Michigan Bankruptcy Blog

Espinosa Does Not Excuse Compliance With Bankruptcy Rules When Defect is Detected Pre-Confirmation

In re Peckens-Schmitt, Bankr. W.D. Mich., July 16, 2010 (Case No. 10-04164, Hon. Scott W. Dales).

In a notable decision, the United States Supreme Court recently upheld a bankruptcy court's confirmation of a Chapter 13 plan that discharged part of a student loan debt without an adversary proceeding where the student loan creditor had notice of the plan but did not object. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010).

Now, the Bankruptcy Court for the Western District of Michigan has clarified that Espinosa does not excuse Chapter 13 debtors from complying with the Federal Rules of Bankruptcy Procedure. In In re Peckens-Schmitt, the debtor believed that PNC's mortgage on her home was unperfected, so she proposed a Chapter 13 plan that treated PNC as an unsecured creditor. PNC did not object.

The Bankruptcy Court denied confirmation without prejudice. The court noted that under the bankruptcy rules, an adversary proceeding is required to avoid or invalidate a lien, and confirming a plan that effectively invalidates a lien without an adversary proceeding would not comply with that rule. The court reasoned that Espinosa was based on principles of finality, as the plan was already confirmed. Here, however, the court was aware of the defect before confirmation, and Espinosa requires bankruptcy courts to address defects in proposed plans. Consequently, the court held that Espinosa does not "authorize[e] the court to turn a blind eye to the procedural shortcut that the Debtor proposed in her Plan by extinguishing PNC's lien as unperfected without the procedural safeguards of an adversary proceeding."

This case makes it clear that Espinosa does not allow Chapter 13 debtors to propose a plan that is inconsistent with the bankruptcy rules, even if the creditor who would be affected fails to object. 

Categories: Chapter 13, U.S. Supreme Court, Western District of Michigan