Cite as: Keith M. Lundin, Lundin On Chapter 13, § 49.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
There is a temptation to simply provide for the avoidance of a creditor’s lien in the Chapter 13 plan. However, there is no specific permission for such a plan provision in 11 U.S.C. § 1322. It has been held that lien avoidance is not an “appropriate provision not inconsistent with this title” permitted by the kitchen sink authorization in 11 U.S.C. § 1322(b)(10).1 If lien avoidance is clearly spelled out in the plan and notice to the lienholder is adequate, a good argument can be made that lien avoidance through confirmation is binding on the lienholder that fails to object.2 Waiting until after confirmation to bring a lien avoidance action in a Chapter 13 case is not recommended. Some courts have held that confirmation of a plan bars a debtor’s action to avoid liens if the confirmed plan is silent with respect to lien avoidance.3 On the other hand, it has been held that a Chapter 13 case can be reopened after completion of payments and discharge to allow the debtor to avoid a lien under § 522(f).4
Bankruptcy Rule 4003(d) provides that avoiding a lien that impairs an exemption under § 522(f) is motion practice under Rule 9014. However, because lien avoidance under § 522(f) could be characterized as determining the validity, priority or extent of a lien,5 some courts have applied Bankruptcy Rule 7001(2) and require the filing of a complaint. In such a jurisdiction, debtor’s counsel should not attempt to exercise lien avoidance by motion or solely by provision of the Chapter 13 plan.6 Lien avoidance cannot be accomplished in a Chapter 13 case by only claiming the property exempt in Schedule C to Official Bankruptcy Form 6.7
In most jurisdictions, lien avoidance under § 522(f) in Chapter 13 cases is safely accomplished in three steps:
Before confirmation of a plan, file a motion to avoid lien, serving the lienholder and the trustee.
Provide in the plan for lien avoidance under § 522(f), with separate provision for payment of the resulting unsecured claim.
Claim an exemption on Schedule C to Official Bankruptcy Form 68 to support the use of lien avoidance under § 522(f).
The Supreme Court’s 1992 opinion in Taylor v. Freeland & Kronz9 affects the procedure for lien avoidance in Chapter 13 cases. As mentioned above,10 Taylor held that Bankruptcy Rule 4003(b) prohibits an objection to exemptions after 30 days after the conclusion of the meeting of creditors (or the filing of any amendment to the exemption list). After Taylor, the trustee or creditors must object to exemptions within the 30 days provided in Bankruptcy Rule 4003(b), else the exemptions will be allowed even if applicable state or federal exemption law would not support the exemption. Although Taylor was a Chapter 7 case, Bankruptcy Rule 4003 also applies in Chapter 13 cases.
Taylor and Bankruptcy Rule 4003(b) impact § 522(f) because the predicate for lien avoidance under § 522(f) is a lien that “impairs an exemption to which the debtor would have been entitled.”11 If the debtor claims an exemption in Schedule C to Official Bankruptcy Form 6 and if no one objects within 30 days after the conclusion of the meeting of creditors, Bankruptcy Rule 4003(b) as interpreted in Taylor prohibits any collateral attack on the allowance of that exemption.
The Taylor issue arises in § 522(f) litigation when the Chapter 13 debtor files a motion to avoid a lien under § 522(f) and the lienholder defends by asserting that the underlying exemption is not valid. It is arguable from Taylor that a creditor cannot attack the validity of a debtor’s exemption claim after the 30-day period in Bankruptcy Rule 4003(b) in the guise of defending a § 522(f) lien avoidance action. In other words, the creditor that fails to object to a Chapter 13 debtor’s exemptions within the 30-day period in Bankruptcy Rule 4003(b) cannot defend a subsequent § 522(f) action on the ground that the debtor was not entitled to the exemption that is impaired by the creditor’s lien. Taylor is implicated any time the response to a § 522(f) lien avoidance action is filed more than 30 days after the conclusion of the meeting of creditors and the response challenges the underlying claim of exemptions.12
Some courts have accepted this view of how Taylor and Bankruptcy Rule 4003(b) work with respect to lien avoidance in a Chapter 13 case. In In re Fulton,13 the debtor scheduled real property and cars, listing as exempt the real property and some equity in one of the cars. The time period for objecting to exemptions under Bankruptcy Rule 4003(b) expired without objection. The debtor then sought to avoid a judicial lien that impaired the exemptions. The lienholder defended on the ground that the debtor’s exemptions were not valid. The court concluded that Taylor applied and precluded the bank’s defense:
As to the property . . . and the automobiles, debtor lists these properties as exempt. . . . No objection was made to debtor’s exemptions, and the time period for objecting to exemptions has passed. Therefore, debtor’s exemptions are allowed. Taylor v. Freeland & Kronz, [503 U.S. 638 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)]. Under Bankruptcy Code section 522(f)(1), [the bank’s] claimed judicial lien is avoidable to the extent it impairs an exemption otherwise available to the debtor. Since debtor has claimed these properties as exempt, [the bank’s] claimed judicial lien is avoidable.14
