Court Opinion

ID: 768802
Source: CourtListenerOpinion
Date Created: 2012-04-18 09:14:18+00
Date Added: 2024-06-11T17:55:38.383709
License: Public Domain

213 F.3d 318 (7th Cir. 2000)
In Re:  Diana Lynn Harvey,    Debtor-Appellant
No. 98-4094
In the  United States Court of Appeals  For the Seventh Circuit
Argued April 13, 1999
Decided May 2, 2000

Appeal from the United States District Court  for the Northern District of Indiana, Fort Wayne Division.  No. 1:98-cv-182--William C. Lee, Chief Judge.
Before Kanne, Rovner, and Diane P. Wood, Circuit  Judges.
Diane P. Wood, Circuit Judge.

1
At the time Diana  Harvey filed for protection under Chapter 13 of  the Bankruptcy Code in September 1996, she owed  $16,165 to General Motors Acceptance Corporation  for her 1993 Oldsmobile Cutlass Supreme.  Unfortunately (at least for GMAC), the car was  then worth only $9,500. GMAC had a perfected  security interest in the car, but the disparity  between the value of the asset and the total  amount of the debt made it an unsecured creditor  to the tune of $6,665.

2
This case concerns the practice known in the  typically colorful bankruptcy jargon as "lien  stripping." Harvey argues that under the terms of  the Chapter 13 plan approved by the bankruptcy  court, she was entitled to have the lien on the  car removed as soon as she paid back the $9,500;  GMAC offers a number of reasons why that should  not be the case and its lien should continue  until the termination of the bankruptcy  proceeding or the satisfaction of the full debt,  whichever comes first. The district court agreed  with GMAC, but we find that GMAC's failure to  protect its rights in a timely fashion requires  us to reverse.

3
* Harvey filed for protection under Chapter 13 of  the Bankruptcy Code on September 20, 1996. GMAC  was an "undersecured" creditor, because its  security interest in the vehicle covered only  $9,500 of the $16,165 debt. Under sec. 506(a) of  the Bankruptcy Code, 11 U.S.C. sec. 506(a), GMAC  was entitled to an allowed secured claim of  $9,500 and an unsecured residual claim of $6,665.

4
Accompanying Harvey's petition for bankruptcy  relief were two documents that are the source of  the controversy here. The first was a three page  document to which the parties refer as the "long  form plan." It proposed a weekly payment of $128  for five years (or until the general unsecured  claims were paid). It also set payment priorities  for the plan. Section 2(B) of the plan, which  appeared on the first page, provided that GMAC's  $9,500 secured claim was to be paid prior to its  $6,665 unsecured claim. The same section that  preserved GMAC's priority specifically mentioned  the lien that GMAC retained on Harvey's  Oldsmobile. Through the following language, this  section provided for the stripping of the lien:  "[u]pon payment of the allowed secured claim as  indicated, any lien held by GMAC on said vehicle  shall be void and title to said vehicle shall be  released to Debtor." Finally, the plan arranged  for priority payment to another secured lender as  well as to holders of claims entitled to priority  under 11 U.S.C. sec. 507.

5
Along with this detailed proposal, Harvey  submitted a single page document (the "short form  plan") that, from all appearances, summarized the  terms of the longer form. It, too, established a  $128 weekly payment for a five year period. It  then stipulated that the order of payments would  be (1) secured claims, (2) sec. 507 priority  claims, and (3) unsecured claims. Unlike the long  form, it did not mention the cancellation of  GMAC's lien after Harvey had finished paying for  the secured portion of GMAC's claim. Instead, it  said only that "[h]olders of allowed secured  claims shall retain the liens securing such  claims" and was silent about the treatment of a  lien after the allowed secured claim was paid in  full.

