Consumer creditors were dealt a favorable hand on the issue of lien "revival" or "revesting" in a recent decision authored by Judge Eugene R. Wedoff in In re Booth.¹ The issue presented in Booth is the effect of dismissal of a chapter 13 case in which the secured portion of a creditor's claim was paid in full upon the creditor's lien.

Clarence Booth filed chapter 13 in October 1998. The plan proposed by Booth called for valuing an automobile lender's claim in the amount of $15,750, or approximately $5,673.32 short of the amount outstanding. The plan also provided that:

Upon completion of payment of the secured portion of any claim, the property securing said claim shall vest in the debtor free and clear of any lien, claim or interest of a secured creditor...if the security is property for which a release of title is necessary, upon satisfaction of said secured claim, the secured creditor shall furnish a release of said title to the debtor.

During the course of the case, the debtor paid the secured claim. Nonetheless, the case was subsequently dismissed due to a material default in plan payments. At no time prior to dismissal did the debtor request, nor did the secured creditor provide, a release of the automobile lien.

Two months later, the debtor filed a chapter 7 case. The secured creditor pursued relief from the automatic stay, in response to which the debtor filed an emergency motion to establish that the lien on the automobile had been satisfied pursuant to the prior chapter 13 plan. While considering the debtor's motion, the court observed that the relevant issue was not whether a plan providing for lien satisfaction prior to plan completion could be confirmed and upheld, but rather the fact that the plan terms had not been challenged, the plan had been confirmed and, therefore, was binding on all creditors.² The court instead identified the issue as whether the lien satisfaction provisions of the chapter 13 plan are undone by a provision of law operating apart from the terms of the plan.³

The court then looked to the effect of §349(b)(3), which provides that the dismissal of a bankruptcy case revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case. In this case, the debtor's plan called for all property of the estate as defined by §§541 and 1306 of the Bankruptcy Code to remain property of the estate following confirmation. As a result, there was no issue as to whether the subject vehicle constituted property of the estate, either after the secured claim was paid or at the time of dismissal.

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Perhaps the best approach for the wary creditor is to begin objecting to chapter 13 plan provisions calling for liens to be surrendered prior to the conclusion of the case.

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The court went on to reason that revestment extended not only to the debtor but to any property interest in place at the time the chapter 13 was commenced.⁴ Referring to the lender's lien, the court stated:

That lien, at the commencement of the case, was in the full amount owed by [the debtor] to [the lender], limited to the value of the automobile. The satisfaction of the lien was possible only through the operation of the plan during the bankruptcy case; hence the re-vesting of the property interest to its pre-bankruptcy state requires revival of the lien.⁵

In further support of its ruling, the court pointed out that such an outcome did not conflict with any general bankruptcy policy. First, the outcome was consistent with the outcome had the debtor never filed bankruptcy, which, of course, is the intended outcome in the event of dismissal. Second, liens generally survive bankruptcy.⁶ Third, failing to revest the lender with its lien would encourage the pursuit of "chapter 20" cases and effectively permit installment redemption in chapter 7 cases, derived from applicable Seventh Circuit authority.⁷

Judge Wedoff's opinion is thorough and well reasoned. That is not to say that all questions related to this issue have been resolved. What if the lender had promptly released its lien as required by the plan, prior to dismissal? Would the lender's lien "revest" upon dismissal, notwithstanding an intervening security interest in favor of a third party? Would the court be willing to consider a motion seeking some form of equitable revival or revestment of a lien satisfied pursuant to the plan at an earlier date?

While the court acknowledges local precedent upholding lien-satisfaction provisions in chapter 13 cases,⁸ it would certainly appear foolhardy for a lienholder to surrender title prior to the close of the chapter 13 proceeding. Certainly this case would provide a compelling argument for the harm that may inure to the lienholder should it be required to surrender its lien immediately upon payment of the secured claim but prior to the completion of the plan.

On the other hand, creditors in this position must be cognizant of the liability that may result should they fail to comply with the lien surrender provisions of a confirmed plan. The worst-case scenario is a contempt citation; the best-case scenario involves being named in a turnover action. Perhaps the best approach for the wary creditor is to begin objecting to chapter 13 plan provisions calling for liens to be surrendered prior to the conclusion of the case. Booth provides an excellent road map to navigate the grounds of such an objection.

Footnotes

¹ 289 B.R. 665 (Bankr. N.D. Ill. 2003). Return to article

² Id. at 668. Return to article

³ Id. Return to article

⁴ See, also, Carter v. United States HUD, 1998 U.S. App. LEXIS 680 (9th Cir. 1998) (dismissal revests the property in the entity in which such property was vested immediately before the commencement of the case, subject to all encumbrances that existed prior to bankruptcy (citations omitted)). Return to article

⁵ Id. at 669. Return to article

⁶ Citing Dewsnup v. Timm, 502 U.S. 410, 419, 112 S.Ct. 773, 779 (1992). Return to article

⁷ Id. at 669, citing In re Edwards, 901 F.2d. 1383 (7th Cir. 1990). Return to article

⁸ Id. at 668, citing In re Shorter, 237 B.R. 443 (Bankr. N.D. Ill. 1999). Return to article