Source: http://www.brentsorensonlaw.com/the-binding-effect-of-chapter-13-plan-confirmation/
Timestamp: 2019-04-19 00:42:16+00:00

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There has been little question but that absent a sustained objection prior to confirmation, both debtors and creditors are bound by the valuation of collateral set forth in the debtor’s chapter 13 plan. I say “little” question because recent dissent on the issue causes us to carefully examine the relevant statutory authority, case law, and policy considerations which require chapter 13 plan confirmation to bind all parties to the terms set forth therein, and require any objection to the plan terms to be made prior to confirmation.
Under the Bankruptcy Code, the debtor possesses the exclusive right to file a chapter 13 plan. Alternatively, the creditor possesses the right to object to confirmation of the plan if its interest is not properly treated in the plan. In the chapter 13 plan, the secured creditor’s claim is bifurcated into secured and unsecured claims pursuant to 11 U.S.C. §506. The secured creditor retains a secured claim up to the fair market value of the collateral securing the claim. The debtor must propose, at a minimum, to pay over the life of the plan the fair market value of the collateral securing the creditor’s claim. It is the debtor who is in possession of the collateral and who is in a far superior position to estimate its fair market value. The secured creditor possesses the statutory right to object to the plan if it disputes the value of the collateral as set forth in the plan. This article addresses the issue of whether the debtor and creditor are bound by the value of collateral as set forth in the confirmed chapter 13 plan, and whether the allowed claim of a secured creditor may be bifurcated without forcing the debtor to object to the creditor’s proof of claim.
Part I of this article will examine the relevant case law and statutory provisions of the Bankruptcy Code which bind all parties to the terms of the confirmed chapter 13 plan; such terms to include the value of collateral as set forth in the debtor’s plan. Part II of this article will distinguish “bifurcating” a secured creditor’s claim versus voiding or reducing the claim. Part III of this article will discuss the important policy considerations which must be considered in order to preserve the debtor’s exclusive right to propose a viable chapter 13 reorganization plan.
The 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) (emphasis added).
The necessity for binding all parties to the terms of the confirmed chapter 13 plan is readily apparent once careful examination is made of the statutory process leading up to plan confirmation.
Under chapter 13 of the Bankruptcy Code, the debtor is given the exclusive right to file a chapter 13 reorganization plan. 11 U.S.C. §1321. Section 1321 states that “the debtor shall file a plan”. The legislative history of section 1321 further states that “[t]he debtor has the exclusive right to propose and file a plan…” H.R. No. 95-595, 95th Cong., 1st Sess. 428 (1977) (emphasis added). The debtor is the logical one to formulate a plan according to his income and expenses and is the one in possession of the collateral which must be valued for proper treatment of secured claims within the chapter 13 plan.
Once the debtor has filed a proposed chapter 13 plan, all creditors are given notice of the plan and its terms, and each is granted the statutory right to object to confirmation of the plan. 11 U.S.C. §1324. Legislative history of section 1324 states that an objection to confirmation “is predicated on failure of the plan or the procedures employed prior to confirmation to conform with the requirements of chapter 13.” S.R. No. 95-989, 95th Cong., 2d. Sess. 142 (1978) (emphasis added). Therefore, every creditor, secured or unsecured, possesses the statutory right to object to confirmation of the debtor’s proposed chapter 13 plan if the plan does not meet the specific requirements of chapter 13.
(C) the debtor must surrender the property securing the claim to the holder of the claim.
11 U.S.C. $1325(a)(5); H.R. No. 95-595, 9th Cong., 1st Sess. 430 (1977) (emphasis added).
Assuming that the creditor has not accepted the chapter 13 plan and that the debtor has not surrendered the collateral, then the debtor must distribute under the plan, property of a value that is not less than the “allowed amount” of the creditor’s secured claim as determined by 11 U.S.C. §506. The “allowed amount” of the secured claim as determined under 11 U.S.C. §506 is equal to the fair market value of the collateral securing the creditor’s claim. Therefore, the court must determine whether the plan, as proposed by the debtor, will pay to the secured creditor over the life of the plan the fair market value of the collateral securing its claim. 11 U.S.C. §1325(a)(5)(B). Inherent in this task is the necessity that the court, at the time of confirmation, determine the fair market value of the collateral.
