The debtor’s proposed Chapter 13 Plan called for a lien strip down on a creditor’s second mortgage in the case of Hippolito and Nancy Gonzalez decided on March 25, 2013. In a Chapter 13 proceeding if there is no equity to support a subsequent mortgage then the mortgage may be stripped down and made completely unsecured under Section 1322 (b) (2) of the Bankruptcy Code. A Chapter 13 Plan to strip down a mortgage is considered a contested matter under the Federal Rules of Bankruptcy Procedure. Fed. R. Bankr. Rule 9014 requires motions and contested matters to be served in the manner provided for by service of the summons and complaints, governed by Rule 7004. In the Gonzalez matter the bankruptcy judge determined that though the Chapter 13 Plan notice did contain the proper address for the creditor it lacked the detail required by the rule.

Federal Rules of Bankruptcy Procedure 7004 (b) (3) states that service may be made by first-class mail on a “domestic or foreign corporation or public partnership or other incorporated association by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent or to any other agent authorized by appointment or by law to receive service of process.” It also requires mailing notice to the defendant.

The court in Gonzalez elaborated that the purpose of the rule is to ensure that summons and complaints and other critical notices expeditiously reach the appropriate decision-maker so he can file a timely objection. So while the Gonzalez debtors directed the notice to the correct address it was not directed to the specific attention of an officer or the managing or general agent of the secured creditor.

The court ultimately held that the debtor’s service of the notice violated due process because it was not reasonably calculated to get the information to the creditor’s specific corporate officer or an individual who could have attended to it in a timely manner. The court held that due process was not satisfied because the corporation was not given sufficient time to object and the outcome would have been different had the notice been properly drafted and served. In this instance the confirmation hearing was less than one month after the notice was mailed.

The debtor argued further that since his Chapter 13 Plan had been confirmed the creditor could not question a Final Confirmation Order. However Judge Donald H. Steckroth, the bankruptcy judge, ruled that courts will not defer to a Chapter 13 Confirmation Order if it would result in a denial of due process of the fifth amendment to the United States Constitution. The lesson in this instance was that the doctrine of res judicata did not bar the creditor’s motion to challenge the confirmation and strip down order. Accordingly, the court ordered that the creditor’s proof of claim be reinstated as a secured claim and the debtor’s plan was required to satisfy the mortgage in full by making payments to the creditor.

The take away from the case is that if a creditor misses a lien stripping motion and or confirmation plan notice it should carefully examine the content of the notice. If the notice was defective that fact may well allow the creditor, as in this case, to argue that its due process rights had been violated and have its claim reinstated as secured.

Bari J. Gambacorta is a Shareholder and member of Stark & Stark’s Bankruptcy & Creditor’s Rights and Collections Groups.

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