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.
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Michael Buccino, J.D. Candidate 2010
No. 4, Vol. 1 (2009)