In Re Ramey
ORDER
Before the Court are two objections to the claims of First National Bank of Eastern Arkansas (“First National”) filed by Tommy Ramey (“Debtor”) and an objection filed by First National to confirmation of the Debtor’s third amended plan. After hearings on May 19 and July 8, 2003, at Helena, Arkansas, the Court took the various objections under advisement.
The matters before the Court are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B) and (L), and the Court has jurisdiction to enter a final judgment in this case.
BACKGROUND
The Debtor filed a voluntary petition for relief under the provisions of Chapter 13 of the United States Bankruptcy Code on September 20, 2002. The Debtor did not schedule First National as a creditor, nor did the original proposed plan filed with the petition provide for any claim of First National. On November 1, 2002, the Debtor filed an amendment to his plan, which, like the original plan, did not provide for any claim of First National.
On November 20, 2002, First National filed two secured claims. The first claim, identified by account number 107053, was for the principal sum of $2639.92 and interest accruing from September 20, 2002, at 9.5% per annum. The second claim, identified by account number 540000226, resulted from a debt owed on a credit card in the amount of $1959.49 and interest accruing from September 20, 2002, at the rate of 10% per annum. The collateral securing both claims was listed as real estate valued in First National’s claim at $4500.00. However, the Debtor’s second amended plan, filed March 11, 2003, stated that First National held a secured claim collat-eralized by real property in the sum of $1600.00. 1
On February 3, 2003, the Debtor filed an objection to the claim of First National. The objection alleged that the claim for $1959.49 was unsecured. On March 3, 2003, First National responded to the objection and alleged that the claim was secured pursuant to an “other indebtedness” clause in a trust deed granted by the Debtor to First National. Before the objection to the claim could be set for a hearing, the Debtor filed a second amended plan on March 11, 2003, and on March 13, 2003, the Debtor filed an additional objection to First National’s secured claim for $2639.92 and interest. The objection alleged that the proper amount of the secured claim was $1598.80.
On March 14, 2003, the Chapter 13 Trustee filed a motion to allow claims. Notwithstanding that First National had filed two secured claims, the Trustee treated the claim of $1959.49 as “additional unsecured” even though no objection to the claim had been sustained. (Order Allowing Claims, March 14, 2003.) The
On April 22, 2003, an order was entered confirming the Debtor’s second amended plan filed March 11, 2003, because no objection to confirmation of the plan had been filed. The confirmed plan provided that First National would have a secured claim collateralized by realty in the sum of $1600.00 payable in full within the life of the plan at 9.5% interest and that First National would have an unsecured claim on account number 540000226, a Visa Card, in the sum of $1959.49. 2
On June 3, 2003, the Debtor filed a third amended plan that treated First National’s secured claim, identified by account number 107053, as an unsecured claim and reduced it to $2596.99. The plan treated the second claim, which was apparently the Visa claim, as an unsecured claim reduced to the sum of $355.92. On June 9, 2003, First National objected to the third amended plan filed June 3, 2003, alleging that its two claims should be treated as secured.
On July 8, 2003, a hearing was held on the Debtor’s two objections to First National’s claims and on First National’s objection to confirmation of the third modified plan. 3
The Debtor argues that since the plan treated First National’s claim of $1959.49 as unsecured in the second amended plan filed March 11, 2003, and the plan was confirmed on April 22, 2003, without objection by First National, the principles of res judicata apply and, therefore, the Debtor’s objection to the secured status of the claim for $1959.49 must be sustained.
First National argues that its claim is secured pursuant to Arkansas law by virtue of an “other indebtedness” clause in a trust deed (referred to by counsel for the bank as a “future advance” clause), and, therefore, its claim should be determined to be secured and its objection to the third modified plan should be sustained. First National also argues that the Debtor knew from correspondence with the bank’s counsel that First National objected to treatment of its claim of $1959.49 as unsecured.
DISCUSSION
Although the amount of the debt at issue is relatively small, the procedural posture of this case raises an important question as to how a Chapter 13 debtor may properly modify or eliminate a lien. The Bankruptcy Code and the Bankruptcy Rules contain different procedures used to determine whether a claim is secured, and the caselaw is sharply divided as to which is more appropriate.
