EASTERN DISTRICT OF KENTUCKY

                                                               ASHLAND DIVISION








DEBTORS                                                                               CASE NO. 04-10526



                                                         MEMORANDUM OPINION


Mark Anthony Roberts and Dawn Renee Roberts (the “Debtors”) are before the court on the Motion to Avoid and Set Aside Mortgage Filed by Fairbanks, Successor to Meritage Mortgage Corporation that they filed in this case on September 16, 2004. The motion seeks to avoid the mortgage of Fairbanks Capital Corporation and/or Meritage Mortgage Corporation (“Meritage”)[1] due to a defective acknowledgment. Hav­ing con­sidered the Debtors’ motion, Meritage’s response thereto, and the briefs and arguments of counsel, the court con­cludes that the motion must be overruled.


Factual and Procedural Background

On or about September 5, 2002 the Debtors executed a Mortgage on their residence (the “Property”) in favor of Meritage Mortgage Corpo­ration, and the mortgage was recorded in the office of the Clerk of Boyd County, Kentucky on September 17, 2002. On July 2, 2004 the Debt­ors filed a voluntary petition for relief under Chapter 13 of the Bank­ruptcy Code. The Debtors’ Schedule D (Creditors Holding Secured Claims) listed Fairbanks as holding a $24,000 claim secured by a first mortgage on the Property, and the claim was not listed as contingent, unliquidated, or disputed. That same day, the Debtors filed two pro­posed Chapter 13 Plans (the “Plans”). Paragraph III.F. of each of the Plans provides:

Any creditor filing a claim as secured that is not otherwise provided for by this plan or Court order shall be treated as a claim secured to the extent of the value of the collateral set forth in the proof of claim, to be paid inside the plan with interest at the contract rate.


Paragraph III.E. of the Plan filed at 11:20 a.m. (the “First Plan”) indicates that no liens are to be avoided under § 522(f) of the Bank­ruptcy Code; Paragraph III.E. of the Plan filed at 11:23 a.m. (the “Second Plan”) provides that the liens of World Finance Corp. and Amer­i­can General were to be avoided under § 522(f). Paragraph VII (“Special Pro­vi­sions”) of the First Plan is blank; Paragraph VII of the Second Plan states:

If The [sic] Debtor has stated in Section F [sic – pre­sum­ably Section III.F.] that a claim is Unsecured then it shall be treated as unsecured even if the Creditor files a claim as Secured. The mortgage debt owed to Fairbanks shall be treated as an unsecured debt due to a defective notarization on the mortgage.


­On July 8, 2004 the court issued a notice setting November 23, 2004 as the deadline for filing proofs of claim in the Debtors’ Chap­ter 13 case. On September 13, 2004 the court confirmed one of the Plans, not specifying which. Meritage did not timely file a proof of claim.

As mentioned above, on September 16, 2004 the Debtors filed the motion presently before the court. The motion was served on Meritage by mailing it to “Fairbanks, Successor to Meritage Mortgage Corp., P. O. Box 9001710, Louisville, Kentucky 40290.” Meritage filed an ob­jection on September 30, 2004 (which it supplemented on November 9, 2004) and the court conducted hearings on the motion on October 13 and November 12, 2004. On November 15, 2004 the court entered an order af­fording the Debtors through December 1, 2004 within which to file a brief, affording Meritage and Beverly M. Burden, the standing Chapter 13 trustee (the “Trustee”), through December 15, 2004 within which to file responsive briefs, and affording the Debtors through December 20, 2004 within which to file a reply brief. The Debtors filed a brief on November 30, 1004. On December 7, 2004 the Trustee filed a response agreeing with the Debtors’ position that “[t]he confirmed plan is res judicata as to all issues addressed by the plan,” but asking the court to overrule the Debtors’ motion because avoidance must be sought by an adversary proceeding initiated by the Trustee. The Trustee also stated that, if the Debtors are unsuccessful in avoiding the mortgage or Mer­i­tage does not consent to the avoidance, the Trustee will file a com­plaint to set the mortgage aside. Meritage filed a brief in support of its position on December 14, 2004. The Debtors did not timely file a reply brief.


Legal Discussion

The Debtors argue, first, that Meritage is bound by the Second Plan’s provision for the avoidance of the mortgage.[2] While it is true that “[t]he provisions of a confirmed plan bind the debtor and each credi­tor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has ac­cept­ed, or has rejected the plan,” 11 U.S.C. § 1327(a), the Second Plan – assuming it was the Plan confirmed by the court – simply does not provide for the avoidance of the mortgage. Rather, Paragraph VII of the Plan provides only that the Fairbanks mortgage would be treated as an unsecured claim. Accordingly, Meritage will not receive any dis­tributions on account of a secured claim (including interest thereon);[3] however, the mortgage will remain in effect and, absent avoidance, will remain enforceable after the conclusion of the case to the extent enforceable under applicable nonbankruptcy law.[4] Although Meritage will not receive a distribution in this Chapter 13 case, its mortgage has not been avoided by virtue of confirmation of either of the Plans.

