bankruptcy court ruled in favor of the debtors, holding that “the confirmation of the plan invested the residence in the [debtors] free and clear ”from the privilege of the creditor. Identifier. The district court reversed, holding that any interest in the residence of debtors 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. to 92 (citing Dewsnup vs. Timm, 502 US 410, 418 (1992)). If a debtor wishes to “extinguish or modify a lien during the bankruptcy process, positive action must be taken to that end”. Identifier. In this case, the required positive step was the opening of adversarial proceedings to determine the validity, priority or extent of the creditor’s lien. Identifier. (citing Fed. R. Bankr. P. 7001 (2)). In addition, the Court observed, a confirmed Chapter 13 plan is not res judicata “With respect to issues that may be raised under the less formal procedure for disputed issues. . . . ” Identifier. at 93. Thus, the creditor’s lien remained valid and enforceable despite 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 § 1327 were identical to those presented (and rejected by) the Fourth Circuit in Cen-Pen. Likewise, the debtor had not initiated adversarial proceedings to challenge the validity of the bank’s lien on the vehicle. Sherrell, 2021 Banque LEXIS 3378, at * 6. In addition, the Court concluded that the debtor’s recourse to the 2017 changes to the Bankruptcy Rules was “inappropriate”. Identifier. at 7 O’clock. Advisory Committee Notes to Rule 3012 clarified the interaction between valuing a claim secured under a Chapter 13 plan (Rule 3012 (b)) and challenging the underlying lien itself. through adversarial proceedings (rule 7001):
Adversarial proceedings are initiated when the validity, priority or extent of a lien is in question, as prescribed in Rule 7001. This procedure is relevant to the basis of the lien itself, whereas the 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 scheme, it could have filed a proof of claim on behalf of the bank. Identifier. at * 6–7 (citing Fed. R. Bankr. P. 3004). Since she failed to do so and had reason to know that the claim had not been paid when “she determined the lump sum that would be required to pay all of the authorized claims in full” , identifier. at * 7, the Court held that the debtor could not “rely on the proposed, but failed, repayment provision in the scheme to seek the windfall of an unencumbered vehicle after the trustee has paid no payment to [the bank]. ” Identifier. at 7 O’clock. Thus, the Court ruled that the confirmed Plan released only the debtor in person liability on the loan to the bank but did not cancel or otherwise affect the bank’s lien on the vehicle. Since the bank remained entitled to turn to the vehicle for the reimbursement of its debt, it did not violate the order confirming the plan or the debtor’s discharge by seeking to repossess the vehicle, and the request for sanction of the debtor. debtor was rejected. Identifier. at 8.
Secured creditors are generally only required to file a proof of claim in a Chapter 13 case 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 collateral for the repayment of their debt. While the 2017 changes to the Bankruptcy Rules simplified and streamlined the requirements for filing a Chapter 13 plan, they did not repeal the pre-existing procedural requirements for waiving liens. Thus, a debtor cannot take advantage of a secured creditor’s lack of participation in a case by drafting plan language that would allow the debtor to bypass the requirements of Rule 7001 to void a creditor’s lien without committing an adversarial procedure to do so.