Opinion
Case No. 95-10753-AM
November 16, 1995
Patricia E. Mealer, Esquire, Maloney, Yeatts Barr, P.C., Richmond, VA, Of counsel for Debtor
Rosenblum and Rosenblum, P.C., Of Counsel for Joseph and Janice Klocek
MEMORANDUM OPINION AND ORDER
A hearing was held on November 7, 1995, on the debtor's objection to the secured claim filed by Joseph and Janice Klocek in the amount of $51,533.00. The debtor does not dispute the amount of the claim, but disputes that it is secured. The issue is whether the confirmed plan's treatment of the claim as unsecured, and the creditor's failure to object to confirmation, resulted in the avoidance of its lien. For the reasons set forth in this memorandum opinion, the court concludes that the judgment lien has not been avoided.
Where an objection to a proof of claim goes not to the amount owed but to the existence or nonexistence of the creditor's claimed lien, the issue should properly be raised by an adversary proceeding rather than as an objection to claim. In re Hill, 166 B.R. 444 (Bankr.D.N.M. 1993); F.R.Bankr.P. 7001. In the present case, however, the creditors have not objected to the procedure employed and have appeared and fully participated in the litigation. While the court could, as in Hill, dismiss the objection without prejudice to the bringing of an adversary proceeding to determine the validity of the disputed lien, doing so at this stage, after the parties have appeared and argued the merits of the controversy, would not promote the ends of justice and would simply result in added expense and delay to the parties, without any corresponding benefit to the adjudicative process. Accordingly, in this instance the court will rule on the issues as framed and argued by the parties. However, in any case where the affected creditor either did not appear or appeared but objected to the failure to bring an adversary proceeding, the court would require the filing of an adversary complaint.
Facts
The facts are not in dispute. The debtor filed a voluntary chapter 13 petition in this court on February 24, 1995. Approximately 6 months earlier, a $50,000.00 judgment had been entered in favor of Joseph and Janet Klocek against the debtor in the Superior Court of the District of Columbia based on an arbitration award. This order was docketed in the clerk's office of the Circuit Court of Fairfax County, Virginia, on September 26, 1994, and under Virginia law became a lien against the debtor's interest in real estate located at 1960 Lakeport Way, Reston, Virginia (Lot 54, Block 1C, Section 80, Reston, Fairfax County, Virginia). The debtor, aware of the judgment but apparently unaware that it had been docketed in Virginia, listed the Kloceks' claim on his schedules as unsecured. The Kloceks filed a timely proof of claim on March 22, 1995, asserting a secured claim in the amount of $51,533.OO.
In argument, the Kloceks' attorney asserted that the debtor had been given notice of the domestication of the judgment in Virginia. No evidence was presented by either party on this issue. In any event, the debtor's awareness or lack of awareness of the Kloceks' judgment lien has no effect on the analysis of the legal issue presented.
No supporting documentation or evidence of secured status was attached to the proof of claim. On the place provided on the proof of claim form for "Brief Description of Collateral," the Kloceks' attorney checked the block for "Motor Vehicle," although it would appear that he meant to check the box for the adjacent choice, "Real Estate."
In the meantime, the debtor apparently submitted a plan dated March 10, 1995. That plan was superseded by an amended plan dated March 30, 1995, which in turn was replaced by an amended plan dated May 25, 1995. Neither of the amended plans made any specific mention of the Kloceks' claim or explicitly treated it as secured. There is no suggestion that the Kloceks were not mailed copies of the various plans. The Kloceks did not object to any of the plans. The only formal objection to any of the plans was by the chapter 13 trustee, who filed an objection on June 14, 1995, to the May 25, 1995, plan. The trustee's objection was resolved by an agreed modification, incorporated in the order confirming the plan, increasing the amount of the plan payments. An order confirming the plan was signed on July 28, 1995, and entered on the docket on August 4, 1995.
The debtor apparently placed the wrong docket number on the plan, with the result that it was never docketed or filed in this case. An order was entered by the clerk dismissing the case under Local Rule 313 for failure to timely file and distribute a plan. The order of dismissal was subsequently vacated on the debtor's motion and the case was reinstated on the docket.
The plan as filed with the court called for payments of $632.00 per month for 36 months and provided for a 14% dividend to unsecured creditors. The order confirming the plan requires payments of $750.00 per month for 36 months, all Federal and state income tax refunds in excess of $250.00, "plus such additional amounts as are determined by the Trustee to be disposable income of the Debtors during the pendency of this proceeding."
