Matter of Howard ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 91-3595
In the Matter of: WALTER HOWARD and
VERLEAN HOWARD,
Debtors.
SUN FINANCE COMPANY, INC.,
Appellant,
versus
WALTER HOWARD and VERLEAN HOWARD,
Appellees.
Appeals from the United States District Court
for the Eastern District of Louisiana
( September 8, 1992 )
Before HIGGINBOTHAM and DUHÉ, Circuit Judges and HUNTER,*
District Judge.
HIGGINBOTHAM, Circuit Judge:
We deal in this case with the effect of a confirmed
reorganization plan under Chapter 13 of the Bankruptcy Code on a
secured creditor who fails to object to the plan before
confirmation. We conclude 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 has filed an objection to
the creditor's claim. If no objection is filed to a secured
*
Senior District Judge of the Western District of Louisiana,
sitting by designation.
claim, the creditor is entitled to rely upon its lien and not
participate in the bankruptcy proceedings. Accordingly, we
reverse the judgment of the district court and remand for further
proceedings consistent with this opinion.
I.
The facts in this case are undisputed. Sun Finance Company,
Inc. held a secured mortgage in the amount of $4,590.47 on two New
Orleans properties owned by the Howards. On May 21, 1990, the
Howards filed a Chapter 13 bankruptcy petition and plan. The plan
described the Sun Finance claim as disputed. The Howards listed as
an asset an action against Sun for unfair and deceptive trade
practices. The plan provided that Sun would be paid $500 of its
secured debt in full compromise of the Howards' claimed action
against Sun and Sun's lien would be lifted.
Sun was listed as a secured creditor in the Howards'
bankruptcy and received notice of the filing of the petition, the
creditors' meeting, and the plan confirmation hearing. The notice
of the creditors' meeting and the confirmation hearing contained
the following summary of the plan: "The plan proposes payments of
$64.00 monthly to the Trustee with unsecured claims to be paid
100.00% over approximately 36 months." At no time did Sun receive
a copy of the plan itself or actual notice that its claim had been
compromised to $500. Sun filed a proof of claim before the
confirmation hearing. The Howards did not file an objection to
Sun's proof of claim. Sun did not participate in the confirmation
proceedings beyond filing its proof of claim. No objection was
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made to the plan's confirmation and the bankruptcy court confirmed
it on July 10, 1990.
When Sun did not receive the payments which it anticipated, it
filed a motion to lift the automatic stay in order to permit it to
foreclose on its note and mortgage. The bankruptcy court refused
to lift the stay, ruling that the confirmation of the plan was res
judicata to the issues raised in Sun's motion because Sun failed to
object to the plan prior to confirmation.
The district court affirmed the ruling of the bankruptcy
court.
II.
The Howards assert in defense of the district court's judgment
that the confirmation of a Chapter 13 plan has a res judicata
effect as to all issues decided in the plan. Therefore, they
argue, Sun is bound by the plan's provision that their secured
claim is offset by the Howards' claims against Sun. On its face,
§ 1327(a) of the Bankruptcy Code gives a Chapter 13 reorganization
plan a sweeping binding effect on all creditors. It provides that
"the provisions of a confirmed plan bind the debtor and each
creditor, whether or not the claim of such creditor has objected
to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a).
Property which passes through the plan vests in the debtor "free
and clear of any claim or interest of any creditor provided for by
the plan." § 1327(c).
Provisions of the bankruptcy code cannot be read in isolation
but should be interpreted in light of the remainder of the
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statutory scheme. United Savings Assoc. v. Timbers of Inwood
Forest, 108 S. Ct. 626, 630 (1988); In re Southmark (Southmark Corp.
v. Southmark Personal Storage, Inc.), 138 B.R. 831, 834 (Bankr.
N.D. Tex. 1992). Several provisions of the bankruptcy code provide
special procedures to protect secured creditors and their liens.
