Opinion ID: 76178
Heading Depth: 2
Heading Rank: 2

Heading: The Bankruptcy Court's Denial of Universal's Motion to Dismiss

Text: 28 Section 1325(a) requires the bankruptcy judge to confirm a plan if it meets certain requirements, one of which is that the proposed plan conforms with the requirements of Chapter 13 and the applicable provisions of Title 11. § 1325(a)(1). According to the plain statutory language, § 1322 is a mandatory provision contemplated by § 1325(a)(1) and the confirmed plan should comply with it. Section 1325(a)(5), in turn, references secured creditors and mandates plan confirmation if (1) the secured creditor accepts the plan; (2) the plan provides that the secured creditor retain its lien and be paid the full amount of the allowed claim; or (3) the debtor surrenders the property securing the claim to the creditor. Thus, there are three options to the treatment of a secured creditor's claim that compel confirmation of a plan, none of which were present in the facts here. First, Universal, by filing a proof of claim contrary to the amount indicated in Bateman's first plan, did not indicate its acceptance of the plan to the detriment of its lien by declining to further participate in the confirmation proceedings. Confirmation would have been proper under § 1325(a) if Universal conceded to the treatment of its claim under the Plan. Universal did not accept the Plan, however; rather, after receiving the first plan, it filed a proof of claim with a different, higher amount. Because there was no objection to the proof of claim, Universal did not need to act further and the claim was deemed allowed. We will not permit Universal's reliance on the terms of the bankruptcy code, and Universal's subsequent silence on the matter, to act as an acceptance under § 1325(a). There is no indication that Universal accepted the Plan and we will not treat its actions as comprising such. It is also undisputed that neither Universal was provided for in full pursuant to its allowed claim and § 1325(a)(5)(B), nor was the property surrendered to it. Accordingly, Bateman cannot claim that the Plan's confirmation was proper at the outset or was entitled to confirmation because it did not meet the mandatory provisions of § 1322 and Universal did not accept, nor was it alternatively sufficiently provided for, under § 1325(a)(5). 7 29 Universal argues that because the Plan did not meet the requisites of § 1325, which it maintains are mandatory for confirmation, the Plan cannot be afforded res judicata effect under § 1327. Title 11, U.S.C. § 1327(a) provides 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. Thus, § 1327 gives res judicata effect to a confirmed Chapter 13 plan. A leading treatise makes clear that the binding effect ... extends to any issue actually litigated by the parties and any issue necessarily determined by the confirmation order, including whether the plan complies with sections 1322 and 1325 of the Bankruptcy Code. For example, a creditor may not after confirmation assert that the plan ... is otherwise inconsistent with the Code in violation of section 1322(b)(10) or section 1325(a)(1). 30 8 Collier on Bankruptcy, ¶ 1327.02[1][c] at 1327-5 (15th rev. ed. 2003) (footnotes omitted). 31 We set forth in In re Justice Oaks II, Ltd., and reiterate here, that res judicata refers to claim preclusion in the sense Bateman seeks to apply the doctrine, meaning, [i]f the later litigation arises from the same cause of action, then the judgment bars litigation not only of `every matter which was actually offered and received to sustain the demand, but also [of] every [claim] which might have been presented.' 898 F.2d 1544, 1549 n. 3 (11th Cir.1990) (quoting Baltimore S.S. Co. v. Phillips, 274 U.S. 316, 319, 47 S.Ct. 600, 602, 71 L.Ed. 1069 (1927)). Preclusion under § 1327 is somewhat harsher than common law issue preclusion, however. At common law the litigation of an issue is precluded only if that issue was actually litigated and decided and if the determination of that issue was necessary to the judgment in a previous action between the parties. In re Starling, 251 B.R. at 910 n. 2 (quoting In re Sanders, 243 B.R. 326, 328 (Bankr.N.D.Ohio 2000)). Confirmation of a Chapter 13 plan by a bankruptcy court of competent jurisdiction, in accordance with the procedural requirements of notice and hearing of confirmation, is given the same effect as any district court's final judgment on the merits. In re Justice Oaks II, Ltd., 898 F.2d at 1550 (citing Stoll v. Gottlieb, 305 U.S. 165, 170-71, 59 S.Ct. 134, 137, 83 L.Ed. 104 (1938)). 8 Universal's proof of claim and the Plan's listed distribution amount, however improper, was within the definition of claim preclusion because it very well might have been and, as we have articulated should have been, presented before the bankruptcy judge prior to the Plan confirmation. See In re Starling, 251 B.R. at 910. The Plan was improperly confirmed because it conflicted with § 1322's mandatory provisions. Had Universal objected to or appealed from the Plan's confirmation, it would have prevailed without question, given the facts presented to us. Universal, however, did not do so and § 1327 binds creditors to the provisions of the Plan. The Plan provided that Universal be paid monthly a certain amount to fulfill the disputed claim. Universal cannot now, years later, urge us to dismiss the Chapter 13 petition and unravel the Plan's execution when it otherwise retains its lien in full. 32 We are persuaded by the reasoning in Simmons that a secured creditor's lien survives a contrary plan confirmation. 