Opinion
Case No. 09-18376.
4-2-2010
In re: MARK A. RUHSTALLER TARA L. RUHSTALLER, Chapter 13, Debtors.
Presently before the Court is a confirmation objection ("Objection") (Doc. 19) filed by Fifth Third Bank (hereinafter, "the Bank)".
The Bank holds a second mortgage on the Debtors' residence. The Debtors' chapter 13 plan states that The Bank's second mortgage "shall be `stripped' by . . . Confirmation . . . as there is not equity for the Second Mortgage to attach." See Doc. 6 at ¶ 30. The Objection contends that the value of the residence exceeds the amount of the first mortgage (hereinafter, the "Substantive Argument").
A confirmation hearing was held on February 23, 2010. The Debtors presented evidence that the value of the residence does not exceed the first mortgage. The Bank did not present any evidence.
In lieu of evidence the Bank raised a new argument. The Bank now contends that its lien cannot be avoided absent the filing of a pre-confirmation motion (hereafter, the "Procedural Argument").
According to its counsel, the Bank was not prepared to present evidence at the confirmation hearing because it was waiting for the Debtors to file a motion. The Bank noted that both the plan and the Trustee's notes from the creditors' meeting state that a motion will be filed. See Doc. 6 at ¶ 30; Doc. 20 at ¶ 14. The Court agrees with the Trustee that the Bank's Procedural Argument appears to elevate form over substance. The Bank instigated the confirmation hearing by disputing the plan's valuation of the residence. Notice of the February 23, 2010 confirmation hearing was served on the Bank. See Doc. 17. LBR 3015-3(a)(3) requires that "[a]ll parties shall be prepared to present all witnesses and other evidence at the confirmation hearing."
Being a threshold issue, the Procedural Argument will be addressed first.
PROCEDURAL ARGUMENT
Although not addressing whether a motion is required, both the Sixth Circuit and this Court have permitted the avoidance of an unsecured mortgage through plan confirmation without motion. See In re Lane, 280 F.3d 663 (6th Cir. 2002); In re Hill, 304 B.R. 800 (Bankr. S.D. Ohio 2003). Hill held that an adversary proceeding is not required because the lien is avoided by operation of 11 U.S.C. § 1327(c), which "is effectuated only upon plan confirmation." Hill, 304 B.R. at 803-04.
Subsequent to Lane and Hill, Judge Stosberg also decided that an adversary proceeding is not required. See In re Bennett, 312 B.R. 843 (Bankr. W.D. Ky. 2004). Unlike Lane and Hill, however, Bennett requires the filing of a motion with the filing of the plan. Id. at 848. While noting that the lien is avoided by § 1327(c), Bennett concluded that the practice is subject to Fed. R. Bankr. P. 3012 ("court may determine the value of a claim secured by a lien . . . on motion"). Bennett, 312 B.R. 847-48. The filing of a motion also increases the likelihood that due process will be satisfied. Id. at 848.
Although this Court believes that a preconfirmation motion may represent a better practice it is not required by the Bankruptcy Code.
The Court realizes that a motion and order may better effectuate the clearing of title. That is why this Court has entertained postconfirmation motions to avoid a wholly unsecured mortgage even though, as the Bank correctly notes, such a motion may be moot because of the preclusive effect of the confirmed plan.
The Court also agrees with Bennett that a preconfirmation motion increases the likelihood that due process will be satisfied. However, as Bennett notes, the filing of a motion does not guarantee that due process will be satisfied. Bennett, 312 B.R. at 848. Similarly, the absence of a motion does not mean that due process cannot be satisfied. This case is an excellent example. The plan was served on the Bank on December 30, 2009. See Doc. 18. The Bank filed its Objection on January 25, 2010. See Doc. 19. The Objection reveals that the Bank clearly understood that the plan challenged its lien and why.
I. Section 506(a)
Whether a mortgagee possesses a secured claim is determined by 11 U.S.C. § 506(a). Lane, 280 F.3d at 664. The claim is secured if the value of the collateral exceeds the claims of senior encumbrances. Id. at 669. Section 506(a) expressly provides that "[s]uch value shall be determined . . . in conjunction with any hearing . . . on a plan affecting such creditor's interest." Therefore, a Rule 3012 motion is not required to accomplish a § 506(a) valuation pursuant to a plan. See also In re Nichols, 440 F.3d 850, 856 n.5 (6th Cir. 2006) (suggesting that valuation of collateral pursuant to a chapter 13 plan is determined at confirmation).
Even if Rule 3012 expressly required a motion when a § 506(a) valuation is implicated by a plan, which it does not, the Bankruptcy Code always controls when there is a conflict between the Code and the Rules. See In re Chavis, 47 F.3d 818, 822 (6th Cir. 1995).
II. Section 1327(c)
If Hill is applied consistently, § 1327(c) not only disposes of the need for an adversary proceeding but also a motion. There is no predicate for a complaint or motion to avoid a wholly unsecured mortgage. The only predicate in the entire Code is § 1327(c), which "is effectuated only upon plan confirmation." Hill, 304 B.R. at 803-04. Even Bennett acknowledges that the lien is avoided by § 1327(c). Bennett, 312 B.R. at 848.
III. Application
Because a motion is not required by the Code, the Procedural Argument is without merit. Consequently, the Court must address the Substantive Argument.
SUBSTANTIVE ARGUMENT
The Bank contends that the value of the collateral exceeds the first mortgage. However, the evidence from the confirmation hearing differs.
The Debtors presented the testimony of Ron Sears, a certified appraiser. Pursuant to his appraisal of the property, Mr. Sears believes it is worth $159,000. Mrs. Ruhstaller also testified. After identifying several items of deferred maintenance, she stated her belief that the property is not worth more than $150,000. The Bank did not present any evidence.
The first mortgage on the property secures a $167,038.78 debt. See Claim No. 2-1. Therefore, The Bank's second mortgage is unsecured even if the residence is worth $159,000.
CONCLUSION
Because the Bank's second mortgage is wholly unsecured, the Objection is OVERRULED. The plan will be confirmed by separate order.
IT IS SO ORDERED.