Section 502(a) provides that "a claim or interest, proof of which
is filed under Section 501 of this title, is deemed allowed, unless
a party in interest . . . objects." Section 506(a) further
provides that the value of a secured claim must be determined in
conjunction with any plan that would affect the creditor's
interest. A timely-filed proof of claim constitutes prima facie
evidence of the validity and amount of the claim. B.R. 3001. To
rebut a proof of claim, the debtor must file an objection under
B.R. 3007. Sun asserts that because no objection was made to its
timely-filed proof of claim, § 502(a) requires that it be deemed
allowed under the plan. Because the proper procedure for objecting
to Sun's proof was not followed, Sun asserts, the plan cannot
effectively reduce the amount of their lien.
We have addressed the effect of the confirmation of a Chapter
13 plan on creditors who fail to object to the confirmation twice
before. Sun finds support for its position in In re Simmons, 765
F.2d 547 (5th Cir. 1985). In Simmons, a creditor who had perfected
a statutory lien was incorrectly listed in the debtor's plan as an
unsecured creditor. The creditor indicated that he would approve
the plan, but added the proviso that he must be listed as a secured
creditor. The creditor did not object to the plan at the
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confirmation hearing and his status under the plan was never
corrected. The debtor argued that because the creditor had failed
to object to the plan's confirmation he was bound by its terms and
his lien was therefore invalid. We disagreed, holding that a
Chapter 13 plan may not substitute for an objection to a secured
creditor's proof of claim. Once the creditor has filed a proof of
claim, "the Code and the Rules clearly impose the burden of placing
the claim in dispute on any party in interest desiring to do so by
means of filing an objection." Id. at 552. A secured creditor is
therefore not bound by a plan which purports to reduce its claim
where no objection has been filed.
The Howards rely on our decision in Republic Supply Co. v.
Shoaf, 815 F.2d 1046 (5th Cir. 1987), to support their position
that confirmation of a Chapter 13 plan is res judicata against any
creditor who fails to object to its confirmation. The bankruptcy
court in Shoaf included in a Chapter 13 plan a provision
invalidating a guaranty by a third party in favor of one of the
creditors. That creditor objected to the provision in one hearing,
but failed to object to the plan at the final confirmation hearing.
Although the bankruptcy court was without statutory authority to
release the guaranty in the plan, we held that the plan
confirmation was nonetheless res judicata on the issue of the
validity of the plan provision affecting the guaranty.
The apparent tension between Simmons and Shoaf reflects no
more than the difficulty in striking a workable balance between the
interest in the protection of secured creditors and the interest in
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finality for Chapter 13 debtors. To the extent that these cases
might be in conflict, we would be bound to follow Simmons as the
earlier decision of this court on the subject. Broussard v.
Southern Pacific Trans. Co., 665 F.2d 1387, 1389 (5th Cir. 1982)
(en banc). We believe, however, that when properly read, these
cases are not in conflict.
A secured creditor "with a loan secured by a lien on the
assets of a debtor who becomes bankrupt before the loan is repaid
may ignore the bankruptcy proceeding and look to the lien for
satisfaction of the debt." Simmons, 765 F.2d at 556, quoting In re
Tarnow, 749 F.2d 464, 465 (7th Cir. 1984). In other words, a
secured creditor may remain outside the bankruptcy proceedings
until an interested party objects to his allowed secured claim.
This right to stay outside the bankruptcy process by relying solely
on the value of one's lien would be meaningless, however, if the
creditor's claim can be compromised away without further notice and
he is bound by that compromise. Strict adherence to the
requirement that an objection be filed to challenge a secured claim
is necessary to protect this important interest under the Code.