6
Harvey's plan was confirmed on November 27,  1996, without objection--including, most  importantly for our purposes, any objection to  the lien-stripping provision. She began making  payments shortly thereafter, but in February 1997  she requested and received a temporary suspension  while she was on maternity leave. This suspension  was to last until May 30, at which point Harvey  was to continue repayment. Instead, she again  fell behind, and on January 15, 1998, she filed  an Application to Modify and a First Modified  Chapter 13 Plan. The new proposed plan would have  reduced her weekly payment by $8 from $128 to  $120, but it made no change in the treatment of  GMAC's lien spelled out in the November 1996  plan.

7
It was at this juncture that GMAC first  objected to the lien stripping terms of the plan.  GMAC claimed that it had never received page one  of Harvey's original long form plan, which was  where section 2(B) was to be found. The  bankruptcy court must have found this a strange  assertion, since the numbers "2" and "3" that  appear prominently on the bottom of the pages of  that GMAC conceded it received should have put it  on notice that something was probably missing. In  any event, the court found that GMAC received  both plans in their entirety. Since GMAC does not  argue on appeal that this finding was clearly  erroneous, we take as an established fact that it  received all of Harvey's original long form plan.

8
Nevertheless, on consideration of Harvey's  motion to modify her plan, the bankruptcy court  decided to construe the long form and short form  as creating two distinct plans. Next, it decided  not to apply the usual rule precluding a  collateral attack on a confirmed plan, because it  could not tell which plan was confirmed. This  confusion, the court believed, was Harvey's  fault, because she did not make it clear on  September 20, 1996, whether the court was  confirming the long or the short plan. Applying  the principles that bankruptcy plans are to be  treated as contracts and interpreted under state  law, see Hillis Motors, Inc. v. Hawaii Auto.  Dealers' Ass'n, 997 F.2d 581, 588 (9th Cir.  1993), and that ambiguity in a contract should be  construed strictly against the drafter, see Fresh  Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1132 (Ind.  1995), the court decided that Harvey should bear  the consequences of any uncertainty about which  plan was confirmed. And those consequences were  dire: if the confirmed plan had been the short  form version, there was no lien-stripping  provision and Harvey had no case. This rationale  led the bankruptcy court to grant GMAC's motion  to dismiss the action. The district court  affirmed, agreeing with the bankruptcy court's  ambiguity analysis and concluding that if Harvey  could extinguish GMAC's lien prior to completion  of her payment schedule, it would undermine the  purposes of Chapter 13.

II

9
The practice of lien stripping gives rise to a  set of difficult questions under bankruptcy law.  Whether lien stripping over a creditor's  objection is permitted prior to the completion of  a Chapter 13 plan remains an open question. See,  e.g., In re Talbot, 124 F.3d 1201, 1209 n.10  (10th Cir. 1997). GMAC argues that it should not  be permitted, relying principally on the Supreme  Court's analysis of Chapter 7 of the Bankruptcy  Code in Dewsnup v. Timm, 502 U.S. 410 (1992),  which held that a Chapter 7 debtor could not  strip down its creditors' liens on real property  to the value of the collateral. In GMAC's view,  there is no reason to treat Chapter 13 and  personal property differently. Were the opposite  rule to prevail, GMAC foresees abusive debtor  practices: a cagey debtor could begin under  Chapter 13, strip a creditor's lien, then convert  to Chapter 7 as allowed by 11 U.S.C. sec. 1307  and thwart the Dewsnup rule. Lien stripping would  also, in GMAC's opinion, undermine its rights  under sec. 349 of the Bankruptcy Code, under  which its lien is reinstated in the event  Harvey's case is dismissed.

10
Harvey counters by pointing to 11 U.S.C. sec.  1322(b)(2) (allowing a modification of the  secured creditors' rights) and sec. 1325(a)(5)  (allowing confirmation of plans that protect  allowed secured claims), which she thinks can be  read together to allow lien stripping. She  further notes that there is no policy problem  here since, under her plan, GMAC gets everything  that it has a right to expect. If, instead of  restructuring under Chapter 13, Harvey simply  defaulted, GMAC could seize the car and get  $9,500. Harvey would then still owe $6,665  (assuming a deficiency judgment were allowed).  GMAC would collect its $6,665 along with all of  the other unsecured creditors. Harvey notes that  her plan produces precisely the same result--  GMAC retains the lien on the car until it  receives $9,500, at which point it joins all of  Harvey's other unsecured creditors and hopes for  the best.

