McKay, In re, s. 83-1184

• Decision Date: 10 April 1984
• Docket Number: Nos. 83-1184,83-1209,s. 83-1184
• Parties: 10 Collier Bankr.Cas.2d 1303, 11 Bankr.Ct.Dec. 1104, Bankr. L. Rep. P 69,844 In re Michael D. McKAY and Eileen P. McKay. Appeal of COMMONWEALTH of PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE. In re Arthur GRAHAM. Appeal of COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE.
• Court: U.S. Court of Appeals — Third Circuit

Page 44

732 F.2d 44

10 Collier Bankr.Cas.2d 1303, 11 Bankr.Ct.Dec. 1104,

Bankr. L. Rep. P 69,844

In re Michael D. McKAY and Eileen P. McKay.

Appeal of COMMONWEALTH of PENNSYLVANIA, DEPARTMENT OF PUBLIC

WELFARE.

In re Arthur GRAHAM.

Appeal of COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE.

Nos. 83-1184, 83-1209.

United States Court of Appeals,

Third Circuit.

Argued Nov. 14, 1983.

Decided April 10, 1984.

Mitchell W. Miller (argued), Jack K. Miller, Philadelphia, Pa., for appellees.

Jason W. Manne (argued), Asst. Counsel, Dept. of Public Welfare, Harrisburg, Pa., for appellant.

Before ADAMS, BECKER, and VAN DUSEN, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

These consolidated appeals present a question of the proper allocation of pleading burdens in a chapter 13 bankruptcy proceeding. Specifically, we must determine whether, in a dispute over the avoidance of a judicial lien pursuant to 11 U.S.C. Sec. 522(f), ¹ the debtor or the lien creditor must file and serve a complaint (or motion) or else suffer an automatic adverse determination. The question arises as the result of an attempt by appellees, who are public welfare recipients and Chapter 13 petitioners, to avoid the judicial liens created by cognovit notes that they signed as a pre-condition to receiving public assistance.

The bankruptcy court believed that it had authority, pursuant to 11 U.S.C. Sec. 1322(b)(10), ² to authorize the debtor to avoid all section 522(f) liens simply by listing those liens in the Chapter 13 plan itself. We disagree and hold that where a debtor seeks to avoid a judicial lien pursuant to 11 U.S.C. Sec. 522(f), the adversary proceedings rules adopted by the Bankruptcy Code apply, and that the debtor thus bears the burden of filing a complaint with the bankruptcy court and serving a copy of it on each creditor whose lien the debtor seeks to avoid. This procedure was not followed in this case. We therefore reverse and remand for further proceedings.

I.

These consolidated appeals by DPW are from decisions by the bankruptcy court, affirmed by the district court, approving the Chapter 13 plans of debtors Michael and Eileen McKay (No. 83-1184) and Arthur Graham (No. 83-1209). In both cases, the debtors filed a petition and a plan under Chapter 13 of the Bankruptcy Code, 11 U.S.C. Sec. 1301 et seq., containing a provision stating: "Debtor avoids liens avoidable under 11 U.S.C. 522(f)." And in both cases, the bankruptcy court sent a computerized notice of the bankruptcy proceedings, prepared by appellees' counsel, to all the creditors listed in the debtor's petition, including the appellant, Commonwealth of Pennsylvania, Department of Public Welfare (DPW). The notice contained the name and address of the debtor and his attorney, the amount of secured and unsecured debts, the time and place of the creditors' hearing and the plan confirmation hearing, the amount of proposed monthly payments to the trustee, and the following statement:

A debtor may provide in a plan for the avoidance of certain liens under Sec. 522-F which impair an exemption to which the debtor otherwise might have been entitled if the lien is a judicial lien or is a nonpossessory, nonpurchase money security interest in household furnishings and other types of personal property. Any objections to the avoiding of the aforementioned liens, to confirmation of debtor's plan or debtor's claim of exempt property shall be made pursuant to Rule 914 of the rules of bankruptcy procedure. All objections shall be filed with the Clerk, U.S. Bankruptcy Court, at the address shown below no later than 10 days before the confirmation hearing, and such objections shall be served on both the debtor and debtor's attorney whose names and addresses appear on this notice no later than 5 days before the confirmation hearing. The debtor's plan provides for the avoidance of liens under Sec. 522-F.

The notice, which DPW received, did not state that DPW held a lien against the debtor's property, nor did it state explicitly that the debtor sought to avoid DPW's lien. More importantly for purposes of this appeal, the notice stated that all avoidable section 522(f) liens will be avoided unless the holder of the lien files an objection pursuant to Fed.R.Bankr.P. 914 prior to approval of the Chapter 13 plan by the bankruptcy court. The notice thus burdens the creditor with the duty of pleading that its specific lien should not be avoided; under these terms of the notice, if the creditor does not file such an objection, his lien will be avoided.