The Federal Rules of Bankruptcy Procedure provide that a creditor is permitted but not required to file a proof of claim. Section 502(a) of the Bankruptcy Code provides that a claim, proof of which is filed under 11 U.S.C. § 501(a), is deemed allowed unless a party in interest objects.
Manufacturer’s Hanover Trust v. Bartsh (In re Flight Transp. Corp.),
A hearing on an objection to a claim becomes an adversary proceeding if the objection includes a demand for relief of the kind specified in Federal Rule of Bankruptcy Procedure 7001. See Federal Rule of Bankruptcy Procedure 3007. Federal Rule of Bankruptcy Procedure 7001 requires an adversary proceeding to determine the validity, priority or extent of a lien.
Federal Rule of Bankruptcy Procedure 3012 provides:
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.
Thus, an objection to claim becomes an adversary proceeding if the objection concerns the determination of the extent or validity of a lien, and the court is authorized to value the collateral to which the lien attaches.
The claims allowance procedures are applicable generally to cases filed under Chapters 7, 12, and 13, and, with some modification, to Chapter 11. These procedures can be used to determine the amount and the status of the claim as secured or unsecured.
CONFIRMATION PROCESS
Another way to modify or eliminate a lien is through the confirmation process. Pursuant to the procedural rules regarding confirmation, a debtor may file a Chapter 13 plan with the petition. If not, the plan must be filed within 15 days thereafter. Federal Rule of Bankruptcy Procedure 3015(b).
The plan or a summary of the plan shall be included with each notice of the hearing on confirmation mailed pursuant to Federal Rule of Bankruptcy Procedure 2002 and 3015(d). The local practice requires an objection to confirmation to be filed on or before ten days after completion of the 341(a) first meeting of creditors. General Order No. 20, United States Bankruptcy Court, Eastern and Western Districts of Arkansas. The Bankruptcy Rules require only that objections be filed before the confirmation hearing. Federal Rule of Bankruptcy Procedure 3015(f). If no objection to confirmation is filed, an order confirming the plan is entered without a hearing.
In the case of modified plans, the modification itself is served on the creditor, who then has 20 days from the date of the notice of modification to file an objection to confirmation. Federal Rule of Bankruptcy Procedure 3015(g). If no objection to the modified plan is filed within the 20 days provided by Federal Rule of Bankruptcy Procedure 3015(g), the plan is confirmed without a hearing.
The Bankruptcy Code sets out the effect of confirmation of a Chapter 13 plan. The Code provides the following:
(a) 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.
(b) Except as otherwise provided in the plan or in the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
(c) Except as otherwise provided in the plan or in the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.
11 U.S.C. § 1327 (2000).
An unappealed, confirmed plan is
res judicata,
and its terms are not subject to collateral attack. 8 Collier on Bankruptcy ¶ 1327.02[1] (Alan N. Resnick & Henry J. Sommer, et al. eds., 15th ed. rev.1993). The
res judicata
doctrine applies to all issues actually litigated and any issue necessarily determined by the confirmation order.
Adair v. Sherman,
Section 1322(b)(2) of the Bankruptcy Code specifically permits a plan to “modify the rights of holders of secured claims” with some restrictions not applicable in this case. 11 U.S.C. § 1322(b)(2)(2000). The amount of a secured claim is determined in part by reference to the value of the debtor’s property that secures the claim. 11 U.S.C. § 506(a)(2000).