In contrast, in In re Maylin,15 the court allowed a Chapter 13 debtor to use § 522(f) to avoid a lien on the debtor’s homestead but refused to apply Taylor to preclude the lienholder’s challenge to the underlying exemption. In Maylin, the debtor listed an exemption in money due from the debtor’s former spouse. A law firm had a lien on that same money. The law firm failed to object to the exemption claim within the 30 days provided in Bankruptcy Rule 4003(b). Notwithstanding Taylor, the law firm was permitted to dispute the underlying exemption as part of its objection to confirmation of a plan that included avoidance of the law firm’s lien under § 522(f). As explained by the court:
[Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)] cannot not [sic] mean that secured creditors lose important rights by doing exactly what the law has long said they can do: Ignore the bankruptcy proceeding until hailed into court. . . . [The rule in Taylor] does not foreclose a secured creditor from defending a § 522(f) or § 522(h) action by denying that the property involved is exempt under applicable law. Notwithstanding Rule 4003(b) and Taylor, affected secured creditors may contest the bona fides of an exemption in defense of a § 522(f) lien avoidance motion.16
It is not obvious why the Maylin court found an exception to Taylor for an exemption challenge raised as a defense to a § 522(f) action. The strict rule of application of Bankruptcy Rule 4003(b) adopted by the Supreme Court in Taylor is not dependent upon whether the exemption challenge is raised affirmatively or defensively. Section 522(f) is one of the most likely contexts in which the validity of an exemption will be at issue in a bankruptcy case. It is hard to believe that defense of a § 522(f) motion is an unstated exception to the general rule of protection of exemptions in Taylor. Any creditor with a lien that might be vulnerable under § 522(f) should not risk forfeiture of defenses by failing to object to exemptions within the 30-day time period in Bankruptcy Rule 4003(b).
Lien avoidance under § 522(f) typically will be initiated by the debtor in Chapter 13 cases. However, the U.S. Court of Appeals for the Fifth Circuit has held that lien avoidance can also be initiated by the Chapter 13 trustee. In Tower Loan of Mississippi, Inc. v. Maddox (In re Maddox),17 the Fifth Circuit found standing in § 1302 of the Code for the Chapter 13 trustee to avoid liens under § 522(f):
When we examine § 1302 closely, we discern that congress has given the chapter 13 trustee a broad array of powers and duties. . . . [A] chapter 13 trustee “is no mere disbursing agent.” . . . Under subsection (b)(1) of § 1302, the chapter 13 trustee has the power contained in § 704(5) . . . [a]nd under subsection (b)(2) of § 1302 that trustee is granted standing to “appear and be heard” in a hearing to confirm a Chapter 13 plan. . . . [T]hese subsections support the proposition that a chapter 13 trustee has standing to avoid liens under § 522(f).18
The Chapter 13 trustee will not often be inclined to initiate lien avoidance under § 522(f).19 The predicate for lien avoidance under § 522(f) is a lien that impairs an exemption to which the debtor would otherwise be entitled. Debtors have incentives to use § 522(f) to avoid liens and thus maximize their personal exemptions. A Chapter 13 trustee who successfully prosecutes a § 522(f) motion would usually benefit only the debtor by preserving an exemption. Other creditors will be benefited by a lien avoidance when the mathematics of the plan shifts favorably because the lienholder need no longer be treated as a secured claim holder at confirmation. For example, if the debtor chooses not to avoid a lien that is vulnerable under § 522(f) and the proposed plan is a composition plan paying less than 100 percent to unsecured claim holders, the trustee may have an obligation to move to avoid the lien if the result would increase the money available to pay unsecured claims. The trustee will have to measure the expense of the lien avoidance litigation against the potential benefit to unsecured claim holders of treating the lienholder as unsecured.
1 In re McKay, 732 F.2d 44, 48 (3d Cir. 1984).
2 See § 120.1 11 U.S.C. § 1327: Overview, § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors, § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, § 120.4 11 U.S.C. § 1327(c): Free and Clear Effect on Liens and § 120.5 Effects of Confirmation after BAPCPA.
3 See § 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors. See, e.g., Marlow v. Sweet Antiques (In re Marlow), 216 B.R. 975 (Bankr. N.D. Ala. 1998) (Res judicata effect of confirmation and finality of order allowing claims bar debtor’s postconfirmation preference action to avoid a judicial lien.).
4 In re Pressley, 242 B.R. 193 (Bankr. S.D. Fla. 1999). But see In re Levy, 256 B.R. 563 (Bankr. D.N.J. 2000) (Although a Chapter 13 case can be reopened after discharge to permit the debtor to avoid a lien that impairs an exemption under § 522(f), laches bars motion four years after the petition and six months after the closing of the case.).
5 See analogous issue whether cramdown or lien stripping requires an adversary proceeding at confirmation, addressed in §§ 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors and 233.1 [ Notice and Due Process Considerations, Including Claims Allowance and Valuation ] § 121.2 Notice and Due Process Considerations, Including Claims Allowance and Valuation.