The debtor is the party in possession of the collateral and is the logical party to make a good faith estimate of its value. The debtor is the one who proposes the chapter 13 plan and who must propose to pay the secured creditor the fair market value of the collateral securing the claim. The secured creditor who fails to object to the value assigned to its collateral in the chapter 13 plan will be bound by the terms of the confirmed plan pursuant to 11 U.S.C. §1327.
In this case, the bank failed to timely object to the plan. Having slept on its rights, the bank now seeks to recover its collateral, despite the existence of a confirmed chapter 13 plan that provides for payment to the bank. The issue of the bank’s adequate protection, which centers around valuation of the bank’s collateral, could have been, and should have been, raised prior to confirmation.
In re Guilbeau, 74 B.R. at 14 (emphasis added).
The Guilbeau court denied the bank its motion for relief from the automatic stay because it failed to raise the issue of adequate protection at the proper time. The issue of adequate protection centered around valuation of the bank’s collateral and should have been raised prior to confirmation. The bank failed to exercise its statutory right pursuant to 11 U.S.C. §1324 to object to treatment of its claim under the chapter 13 plan, and in doing so, was bound by the terms of the plan. Following the Guilbeau holding, a secured creditor who disputes the debtor’s chapter 13 valuation of collateral securing its claim, must object to confirmation of the plan pursuant to section 1324 for failure of the plan to provide the fair market value of the collateral over the life of the plan as required by 11 U.S.C. §1325(a)(5).
In re Patterson, 107 B.R. at 579 (citing Associates Commercial Corp. v. Brock, 6 B.R. 105, 106 (Bankr. N.D. Ill. 1980)).
The Patterson court further stated that, “[h]ad [the secured creditor] filed an Objection to Confirmation…it probably would have succeeded. However, it did not, and cannot at this late date attempt to set aside confirmation of the plan.” In re Patterson, 107 B.R. 576.
The holding of the Patterson court follows the clear policy consideration of section 1327 of the Bankruptcy Code in finalizing the terms of the chapter 13 plan. The chapter 13 confirmation process would be rendered a practical nullity if creditors were allowed to ignore the confirmation process and to later object to treatment of its claim under the plan.
As a result of this section [11 U.S.C. §1327], the bank is bound by the terms of the debtor’s plan and, absent a post-confirmation change in circumstances, may not attempt to alter its treatment under the plan.
In re Botteri, 108 B.R. at 166.
As in the two previously cited cases, the secured creditor in Botteri failed to object to the terms of the chapter 13 plan. In doing so, it lost its right to object to treatment of its claim under the plan.
In all of the cases cited above, the debtor provided for the secured creditor to retain its lien and to be paid over the life of the plan the fair market value of the collateral securing its claim (as required by 11 U.S.C. §1325(a)(5)). The courts unanimously held that the secured creditor who is properly treated as secured under the plan cannot after confirmation object to the terms of the plan. These cases must be distinguished from cases wherein the debtor fails to treat the secured creditor as secured. In those cases, the courts properly hold that a debtor’s chapter 13 plan may not void an otherwise valid lien by merely treating the secured claim as unsecured. In those instances, even failure of the creditor to object to confirmation of the plan will not bind the creditor to the “unsecured” status as set forth in the plan.
U.S.C. §506(a). The chapter 13 debtor must propose a plan which, at a minimum, will provide for payment of the value of collateral securing the creditor’s claim. 11 U.S.C. §1325(a)(5). Pursuant to sections 506, 1322(b)(2) and 1325(a)(5) of the Title 11, U.S.C., the chapter 13 debtor may bifurcate the secured creditor’s claim. He may not, however, void the secured creditor’s otherwise valid lien by treating the claim as unsecured.
In the recent case of In re Terranova, 152 B.R. 20 (Bankr. D. Conn. 1993), the court carefully analyzed the bifurcation process under the Bankruptcy Code. The court held that “the starting point of a §506(a) bifurcation is an ‘allowed claim.'” Terranova, 152 B.R. at 22. Section 502(a) of Title 11, U.S.C. states that a “claim…proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest…objects.” Therefore, a creditor’s filed proof of claim will be allowed absent an objection by the debtor. Once the “allowed claim” is determined, then section 506 of Title 11, U.S.C. bifurcates the allowed claim into secured and unsecured claims. See Terranova, 152 B.R. at 22.