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The ability to modify liens by curing defaults, to re-amortize debt payments, or to strip liens, either partially or totally, is at the very heart of the confirmation process. The issues of the value of collateral and the validity of the creditor’s hen, including perfection of the lien, are routinely determined at the confirmation hearing. Seldom in this jurisdiction are the validity and extent of liens determined by resorting to the claims allowance procedure. If the plan modifies the rights of a holder of a secured claim, the Court is required to determine the amount of the secured claim in the context of a hearing on confirmation. Nothing in the rules would prohibit a creditor or the debtor from using the claims allowance procedure, but a creditor must
DECISIONS DENYING PRECLUSIVE EFFECT TO CONFIRMED PLANS
Notwithstanding that the principles of res judicata generally apply to orders confirming plans of reorganization in Chapter 13, several Circuit Courts of Appeal, District Courts and Bankruptcy Courts have declined to give preclusive effect to an order confirming a Chapter 13 plan. The issue of whether it is appropriate to apply the doctrine of res judicata to an order confirming a plan frequently arises when a secured claim is modified or eliminated by the plan, the plan is confirmed without objection, and subsequently the same claim is allowed or deemed allowed because no timely objections to it are filed. The following eases illustrate how various courts have dealt with such situations.
The Eleventh Circuit Court of Appeals held that an order confirming a plan that modified a claim secured solely by a security interest in the debtor’s principal residence in violation of 11 U.S.C. § 1322(b)(2) was not entitled to
res judicata
effect even though the creditor did not object to confirmation.
Universal Am. Mort. Co. v. Bateman (In re Bateman),
The Court in
Bateman
relied on the previous decision of the Fifth Circuit,
Simmons v. Savell, (In re Simmons),
In a subsequent case, the Eleventh Circuit allowed an appeal on the issue of the validity of a creditor’s secured claim even though there was never an appeal from the order confirming the plan that failed to provide for treatment of the creditor’s claim. See
Foremost Fin. Servs. v. White (In re White),
In addition to
In re Simmons
cited above, the Fifth Circuit Court of Appeals has denied preclusive effect to a confirmed Chapter 13 plan in other cases. In the case of
Sun Finance Company v. Howard (In re Howard),
In the case of
Boyd v. United States (In re Boyd),
In at least two cases, the Fourth Circuit Court of Appeals has refused to accord
res judicata
effect to an order confirming a Chapter 13 plan to which the creditor failed to object. In the case of
Deutchman v. Internal Revenue Service (In re Deutchman),
Similarly, in the case of
Cen-Pen Corp. v. Hanson,
The Court in
Hanson
held that the plan did not provide for the creditor’s claim, even though the plan actually did provide for it as an unsecured claim. The Court said, under section 1327(c), a plan does not “provide for” a secured claim unless it provides for payment equal to the value of the collateral. See, also,
In re Escobedo,
RULINGS OF BANKRUPTCY COURTS IN THE EIGHTH CIRCUIT
The decisions on this issue that have been rendered by bankruptcy courts in the Eighth Circuit are also in conflict.
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The court in
In re Harnish
held that if the secured creditor participates by filing a proof of claim, the secured creditor’s claim is provided for in the plan, and the plan does not provide a lien in the plan, then the creditor’s lien is extinguished by the order confirming the plan.
In re Harnish,
In the same vein, the court in
In re Basham
held that a secured creditor was bound by a plan providing that the surrendering of the collateral fully satisfied the claim.
In re Basham,
In contrast, the court in
In re Stein
ruled that a secured claim survived a plan of reorganization treating the claim as partially unsecured because no one objected to the proof of claim or attempted to avoid the lien through an adversary proceeding.
In re Stein,
THIS COURT’S RULINGS ON THE ISSUE
This Court has dealt with this issue in two cases:
Kuebler v. Commissioner (In re Kuebler),
Kuebler
involved a confusing set of facts. The IRS had both a secured and unsecured claim. The original plan provided in one paragraph that “the holder of each such [secured] claim shall retain the lien securing such claim” while other provisions of the plan treated the claim as an unsecured priority claim.
In re Kuebler,
In re Smith also involved a confusing set of facts including discharge issues. In Smith, the plan proposed to pay the priority claim in full, but stated an amount of claim that differed from the allowed amount. The Court ruled that the debtor could not use the confirmation process as a substitution for an objection to claim; therefore, the plan did not discharge certain unpaid tax claims. The Court noted that the issue at confirmation was not the amount of the claim but the claim’s treatment under the plan. Both Kuebler and Smith also involved the issue of lack of notice to satisfy due process.
