In re Mansaray-Ruffin
| Decision Date | 24 June 2008 |
| Docket Number | No. 05-4790.,05-4790. |
| Citation | 530 F.3d 230 |
| Parties | In re Janica MANSARAY-RUFFIN, Debtor. SLW Capital, LLC v. Janica Mansaray-Ruffin; William C. Miller, Janica Mansaray-Ruffin, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
David A. Scholl, Esq., [Argued], Regional Bankruptcy Center of Southeastern Pennsylvania, Newtown Square, PA, Counsel for Debtor-Appellant Janica Mansaray-Ruffin.
David B. Banks, Esq., [Argued], Banks & Banks, Philadelphia, PA, Counsel for Plaintiff-Appellee SLW CAPITAL, LLC.
Before: RENDELL, GREENBERG, and VAN ANTWERPEN, Circuit Judges.
This appeal requires us to determine whether the debtor in a Chapter 13 bankruptcy case successfully invalidated a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure. We agree with the lienholder, as well as with the Bankruptcy Court and the District Court, that the answer to this question is no. Accordingly, we will AFFIRM.
On November 26, 1996, Janica Mansaray-Ruffin borrowed $25,600 from United Companies Lending Corporation ("United") and, as collateral for that loan, executed a mortgage in favor of United against her primary residence—5101 West Girard Avenue, Philadelphia, PA 19131. The mortgage was recorded as a first lien against the property. United later assigned the mortgage to EMC Mortgage Corporation ("EMC"), and, after the instant appeal was filed, EMC assigned the mortgage to SLW Capital, LLC ("SLW"), making SLW the proper appellee.
On February 27, 2002, Mansaray-Ruffin's counsel sent a letter to EMC, claiming that United had committed a number of violations of the Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., in connection with the initial execution of the mortgage. Counsel made clear in the letter that, based on these violations, Mansaray-Ruffin was asserting "a right to rescind the transaction, pursuant to 15 U.S.C. § 1635 of TILA, which she hereby exercises." (App.30-31.) It does not appear that EMC ever responded to this letter.
On August 13, 2002, Mansaray-Ruffin filed a voluntary Chapter 13 bankruptcy petition and a Chapter 13 reorganization plan with the United States Bankruptcy Court for the Eastern District of Pennsylvania and, in the accompanying schedules, listed EMC as a disputed secured creditor. The plan included the following regarding EMC:
In addition, the Debtors shall file adversary proceedings seeking to rescind or otherwise avoid in whole or in part the secured claims arising from the mortgage[] held against her residential realty by EMC.... However, the Debtor does anticipate making payments on the first and larger of these loans directly to EMC outside of the Plan to protect her interests in the event that the proceedings are not entirely successful.
(Original Chapter 13 Plan of Debtor.) On August 31, 2002, EMC was mailed notice of Mansaray-Ruffin's plan, including the deadline for filing a proof of claim. EMC did not file a proof of claim—either before or after the December 31, 2002 bar date.
On February 19, 2003, Mansaray-Ruffin filed an amended plan, a copy of which she had mailed to EMC the day before. The amended plan replaced the above-quoted language with the following:
The Debtor planned to file a further adversary proceeding to avoid in whole or in part the secured claim allegedly arising from the first mortgage held against her residential realty by [EMC]. However EMC has not filed a proof of claim in this bankruptcy case. The Debtor will therefore file a proof of claim in the amount of $1000 on behalf of EMC, and will resort to an adversary proceeding against EMC only in the event that EMC successfully amends that claim and asserts a larger or a secured claim. The Debtor has been paying the regular mortgage payments to EMC outside of the plan in the event that her challenge of the claim of EMC would not be entirely successful. However, upon confirmation of this plan, in which the claim of EMC will be fixed as an unsecured claim in the amount of $1000 unless it is able to object to this claim, the Debtor will cease making payments to EMC, and EMC will be obliged to satisfy its mortgage against the Debtor's home upon the discharge of its debt as filed or allowed.
(App.34.) That same day, Mansaray-Ruffin filed an unsecured proof of claim on behalf of EMC in the amount of $1,000, with the following notation: "ALLEGED MORTGAGE—RESCINDED." (App.32.)1
Neither EMC nor any other creditor filed objections to the plan, and it was confirmed on March 25, 2003. Thereafter, however, EMC continued to send Mansaray-Ruffin billing statements, as if the plan's confirmation had no effect on the mortgage. Mansaray-Ruffin sent EMC two letters, explaining her position that, under the terms of the plan, she now owed EMC a $1,000 unsecured debt (not the approximately $40,000 mortgage-backed balance that EMC was asserting).
