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In re McKay

April 10, 1984

IN RE: MICHAEL D. MCKAY AND EILEEN P. MCKAY; COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, APPELLANT; IN RE: ARTHUR GRAHAM, COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, APPELLANT


On Appeal from the United States District Court for the Eastern District of Pennsylvania.

Adams, Becker, and Van Dusen, Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

These consolidated appeals present a question of the proper allocation of pleading burdens in a chapter 13 bankruptcy proceeding. Specifically, we must determine whether, in a disupte over the avoidance of a judicial lien pursuant to 11 U.S.C. § 522(f),*fn1 the debtor on the lien credotor must file and serve a complaint (or motion) or else suffer an automatic adverse determination. The question arises as the result of an attempt by appellees, who are public welfare recipients and Chapter 13 petitioners, to avoid the judicial liens created by cognovit notes that they sigend as a pre-condition to receiving public assistance.

The bankruptcy court believed that it had authority, pursuant to 11 U.S.C. § 1322 (b)(10),*fn2 to authorize the debtor to avoid all section 522(f) liens simply by listing those liens in the Chapter 13 plan itself. We disagree and hold that where a debtor seeks to avoid a judicial lien pursuant to 11 U.S.C. § 522(f), the adversary proceedings rules adopted by the Bankruptcy Code apply, and that the debtor thus bears the burden of filing a complaint with the bankruptcy court and serving a copy of it on each creditor whose lien the debtor seeks to avoid.This procedure was not followed in this case. We therefore reverse and remand for further proceedings.

I.

These consolidated appeals by DPW are from decisions by the bankruptcy court, affirmed by the district court, approving the Chapter 13 plans of debtors Michael and Eileen McKay (No. 83-1184) and Arthur Graham (No. 83-1209). In both cases, the debtors filed a petition and a plan under Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301 et seq., containing a provision stating: "Debtor avoids liens avoidable under 11 U.S.C. 522(f)." And in both cases, the bankruptcy court sent a computerized notice of the bankruptcy proceedings, prepared by appellees' counsel, to all the creditors listed in the debtor's petition, including the appellant, Commonwealth of Pennsylvania, Department of Public Welfare (DPW).The notice contained the name and address of the debtor and his attorney, the amount of secured and unsecured debts, the time and place of the creditors' hearing and the plan confirmation hearing, the amount of proposed monthly payments to the trustee, and the following statement:

A debtor may provide in a plan for the avoidance of certain liens under Sec. 522-F which impair an exemption to which the debtor otherwise might have been entitled if the lien is a judicial lien or is a nonpossessory, nonpurchase money security interest in household furnishings and other types of personal property.Any objections to the avoiding of the aforementioned liens, to confirmation of debtor's plan or debtor's claim of exempt property shall be made pursuant to Rule 914 of the rules of bankruptcy procedure. All objections shall be filed with the Clerk, U.S. Bankruptcy Court, at the address shown below no later than 10 days before the confirmation hearing, and such objections shall be served on both the debtor and debtor's attorney whose names and addresses appear on this notice not later than 5 days before the confirmation hearing. The debtor's plan provides for the avoidance of liens under Sec. 522-F.

The notice, which DPW received, did not state that DPW held a lien against the debtor's property, nor did it state explicitly that the debtor sought to avoid DPW's lien.More importantly for purposes of this appeal, the notice stated that all avoidable section 522(f) liens will be avoided unless the holder of the lien files an objection pursuant to Fed. R. Bankr. P. 914 prior to approval of the Chapter 13 plan by the bankruptcy court. The notice thus burdens the creditor with the duty of pleading that its specific lien should not be avoided; under these terms of the notice, if the creditor does not file such an objection, his lien will be avoided.

DPW filed an objection to the debtor's form notice, makning a three-step objection to its validity. First, it argued that avoidance of a lien pursuant to section 522(f) is a proceeding to "determine the validity, priority, or estent of a lien or other interest in property." Second, it argued that under Fed. R. Bankr. P. 701(2), this fact renders section 522(f) lien avoidance subject to the adversary proceedings rules for bankruptcy cases (i.e., Fed. R. Bankr, P. 701-782). And third, it argued that the adversary proceedings rules require that the debtor file a complaint with the bankruptcy court and serve that complaint on every creditor whose lien the debtor seeks to avoid.*fn3 Thus, according to the DPW, the law places the burden of pleading on the debtor.*fn4

In both cases, the bankruptcy court rejected the DPW's argument and concluded that 11 U.S.C. § 1322(b)(10) authorized the debtor to provide for avoidance of judicial liens in the Chapter 13 plan itself. Consequently, the court concluded that the burden was on DPW under Fed. R. Bankr. P. 914 to file an objection to the debtor's Chapter 13 plan. Since DPW never filed such an objection, the bankruptcy court approved the plan, and thereby avoided DPW's lien.*fn5 Two district judges of the Eastern District of Pennsylvania affirmed without opinion.

II.

The answer to the question of whether the bankruptcy and district courts erred in placing the burden of pleading on the DPW turns on the inter-relationahip among three sections of the Bankruptcy Code: section 522(f) authorizing certain forms of lien avoidance, section 405(d) setting forth the procedural rules applicable in bankruptcy cases, and section 1322(b)(10) ...


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