SUMMARY OF JUDICIAL RATIONALES USED TO DENY PRECLUSION
It is obvious from a review of the cases cited above that courts have resorted to a variety of rationales to reach the conclusion that
res judicata
does not apply to a confirmed plan. Some courts exalt the claims resolution procedure over the confirmation process more or less arbitrarily and reason that if the alternative procedures to determine a secured claim were not utilized,
res judicata
does not apply.
See, e.g., Hanson,
Other courts that decline to apply
res judicata
principles appear to base their decisions, in part, on the fact that the plan provisions are so incorrect under the law that to apply
res judicata
leads to an absurd result.
See, e.g., In re Boyd,
Some courts have denied
res judicata
effect by relying on a strained interpretation of the requirement that a claim be properly “provided for” under section 1327(c).
See, e.g., In re Deutchman,
Another rationale used for denying the application of
res judicata
is based on the idea that a secured creditor may decline to participate in the bankruptcy process, whereupon the creditor’s lien flows through the bankruptcy unaffected.
See, e.g., In re Simmons,
In his multi-volume treatise Chapter 13 Bankruptcy, Judge Keith Lundin examines the question of whether a confirmed plan is entitled to preclusive effect as to lien treatment by focusing on whether the creditor whose hen was treated in the plan had adequate notice to satisfy procedural due process. Judge Lundin has commented that
It would be nice if the Bankruptcy Code and Rules prescribed a unitary procedure for fixing value, determining the extent of hens, confirming plans and allowing claims, but these processes are at once separate and inextricably intertwined in a Chapter 13 case. Courts such as the Fourth Circuit that have declared bright-line rules for the ascendancy of one or another procedure immediately encounter the reality of the next case in which an awkward exception or inconsistency reveals that more is going on than just picking among procedures. These courts are asking the wrong question. The issue is not, which procedure trumps another? The issue is, did the creditor have sufficient notice of the plan and opportunity to object such that confirmation has the effects described in § 1327(a), (b) and (c)?
Procedural due process can be satisfied in several ways without violating any fundamental principles of bankruptcy law. Describing in a Chapter 13 plan the treatment of a secured claim and determining the allowed amount of a secured claim for purposes of § 506(a) inevitably involve some of the same questions of fact and law. Valuation of collateral is often at the heart of both. There is no reason under the Bankruptcy Code or Rules why the overlapping issues can’t be decided in either eontext-during a hearing on confirmation of the plan or as part of a hearing before or after confirmation on an objection to a claim. If notice is adequate, the value of a secured claim holder’s collateral can be determined on a motion in advance of confirmation under Bankruptcy Rule 3012, at the confirmation hearing as part of the trial of a contested plan, or at a hearing on an objection to the creditor’s claim. The outcome of each of these procedures is the same for purposes of the effects of confirmation in § 1327 — if notice was adequate and the procedural due process rights of the secured claim holder are respected, a bankruptcy court order fixing the value of collateral, determining the allowed amount of a secured claim or defining what the secured claim holder will receive in satisfaction of its lien rights is binding on all parties without regard to the label on the process
Keith M. Lundin, Chapter 13 Bankruptcy § 233.1 (3d ed. 2000 & Supp.2002) (footnotes omitted). 8
THE COURT’S DECISION
After examining the various reasons for denying preclusion to a confirmed plan, this Court finds that the analysis must take into account the principles that an order confirming a Chapter 13 plán is deemed final under the statute and for purposes of appeal.
If an order is final, then a rationale cannot be valid that subjects the order to collateral attack because it is wrong or because an alternate procedure could have been used to determine the issue. It is well settled that an order need not correctly apply the law to be given preclusive effect.
Underwriters Nat’l Assurance Co. v. North Carolina Life & Accident & Health Ins. Guar. Ass’n,
As discussed by Justice Blackmun in
Dewsnup v. Timm,
To deny preclusive effect to a confirmation order invites the chaos reflected in the cases. Whether a claim is to be treated as secured is necessarily decided within the confirmation process and will sometimes require a determination of the amount of the claim if the issue is whether the claim is undersecured.
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If a creditor fails to object to treatment of its claim in the plan, the creditor will suffer the consequences.
