Document Type
Research Memorandum
Publication Date
2009
Abstract
(Excerpt)
In SLW Capital, LLC v. Mansaray-Ruffin (In re Mansaray-Ruffin), 530 F.3d 230, 233 (3d Cir. 2008), the Third Circuit considered whether a Chapter 13 confirmation plan has res judicata effect with respect to a creditor’s lien when no adversary proceeding regarding the lien was brought under the Federal Rules of Bankruptcy Procedure (“the Rules”). The court held that the plan had no res judicata effect on such a lien. Accordingly, the lien passed through bankruptcy unaffected and could only be invalidated through an adversary proceeding. In doing so, the court made it clear that the requirements of the Rules outweigh any final, binding effect the Bankruptcy Code (“the Code”) might give to a confirmed plan, opining that, while the Code creates the substantive rights of creditors and debtors in bankruptcy proceedings, the Rules define the process by which those rights may be affected. In this instance, the Rules require an adversary proceeding to determine “the validity, priority, or extent of a lien or other interest in property.” Fed. R. Bankr. P. 7001(2). Meanwhile, the Code makes the terms of a confirmed plan binding on all parties. 11 U.S.C. § 1327.
In In re Mansaray-Ruffin, the debtor submitted a Chapter 13 plan that was confirmed via a confirmation hearing. The plan resolved the creditor’s lien for far less than its original value. The creditor, who had not objected to the plan, subsequently moved to maintain it lien despite the confirmed plan because the debtor never initiated the statutorily required adversary proceeding. The court ruled for the creditor, holding that the need for an adversary proceeding under the Rules outweighs the normal binding effect of a confirmation plan. In doing so, the court relied on the due process requirements of the Fifth Amendment. It stated that due process rights were implicated because an adversary proceeding required procedural protections, such as service of process, that were not available to the creditor in a confirmation hearing. Prior decisions in the Third Circuit and other jurisdictions supported such rationale. Thus, the Third Circuit’s decision in In re Mansaray-Ruffin reinforced the existing law that confirmation plans do not act as res judicata with respect to issues for which the Rules require an adversary proceeding.
The decision, however, was not unanimous. In his dissent, Judge Greenberg argued that the creditor’s due process rights were not violated by enforcement of the confirmation plan. He also cited prior decisions by the Third Circuit that made confirmation plans binding while arguing that Congress intended confirmation plans to create finality within the bankruptcy process. He contended that the court should not attempt to abridge that finality as it saw fit.
Despite Judge Greenberg’s objections, the decision of the Third Circuit, together with similar decisions in other circuits, leaves debtors filing for relief under Chapter 13 in a precarious position: they must be careful to abide by all the procedural requirements of the Rules and the Code and cannot rely on the apparent finality of a confirmed plan to act as a final resolution to liens any creditors may claim against them.