In Terranova, the debtor proposed to bifurcate a secured creditor’s claim pursuant to section 506 of the Bankruptcy Code. The creditor filed a timely proof of claim to which the debtor did not object. The claim was deemed “allowed” pursuant to 1l U.S.C. §502(a). The debtor then filed a motion to bifurcate the claim, valuing the collateral at an amount less than the “allowed claim”. The court upheld the bifurcation and determined that the creditor held a secured claim up to the value of collateral as set forth by the debtor and held an unsecured claim for the remainder of the “allowed claim”. Terranova, 152 B.R. at 23. The holding of the court recognized that a creditor’s timely filed proof of claim will be allowed absent an objection by the debtor. 11 U.S.C. §502. The court also recognized that the allowed claim may then be bifurcated pursuant to section 506 of Title 11, U.S.C..
The court in Sun Finance Co., Inc. v. Howard (In re Howard), 972 F.2d 639 (5th cir. 1992) held that a chapter 13 plan which purports to reduce or eliminate a creditor’s secured claim is res judicata as to that creditor only if the debtor files an objection to the creditor’s claim. Howard, 972 F.2d at 639 (emphasis added).
Arguably, the holding of Howard is limited to the situation where the debtor attempts to reduce the allowed claim of the secured creditor, as opposed to merely bifurcating the allowed claim into secured and unsecured claims. In the Howard case, the debtor proposed to pay only $500 of the $4,590.47 secured claim as filed by the creditor. The debtor disputed the filed claim of the creditor but did not file an objection. The case did not involve a bifurcation at all. It involved the attempt of a debtor to reduce the secured creditor’s allowed claim, and not an attempt to bifurcate it. The debtor did not allege that the value of collateral securing the claim was $500; he alleged that the claim itself was only $500. Therefore, the holding of Howard is arguably consistent with this article’s premise that a section 502 allowed claim may be bifurcated into secured and unsecured claims without requiring the debtor to object to the creditor’s proof of claim. The allowed claim just can’t be reduced or eliminated without a timely objection to the proof of claim.
It is this writer’s position that the debtor in Howard could have bifurcated, as opposed to reduced, the $4,590.47 allowed claim into secured and unsecured claims by providing in the plan a good faith estimate of the value of the collateral securing the claim. To the extent the holding in Howard stands for the proposition that an allowed claim may not be bifurcated without an objection to the creditor’s filed proof of claim, the author of this article vehemently rejects the holding as contrary to law.
As used in §101(5) [of Title 11, U.S.C.], ‘right to payment’ and ‘right to an equitable remedy’ mean ‘nothing more nor less than an enforceable obligation’.
Johnson, 111 S.Ct. at 2151 (quoting Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. – – -, 110 S.Ct. 2126, 109 L.Ed.2d 588.
Thus, a “claim” represents the dollar amount of the enforceable obligation owed to the creditor; it does not represent the value of collateral securing the “allowed claim”. Section 502 of the Bankruptcy Code merely allows the amount of money owed to the creditor to be determined; it does not determine the value of collateral securing the claim and thus could not determine what amount of the claim is secured or unsecured. Practically speaking, the creditor simply does not have the necessary information pertaining to the condition of the collateral to make a good faith estimate of its value. The debtor does have the necessary information to make such an estimate and is bound to do so in good faith. 11 U.S.C. §1325(a)(3). It should be noted that the debtor proposing a section 506 bifurcation should provide adequate notice in the chapter 13 plan that the secured creditor’s allowed claim has been bifurcated into secured and unsecured claims pursuant to section 506(a) of the Bankruptcy Code.
The Court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity as the court may direct.
Bankruptcy Rule 3012 (emphasis added).
It is unclear whether the Linkous holding stands for the proposition that a Bankruptcy Rule 3012 valuation hearing must be had in every case where bifurcation of a creditor’s claim is proposed. To the extent that the Linkous holding does require a Bankruptcy Rule 3012 valuation hearing to be had in every section 506 bifurcation situation, the holding is contrary to the intent of Bankruptcy Rule 3012. Such a requirement would pose a substantial and undue burden on the chapter 13 debtor, as well as the court.
