An amendment to Rule 3015(c)(1) is currently under review that will permit courts to “opt out” and use a Local Form Plan. Public comment ended on Oct. 3, 2016, and it looks as if Official Form 113, also known as the National Form Plan, and the related Rule amendments will go into effect on Dec. 1, 2017, absent intervention from the Judicial Conference, the Supreme Court or Congress.
This imminent inevitability has led many bankruptcy courts to consider opting out of the National Form Plan. Instead of adopting the Official Form, a district may require a local form plan, provided it satisfies proposed Rule 3015.1. This option seems attractive. At a recent court conference, an overwhelming majority of those with whom I spoke about the proposal told me the same thing: The National Form Plan cannot be used.
While bases for rejection of the national form vary, I will narrow the focus to one common refrain: “You can’t avoid a lien in a plan.” I work in a district in which its local form plan provides the ability to avoid certain liens through confirmation. Consequently, I began to wonder whether our form plan was errant. If it was not, I questioned why access to an easy mechanism for certain actions under a federal code should not be implemented on a national level pursuant to a standard form — that is, why should a debtor in one district have to expend more resources, including both time and money, than a debtor in another district to take advantage of the same benefit simply based on his venue?
Section 3.4 of the National Form Plan permits a debtor to avoid judicial liens or nonpossessory, nonpurchase-money security interests that impair exemptions to which the debtor would be entitled under § 522(b). Section 3.4 requires the debtor to complete a three-column table. First, the debtor must provide information on the lien, including the name of the creditor, the collateral securing the lien, and the identifying information of the recorded lien. The second column, “Calculation of lien avoidance,” requires the debtor to demonstrate that the lien impairs an exemption. This calculation tracks the analysis in § 522(f)(2). If only a portion is avoided, the third column sets out the treatment to pay the remaining secured claim in full. Any resulting unsecured claim, to the extent allowed, is paid according to Part 5 of the plan, which deals with nonpriority unsecured claims.
The opposition to Section 3.4 of the National Form Plan appears strictly procedural. Currently, Rule 4003(d) provides that the § 522(f) lien avoidance shall be brought by motion in accordance with Rule 9014. Accordingly, unlike other avoidance actions under the Bankruptcy Code that require an adversary proceeding, this type of lien avoidance is simply a contested matter. Procedural due process associated with contested matters is addressed in Rule 9014(a). “[R]easonable notice and opportunity for hearing shall be afforded the party against whom relief is sought.” Consistent with this Rule, Part 1 (“Notices,” on the first page of the National Form Plan) requires a debtor to check a box indicating whether “Included” or “Not Included” in the plan is a provision for the “[a]voidance of a judicial lien or nonpossessory, nonpurchase-money security interest, set out in Section 3.4.” The debtor is cautioned: “If an item is checked as ‘Not Included’ or if both boxes are checked, the provision will be ineffective if set out later in the plan.”
Contested matters must be served according to Rule 7004 in the same way as serving a summons and complaint. Rule 9006(d) requires that the lien-avoidance action and notice of hearing be served not later than seven days prior to the hearing date. This period is less than the 28 days’ notice for the confirmation hearing pursuant to Rule 2002(b). Consistent with these Rules, as long as the debtor serves his plan pursuant to Rule 7004 on the judgment lienholder, the lienholder is given adequate notice and more than ample opportunity to object or respond.
Some courts currently require a separate motion to avoid a lien pursuant to § 522(f). Typically, those courts hold that lien avoidance through a plan is not authorized in § 1322. Other courts recognize that a plan may provide lien avoidance pursuant to §§ 522(f) and 1322(b)(2). Fortunately, the Advisory Committee on Bankruptcy Rules has resolved this divisive procedural question through proposed amendments to Rule 4003, which will provide for § 522(f) lien avoidance in a chapter 13 plan. This will give definitive procedural effect to Section 3.4.
Bankruptcy courts must always scrutinize the requirements of confirmation. The plan must satisfy the requirements of § 1325 and comply with all the applicable provisions of the Bankruptcy Code. As the Committee Note to the National Form Plan clarifies, “Nothing in the Official Form requires confirmation of a plan containing provisions inconsistent with applicable law.” Section 3.4 notes that the lien will be avoided “[u]nless otherwise ordered by the court.” The court may require more evidence or support for the calculation in Section 3.4. Ultimately, confirmation of the plan may be denied, or the lien avoidance request may be denied in the confirmation order. Court scrutiny of Section 3.4, procedural clarification of amended Rule 4003(d), and general safeguards of due process should calm concerns over the adoption of the National Form Plan. Stated differently, the form does not avoid the lien; the form contains a motion to avoid, and it is the confirmation order that either grants or denies that request.
Opting out does not provide a refuge. Even though Rule 3015.1(d) will not require a local form plan to contain a lien-avoidance section, Rule 3015.1(c) does require the local form plan to include an initial paragraph for the debtor to provide notice if the plan avoids a lien. This reinforces the fact that debtors may avoid a judgment lien through their chapter 13 plans. Courts may craft their local form plan to accomplish this lien avoidance in a way that addresses their individual concerns. In the end, chapter 13 debtors will need an efficient mechanism to accomplish § 522(f) lien avoidance and achieve confirmation of a plan that modifies the secured claim.[1] Although not currently universally accepted, the National Form Plan should have wide appeal, particularly for mechanical § 522(f) lien avoidance. Use of Section 3.4 efficiently consumes debtors’ limited resources and facilitates counsel in achieving a fresh start for their clients. Uniformity benefits those who routinely review chapter 13 plans, including creditors holding avoidable liens, trustees, judges and even law clerks. Scrutinizing Section 3.4 shall prove more efficient than combing through “nonstandard” provisions or deciphering locally devised motions.
The National Form Plan might not be perfect, and it certainly has its weaknesses. But it also has its strengths, arguably including a mechanism for lien avoidance. Before rushing to opt out, perhaps consider that the National Form Plan could be “employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.”[2]