6 In re McKay, 732 F.2d 44 (3d Cir. 1984) (Chapter 13 debtor cannot avoid liens under § 522(f) through a provision of the plan but must file a separate complaint.); In re Shaffer, 48 B.R. 952 (Bankr. N.D. Ohio 1985) (Lien avoidance through provision of confirmed Chapter 13 plan is not effective after conversion from Chapter 13 to Chapter 7.).
7 In re Mitchell, 80 B.R. 372 (Bankr. W.D. Tex. 1987). See also § 35.4 [ Schedule C—Exemptions ] § 36.10 Schedule C—Exemptions.
8 See § 35.4 [ Schedule C—Exemptions ] § 36.10 Schedule C—Exemptions.
9 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).
10 See § 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1 Available and Important in Chapter 13 Cases.
11 11 U.S.C. § 522(f)(1).
12 But see In re Heretakis, 293 B.R. 82, 85–86 (Bankr. D. Mass. 2003) (Response to motion to avoid judicial liens filed within 30-day deadline under Bankruptcy Rule 4003(b) can challenge homestead exemption notwithstanding that lienholders did not file a separate objection to exemptions. “Rule 4003(b) does not require a particular form for an objection to exemption . . . . [T]he Creditors are not precluded from objecting to the Debtor’s claimed homestead exemption on the ground that they failed to file pleadings separate and apart from their Oppositions to the Debtor’s Motion to Avoid Judicial Liens, particularly as their Oppositions were filed within the time prescribed by Fed. R. Bankr. P. 4003(b) and gave the Debtor ample notice of the grounds for their objections.”).
13 148 B.R. 838 (Bankr. S.D. Tex. 1992).
14 148 B.R. at 841. Accord In re Blocker, 242 B.R. 75, 76–77 (Bankr. M.D. Fla. 1999) (On debtor’s motion to avoid judicial lien on homestead property, lienholder’s argument that homestead exemption is not supported by the Florida Constitution fails because neither the lienholder nor the trustee objected to the homestead exemption within the 30 days allowed by Bankruptcy Rule 4003 and Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992). Debtor claimed a homestead exemption in a duplex. Nobody objected. After the 30-day period in Bankruptcy Rule 4003, the debtor moved to avoid a judicial lien on the duplex. “Debtor claimed the property at issue as exempt. Neither the Trustee nor FUNB filed an objection within the thirty-day (30) time period prescribed by Bankruptcy Rule 4003. Therefore, the exemption for the property at issue was allowed once the thirty-day time period ran, even though the legal basis for the exemption is at issue. . . . Having determined the property at issue is exempt for the purposes of this case; Debtor is entitled to avoid FUNB’s judicial lien on such property.”); In re Allard, 196 B.R. 402, 408–11 (Bankr. N.D. Ill.) (Debtor can use § 522(f) to avoid a $140,441.04 judgment lien against property owned by the debtor and spouse as tenants by the entirety where judgment was against only the debtor. Great Southern sued the debtor in 1992. Less than a month after the lawsuit was filed, the debtor and the debtor’s spouse quitclaimed residential property to themselves as tenants by the entirety. Two years later, Great Southern obtained a judgment solely against the debtor. The judgment was recorded. The debtor then filed a Chapter 13 case claiming the real property as exempt. Great Southern did not object to the exemption. The debtor then moved to avoid Great Southern’s lien. “The Supreme Court has stated that § 522(l) and Bankruptcy Rule 4003(b) bar contesting the validity of an exemption after the 30-day period for objecting has expired where no extension has been granted, even though a valid objection could have been made if the party acted promptly. . . . Thus, under the Code, Rules, and the [Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)] case, Great Southern cannot now object to the Debtor’s claims of exemption . . . . Because under the Illinois statute the Debtor’s Property cannot be sold upon Great Southern’s judgment, it is exempt from the forced sale process that could be effected by Great Southern or any other judgment creditor of only the Debtor. . . . Under Illinois case law, where the right of sale cannot be asserted, the existence of the lien must be denied. . . . Because Great Southern’s lien will remain on the Property if not avoided, it impairs the Debtor’s exemptions claimed in the Property. . . . [U]nder amended § 522(f)(2)(A) Great Southern’s lien impairs the Debtor’s exemptions claimed in the Property because that lien ($140,441.04), which is the only lien on the Property, and the amount of the exemptions ($120,000 and $7,500) that the Debtor could and did claim if there were no liens on the Property, exceeds the value that the Debtor’s interest in the Property would have in the absence of any liens.”), aff’d, 202 B.R. 938, 941–45 (N.D. Ill. 1996) (“Because Great Southern failed to object within the permissible time period, under [Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)], it may no longer challenge the validity of the exemption. . . . [T]he exemption of Allard’s interest in his residence from his bankruptcy estate—an exemption that Great Southern cannot challenge—also applies in the best interest analysis under Section 1325(a)(4).”).
15 155 B.R. 605 (Bankr. D. Me. 1993).
16 155 B.R. at 613.
17 15 F.3d 1347 (5th Cir. 1994).
18 15 F.3d at 1355.
19 See § 60.1 [ Avoidance and Recovery Powers ] § 53.12 Avoidance and Recovery Powers.