Opinion
Case No. 97-17400-SSM
February 2, 1998
Glenn Alan Marston, Esquire, Ms. Joanne Margaret Marston, Chantilly, VA, Debtors, Pro se
MEMORANDUM OPINION AND ORDER
Before the court are (a) the debtors' motion to avoid, under 11 U.S.C. § 522(f), a security interest apparently claimed by Sears in a refrigerator the debtors purchased from Sears; and (b) the debtors' motion for abeyance of judgment. Because the underlying motion has not been properly served, and because in any event § 522(f) does not permit avoidance of a purchase-money security interest, the motion, to the extent is seeks lien avoidance under § 522(f), will be denied without prejudice to further proceedings on the other issues raised by the motion.
Background
The debtors, Glenn Alan Marston and Joanne Margaret Marston, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on October 6, 1997. The chapter 7 trustee filed a report of no distribution on November 7, 1997, and the debtors received a discharge of their dischargeable debts on January 16, 1998.
On December 19, 1997, the debtors filed the motion presently before the court seeking to avoid a lien held by Sears on a "refrigerator, as well as other consumer goods" sold and delivered by Sears to their house located in Chantilly, Virginia. The motion alleges that Sears's security interest "can be offset by" unliquidated claims that the debtors say they have against Sears. These claims, it is alleged, "will almost certainly exceed any amounts which [the debtors] owe to . . . Sears," and that the debtors "should be permitted an offset, with Sears paying the co-debtors the difference, if any." They also allege that the damages will exceed the current fair market value of the collateral, and that they should be permitted to redeem the refrigerator, by offsetting an equivalent amount of their damage claim against Sears. They allege, finally, that the sale documents and credit agreement with Sears are legally insufficient to create a valid purchase-money security interest under Virginia law as a result of "certain defects." As relief, they request the avoidance of Sears' lien under 11 U.S.C. § 522(f), and that the court "take whatever actions related thereto or necessary to make them whole, including the awarding of money damages, if deemed appropriate"; or, alternatively, that they been allowed to redeem the property, using their claimed offset. Service of the motion was made on Sears by first-class mail addressed to "Sears, P.O. Box 8, Boise, ID 83707-0008." In a subsequent motion filed June 21, 1998, and entitled "Motion for Abyeance of Judgment," the debtors request that the court enter the order avoiding Sears' lien, but withhold determination on the other issues, including the claimed monetary damages, in order to permit the parties to come to an informal settlement, if possible.
These claimed damages are said to arise from damage to the debtors' mobile home "caused by the negligence or misconduct of employees or agents of Sears."
Discussion A.
The threshold problem is that the debtors' motion has not been properly served. Under F.R.Bankr.P. 4003(d) and 6008, a debtor's motion to avoid a lien under § 522(f), Bankruptcy Code, or to redeem property from a lien under § 722, Bankruptcy Code, is a contested matter governed by F.R.Bankr.P. 9014. That rule in turn requires that the motion "be served in the manner provided for service of a summons and complaint by Rule 7004." Rule 7004 in turn permits service by any means authorized by Fed.R.Civ.P. 4 and, in addition, permits service by first-class mail. For service on a domestic or foreign corporation, the motion must be mailed "to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process. . . . " The motion here was simply mailed to what appears to be a post-office box in a state that the court can take judicial notice is not the state in which Sears, Roebuck Company has its corporate offices. Accordingly, entry of the order tendered by the debtors avoiding the lien claimed by Sears is not proper.
In the subsequent motion for abeyance of judgment, the debtors added to the certificate of service "Attn: Officer, Managing or General Agent, or Authorized Agent — BANKRUPTCY MATTER." This does not, however, satisfy with the requirements of Rule 7004(b)(3). Service under that rule requires that the pleading or process be mailed to the attention of a named person who has his or her office at that address and receives mail there.
B.
Even if there were not a problem with service, there is a more fundamental problem in that § 522(f), Bankruptcy Code, can only be used to avoid a "judicial lien" against exempt assets or a "nonpossessory, nonpurchase-money security interest" in certain types of exempt assets. The debtors' motion on its face shows that the claimed lien of Sears is not a judicial lien, and — since it is a lien for the purchase price of the refrigerator — is clearly not a "nonpurchase-money" security interest either. Put simply, § 522(f), Bankruptcy Code, does not allow the avoidance of a consensual security interest to secure the purchase price of an exempt asset. Thus, even had service of the motion been proper, no legal basis has been stated for avoiding Sears' security interest under § 522(f).