See Universal Suppliers, Inc. v. Regional Bldg. Sys., Inc. (In re Regional Bldg. Sys. Inc.),
The principles of
res judicata
should be applied except in cases where the notice to the creditor of the plan treatment of the hen is so insufficient that it violates due process of law.
See, e.g., In re Linkous,
Pursuant to this analysis, the Court concludes that the Debtor’s objection to the secured status of First National’s claim of $1959.49 (account number 540000226 or 5408 1673 9000 0226) is sustained and that the Debtor’s objection to First National’s claim for $2639.92 (account number 107053) is overruled by agreement.
First National’s objection to confirmation of the third modified plan is sustained by agreement as to the secured status and amount of First National’s claim for $2639.92. First National’s objection to confirmation of plan is also sustained as to the amount of the $1959.49 claim. However, the Court overrules First National’s objection as to the plan’s characterization of the claim of $1959.49 as unsecured. First National had specific notice of the Debtor’s intention to treat its claim as unsecured because First National was served with a copy of the second amended plan, and the proposed treatment of the claim for $1959.49 is unambiguously stated as unsecured. First National did not object to the plan. When the second amended plan was confirmed, the order became final, and First National is now precluded from challenging it on the merits because of the principles of
res judicata.
Therefore, First National has a secured claim
IT IS SO ORDERED.
Notes
. The second amended plan is unclear as to whether the $1600.00 figure refers to the value of the collateral or whether the plan disputes the total amount of the two claims.
. Documentation submitted with First National's proof of claim for $1959.49 identifies the credit card issued to the Debtor as a Master Card; however, the parties consistently referred to the credit card as a Visa. The parties also refer to the claim as identified by either account number 540000226 or 5408 1673 9000 0226.
. The Court had previously ruled against the Debtor on May 19, 2003, because of testimony that indicated First National never received notice of the second amended plan. However, on a motion to reconsider heard by the Court on July 8, 2003, First National conceded that its previous testimony was in error and that it did receive notice. Therefore, by agreement, the matters were taken under advisement based on the record established at both hearings. The Debtor conceded that there was no basis to treat First National's secured claim of $2639.92 as unsecured and agreed to an order overruling the Debtor’s objection to that claim.
. The amount of a secured claim is determined by establishing by a preponderance of the evidence the amount of the claim and the value of the collateral securing the claim. 11 U.S.C. § 506(a) (2000). If the value of the collateral is more than the amount of the claim, the claim is fully secured. If the value of the collateral is less than the amount of the claim, the creditor has a secured claim equal to the value of the collateral and an unsecured claim for the balance. 4 Collier on Bankruptcy ¶ 506[4],
. This procedure is based on necessity because of the volume of cases filed and is seemingly authorized by the definition of notice and hearing in 11 U.S.C. § 102(1)(A) & (B)(i)(ii):
(1) “after notice and a hearing,” or a similar phrase—
(A) means after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances; but
(B) authorizes an act without an actual hearing if such notice is given properly and if—
(i) such a hearing is not requested timely by a party in interest; or
(ii) there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act
. As far as research can determine, the Eighth Circuit Court of Appeals has not ruled on this precise issue in the context of a Chapter 13 confirmed plan.
. If a plan is proposed in an intentional attempt to catch the creditor off guard, some courts have permitted sanctions against the debtor's counsel.
See In re Lemons,
. See also Eric S. Richards, "Due Process Limitations on the Modifications of Liens through Bankruptcy Reorganizations" 71 Am. Bankr.L.J. 43, 44 (Winter 1997) (proposing that principles of due process are essential to a proper analysis of the procedural issues involved in lien modification through bankruptcy reorganization).
. If there is no issue as to the validity of the secured claim because the value of the collateral is sufficient to secure the claim totally, the issue of the amount of the claim would be determined under the claims allowance process because the amount owing under these circumstances is not an issue necessarily determined by the order of confirmation. 8 Collier on Bankruptcy ¶ 1327.02[2], An attempt to reduce the amount of a claim for an arrearage by stating an amount in the plan less than the amount of the allowed claim was held to violate due process because the claim allowance procedure was not used to reduce the amount of the claim.
In re Hobdy,