On October 2, 1995, the debtor filed an objection to the Kloceks' claim, asking that it be disallowed. The Kloceks filed a timely request for hearing, and the matter is ripe for determination.
Conclusions of Law and Discussion
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
The sole disputed issue is whether the confirmation of the debtor's chapter 13 plan, which did not treat the Kloceks' claim as secured, avoided the Kloceks' judgment lien. The debtor, relying on the language of § 1327, Bankruptcy Code and the prior decisions of this court in In re Godson, 114 B.R. 453 (Bankr.E.D.Va. 1990) (Tice, J.) and In re Williams, 166 B.R. 615 (Bankr.E.D.Va. 1994) (Adams, J.), asserts that the Kloceks' failure to object to confirmation of the chapter 13 plan, which did not treat their claim as secured, effectively avoided the judgment lien.
(a) The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of the plan vests all of the property of the estate in the debtor.
(c) Except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for under the plan.
The difficulty with this argument is that it ignores the recent controlling Fourth Circuit opinion in Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995), decided subsequent to Gadson and Williams. In Cen-Pen, the debtors filed a chapter 13 plan that treated the holder of a second and third deed of trust against their residence as unsecured. The plan also included the following language: "All claims to be allowed must be filed; to the extent that the holder of a secured claim does not file a proof of claim, the lien of such creditor shall be voided upon the entry of the Order of Discharge. . . ." The creditor did not object to confirmation, nor did it file a proof of claim. After the debtors completed the plan and received their discharge, the creditor filed an adversary complaint to determine whether it held a valid lien against the debtors' real estate.
The plan provided that unsecured claims would be paid 25 cents on the dollar, and apparently the creditor did receive such payment.
Of course, as noted above, in this case the creditor, unlike the creditor in Cen-Pen, did file a proof of claim.
The Bankruptcy Court ruled that confirmation of the plan vested the residence in the debtors free and clear of the creditor's lien. The District Court reversed, holding "that confirmation of the plan simply vested in the debtors the same interest in the residence that they had before filing a petition for bankruptcy relief-that is, an interest subject to Cen-Pen's liens." 58 F.3d at 92. The Fourth Circuit affirmed. On appeal the debtors argued, as the debtor does here, that the liens had been avoided "because the creditor received notice (by means of a copy of the proposed plan) that the underlying debt was being treated as unsecured but neither objected to confirmation of the plan nor filed a proof of its secured claim." 58 F.3d at 91. Although acknowledging that "at first blush" § 1327 appeared to support the debtors' argument, the Court held that other provisions of the Bankruptcy Code and Rules compelled a different result:
To begin with, appellants' argument ignores the general rule that liens pass though bankruptcy unaffected. A bankruptcy discharge extinguishes only in personam claims against the debtor(s) but generally has no effect on an in rem claim against the debtor's property. For a debtor to extinguish or modify a lien during the bankruptcy process, some affirmative step must be taken toward that end. Unless the debtor takes appropriate affirmative action to avoid a security interest in property of the estate, that property will remain subject to the security interest following confirmation. The simple expedient of passing their residence through the bankruptcy estate could not vest in the Hansons a greater interest in the residence than they enjoyed prior to filing their Chapter 13 petition.
58 F.3d at 92-93 (emphasis added; citations omitted). The Court then held that merely treating the claim as unsecured in the plan was not a "sufficient `affirmative step'" to avoid the creditor's lien, contrasting the "less formal" procedure for plan confirmation with the more formal procedure, particularly as to service of process, that would apply in an adversary proceeding to avoid a lien. The Court further held,
Moreover, the fact that Cen-Pen was listed as an unsecured creditor in the bankruptcy schedules does not suffice to avoid its liens. "Even where confirmed without objection, a plan will not eliminate a lien simply by failing or refusing to acknowledge it or by calling the creditor unsecured." The Hansons should not be permitted to eliminate otherwise valid liens on their residence simply by characterizing Cen-Pen's claims in the plan as unsecured. Nor does the combination of Cen-pen's treatment as an unsecured creditor plus its failure to file a proof of claim avoid its lien.
58 F.3d at 94 (citations omitted). See, In re Simmons, 765 F.2d 547 (5th Cir. 1985) (Where plan treated creditor who had filed a secured proof of claim as unsecured, lien survived confirmation of chapter 13 plan where debtor never objected to proof of claim); Matter of Tarnow, 749 F.2d 464 (7th Cir. 1984) (secured creditor's lien survived confirmation of chapter 11 plan where creditor had not filed a proof of claim and was not apparently provided for in plan).