III

11
It is a well-established principle of bankruptcy  law that a party with adequate notice of a  bankruptcy proceeding cannot ordinarily attack a  confirmed plan. 11 U.S.C. sec. 1327(a). See also  In re Greenig, 152 F.3d 631, 635 (7th Cir. 1998);  Spartan Mills v. Bank of America Illinois, 112 F.3d 1251, 1255 (4th Cir. 1997); Chemetron Corp.  v. Jones, 72 F.3d 341, 346 (3d Cir. 1995). The  reason for this is simple and mirrors the general  justification for res judicata principles--after  the affected parties have an opportunity to  present their arguments and claims, it is  cumbersome and inefficient to allow those same  parties to revisit or recharacterize the  identical problems in a subsequent proceeding.

12
This is especially true in the bankruptcy  context, where a confirmed plan acts more or less  like a court-approved contract or consent decree  that binds both the debtor and all the creditors.  Bringing the various creditors' interests to the  table once is difficult enough; permitting one of  the creditors to launch a later attack on a  confirmed plan would destroy the balance of  interests created in the initial proceedings.

13
To avoid this problem, GMAC asserts that the  very filing of two plan documents (the long form  and the short form) created an ambiguity with  respect to lien treatment that, under Indiana  contract law principles, should be construed  against Harvey because she drafted the documents.  The first problem with this argument is that it  assumes that Indiana law is the proper referent  for a bankruptcy plan. This is the approach the  bankruptcy court took, following the Ninth  Circuit's decision in Hillis Motors, Inc., 997 F.2d at 588. We are not at all sure this is  correct, however, in light of the federal nature  of bankruptcy, the strong need for uniformity of  approach, and the analogy one could draw to the  treatment of federal court consent decrees. On  the last point, see, e.g., Firefighters Local  Union No. 1784 v. Stotts, 467 U.S. 561, 574  (1984); United States v. ITT Continental Baking  Co., 420 U.S. 223 (1975). It seems more likely to  us that something analogous to the four-corners  principle that applies to federal consent decrees  ought to govern interpretation of plans confirmed  by the bankruptcy court. Nevertheless, the  parties have not made an issue of this point in  the present case, nor do we think that  application of the four-corners principle or some  other federal rule would make a difference to the  outcome; we therefore leave further exploration  of this problem to another day.

14
Even if ambiguity in the identity of the plan  that was confirmed were enough to trump the  bankruptcy principle of repose, this is not the  case for applying such a rule. Harvey's short  form tracks the long form in all material  respects. More importantly, there is a  fundamental defect in GMAC's case. GMAC failed to  lodge a proper objection to the existence of the  two plans before the bankruptcy court acted. GMAC  argues that this lapse did not lead to waiver of  its position here, because Harvey caused the  confusion. It contends that since both the short  and long forms were entitled "Chapter 13 Plan"  and both were signed by Harvey, it could not be  sure which of the two plans Harvey was actually  submitting for confirmation. But we do not see  why Harvey's initial responsibility for the  existence of the two plans relieved GMAC of the  duty of pointing out the problem to the court.  The general rule is that a party in contract  litigation must raise all claims--including those  related to ambiguity--during the first litigation  concerning that contract. See, e.g., Xantech  Corp. v. Ramco Industries, Inc., 159 F.3d 1089,  1092 (7th Cir. 1998); Packer, Thomas, & Co. v.  Eyster, 709 N.E.2d 922, 928 (Ohio App. Ct. 1998);  Johnson v. Anderson, 596 N.E.2d 1146, 1148 (Ind.  App. Ct. 1992). By analogy, GMAC's opportunity  came and went when it first had notice of the  alleged ambiguity about which plan was really  confirmed and what its terms may have been. GMAC  could have raised the same points that it now  asserts during the original confirmation  proceedings.

