Chapter 13 Plan Cannot Avoid Lien Absent Adversary Proceeding

By: Michael Buccino

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In SLW Capital, LLC v. Mansaray-Ruffin (In re Mansaray-Ruffin), the Third Circuit held that a creditor’s lien could not be avoided through the confirmation of a Chapter 13 plan that treated the claim as an unsecured claim.

[1]

  Notwithstanding the importance of finality in bankruptcy proceedings and statutory language binding creditors to the terms of a confirmed plan, since the Federal Rules of Bankruptcy Procedure require an adversary proceeding to invalidate liens, the order confirming the confirmed plan was not res judicata with respect to the status of the creditor’s lien.

[2]

 

The creditor in this action held a mortgage on the debtor’s property, which the debtor contended was rescindable because of material Truth In Lending Act violations. After filing Chapter 13, the debtor submitted a plan that listed the creditor as a disputed secured creditor. When the creditor failed to file its own proof of claim, the debtor filed an unsecured claim on its behalf and considered the mortgage rescinded.  After the plan was confirmed, the creditor continued to request payments from the debtor before initiating an adversary proceeding in which it asked the court to rule that its mortgage continued in spite of the plan. The debtor moved to dismiss asserting that the lien was invalid because the confirmed plan acted as a final ruling on the matter.

 

The debtor argued that the Bankruptcy Code makes the terms of a confirmed plan binding on all parties.

[3]

In In re Szostek,

[4]

the Third Circuit called a confirmation plan res judicata with regard to all issues that could have been decided at the confirmation hearing.  In rejecting the debtor’s argument, the court noted that Szostek also stated that a plan could not be confirmed if it did not meet the mandatory requirements of the Bankruptcy Code.

[5]

  Under the Federal Rules of Bankruptcy Procedure (“Rules”), the determination of “the validity, priority, or extent of a lien or other interest in property” may only be determined by an adversarial proceeding.

[6]

  Because the adversary proceeding requirement in the Rules is mandatory, the court reasoned that any finality the confirmed plan carries is outweighed by due process requirements.

[7]

In Piedmont Trust Bank v. Linkous (In re Linkous),

[8]

the Fourth Circuit refused to view a confirmation plan as res judicata if it resulted in a denial of due process. Furthermore, it is settled case law that even creditors who are given notice of confirmation hearing proceedings will not see their liens invalidated by the results of those proceedings.

[9]

The Third and Fourth Circuits, in In re Harbor Tank Storage Company

[10]

and Banks v. Sallie Mae Servicing Corp. (In re Banks),

[11]

have made it clear that a creditor has a right to expect all notices regarding an adversary proceeding, to which he is entitled under the Bankruptcy Code, and need not be burdened by filing an appearance or claim in a confirmation hearing. In a strongly worded dissent, Circuit Judge Greenberg argued that the majority had erroneously equated the constitutional requirements of due process with the procedural requirements of the Rules and that, since this creditor did receive actual notice sufficient to comply with due process, the plan should have res judicata effect notwithstanding the debtor’s failure to comply with the Rules.

[12]

 

The result of this case is to place a greater burden on consumers filing for bankruptcy relief under Chapter 13. When filing for such relief a debtor must be diligent in following the details of the Rules.

[13]

Where an adversary proceeding is required, the procedure for arranging such a proceeding must be followed exactly.

[14]

Debtors cannot rely on notices regarding a confirmation hearing to alleviate or resolve disputes for which the Rules require an adversary proceeding because creditors are free to ignore those notices and wait for the specific notice requirements associated with adversary proceedings.

[15]

The obvious danger here is that consumer debtors will believe they have resolved various issues through their confirmed plans only to find out that the order of confirmation was not a final determination of the issue in question.

[16]

This will put consumers already in a precarious financial position in even more peril.



[1]

530 F.3d 230, 233 (3d Cir. 2008).

[2]

Id. at 242.

[3]

Id. at 235 (“Mansaray-Ruffin argues that…the Bankruptcy Code generally makes all confirmed plans final.”); see also 11 U.S.C. §1327(a) (2006) (“The provisions of a confirmed plan bind the debtor and creditor, whether or not the claim is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”).

[4]

886 F.2d 1405, 1409 (3rd Cir. 1989).

[5]

Id. at 1411.

[6]

Fed. R. Bankr. P. 7001(2).

[7]

See In re Mansaray-Ruffin, 530 F.3d at 238–39.

[8]

990 F.2d 160, 162 (4th Cir. 1993).

[9]

See In re Mansaray-Ruffin, 530 F.3d at 239. 

[10]

385 F.2d 111, 114–15 (3d Cir. 1967) (upholding creditor’s right to file claim despite knowledge of confirmation hearing due to debtor’s failure to provide proper notice of proceeding).

[11]

299 F.3d 296, 301 (4th Cir. 2002) (saying creditor’s knowledge of confirmation hearing, absent proper filing by debtor, fulfilled “notice” requirement but not “service of process” requirements necessary to give confirmed plan res judicata effect).

[12]

See In re Mansaray-Ruffin, 530 F.3d at 248-49 (Greenberg, J., dissenting). 

[13]

See In re Mansaray-Ruffin, 530 F.3d at 242 (concluding that creditors have the right not to have their liens invalidated unless debtors strictly adhere to all the processes and requirements of the Rules).

[14]

See Id. at 238 (saying an adversary proceeding is mandatory and “establishes a right to specific process”).  

[15]

See In re Harbor Tank Storage, 385 F.2d at 114–15 (saying debtor giving notice of confirmation hearing to creditor did not alleviate need for notice of adversary proceeding); see also In re Banks, 299 F.3d at 301 (saying full adversary proceeding “service of process” is necessary to give confirmation plan res juicata effect).

[16]

See 8 Collier on Bankruptcy, ¶ 1327(a), at 1327–3 (Alan N. Resnick et al. eds., 15th ed. Rev. 2006) (“There must be finality to a confirmation order so that all parties may rely upon it without concerns that actions that they may later take could be upset because of a later change or revocation order.”).