In light of these concerns, Shoaf stands for the proposition
that a confirmed Chapter 13 plan is res judicata as to all parties
who participate in the confirmation process. The general
applicability of res judicata to bankruptcy plan confirmations must
give way, however, to the interest of the secured creditor, as we
recognized in Simmons, in being confident that its lien is secure
unless a party in interest objects to it. Unlike the creditor in
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this case, the holder of the guaranty in Shoaf was not a secured
creditor of the debtor entitled to the protection of §§ 502(a) and
506. The immediate importance of that distinction is demonstrated
by the fact that the Shoaf court found it unnecessary to cite
Simmons. Thus, Simmons represents a limited exception to the
general rule of Shoaf based upon the competing concerns expressed
in the bankruptcy code.
The Howards point to the Third Circuit's decision in In re
Szosteck, 886 F.2d 1405 (3d Cir. 1989) to support their position
that Sun is bound by the terms of the confirmed plan. A closer
reading of Szosteck, however, demonstrates that it is consistent
with our holding. The key to Simmons is the requirement that a
claim be objected to before the creditor loses its ability to rely
upon its lien for relief. In Szosteck, the debtor had filed an
objection to the creditor's claim before the confirmation hearing
was scheduled. Id. at 1406. The filing of an objection is all
that Simmons requires. Once a debtor has objected to a claim, the
creditor is on notice that full participation in the confirmation
proceedings is required or its lien will be at risk.
Applying Simmons to the facts in this case, we find that the
confirmation of the Chapter 13 plan does not bar Sun from seeking
enforcement of its lien. Sun's timely filed proof of claim was
never objected to and Sun did not participate in the confirmation
of the Howards' plan. Accordingly, we will reverse the judgment of
the district court.
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We decline to hold, as the Howards urge, that any flaw in the
provisions of a Chapter 13 plan may be objected to after
confirmation. Such a holding would, as Shoaf recognizes, step too
hard on the debtors' interest in finality after the confirmation of
a Chapter 13 plan. We hold only that a debtor who wishes to
challenge the amount of a secured claim either by asserting a
counterclaim or offset against it or by disputing the amount or
validity of the lien must file an objection to the creditors' claim
in order to put the creditor on notice that it must participate in
the bankruptcy proceedings. A Chapter 13 plan may by its very
nature change the terms of payment and otherwise modify the terms
of the debt underlying the lien. Creditors are put on notice of
the possibility of these types of modifications by notice of the
filing of a Chapter 13 proceeding and must object to the
confirmation of a plan in order to prevent their effect. These
plan provisions will be final as to all creditors in those respects
because they do not conflict with other provisions of the
bankruptcy code. See Matter of Pence, 905 F.2d 1107 (7th Cir.
1990) (allowing Chapter 13 plan to avoid lien where "plan treats
the secured claim in a fair and equitable manner, providing for
full payment of the debt.").
We do not believe that requiring a Chapter 13 debtor to file
an objection to a secured claim before reducing the amount of the
claim represents a substantial additional burden on the ability of
debtors to obtain a fresh start. We do not agree with the Howards
that requiring an objection to a claim before it can be reduced
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through a Chapter 13 plan would require a debtor to check daily
with the clerk to see if a proof of claim has been filed. The
Howards knew that they were using the plan to reduce the amount of
Sun's secured claim. To qualify as a Chapter 13 debtor, an
individual must owe "noncontingent, liquidated, unsecured debts
that aggregate less than $100,000 and noncontingent, liquidated,
secured debts of less than $350,000." 11 U.S.C. § 109(e).
Individual debtors with relatively small debt loads can be expected
to know what their secured debts are and whether their plan will
reduce or eliminate a secured creditor's lien. The burden of
filing a written objection to those claims is not onerous. A
secured creditor with notice that the debtor is objecting to its
claim must participate in the bankruptcy proceedings to protect its
rights. As we see it, the dispute over the secured claim may be
resolved in most cases before confirmation of the plan without
delay.
III.
Sun also asserts that the cursory summary of the plan's
provisions denied Sun due process. We decide this case on other
grounds and do not reach this issue.
REVERSED and REMANDED.
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