15
If GMAC was genuinely uncertain about the  combined effect of the short and long forms (a  total of four pages), it was obligated to raise  this issue with the bankruptcy court prior to the  original plan confirmation. (Note that even under  GMAC's rejected excuse that it did not receive  page 1 of the long form, it is still clear that  GMAC knew that more than one form was before the  court, because it received pages 2 and 3. Its  duty to object thus arose even on its own view of  the facts.) As the bankruptcy court noted in In  re Haynes, 107 B.R. 83, 86 (Bankr. E.D. Va.  1989), "[i]t is obvious, however, that a creditor  should seek to resolve any ambiguities,  regardless of how slight, in view of [the binding  effect of a confirmed plan.]" An objection would  have allowed the bankruptcy judge to evaluate the  submissions and to decide whether it had one plan  with a summary, or two distinct plans.

16
Forcing parties to raise concerns about the  meaning of Chapter 13 filings at the original  confirmation proceedings does not impose an  unreasonable burden on bankruptcy participants.  Quite the contrary--it is perfectly reasonable to  expect interested creditors to review the terms  of a proposed plan and object if the terms are  unacceptable, vague, or ambiguous. As this court  said in In re Pence, 905 F.2d 1107, 1109 (7th  Cir. 1990), a creditor is "not entitled to stick  its head in the sand and pretend it would not  lose any rights by not participating in the  proceedings." See also In re Andersen, 179 F.3d 1253, 1257 (10th Cir. 1999) ("A creditor cannot  simply sit on its rights and expect that the  bankruptcy court or trustee will assume the duty  of protecting its interests."); In re Szostek,  886 F.2d 1405, 1414 (3d Cir. 1989) (stating that  creditors must take an active role in protecting  their rights). Nor is this a situation like that  presented in In re Escobedo, 28 F.3d 34 (7th Cir.  1994). As the Escobedo court made clear, its  refusal to apply res judicata principles in that  case resulted from the fact that the debtor's  original plan failed to comply with the mandatory  provisions of 11 U.S.C. sec. 1322(a)(2). The  modification of a secured creditor's rights--the  issue here--is allowed but not required under  sec. 1322(b).

17
The district court suggested that the only  result of Harvey's decision to file multiple  documents was to confuse the court and potential  creditors. Perhaps this is true. Or perhaps, as  Harvey suggested at oral argument, some trustees  prefer the short form in order to facilitate easy  case management and recordkeeping. Maybe the  simultaneous filing of a short and a long form is  helpful in many cases but inappropriate in  Harvey's case. Or maybe this practice is always  useless at best, confusing at worst. No matter--  the point is that GMAC had to raise these  arguments at the initial confirmation proceedings  since it already had notice of the ambiguities on  which it now hopes to rely.

18
We do not mean to suggest that a party may  never claim in a subsequent proceeding that a  provision of a Chapter 13 plan is ambiguous and  should be read one way or another. It may be the  case that an approved plan contains a term that  raises an unexpected problem at some point in the  future. No party to a bankruptcy plan  confirmation proceeding can be expected to  envision every foreseeable circumstance that  could require a court to construe a particular  plan provision. Here, in contrast, the ambiguity  about which GMAC was complaining was one that was  readily identifiable during the original  confirmation proceedings. After all, as GMAC  points out, 11 U.S.C. sec. 1321 requires  submission of "a [singular] plan." A debtor is  not allowed to have two plans confirmed; thus,  the question whether Section 2(B) of the long  form was part of the plan to be confirmed was a  problem that should have been apparent to any  reasonably diligent creditor.

19
In sum, we hold that if GMAC had doubts as to  what plan was being confirmed in the 1996  proceedings, it should have alerted the  bankruptcy court to the ambiguity at that time,  not 16 months later. We add that our resolution  of this appeal on waiver grounds makes it  unnecessary for us to express an opinion on  whether GMAC could have been forced to accept  lien stripping in a Chapter 13 proceeding over  its objection; we leave that complex subject for  another day.

20
The judgment of the district court  is    REVERSED.