Cen-Pen directly controls the present case. As in Cen-Pen, no "affirmative step" was taken by the debtor to avoid the Kloceks' judgment lien. The lien treatment is rather one of avoidance by silence and implication, since nothing in the plan explicitly mentions, avoids, or modifies the Kloceks' judgment lien, and the Kloceks are simply left to deduce that their otherwise valid judgment lien is to be silently set aside. When debtor's counsel was asked at oral argument what legal basis would have existed for avoidance of the lien had the plan contained explicit language to that effect or had the debtor filed a separate adversary proceeding or contested matter to avoid the lien, she advised the court that the only legal basis for avoiding the lien would have been under § 506(a) and (d), Bankruptcy Code, which, with certain exceptions not relevant here, provides that a creditor's claim is secured "to the extent of the value" of the bankruptcy estate's interest in the collateral, and that a lien is void to the extent it "secures a claim against the debtor that is not an allowed secured claim." Debtor's counsel did acknowledge, however, that under § 506 the Kloceks' claim would be at least partially secured.
To be fair, there is no suggestion in the record that the debtor was deliberately attempting to ambush the Kloceks. Debtor's counsel advised the court that she was unaware of the judgment lien and had not seen the Kloceks' proof of claim at the time the amended plan was filed.
The debtor's schedules reflect that the real estate is co-owned with Joseph F. and Roberta J. Hering but does not state the nature of the co-ownership or the debtor's undivided interest. The schedules state, however, that the value of the debtor's interest is $233,000.00 The only other lien shown against the property is a deed of trust in favor of Waterfield Financial Corp., which is listed on the schedules as holding a claim of $218,000.00. Waterfield, which apparently holds or services both a first and second deed of trust against the property, filed proofs of claim totalling $216,324.54. Taking the latter as correct leaves equity of $16,675.46, which, if correct, would result in $34,857.54 of the claim being unsecured.
Under F.R.Bankr.P. 3012, the procedure for valuation of collateral under § 506 is "on motion of a party in interest" after "a hearing on notice to the holder of the secured claim" and such other parties as the court may direct. Since the objection that is currently before this court focussed solely on the preclusive effect of plan confirmation, and because it is not clear whether, in light of the court's ruling on that issue, the debtor will seek to modify his plan or to convert or dismiss his case, the court's ruling will be without prejudice to a separate motion by the debtors, the chapter 13 trustee, or the Kloceks under § 506, Bankruptcy Code, to determine what portion of the Kloceks' claim is secured.
There is language in Cen-Pen suggesting that any lien avoidance requires the moving party to proceed by adversary proceeding rather than motion. 58 F.3d at 93 (commenting that F.R.Bankr.P. "expressly requires initiation of an adversary proceeding `to determine the validity, priority, or extent of a lien . . .") However F.R.Bankr.P. 3102 expressly provides that the procedure for obtaining a determination under § 506 is by motion. The Advisory Committee Note to the rule explains, "An adversary proceeding is commenced when the validity, priority, or extent of a lien is at issue as prescribed by Rule 7001. That proceeding is relevant to the basis of the lien itself while valuation under Rule 3012 would be for the purposes indicated above." (emphasis added) The concern of the Court in Cen-Pen appeared to center on the lack of individualized notice when provisions that would deprive a creditor of its lien are simply buried, sometimes within boilerplate, in a plan. A motion under Rule 3012 for valuation of security, however, is a contested matter governed by F.R.Bankr.P. 9014. That rule requires that "reasonable notice and opportunity for hearing be afforded the party against whom relief is sought" and further directs, "The motion shall be served in the manner provided for service of a summons and complaint" (emphasis added). Thus, a motion provides the same degree of notice to the affected creditor as would a summons and complaint in an adversary proceeding. Such a motion clearly constitutes an "affirmative step" as envisioned in Cen-Pen, and, because it is separate from the plan itself and is focussed on the specific creditor's lien interest, is not likely to be overlooked or its significance misunderstood by a creditor.
Since the parties have not had an opportunity to brief or argue whether, in light of the court's ruling that the Kloceks' judgment lien survives confirmation of the chapter 13 plan, confirmation itself should be reopened, the court makes no ruling at this time.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The objection to the $51,533 secured claim filed in this case on March 22, 1995, by Joseph and Janice Klocek is overruled.
2. The entry of this order is without prejudice to the right of any party in interest to bring a motion under F.R.Bankr.P. 3012 to determine the value of the claim secured by the Kloceks' judgment lien.
3. The clerk will mail a copy of this order to counsel for the debtor, counsel for the Kloceks, and the chapter 13 trustee.