DPW filed an objection to the debtor's form notice, making a three-step objection to its validity. First, it argued that avoidance of a lien pursuant to section 522(f) is a proceeding to "determine the validity, priority, or extent of a lien or other interest in property." Second, it argued that under Fed.R.Bankr.P. 701(2), this fact renders section 522(f) lien avoidance subject to the adversary proceedings rules for bankruptcy cases (i.e., Fed.R.Bankr.P. 701-782). And third, it argued that the adversary proceedings rules require that the debtor file a complaint with the bankruptcy court and serve that complaint on every creditor whose lien the debtor seeks to avoid. ³ Thus, according to the DPW, the law places the burden of pleading on the debtor. ⁴

In both cases, the bankruptcy court rejected the DPW's argument and concluded that 11 U.S.C. Sec. 1322(b)(10) authorized the debtor to provide for avoidance of judicial liens in the Chapter 13 plan itself. Consequently, the court concluded that the burden was on DPW under Fed.R.Bankr.P. 914 to file an objection to the debtor's Chapter 13 plan. Since DPW never filed such an objection, the bankruptcy court approved the plan, and thereby avoided DPW's lien. ⁵ Two district judges of the Eastern District of Pennsylvania affirmed without opinion.

II.

The answer to the question whether the bankruptcy and district courts erred in placing the burden of pleading on the DPW turns on the inter-relationship among three sections of the Bankruptcy Reform Act of 1978: section 522(f) authorizing certain forms of lien avoidance, section 405(d) setting forth the procedural rules applicable in bankruptcy cases, and section 1322(b)(10) setting forth the permissible scope of reorganization plans under chapter 13 of the Bankruptcy Code.

Section 522(f) of the Bankruptcy Code provides that the debtor may "avoid" a judicial lien to the extent that such lien "impairs an exemption to which the debtor would have been entitled under subsection (b)." ⁶ Section 522(f) does not, however, set out the procedure for avoiding such liens. Section 405(d) of the Bankruptcy Reform Act of 1978 is the general statutory provision setting out what procedural rules control in proceedings conducted pursuant to the code. Section 405(d) provides that the "rules prescribed under section 2075 of Title 28 of the United States Code and in effect on September 30, 1979, [i.e., the Federal Rules of Bankruptcy Procedure] shall apply to cases" under the code to the extent those rules are "not inconsistent with ... this Act." ⁷

One of the bankruptcy rules in effect on September 30, 1979, and still in effect at the time of this litigation, was Rule 701. ⁸ It stated that any proceeding to "determine the validity, priority, or extent of a lien" is subject to the bankruptcy court's adversary proceedings rules, Fed.R.Bankr.P. 701-782. ⁹ Since section 522(f) plainly involves "the validity, priority, or extent of a lien," any procedure conducted pursuant to section 522(f) would thus appear to be subject to the bankruptcy court's adversary proceedings rules so long as those rules are "not inconsistent" with the code.

The bankruptcy court and district courts believed that 11 U.S.C. Sec. 1322(b)(10), which provides that a chapter 13 plan may "include any other appropriate provision not inconsistent with this title" authorized avoidance of a judicial lien without an adversary proceeding, and that, therefore, Rule 701 was inconsistent with the Bankruptcy Code. We disagree. Congress did not intend in section 1322(b)(10) to give the bankruptcy court carte blanche to establish procedures it deems fair without regard to other provisions of the Code. Although it is true that section 405(d) of the Bankruptcy Code does permit its general directive to be overridden by specific laws to the contrary, we do not believe that a substantive catch-all provision such as section 1322(b)(10) contains the requisite specificity or force to suggest that Congress intended it to override the procedural rules adopted by section 405(d).

The debtors' remaining argument is that inclusion of a provision in a Chapter 13 plan providing for the avoidance of section 522(f) liens is not a "proceeding" and therefore the adversary proceedings rules by their terms do not apply. Again, we disagree. The phrase "any proceeding instituted by a party before a bankruptcy judge" in Fed.R.Bankr.P. 701, is not intended as a limit on application of the adversary proceedings rules. A quick review of the language of rule 701 and its accompanying advisory note plainly indicates that the drafter's intent was to require use of the adversary proceedings rules whenever certain forms of property (e.g., judicial liens) were affected in certain ways (e.g., by avoidance pursuant to section 522(f)). We conclude that the drafters of the rules intended all forms of lien avoidance pursuant to section 522(f) to be subject to the adversary proceeding rules.

III.

In sum, we hold that in a proceeding brought under the former bankruptcy rules to avoid a judicial lien (pursuant to 11 U.S.C. Sec. 522(f)) created by a cognovit note signed by a Chapter 13 petitioner as a pre-condition to receiving public assistance, the adversary rules, Fed.R.Bankr.P. 701-782, shall apply, and, therefore, the debtor has the burden of filing a complaint seeking lien avoidance with the bankruptcy court and serving a copy of...