765 F.2d at 559. In Simmons, the creditor secured by a statutory construction lien filed a proof of claim with the bankruptcy court. During the course of the confirmation proceedings, neither the debtor nor the trustee objected to the proof of claim prior to confirmation. Nevertheless, the Chapter 13 plan listed the creditor's claim as unsecured but disputed. The Fifth Circuit held that the notation in the confirmation plan cannot be deemed to constitute... an objection. Id. at 552 (The purpose of filing an objection is to join issue in a contested matter, thereby placing the parties on notice that litigation is required to resolve an actual dispute between the parties.). The court stated that the plan was erroneously confirmed by the bankruptcy court because, not only did it not appropriately provide for the creditor's proof of claim, the plan did not meet any of the prerequisites under § 1325(a)(5) in that the secured creditor did not accept the plan, the plan made no provision that it retained its lien, and the plan did not propose the surrender of the property. 9 Id. at 554. 33 The debtor argued that the effect of the confirmation was to lift the construction lien from the homestead and vest the interest of the property in the debtor free and clear of any `claim or interest' of any creditor. Id. at 555. The Fifth Circuit declined that invitation: 34 After delineating the parameters of the dispute over the meaning of the terms claim or interest, and having observed that the legislative history of section 1327(c) offers no insight regarding this issue, a leading commentator writes that [m]atters are further confused by the fact that there appears to be no sound reason for lifting liens by operation of law at confirmation under chapter 13. 5 Collier on Bankruptcy ¶ 1327.01[3], at 1327-5. Nor are we able to discern any reason for such an effect. Therefore, we agree with the In re Honaker [, 4 B.R. 415 (Bankr.E.D.Mich.1980),] court's conclusion that [t]he reading of Section 1327 urged by [the debtor] would have the Debtor materially improve his financial position, by unencumbering [secured] assets, through the simple expedient of passing his property through the estate. This result has little to recommend it. [ Id. ] at 417 ... It would be anomalous indeed were we to permit [the debtor] a windfall for his mischaracterization of [the creditor's] claim in the plan. ... 35 Id. at 555-56 (emphasis added). Furthermore, the creditor's 36 failure to interpose an objection to the plan or to appeal the confirmation order should not now be permitted to justify avoidance of a lien securing a claim that was originally deemed an allowed secured claim as a result of [the debtor's] failure to object to [the creditor's] timely filed proof of secured claim. 37 Id. at 556. Rejecting the debtor's argument that § 1327 bound the creditor to the treatment of his claim as provided for in the confirmation plan, the Fifth Circuit held that the creditor's statutory lien on the debtor's homestead remained unimpaired by the order of confirmation. Id. at 559. Thus, while the validity of the confirmation order itself was not before the court on appeal, the court held that the effect of confirmation under § 1327 did not invalidate the creditor's lien. 38 For these reasons, if a lien on a mortgage survives the § 1327 res judicata effect of a confirmed plan, then so must any corresponding arrearage claim, such as one Universal asserts here. See In re Hobdy, 130 B.R. 318, 322 (9th Cir.BAP 1991) (holding, in an identical fact situation, that the general terms of § 1327(a) could not override the specific § 502(a) claims provision, therefore, the confirmed plan was fatally defective and could not reduce the arrearage claim). In re Hobdy is especially instructive to the statutory conflict we face here: 39 [T]he plan that was confirmed here was fatally defective in its arbitrary reduction of [the creditor's] secured arrearage claim. We do not believe the need for finality of confirmed plans extends to circumstances present in this case: where a debtor misuses, whether or not intentionally, the plan confirmation process to reduce a valid claim without the requisite notice and opportunity to be heard. In any event, § 502(a) is the statutory provision which specifically governs questions of claims allowance and, consequently, should control over the more general policy considerations embodied in § 1327(a). 40 130 B.R. at 321 (referring to the lack of due process afforded the creditor because it did not have notice of the objection to its proof of claim). The concurrence interpreted § 1327(a) to bind the parties to the distribution amount under the plan, but not the amount of the claim determined by § 502(a). Id. at 322. Thus, the debtor could not satisfy the lien until the entire claim amount was paid, whether pursuant to the plan or otherwise. Id. The concurrence relied, in part, on the language of § 1322(b)(10) which, by implication, prohibits the confirmation of a plan inconsistent with Title 11 — one such inconsistency being for a plan to effectively determine the amount of a secured claim, a result inconsistent with § 502(a) and Rule 3007. Id. at 322. Both the majority and the concurring judges agreed that a proof of claim pursuant to § 502(a) controlled the amount of the creditor's allowed claim, even if the plan amount differed, and held that the plan could not reduce an arrearage claim. 