Under Fed.R.Civ.P. 55, as incorporated into bankruptcy proceedings by F.R.Bankr.P. 7055, as well as under Local Rule 9013-1(H)(4), the court may grant relief requested in a motion by default if no responsive pleading is filed. Further, it is well-settled that the court may deem all well-pleaded allegations as admitted for purposes of the motion. Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994); Nishimatsu Constr. Co. v. Houston Nat'l Bk., 515 F.2d 1200, 1206 (5th Cir. 1975). Nevertheless, even in the face of a default, the court may examine the allegations of a motion to determine whether the plaintiff is entitled to the relief requested, or whether the relief requested has any basis in law. In re Wall, 127 B.R. 353, 355 (Bankr. E.D. Va. 1991 (Tice, J.); see also Thomson v. Wooster, 114 U.S. 104, 113, 5 S.Ct. 788, 792-93, 29 L.Ed 105 (1885); Black, 22 F.3d at 1399; Nishimatsu Constr. Co., 515 F.2d at 1206 10 Moore's Federal Practice 3d § 55.12[1], at 55-18 (1997) ("Upon entry of default, the facts alleged by the plaintiff in the complaint are deemed admitted. However, plaintiff's conclusions of law are not deemed established. Thus, the court may grant only the relief for which a sufficient basis is asserted in the complaint.'") (Emphasis added); 10 Collier on Bankruptcy, ¶ 7055.02, p. 7055-5 (Lawrence P. King, ed., 15th ed. rev. 1997) ("Upon a default, the court is generally required to deem as true the well pleaded allegations of a complaint, but it is not required to agree that the pleaded facts constitute a valid cause of action. If it finds that no claim is stated, it may, in its discretion, refuse to enter the default judgment.").
C.
The debtors also contend in their motion that Sears has no valid security interest at all because Sears failed to comply with the requirements of the Uniform Commercial Code. However, F.R.Bankr.P. 7001 is clear that a proceeding (except for a debtor's lien avoidance action under § 522(f), Bankruptcy Code), to determine the validity, extent or priority of a lien is an adversary proceeding. Such relief cannot be obtained by motion but must be sought by complaint and summons. F.R.Bankr.P. 7003 and 7004; but see In re Wilkinson, 196 B.R. 311, 315 (Bankr. E.D. Va. 1996) (although lien avoidance other than under § 522(f) should have been brought by adversary proceeding, requirement for complaint would be waived where defendant consented to proceeding by motion, since the more formal requirements of an adversary proceeding are intended to protect the defendant.) Thus as to such relief, the debtors will have to file an adversary complaint.
The court will reserve ruling, until the issue is presented in concrete form, as to whether this court actually has subject-matter jurisdiction to decide the validity of the claimed lien.
D.
In their motion, the debtors also seek an award of money damages against Sears, although as to that issue they have asked the court to grant the parties some additional time to attempt to reach a settlement. Under F.R.Bankr.P. 7001, however, a proceeding to recover a money judgment is clearly an adversary proceeding, and must be brought by complaint rather than by motion. Accordingly the court would be unable to grant such relief in the context of the present motion.
Again, the court reserves ruling on the issue of subject-matter jurisdiction.
E.
Their remains, finally, the issue of redemption. Under § 722, Bankruptcy Code, an individual debtor may redeem exempt tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable debt "by paying the holder of such lien the amount of the allowed secured claim . . . that is secured by such lien." (emphasis added). Whether "payment" must be in cash or may take the form of an offset of a debtor's claim against the lien holder does not appear to have been decided by any reported cases. Under F.R.Bankr.P. 6008, redemption may be sought by motion and does not require an adversary proceeding. Assuming — an issue the court does not now decide — that a setoff constitutes "payment" for the purpose of § 722, the determination of the amount and validity of the setoff would appear to be an integral part of the motion and arguably would not require an adversary proceeding. If, however, the debtors seek, not merely a setoff, but a money judgment, the Bankruptcy Rules clearly require an adversary proceeding.
ORDER
For the foregoing reasons, it is ORDERED:
1. The motion to avoid lien is denied without prejudice to its renewal, solely as respects the alternate relief requested of redemption, after proper service is made as required by F.R.Bankr.P. 9014 and 7004, and without prejudice to the debtors' right to bring an appropriate adversary proceeding with respect to the issues of the claimed invalidity of the lien under the Uniform Commercial Code and the claim for money damages.
2. The motion for abeyance of judgment is denied as moot.
3. The clerk will mail a copy of this order to the debtors, Sears, and local counsel for Sears.