Chapter 13 Mortgage Lien Stripping Southern District of California Bankruptcy Court Decision.

01 Sep Chapter 13 Mortgage Lien Stripping Southern District of California Bankruptcy Court Decision.

On August 25, 2008, Judge Adler in the Southern District of Southern California Bankruptcy Court issued a published decision on lien stripping in a chapter 13 case, In re Pereira, 08-03059. In that decision, without authority or direction to any Bankruptcy Code provisions, the Court held that confirmation can not take place until after after the results of lien stripping are ascertained because “the Trustee needs to know how to treat the claim to administer the plan.”

The case involved joint debtors, with no disposable monthly income per the “means test,” that had a plan provision which sought to establish the fair market value of their residence and which also forecasted that they intended to bring an adversary proceeding to strip a wholly unsecured second mortgage.

Only the Chapter 13 Trustee objected since “Plan paragraph 19 need to be deleted/revised; Trustee cannot recommend confirmation until outcome of Adversary Proceeding is ascertainable.”

While the recent Ninth Circuit Kagenveama case would seem to have mooted the Objection to Confirmation by the Chapter 13 Trustee (since the debtors complied with 1325(b)1(B), it is presumed that the Court may have looked to 1325(a)(1) sua sponte, which requires that the chapter 13 plan comply with other provisions of Title 11 and Chapter 13, although it is unclear what other provisions the Court felt may not have been complied with), it appears that the Court was more concerned about setting procedures for lien stripping in the Southern District Bankruptcy Courts, and joining the majority of other districts in the Ninth Circuit.

For many years, Department 2 and Department 4 had disagreed over the proper procedure for lien stripping. Department 4 required adversary proceedings, whereas, Department 2 allowed lien stripping by motion. One of the Chapter 13 Trustees also required that any lien stripping be brought by adversary proceeding.

In this new decision, Department 2 again confirmed that lien stripping may be accomplished through motion. Moreover, Department 2 has now taken lien stripping one step further, holding that it may also be brought by a plan provision, so long as it is “clearly and conspicuously stated in the plan” and the creditor is served in the same manner as lawsuits by “notice of the valuation hearing in compliance with Rule 7004.”

Alternatively, a debtor may strip off a lien through a chapter 13 plan by including a provision in the plan for valuation of the collateral and lien stripping as a matter related to confirmation of the plan. Millspaugh, 203 B.R. at 98; The Rutter Group, Cal. Prac. Guide: Bankruptcy at 18:111.

The Court holds that whenever a chapter 13 plan proposes to strip off a lien, the treatment must be clearly and conspicuously stated in the plan. Moreover, it is not enough to serve just the plan on the affected creditors. 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. Millspaugh, 302 at 102. he ultimate responsibility of proper drafting and proving notice was properly given and that the relief is warranted, is on the debtor. Id at 103.

This is good new for debtors since lien stripping by adversary proceeding is almost always more costly and more time consuming than by motion. Indeed, this decision has possibly saved thousands of dollars in legal fees and months of litigation in each lien stripping proceeding. One can only hope now that all four judges agree with this decision and separate procedures are no longer required in different departments.

But has this decision now caused a problem for automobile cram-downs which had previously been done without Rule 7004 service? Stay tuned for the next blog on this issue.

Written by Michael G. Doan

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