Blue Water Land Development Company, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
BLUE WATER LAND DEVELOPMENT, LLC,
DEBTOR. 	Case No. 08-00842-8-JRL
Chapter 11
____________________________________________________________________________
ORDER
This case is before the court on Bank of America’s response to the debtor’s objection to
claim and request for a hearing. 	On October 9, 2008, the court conducted a telephonic status
conference on this matter.
On February 8, 2008, the debtor filed a petition for relief under Chapter 11 of the Bankruptcy
Code. On June 9, 2008, Bank of America filed a proof of claim in the amount of $14,000,000.00,
plus interest, treble damages, and attorneys’ fees. Bank of America’s claim arises from a deed of
trust which allegedly secures a loan made by Bank of America in the same amount. The validity of
Bank of America’s lien is the focus of ongoing litigation between the parties and the subject of an
objection to claim filed by the debtor on August 28, 2008. In its objection to claim, the debtor states
that it has significant defenses and set-offs to the claim, the claim should be subject to equitable
SO ORDERED.
SIGNED this 21 day of October, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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subordination, and Bank of America should be treated as unsecured. Bank of America argues that
the debtor’s objection to claim is improper because the relief requested must be sought in an
adversary proceeding.
Rule 3007 of the Federal Rules of Bankruptcy Procedure precludes a party from using an
objection to claim to raise issues that must be brought in an adversary proceeding. FED . R. BANKR .
P. 3007(b). 	Rule 7001 provides a list of adversary proceedings and includes proceedings “to
subordinate any allowed claim or interest . . .” and “to determine the validity, priority, or extent of
a lien or other interest in property . . .” FED . R. BANKR . P. 7001(2) and (8). Thus, a request to
subordinate a claim must be brought in an adversary proceeding. 	F ED . R. BANKR . P. 7001(8).
However, a debtor in possession need not bring an adversary proceeding to object to the validity of
a lien when responding to a creditor’s proof of claim. See 10 Collier on Bankruptcy ¶ 7001.03 (Alan
N. Resnick & Henry J. Sommer, eds, 15th ed. Rev. 2007) (“It is possible for the trustee to dispute
the secured status of a creditor filing a proof of claim by denial and affirmative defense without
filing an adversary proceeding”). Here, the debtor acted in violation of Rule 3007(b) by seeking
relief for equitable subordination in its objection to claim. However, the court finds that the debtor
is authorized to challenge the validity of Bank of America’s lien in an objection to claim.
Based on the foregoing, the court permits the debtor to challenge the validity of Bank of
America’s lien in its objection to claim. On the other hand, the court precludes the debtor from
using an objection to claim to request relief for equitable subordination. However, the debtor may
allege equitable subordination against Bank of America in an adversary proceeding.
“END OF DOCUMENT”
Case 08-00842-8-SWH Doc 180 Filed 10/21/08 Entered 10/21/08 12:08:31 Page 2 of 2