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Minnesota: Bankruptcy Courts Enact Local Rule affecting Lien Stripping

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013


by Orin J. Kipp
Wilford, Geske & Cook, P.A. – USFN Member (Minnesota)

In the wake of increased attempts by debtors to strip liens against their principal residence, a new local rule calls attention to the importance of reviewing Chapter 13 plans quickly upon receiving notice of the filing, and determining if an appraisal will be necessary to avoid a lien strip at the time of plan confirmation. Minnesota practitioners were hoping for direction from the Eighth Circuit in a recent lien-stripping case. However, the case (In re Fisette, 695 F.3d 803 (8th Cir. 2012)), was dismissed for lack of jurisdiction. As such, the court did not weigh in on the Bankruptcy Appellate Panel’s (BAP’s) previous decision, which held that a debtor had the ability to strip a “wholly” unsecured lien on the debtor’s principal residence.

Minnesota’s rule committee and the local judges promulgated a new rule that provides the framework for lien stripping and valuation hearings in the future. While this rule, new Local Rule 3012-1 (3012-1), was effective April 1, 2013, the majority of Minnesota’s bankruptcy judges have required compliance with 3012-1 provisions for the past several months.

The objective of 3012-1 is aimed at ensuring that the necessary parties are given appropriate notice of the valuation hearing, along with providing a mechanism by which local title examiners will be able to track the chain and/or validity of encumbrances on real property at the completion of a Chapter 13 plan.

Rule 3012-1 specifically states that “[a] Chapter 13 debtor seeking to modify a claim that is secured by a security interest in real property that is the debtor’s principal residence must provide for that modification in the plan and must bring a motion to determine the value of the secured claim.” Accordingly, 3012-1 requires that a lien strip be accomplished through formal motion practice.

While 3012-1 protects lenders from losing a secured claim without notice, this author’s firm has already encountered complications with the new process. The debtor’s motion must include evidence of the fair market value of the property (typically an independent appraisal). Rule 3012-1 also requires that the valuation hearing be held contemporaneously with the confirmation hearing. As such, creditors are receiving notice of a plan proposing to strip a lien, along with the notice of a motion to value the secured claim, only weeks before the hearing date. At times it is difficult for lenders to coordinate an appraisal within this short time frame in order to determine if the debtor’s proposed valuation is indeed correct, or if the creditor needs to file an objection to the motion. Due to the infancy of 3012-1, there will certainly be further issues appearing as this latest format becomes commonplace.

One positive note is that the majority of debtors attempting to accomplish a lien strip under 3012-1 have failed to strictly comply with the new requirements and have had their motions for valuation denied. This, however, is likely to change as local counsel become more familiar with the process.

In sum, Minnesota’s bankruptcy courts have implemented a mechanism consistent with the BAP’s decision that stripping a wholly unsecured lien is permissible. Rule 3012-1 provides a forum for more and more debtors to actively seek to strip the liens of junior mortgagees — necessitating a heightened focus from Minnesota attorneys representing lenders and servicers.

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