In December 2003, EMC commenced an adversary proceeding in the Bankruptcy Court by filing a "Complaint to Determine Secured Status Pursuant to 11 U.S.C. § 506." EMC sought a determination that, under Federal Rule of Bankruptcy Procedure 7001(2), a lien could only be invalidated through an adversary proceeding and that, therefore, its mortgage continued unaffected by the plan confirmation. Mansaray-Ruffin countered with a motion to dismiss, contending that the confirmed plan was final under the Bankruptcy Code and that EMC had to live with the consequences of not objecting to her treatment of its claim.
On May 6, 2004, the Bankruptcy Court denied Mansaray-Ruffin's motion to dismiss, concluding that "neither the Debtor's proof of claim, filed on behalf of EMC, nor the Debtor's amended plan, nor both taken together, are sufficient to avoid EMC's lien." (App.2.) On July 6, 2004, the Court followed up its denial of the motion to dismiss by issuing an order that "EMC shall retain its first mortgage lien on the Debtor's residence ..., that said mortgage shall be unaffected by the Debtor's confirmed Plan of Reorganization and that said mortgage shall pass through the bankruptcy unaffected to the full extent of the outstanding balance due EMC in connection with the underlying mortgage loan." (App.4.)
On September 26, 2005, the District Court affirmed the Bankruptcy Court's order without explanation.
The Bankruptcy Court had jurisdiction pursuant to 28 U.S.C. § 1334, the District Court had jurisdiction pursuant to 28 U.S.C. § 158(a), and we now have jurisdiction pursuant to both 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. In conducting our review, we use the same standards as the District Court. In re Am. Classic Voyages Co., 405 F.3d 127, 130 (3d Cir.2005). Therefore, since the issues in this case are legal in nature, we review the decision of the Bankruptcy Court de novo. Id.
We begin with a discussion of the applicable law governing the procedure for invalidating liens in bankruptcy. The United States Supreme Court prescribes rules of practice and procedure for bankruptcy cases. 28 U.S.C. § 2075. The rules are not to "abridge, enlarge, or modify any substantive right." Id. Pursuant to this authority, the Court has promulgated the Federal Rules of Bankruptcy Procedure.
Federal Rule of Bankruptcy Procedure 7001 sets forth matters that may only be resolved through an "adversary proceeding," including the determination of the "validity, priority, or extent of a lien or other interest in property." Fed. R. Bankr.P. 7001(2).2 An adversary proceeding is essentially a self-contained trial— still within the original bankruptcy case— in which a panoply of additional procedures apply. See Fed. R. Bankr.P. 7001-7087. Many of these procedures derive in whole or in part from the Federal Rules of Civil Procedure, giving an adversary proceeding all the trappings of traditional civil litigation. For example, Federal Rule of Bankruptcy Procedure 7003 adopts wholesale Federal Rule of Civil Procedure 3 and thus requires the filing of a complaint to commence an adversary proceeding. Adopting and modifying portions of Federal Rule of Civil Procedure 4, Federal Rule of Bankruptcy Procedure 7004 requires the service of a summons and a copy of the complaint. Federal Rule of Bankruptcy Procedure 7012 provides that the defendant has 30 days to file an answer after the issuance of the summons and makes Federal Rule of Civil Procedure 12(b)-(h) applicable in its entirety, thus allowing, inter alia, all of the 12(b) defenses, motions for a more definite statement, and judgments on the pleadings. Moreover, an adversary proceeding offers the parties the same opportunity for discovery as traditional civil litigation, and the rules regarding voluntary and involuntary dismissals, default judgments, and summary judgment are identical as well. See Fed. R. Bankr.P. 7026-7037, 7041 7055-7056 ().
The Rules are binding and courts must abide by them unless there is an irreconcilable conflict with the Bankruptcy Code. See In re Am. Classic Voyages Co., 405 F.3d at 132; In re McKay, 732 F.2d 44, 47-48 (3d Cir.1984); In re Decker, 595 F.2d 185, 189 (3d Cir.1979). The three concepts included in Rule 7001(2)—validity, priority, and extent—all pertain in some way to "the basis of the lien itself." Fed. R. Bankr.P. 3012 advisory committee's note. The "validity" of a lien—which, unlike "priority" and "extent," is at the heart of the case before us—refers to its "legal force." American Heritage Dictionary of the English Language (4th ed.2004).3 The debtor here referred to the concept of commencing an adversary proceeding against EMC in her original plan and her amended plan, but none was ever initiated.
Mansaray-Ruffin argues that she has successfully invalidated EMC's lien without an adversary proceeding because (1) she filed an...
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