Court: United States Bankruptcy Court, N.D. Illinois; September 16, 2009; Us Bankruptcy; United States Bankruptcy Court
Litton Loan Servicing objected to Milliletti Forrest's Modified Chapter 13 Plan, which sought to strip a wholly unsecured second lien on her residence. The court ruled that Forrest must file an adversary proceeding to strip off the junior mortgage, as mandated by the Bankruptcy Code, Bankruptcy Rules, and constitutional requirements. The objection arose because the plan's lien stripping provision was deemed insufficient without the formal adversary proceeding process, which is necessary to determine the validity and priority of liens. Although some courts have allowed valuation without an adversary proceeding, this ruling clarifies that voiding a lien as wholly unsecured equates to declaring it void in an adversary context, thereby converting it into an unsecured claim. The court emphasized that allowing such a lien avoidance through the plan confirmation would undermine protections for secured claim holders, particularly regarding mortgages on the debtor's primary residence.
Legislative intent mandates that a debtor must initiate an adversary proceeding to secure relief, particularly regarding student loan discharges as evidenced in *In re Hanson*, where the court voided a discharge due to the debtor's failure to file such a proceeding under 11 U.S.C. § 523(a)(8) and Fed. R. Bankr. P. 7001(6). Despite a confirmed Chapter 13 plan, the court ruled that the discharge of student loans was unenforceable without the necessary adversary proceeding. Conversely, cases like *In re Andersen* and *In re Pardee* have been criticized for allowing debtors to bypass procedural requirements of the Bankruptcy Code through vague plan provisions.
In the current case, Forrest aims to strip a junior mortgage held by Litton Loan Servicing from her primary residence through her Chapter 13 Plan, citing a lack of equity. However, this action necessitates filing an adversary proceeding, which Litton has not waived its right to, as confirmed by its counsel in court. Due process, as outlined in the Fifth Amendment and reinforced by *In re Hanson*, requires that parties receive appropriate notice and opportunity for a hearing before property rights can be affected. The decision emphasizes that heightened notice is due when the Bankruptcy Code and Rules stipulate it, and a mere inclusion in a Chapter 13 Plan cannot bind a creditor without the proper adversary proceeding.
Additionally, Forrest’s plan fails to provide a sufficient basis for lien stripping, as it does not meet the necessary legal standards.
A creditor's failure to object to a Chapter 13 plan provision that strips a lien may result in the issue being considered defaulted, as reasoned by the Ninth Circuit. However, for a debtor to strip a lien, they must meet the criteria for a default judgment, which is at the discretion of the trial judge. Insufficient facts can lead to denial of such judgment. Recent Supreme Court rulings require that a party must provide sufficient factual allegations that, if accepted as true, establish a plausible claim for relief. In the case at hand, Forrest attempted to strip Litton Loan Servicing’s junior mortgage through a vague provision in her Chapter 13 Plan but failed to provide adequate factual support, such as the value of her residence or details of the existing mortgages. Consequently, under the Bankruptcy Code and related rules, she cannot strip the junior mortgage through the Plan without filing an adversary proceeding, which is required for such relief and ensures due process for Litton Loan Servicing through proper notice. Therefore, Forrest’s attempt to strip the mortgage is deemed unconstitutional, and her plan's confirmation will be denied.
