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Issue  18  Article  38
Published:  1/1/1997

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Bankruptcy - 11 U.S.C. Section 1327 and Chapter 13 Lien Avoidance
Edmund T. Urban, Vice President and Corporate Counsel

In Cen-Pen Corp. v. Hanson, 58F. 3rd 89 (4th Cir. 1995), a Chapter 13 plan treated Cen-Pen as an unsecured creditor (entitling it to approximately 25% of its claim). The plan required each creditor to submit a proof of claim and an objection to the plan within specified time periods and the plan specified that the plan would be automatically confirmed if no such objections were received. Further, the plan stated that, to the extent that the holder of a secured claim does not file a proof of claim, the lien of the creditor shall be avoided upon entry of the order of discharge. Cen-Pen apparently did not file an objection to the plan. The plan was confirmed and all creditors submitting allowable claims were paid pursuant to the plan. Cen-Pen secured a copy of the plan which treated it as an unsecured creditor.

11 U.S.C. Section 1327 states that:

"(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 a 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 by the plan."

The debtor contended that 11 U.S.C. Section 1327, particularly 11 U.S.C. Section 1327(c), eliminated Cen-Pen’s lien. The court disagreed, citing Dewsnup v. Timm, 502 U.S. 410 (1992) for the general rule that liens pass through bankruptcy unaffected. A discharge extinguishes only in personam claims against the debtor but generally has no effect on an in rem claim against the property of the debtor. Johnson v. Home State Bank, 501 U.S. 78 (1991) was cited by the court. The debtor must take an affirmative action to avoid a lien. No adversary proceeding under Rule 7001(2) and Rule 7004 was conducted, which the court ruled was required. Adequate notice is a prerequisite to according preclusive effect to a confirmation order under 11 U.S.C. Section 1327. In Re Linkous, 990 F. 2d 160 (4th Cir. 1993). The court cited 11 U.S.C. Section 506(d)(2) as further support of its statement that failure to file a proof of claim is not the basis of avoiding a lien and cited 11 U.S.C. Section 501 as providing for, but not requiring, filing of a proof of claim.

Listing Cen-Pen as an unsecured creditor did not suffice to avoid the lien, the court stated. The debtor argued that the plan provisions regarding the effect of failure to file a proof of claim, together with listing Cen-Pen as an unsecured creditor, "provided for" Cen-Pen’s claim sufficient to satisfy the requirements of 11 U.S.C. Section 1327(c) and vest title in the debtor free and clear of Cen-Pen’s lien. Generally, a plan "provides for" a claim or interest when it acknowledges the claim or interest and makes explicit provisions for its treatment. The court noted holdings that a plan "provides for" a lien by, for example, expressly providing for payment of an allowed secured claim and cancellation of the lien. "Several courts have held that a plan ‘provides for’ the lien held by a secured creditor only when it provides for payment to the creditor in an amount equal to its security. In Re Bradshaw, 65 B.R. 556 (Bankr. M.D.N.C. 1986)..." The debtor’s plan nowhere mentioned or otherwise acknowledged Cen-Pen’s lien and "certainly did not ‘provide for’ treatment of the liens or full payment of the underlying claim." The court stated that, since as an unsecured creditor, Cen-Pen would receive only 25% of its claim, the plan did not "provide for" Cen-Pen’s claim and its lien survived the Chapter 13 confirmation.

There was a vigorous dissent on the basis that 11 U.S.C. Section 1327 should clearly have led to an opposite result. And, one would think that, with all of the cases generated under 11 U.S.C. Section 1327, the Bankruptcy Reform Act of 1994 would have amended that section, but it did not.

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