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Modified security interests, how much notice required?

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In 1993, the Fourth Circuit decided Piedmont Trust Bank v. Linkous, 990 F.2d 160 (4th Cir. 1993), which addressed the notice required to a secured creditor when confirmation of a bankruptcy plan requires a valuation under 11 USC 506(a) of the bankruptcy code. In this case, Piedmont owned a security interest in a mobile home and a vehicle and was due balances of roughly $18,000.00 on the mobile home and $4,000.00 on the vehicle. The Chapter 13 plan proposed by Linkous treated only $6,000 of the mobile home loan as secured and $1,000.00 of the car loan as secured. The Plan treated the remaining balances as unsecured. Piedmont was given a summary of the Chapter 13 plan but was not otherwise notified of the ‘506(a) valuation.

The Chapter 13 Plan was confirmed and two weeks later Piedmont filed its claims which treated the full balance of the claims as secured. Piedmont then filed a Motion to Revoke the Order Confirming the Plan and Dismiss or Convert the Case. The bankruptcy court determined that it did not have grounds to revoke the confirmation noting that Piedmont had been given notice and failed to use procedures available to it to protect its interest.

The Fourth Circuit determined that the statute required notice that the debtor planned to hold a section 506 valuation hearing and that in order to reasonably convey the required information, Linkous’ notice must state that such hearing will be held. In this case, the notice Linkous gave did not make reference to any intent to reevaluate the secured claims pursuant to ‘506(a).

The Court commented that though a sophisticated lender should have known its interests where in jeopardy but nonetheless held that the failure to inform the secured creditor of an intent to reclassify its claim into partially secured and partially unsecured status was a violation of Piedmont’s due process right, and that vacating the final order of the bankruptcy court, with respect to Piedmont’s rights, was appropriate and that a ‘506 valuation hearing should be held to determine what portions of Piedmont’s loans should be considered secured and what portions unsecured.

Locally, the Eastern District of Virginia has promulgated Special Notice requirements for secured creditors whose security interests are proposed to be altered by the Chapter 13 plan. See Local Rule 3015-2. This Special Notice must be served by the debtor or debtor’s bankruptcy attorney on the creditor within 15 days after filing the plan to inform. This form was generated in response to the aforementioned Piedmont Trust Bank decision. However, the current Chapter 13 plan utilized by the Eastern District does notify the secured creditor of the intent to reclassify its claim into partially secured and partially unsecured status in at least 3 separate locations. Unlike the Chapter 13 plan before the court in Piedmont, a little over a full page of the six page plan is devoted to informing secured creditors of the intent to value collateral at its replacement cost and treat the remaining portion of the debt as unsecured. Further, the Plan specifically says, in bold, underlined text on the first page that the motions in paragraphs 3, 6 & & to value collateral. . . may be granted without further notice or hearing unless a written objection is filed not later that seven (7) days prior to the date set for the confirmation hearing and the objecting party appears at the confirmation hearing.

In light of this Plan language, is an extra Special Notice required, in addition to the ominous language in the Plan regarding the valuation of security interests . . . all to comply with the standard set forth in the Fourth Circuit’s Piedmont decision? I’m not so sure.

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