Referring to valuation of secured claims pursuant to section 506(a) of the Bankruptcy Code, the Advisory Committee Note to Bankruptcy Rule 3012 states, “[t]his rule permits the issue [valuation] to be raised on motion by a party in interest.” Advisory Committee Note (1983) to Bankruptcy Rule 3012 (emphasis added). Additionally, the text of Bankruptcy Rule 3012 states, “[t]he court may determine the value of a claim secured by a lien…on motion of any party in interest…” Bankruptcy Rule 3012. Thus, by the express language of the statute, as well as the Advisory Committee Note, the rule is intended to allow the court to determine the value of collateral for section 506 bifurcation purposes upon the motion of a party in interest. The statutory language is permissive, not mandatory. It seems obvious that upon proper notice of a proposed bifurcation or “cram down” in a chapter 13 plan that the creditor is or should be deemed to have accepted the debtor’s estimation of value unless the creditor (1) objects to the plan, or (2) files a motion requesting that a valuation hearing be set pursuant to Bankruptcy Rule 3012. Notwithstanding a motion by a party in interest, the court must make such a valuation on its own in order to determine if the debtor’s plan provides for payment of the fair market value of the creditor’s collateral over the life of the plan. 11 U.S.C. §1325(a)(5). Therefore, Bankruptcy Rule 3012 does not require a hearing and notice in order to determine the amount of the secured claim for section 506(a) bifurcation purposes. Rather, it allows a debtor or creditor to request that it be done, if necessary, after notice and hearing.
The Linkous decision is not binding authority in the Western District of Oklahoma, but it does identify some of the common problems faced by debtors and creditors alike. A practical solution to the due process problem set forth in Linkous would be for debtors to clearly state in their chapter 13 plans, which should be sent to all creditors, that the allowed claims of secured creditors will be bifurcated into secured and unsecured claims pursuant to section 506(a) of the Bankruptcy Code. This should satisfy the notice requirements which are designed to protect the creditor’s due process rights.
Once again, while a debtor may bifurcate the secured creditor’s allowed claim, he cannot reduce the claim absent filing an objection thereto. Likewise, the debtor may not void a creditor’s otherwise valid lien by treating the claim as unsecured.
In the case of In re Roberts, 138 B.R. 84 (Bankr. N.D. Okla. 1992), the U.S. Bankruptcy Court for the Northern District of Oklahoma recently addressed the issue of whether the terms of a confirmed chapter 13 plan may void the valid security interest of a secured creditor. The court held that a debtor may not void a security interest by the terms of a confirmed plan. Roberts, 138 B.R. at 86.
In Roberts, the debtor listed Sears as an unsecured creditor in her chapter 13 plan. Sears, however, possessed a valid security interest in some of the debtor’s property. Sears filed a proof of claim as a secured creditor pursuant to 11 U.S.C. §§501. The Roberts court held that section 1327 of Title 11, U.S.C. is binding “only as to those issues actually decided or which could have been decided.” Roberts, 138 B.R. at 86. The validity of Sears lien was not decided at the confirmation hearing and thus was not res judicata pursuant to 11 U.S.C. §1327. Id.
The Roberts court recognized that the debtor’s plan never should have been confirmed because it failed the requirement of 11 U.S.C. §1325(a)(5) that the holder of the secured claim retain its lien and be paid the value of its collateral. Roberts, 138 B.R. at 86. The court made the very important distinction between the facts of the case and those cases where the debtor properly treats the creditor as secured. Roberts, 138 B.R. at 87.
In Roberts, the debtor argued that Sears was bound by its treatment as an unsecured creditor under the confirmed plan pursuant to 11 U.S.C. §1327. The debtor cited two cases previously discussed in this article as relevant case law on the issue: In re Patterson, 107 B.R. 576 (Bankr. S.D. Ohio 1989); In re Guilbeau, 74 B.R. 13 (Bankr. W.D. La. 1987); and In re Botteri, 108 B.R. 164 (Bankr. S.D. Ohio 1989). The court in Roberts distinguished those cases as inapplicable because they did not involve the voiding of an otherwise valid security interest by the terms of the plan. Roberts, 138 B.R. at 87. The court stated that the cases “do involve instances where the plan provided for payments on a recognized secured claim.” Id. Thus, the Oklahoma court recognized that a secured creditor is bound by the terms of the confirmed plan, provided that it is properly treated as a secured creditor. It is only when the debtor attempts to void the secured creditor’s lien and treat it as an unsecured creditor that the binding effect of 11 U.S.C. §1327 will not apply.
