Adversary Proceedings on Mortgage Liens

Prior to confirmation, the Chapter 13 debtor in SLW Capital v. Mansaray-Ruffin filed a proof of claim on behalf of the mortgage creditor stating the debt was unsecured and in an amount of only $1,000.  Further, debtor’s Chapter 13 plan included a special provision stating that the mortgage creditor’s lien was avoided and the creditor held only an unsecured claim.  The mortgage creditor received notice of the proposed plan and proof of claim filed by the debtor, but failed to object prior to confirmation.  The plan was then confirmed without objection.

Nine months later, the mortgage creditor filed an adversary proceeding to determine the validity of its lien.  In upholding the rulings of the bankruptcy and district courts, the Third Circuit held that the provision in the confirmed plan could not override due process considerations that require all lien avoidance actions to be filed as adversary proceedings pursuant to the Bankruptcy Rule 7001.  Moreover, the debtor’s attempt to modify the secured creditor’s lien through the filing of an unsecured proof of claim violated the longstanding principle that lien holders may choose not to participate in a bankruptcy proceeding without substantively affecting their secured interests.