In re Therneau
| Decision Date | 26 November 1997 |
| Docket Number | Bankruptcy No. 97-01510-5-ATS. |
| Citation | 214 BR 782 |
| Parties | In re Jeffrey Neil THERNEAU and Sharon Diane Therneau, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
John F. Logan, Kirschbaum, Nanny, Logan & Brown, P.A., Raleigh, NC, for American General Finance of America, Inc.
Trawick H. Stubbs, Jr., Stubbs, Pahl & Perdue, P.A., New Bern, NC, Trustee.
Donald A. Davis, Raleigh, NC, for Debtor.
The matter before the court is the objection filed by American General Finance of America, Inc. ("American General") to the chapter 13 plan filed by the debtors, Jeffrey Neil Therneau and Sharon Diane Therneau. A hearing was held in Raleigh, North Carolina on November 18, 1997. The objection will be denied.
Mr. and Mrs. Therneau filed for relief under chapter 13 of the Bankruptcy Code on August 22, 1997, and listed American General on their schedules as an unsecured creditor with a claim of $4,000. The debtors proposed a plan that provided for 54 monthly payments of $550 and that treated American General's claim as unsecured.
American General filed a proof of claim asserting a claim of $4,676.67 secured by a lawnmower, weedeater, patio furniture, IBM home computer, bowling equipment, golf equipment, stereo, 3 TVS and 2 VCRs. No objection was filed to American General's secured claim, and there is no mention of American General's secured claim in the debtor's chapter 13 plan.
American General contends that the plan cannot be confirmed because it fails to deal with American General's secured claim. The debtors contend that American General never filed a financing statement, that American General's security interest is unperfected, and that American General does not have a secured claim that must be paid through the plan.
American General, which as a policy does not file financing statements to perfect its security interests in consumer goods, readily concedes that pursuant to North Carolina General Statute § 25-9-301(1)(b) its security interest is not perfected in this bankruptcy case.1 Nevertheless, American General argues that it has a valid secured claim because the debtors did not file an adversary proceeding to avoid its unperfected security interest.
The United States Court of Appeals for the Fourth Circuit in Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir.1995) held that the creditor's security interest survived confirmation of the debtors' plan because the debtors "failed to take appropriate steps to avoid the creditor's liens." Id., at 91. The issue presently before the court, however, is confirmation of the debtors' plan, not the survival of American General's lien after confirmation.
At the confirmation hearing American General admitted that its lien was unperfected, and consequently, its treatment in the plan as an unsecured creditor is entirely appropriate and consistent with the undisputed facts. To treat American General as a secured creditor would be prejudicial to and unfairly discriminate against other unsecured creditors. Accordingly, American General's objection will be denied, and the debtors' plan will be confirmed.
But, there is more to this case than confirmation of the plan. The real issue is that raised in Cen-Pen: Will American General's unperfected lien survive confirmation of the debtors' plan? American General argues that according to the Fourth Circuit's ruling in Cen-Pen, the debtors must take affirmative action, i.e., bring an adversary proceeding, to avoid the unperfected lien. The court agrees that affirmative action is required to avoid the lien, but disagrees that the action must be an adversary proceeding.
The court in Cen-Pen stated that "to extinguish or modify a lien during the bankruptcy process, some affirmative step must be taken toward that end." 58 F.3d at 92. As a general rule, "liens pass through bankruptcy unaffected," and "unless the debtor takes appropriate affirmative action to avoid a security interest in property of the estate, that property will remain subject to the security interest following confirmation." Id. at 92 (citations omitted). The affirmative action that the court called for in Cen-Pen, which involved a bona fide dispute between the chapter 13 debtors and a creditor concerning the effect of a prebankruptcy settlement, was an adversary proceeding.
Rule 7001(2) of the Federal Rules of Bankruptcy Procedure provides that a proceeding "to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d)" is an adversary proceeding. Furthermore, the court in Cen-Pen held that "confirmation of a chapter 13 plan generally cannot have preclusive effect as to the validity of a lien, which must be resolved in an adversary proceeding." 58 F.3d at 93.
While Rule 7001(2) clearly requires that the validity, priority, and the extent of liens must be challenged in an adversary proceeding, an adversary proceeding is not the only procedure for eliminating a lien. The avoidance of liens under § 522(f) does not require an adversary proceeding because this section is specifically excluded from Rule 7001(2). But, secured claims may also be challenged by objection and may be modified or removed by the valuation process pursuant to 11 U.S.C. § 506(a) and (d) and Rule 3012.
If a creditor files a secured proof of claim and includes no documentation to support the existence of a security interest, the debtor need not file an adversary proceeding to reduce the claim to an unsecured claim; a less formal objection to the claim is sufficient. Similarly where, as in this case, a creditor makes no claim of having a perfected security interest, an objection to the secured claim rather than an adversary proceeding would be an appropriate way to challenge the lien.2
Another means short of an adversary proceeding to modify the lien is the valuation process and the application of § 506(a) and (d). The debtor could have the...
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