Once a debtor has completed plan payments, the bankruptcy court has power under Bankruptcy Rule 7070 to clear title by removing liens that were stripped off in the debtor’s chapter 13 plan.
In California, the court may impose attorneys’ fees on a lender who doesn’t voluntarily remove a mortgage that had been declared void in the plan, according to an October 11 opinion by Bankruptcy Judge Christopher M. Klein of Sacramento, Calif. Belatedly removing the voided mortgage doesn’t prevent the court from assessing the lender with the debtor’s attorneys’ fees.
The Stripped-Off Mortgages
Two debtors confirmed their chapter 13 plans and completed their plan payments in 2020 and 2021. Before confirmation, the debtors’ secondary deeds of trust were valued at zero dollars because the debtors’ homes were worth less than the first mortgage debt. As a result, the second-lien lenders only had unsecured claims. On the completion of plan payments, the subordinate liens were stripped off under Sections 506(d) and 1322(b)(2).
The lenders did not remove their liens as California law requires when the mortgage debt was reduced to zero on the completion of plan payments.
In one case, the lender did not remove the stripped-off lien despite three notices from the debtor. The debtor filed an adversary proceeding when the lender failed to act for 19 months. Two months after being sued, the lender reconveyed the stripped-off mortgage, or, as Judge Klein said, “710 days after the lien became void.”
After complaints by the debtor in the second case, the lender reconveyed the lien six months after the lien became void following the completion of plan payments. In the second case also, the debtor had sued in bankruptcy court when the lender had not voluntarily removed the lien.
In both cases, the lenders moved for summary judgment to dismiss the complaints. The lenders contended that (1) there was no statutory or common law claim to remove the liens, and (2) attorneys’ fees were not available.
Judge Klein denied the lenders’ motions for summary judgment and granted summary judgment on behalf of the non-moving debtors. As he explained in his opinion, “The federal lien removal authority, independent of state law, is firmly rooted in more than a century of federal law.”
Federal Authority
Judge Klein explained why the debtors had claims under federal law to remove the voided liens.
When the debtors completed plan payments, the judgments being enforced were the plan confirmation orders under Section 1322(b)(2), which made the liens void under Section 506(d).
The power to remove the voided liens, Judge Klein said, “is now found at 28 U.S.C. § 1655, in tandem with Federal Rule of Civil Procedure 70 and Federal Rule of Bankruptcy Procedure 7070.” He explained the procedure:
If a party does not comply with a judgment requiring conveyance of land, delivery of a deed or other document, or performance of some other specific act, then the court may appoint someone to do so at the disobedient party’s expense. The disobedient party may be held in contempt. Finally, the court may enter a judgment divesting title and vesting it in others. Fed. R. Civ. P. 70, incorporated by Fed. R. Bankr. P. 7070.
Furthermore, the power of the bankruptcy court is expanded geographically under Bankruptcy Rule 7070. Judge Klein explained:
Bankruptcy Rule 7070 incorporates Civil Rule 70 and expands its geographic scope from “property within the district” to “property within the jurisdiction of the court.” Fed. R. Bankr. P. 7070, incorporating Fed. R. Civ. P. 70.
In addition, lien removal is a “core” proceeding, Judge Klein said. He summed it up as follows:
Congress placed the Rule 7070 tool in the Bankruptcy Court’s toolbox. Regardless of state law, the tool is available nationwide to deal with mortgagees who do not timely reconvey deeds of trust that are “void” under federal law.
Judge Klein also laid out the authority under California law that the debtors could have employed to compel the lenders to remove the voided liens.
Attorneys’ Fees
The voided mortgages and notes all contained clauses calling for the payment of the lenders’ reasonable attorneys’ fees and costs. California law, Judge Klein said, “prohibits non-reciprocal attorneys’ fee clauses in contracts in a manner that makes an otherwise unilateral right to attorneys’ fees reciprocally binding upon all parties in actions to enforce the contract.”
Judge Klein said that the lenders’ reconveyances of the voided mortgages made the debtors the “prevailing parties” for the purposes of the California law on attorneys’ fees. The “belated” reconveyances, he said, did not make the adversary proceedings moot. In addition, Rule 70(e) “exposed” the lenders “to the possibility of contempt.”
Remedy
On completion of plan payments, Judge Klein summed up the cases by saying that the holders of stripped-off liens
thereupon ha[ve] a federal duty to request that the [deed of trust] trustee reconvey the deed of trust on the void[ed] debt. If voluntary reconveyance does not timely occur following completion of chapter 13 plan payments, then the debtor is entitled to invoke the federal lien removal power in an adversary proceeding seeking involuntary reconveyance.
Judge Klein denied the lenders’ motions for summary judgment. Although the debtors had not cross-moved for summary judgment, “it nevertheless is permissible to grant summary judgment for a non-moving party if the issues were presented in the original motion and the moving party had a full and fair opportunity to ventilate the issues,” Judge Klein said.
Judge Klein granted summary judgment in favor of the debtors and ruled that the debtors “are entitled to attorneys’ fees and costs pursuant to the fee provisions in the respective deeds of trust.”
Once a debtor has completed plan payments, the bankruptcy court has power under Bankruptcy Rule 7070 to clear title by removing liens that were stripped off in the debtor’s chapter 13 plan.
In California, the court may impose attorneys’ fees on a lender who doesn’t voluntarily remove a mortgage that had been declared void in the plan, according to an October 11 opinion by Bankruptcy Judge Christopher M. Klein of Sacramento, Calif. Belatedly removing the voided mortgage doesn’t prevent the court from assessing the lender with the debtor’s attorneys’ fees.