41 The facts here compel an identical result: Universal's secured claim is unaffected by the Plan and survives the bankruptcy unimpaired. 10 See In re Thomas, 883 F.2d 991, 997 (11th Cir.1989) (holding that a secured creditor's lien survived a Chapter 13 discharge even though it had not been provided for in the plan and the secured creditor had not filed a proof of claim). 42 Nevertheless, because the plan was invalid at the point of its completion, we are urged by Universal to dismiss the Chapter 13 petition. Universal argues that the bankruptcy court erred by denying its motion to dismiss the Chapter 13 Plan because the Plan failed to comply with § 1325 of the bankruptcy code. Bateman argues that the denial was proper because the Plan, as confirmed, is res judicata pursuant to § 1327(a) and Universal does not make any allegations of fraud, which is the only basis to revoke a confirmed plan under § 1330(a). 11 Although Universal's lien and arrearage claim survives, we will not reverse the district court's order affirming the bankruptcy court's order denying Universal's motion to dismiss the bankruptcy altogether. 43 Universal had the opportunity to object to the Plan's treatment of its claim at the confirmation hearing or appeal the confirmed plan and, had it done so, the Plan could not have been properly confirmed over its objection. See § 1325. Universal, albeit within its rights, filed a proof of claim to be provided for by the Plan, yet, chose not to involve itself in the Chapter 13 proceedings and bypassed these opportunities to correct the discrepancy before the Plan was confirmed. Furthermore, Universal continued to accept the payments even though it should have been apparent that they were less than adequate to satisfy its arrearage claim. Universal arguably had reason to remain disengaged from the proceedings because it assumed its properly filed proof of claim was sufficient to protect its interests absent a notice of objection by Bateman. Because it did not vindicate its rights at the appropriate stages of the Chapter 13 process, however, Universal cannot now argue for a dismissal of the petition at its near conclusion without assuming some responsibility for letting the discrepancy go this far unchallenged. Accordingly, we decline to unravel three years of diligent execution of the Plan to correct a discrepancy that every party in interest — Bateman, Universal, the trustee, and even the bankruptcy judge — should have noticed and rectified before the Plan was confirmed. Were we to do so, the prejudice afforded Bateman and the other parties in interest would far exceed the possible benefit to Universal at this juncture. This is so, for the most part because, going forward from the conclusion of the plan, Universal retains its secured claim for the arrearage. Bateman will not benefit from a windfall from a plan that should not have been confirmed in the first place. Because we decide that Universal's claim is unimpaired under the confirmed plan, it is not inequitable and is, in fact, synchronous to give the Plan its full intended res judicata effect under § 1327. Also, in pragmatic terms, this action would be disastrous to Bateman and her pursuit of financial solvency and would afford Universal little more in remedial terms than it already possesses by nature of its secured claim under § 1322. Moreover, although Universal was not required to show up at the Chapter 13 confirmation proceedings or file the proof of claim for its secured claim, it did inject itself into the proceedings by seeking payment under the Plan to satisfy its secured claim for arrearage, as it was entitled to do. By electing to do so, Universal assumed some level of responsibility for ensuring that the Plan accounted for its claim in full, or at least objecting to or appealing from the confirmation if it did not. By failing to do so, Universal ignore[d] the confirmation hearing only at [its] peril. 8 Collier on Bankruptcy ¶ 1327.02[1][a] at 1327-4 (15th rev. ed.2003). The extent of that peril, however, demands clear definition within the terms of the bankruptcy provisions, as discussed supra. Accordingly, the district court's order affirming the bankruptcy court's denial of Universal's motion to dismiss is AFFIRMED. 44 However, to the extent that Universal had any rights to act against Bateman pursuant to the terms of the mortgage, it retains those rights despite the terms of the Plan. See Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92-93 (4th Cir.1995) (citing In re Honaker, 4 B.R. 415, 417 (Bankr. E.D.Mich.1980)) (refusing to permit a debtor, by [t]he simple expedient of passing their residence through the bankruptcy estate, to enjoy a greater interest in the residence than they enjoyed prior to filing their Chapter 13 petition.). 12