The Roberts case points out again that a creditor’s lien, like the “amount” of a claim, is deemed valid unless objected to. Once again, the “amount” of a claim or “validity” of a lien are issues entirely separate and apart from the “valuation” of collateral and the section 506 “bifurcation” of an allowed claim.
Congress enacted the Bankruptcy Code with the express intention of providing honest debtors a means by which to obtain a fresh financial start and to repay their debts to the best of their ability. Chapter 13 of the Bankruptcy Code is perhaps the ultimate expression of their congressional intent. Chapter 13 grants the debtor the exclusive right to propose a chapter 13 plan. 11 U.S.C. §1321. It also grants each creditor the right to object to confirmation of the plan if its claim is not properly treated within the plan. 11 U.S.C. §1324.
To allow creditors to assert rights different from those provided for in the confirmed plan would so seriously undermine the chapter 13 confirmation process that section 1327 of Title 11, U.S.C. would be rendered a practical nullity. The debtor must be allowed to propose a chapter 13 plan that treats all claims, secured and unsecured, properly. If the plan does not treat a claim properly, then the creditor must object to confirmation of the plan. This is especially true where value, or the section 506 bifurcation process, is an issue. Because Bankruptcy Rule 3012 does not require that valuation hearings be set, the only way a debtor knows whether his proposed valuation of the creditor’s collateral has been accepted or rejected is by observing whether or not the creditors object to the proposed plan. Conversely, to require the debtor to object to every secured creditor’s proof of claim in order to determine proper valuation of the collateral securing its claim would be undeniably burdensome and would so substantially increase the time and expense of filing a chapter 13 plan that many good faith debtors who would otherwise seek relief under chapter 13 would be denied the opportunity to propose a good faith repayment plan. Such a policy of requiring the debtor to object to every secured creditor’s claim would also overburden the courts with much additional and unnecessary time spent in the resolution of those objections.
Regardless of the outcome or resolution of this issue, it is asserted that those creditors who choose to actively participate in the confirmation process by appearing at the section 341 meeting of creditors as well as the confirmation hearing of the chapter 13 plan will be bound by its terms. Those creditors who negotiate with the debtor or who attend the meeting of creditors should not be allowed to acquiesce in their duty, or to suppress the terms of the chapter 13 plan by claiming they did not have “adequate notice” or that the debtor did not object to their proof of claim. It is argued that the intent of Congress is to provide an efficient and effective mechanism to resolve disputes as to value prior to confirmation. Pursuant to the notice provided to creditors in the debtors plan, the creditors may (1) object, or (2) request, if so required, a valuation hearing to be set to resolve the dispute. To now argue that the debtor must not only propose a plan, but must also assume the entire responsibility of objecting to a potentially great number of individual claims and to have individual hearings set for each objection inconceivable. The expressed language of the Bankruptcy Code would argue against such a radical interpretation of the Bankruptcy Code.
In summary, it is hoped that in some way this article has illuminated some of the issues involved in the confirmation/bifurcation process. It is also hoped that many, if not all, have been persuaded that the position taken by this article with regard to these issues is correct and provides not only the debtor but the creditor with the best opportunity for their efficient resolution.
1. In dicta, the court in Terranova stated that the concerns set forth in Sun Finance Co., Inc. v. Howard (In re Howard), 972 F.2d 639 (5th Cir. 1992) were not implicated in its case. In re Terranova, 152 B.R. at 22- [Fn.2] (Bankr. D. Conn. 1993). The author of this article agrees, but on different grounds. In Terranova the debtor did not attempt to reduce the claim of the secured creditor as did the debtor in Howard. Instead, the debtor in Terranova merely proposed to bifurcate the creditor’s allowed claim.
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