Meritage asserts that the motion should be overruled because an adversary proceeding is required. Meritage is correct. While the avoid­­­ance of judicial liens and nonpossessory, nonpurchase-money security interests impairing exemptions may be sought by motion, Fed. R. Bankr. P. 4003(d); 11 U.S.C. § 522(f), the Debtors’ motion does not fall within that category – a conclusion that is underscored by Para­graph III.E. of the Plans, neither of which provides for the avoidance of Meritage’s mortgage ­under § 522(f). An adversary proceeding is re­quired. Fed. R. Bankr. P. 7001(2); see, e.g., United States v. Mathews (In re Mathews), 209 B.R. 218, 222 (B.A.P. 6th Cir. 1997); In re La­foon, 278 B.R. 767, 770 (Bankr. E.D. Tenn. 2002); In re Baker, 246 B.R. 379, 381, 384 (Bankr. E.D. Mo. 2000); Canelos v. Mignini (In re Canelos), 216 B.R. 159, 165 (Bankr. D. Md. 1997); In re Colston, 213 B.R. 704, 708-09 (Bankr. S.D. Ohio 1997). But see Fid. Fin. Servs. v. Schweit­zer, 16 B.R. 476, 476 (W.D. Ky. 1981) (lien avoidance pursuant to § 522(h) need not be sought by adversary proceeding).[5]

Meritage also asserts that the Debtors lack standing to avoid the mortgage. Again, Meritage is correct. Under § 522(h) of the Bankruptcy Code, a debtor may avoid a transfer that is avoidable by the trustee but that the trustee does not attempt to avoid, but only if the debtor could have exempted the property under § 522(g)(1) if the trustee had avoid­ed the transfer. Section 522(g)(1) authorizes a debtor to exempt prop­erty recovered by a trustee (if it would have been exempt had there been no transfer) only if “the debtor could have avoided such transfer under subsection (f)[(1)(B)] of this section” or “such transfer was not a voluntary transfer of such property by the debtor.” 11 U.S.C. § 522(g)(2), (1)(A). Meritage’s mortgage cannot, as ex­plained above, be avoid­ed by the Debtors under § 522(f), and a mort­gage is a voluntary transfer. E.g., Erdheim v. Thaler (In re Erdheim), 173 F.3d 844 (Table), 1999 WL 147039 (2d Cir. 1999); Trentman v. Meri­tech Mortgage Serv. (In re Trentman), 278 B.R. 133, 135-36 (Bankr. N.D. Ohio 2002). Accordingly, the Debtors may not exempt the collat­eral under § 522(g) so they may not avoid the mortgage thereon under § 522(h). As one of our sister courts sum­ma­rized, after discussing the interplay of § 522­(h) and (g):

Thus, taken together these provisions provide a debtor with the standing to avoid a transfer of property under § 544 if four conditions are met: (1) the bankruptcy trustee does not attempt to avoid the transfer; (2) the debtor could have exempted the property; (3) the debtor did not conceal the prop­erty; and (4) the debtor did not voluntarily transfer the property.


Trentman, 278 B.R. at 135 (citations omitted). The fourth require­ment is lacking here, so the relief sought by the Debtors must be de­nied.[6]



For the foregoing reasons, the court will enter a separate order overruling the Debtors’ motion to avoid Meritage’s mortgage on the Property. The order will be entered without prejudice to the Trustee’s right to seek to avoid the mortgage by a proper proceeding.


Copies to:


James P. Stavros, Esq.

Jon J. Lieberman, Esq.

Beverly M. Burden, Trustee

[1]The Debtors’ motion asserts that the mortgage is held by Fair­banks, as successor to Meritage Mortgage Corporation. Meritage’s re­sponse indicates that the mortgage is held by Meritage Mortgage Cor­poration in care of Select Portfolio Servicing, Inc., formerly known as Fairbanks Capital Corporation.

[2]There can be no question that the First Plan did not provide for the avoidance of the mortgage, as Meritage (or Fairbanks) was not even mentioned therein.

[3]Indeed, since Meritage has failed timely to file a proof of claim, it appears that it will not receive any distribution on its claim even if treated as an unsecured claim.

[4]The conclusion that neither of the Plans avoids Meritage’s mort­gage is pointed up by the fact that the Debtors filed a motion to avoid the mortgage: if the avoidance was effected by confirmation of a Plan, the motion would not have been necessary.

[5]Even if the motion is treated as a complaint, no summons was is­sued with respect thereto and service was not made in accordance with Rule 7004 of the Federal Rules of Bankruptcy Procedure. See Fed. R. Bankr. P. 9014(b), 7004(b)(3).

[6]The first requirement is also lacking, because the Trustee does intend to seek to avoid the mortgage if it is not avoided on the Debt­ors’ motion or by agreement. The second requirement may also be lack­ing, if the mortgage in­cludes a “boilerplate” waiver of the homestead exemption and that waiver would remain enforceable if the mortgage is avoided. See also K.R.S. § 427.060.