New Procedure For Car Cramdowns? Southern District of California Bankruptcy Court

In my previous blog, I had written about how a San Diego Bankruptcy Court ruled last week that a Chapter 13 plan could not be used to bind a 506 value on a creditor unless it was 1)  “clearly and conspicuously stated in the plan,” and 2) the creditor is served in the same manner as lawsuits by “notice of the valuation hearing in compliance with Rule 7004.”

While this was good news in general for Mortgage Lien Stripping by eliminating the need to bring an adversary proceeding in each case, it does present new problems for cramdowns of other debts such as vehicles.

Previously in this district, vehicle cramdowns were accomplished through generic language in the standard chapter 13 model plan for the Southern District of California. These plans were considered binding upon the creditor unless they objected to confirmation.  There was also no local rule requiring that the creditor be served in the same manner as an adversary proceeding under Bankruptcy Rule 7004, nor was there any requirement that a valuation date and time be provided to the creditor.  Now, however, the San Diego Bankruptcy Court has ruled that

“The debtor must serve each affected creditor with the chapter plan and a notice of the valuation hearing (either separately or conjoined with the notice of confirmation hearing), in compliance with Rule 7004. The notice must clearly and conspicuously set forth the proposed treatment to value the collateral and strip off the lien, and the time and date of the hearing along with the deadline to object.  It must be clear that the failure to object will be deemed consent to the valuation of the collateral as stated in the plan…..the Plan needs to clearly and conspicuously specify when the 506(a) hearing to value the residence will take place.“

So does this now mean that the past decades of simple plan language cramming down vehicles and the lack of 7004 notice has now ended?  Does this mean that there needs to be more specific plan language, service under 7004, and a valuation hearing set in each vehicle cramdown case in addition to plan confirmation?

The Bankruptcy Court relied heavily upon the Millspaugh, 302 B.R. 90, opinion.  In that case, the Court stated:

It is important once again to recognize that Rule 7004-compliant service and notice is required not just for those creditors whose liens are to be stripped off. Such service is also required to strip down a creditor to the value of its lien. This is a very common part of chapter 13 plans. As stated in King.

For the purpose of the application of Section 506, there is no procedural distinction to be drawn between stripping down an undersecured lien to the value of the collateral, and stripping off and “voiding” a wholly unsecured lien. Both depend on the same inquiry into the value of the property and the amount of prior liens and both are routine aspects of Chapter 13 plans and the confirmation process. 290 B.R. at 648.

Since the gravamen of the relief sought is the same for both — the valuation of the collateral securing the creditor’s claim — the procedure should also be the same.  Creditors holding interests which a chapter 13 debtor wishes either to strip down or strip off must be served in compliance with Rule 7004.

Until more case law is developed, a cautious debtor should probably make sure that any cramdowns on vehicles take place pursuant with service pursuant 7004 in the Southern District of California Bankruptcy Courts, and that they also make sure that the creditors are also noticed that a valuation hearing will take place at the 341 hearing unless the matter is set for confirmation, at which point the valuation hearing will take place at confirmation.

Yes, the old days of simple cramdowns by confirmation with Rule 2002 service and plan language appear to be over in the Southern District.

Written by Michael G. Doan