Chapter 13 Plan Confirmation Its FinalMaybe...

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Jul/Aug 2000

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The process of having a plan confirmed can be the most difficult aspect of a chapter 13 case. Debtors need
a plan that allows them to retain the property that they need to support themselves and their dependents.
Creditors want their claims paid to the fullest extent feasible. Secured creditors in particular have an interest
in determining how their claims are to be valued and paid, and they must be prepared to object to the plan
if necessary.

A central issue is the inherent conflict between provisions of the Code relating to confirmation of the plan
and to allowance, valuation and objections to claims. The crux of the problem lies in a reading of §1327(a),
which states that the provisions of a confirmed plan bind the debtor and creditors, and §502(a), which
deems as allowed all filed claims to which no objection has been made. When there is an objection to a
claim, §502(b) requires the court to value each claim after notice and a hearing. Bankruptcy Rule 3012
states that the court may determine the value of a secured claim "on motion of any party in interest and after
a hearing on notice to the holder of the secured claim..."

When the actual claim filed by the creditor conflicts with the value stated in the plan, the two need to
be reconciled. In deciding disputes over the treatment of claims, several approaches have been developed.

<h3>Claims Process Controls</h3>

Some courts, following the mandate of §506(a), choose the claims process over the plan confirmation
and require the debtor to object to any claim in which value is disputed. See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Linkous, 990 F.2d
160 (4th Cir. 1993)</a>. In rejecting the debtor's argument that the creditor has an affirmative duty to
determine how a plan proposes to treat its claim, the court observed:

<blockquote>
Appellants have contended that [the creditor], as a sophisticated lender, should have known that its
interests were in jeopardy. Such an argument has some merit, for we do expect creditors to take
some responsibility in the bankruptcy process or lose their rights...However, notwithstanding the
recognized responsibilities of the creditor, the debtor also must meet certain burdens. A debtor
should inform the secured creditor of an intent to reclassify its claim into partially secured and
partially unsecured status. Placing such a responsibility with the debtor is both logical and not
unduly burdensome.
</blockquote>

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 163</a>.

The Bankruptcy Rules, which set forth the procedural mechanism for implementing the Code, do not
permit such indirect attacks on the viability of claims. Bankruptcy Rule 3007 requires that all objections
to claims be in writing and filed with the court, and that the claimant be given 30 days notice of a hearing
to resolve the dispute. Bankruptcy Rule 9014 provides that in all contested matters, such as objections to
claims, "relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be
afforded the party against whom relief is sought." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Hobdy, 130 B.R. 318, 320 (9th Cir. BAP 1991)</a>.<a href="#1" name="1a">1</a>

A problem arises in jurisdictions where confirmation occurs prior to the claims bar date. In these
districts, confirmation is based on the debtor's estimates of claims and values. If the actual claims are later sustained at a higher value, a modification to the plan is necessary.

<h3>Confirmation Process Controls</h3>

A second line of cases places the binding effect of the confirmed plan ahead of the claims process.
These courts require the creditor to take a proactive role in the bankruptcy and monitor the treatment of its
claim. The Seventh Circuit in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Pence, 905 F.2d 1109 (7th Cir. 1990)</a>, found that, for due process
to be satisfied, notice that a claim will be valued does not always require formal notice or a separate hearing
on valuation. "Creditors, especially lending institutions...must follow the administration of the bankruptcy
estate to determine what aspects of the proceeding they may want to challenge." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1109</a>.

Similarly, in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Harnish, 224 B.R. 91 (Bankr. N.D. Iowa 1998)</a>, the creditor's lien was extinguished
by the plan, which did not specifically preserve the lien. While the creditor's claim was not mentioned in
the plan, the debtor's schedules listed the claim as unsecured. According to this court, those facts alone
triggered the creditor's duty to investigate whether or not its lien would be preserved. The Harnish court
ruled that, "by participating in the case by filing a proof of claim, [the creditor] acted at its peril and cannot
be excused from failing to monitor its plan treatment."<a href="#2" name="2a">2</a>

The dissent in Linkous would also place the burden on creditors.<a href="#3" name="3a">3</a> In Linkous, the claims bar date was
after confirmation, and the creditor's claim was not filed until after plan was confirmed. In an interesting
analysis of this situation, the dissent reasoned that, at the time of confirmation, there was no "allowed"
claim to value under §506(a) and that, therefore, the notice requirements of Rule 3012 did not apply. The
dissent viewed its decision as integral to the goals of the confirmation process.<a href="#4" name="4a">4</a>

<h3>Notice Controls</h3>

Finally, some courts look to the form of "notice" given to the creditor of the proposed treatment of the
claim to determine, by reviewing the totality of the circumstances, if due process requirements were
satisfied. If so, res judicata would be appropriate. According to these courts, the notice must be "reasonably
calculated, under the circumstances, to apprise interested parties of the pendency of the action and afford
them the opportunity to present their objections." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Central Hanover Bank and Trust, 339 U.S. 306, 314, 70 S.Ct. 652 (1950)</a>.

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Calvert, 907 F.2d 1069 (11th Cir. (Ala.) 1990)</a>, a bankruptcy court's notice of the confirmation
hearing stated that, at the hearing, the court "may...receive evidence of the value of collateral and determine
allowed secured claims or secured portions of allowed claims." In finding that notice to be inadequate, the
court said:

<blockquote>
...we note that the bankruptcy court's notice that it might hear the valuation issue at the first
confirmation hearing also violated Rule 3012. By issuing general notice that the valuation issue
might be considered without definitely alerting creditors to this prospect, the bankruptcy court
placed an undue burden on creditors. In requiring specific notice, Rule 3012 insures that creditors
will not needlessly attend hearings where collateral valuation will not be contested. It would
contravene the intent of the rule to allow bankruptcy courts, as a routine matter, to issue notice of
a mere possibility that they will consider collateral valuation.<a href="#5" name="5a">5</a>
</blockquote>

Courts following the "adequacy of notice" approach criticize the harsh results of the others. Choosing
the claims process over confirmation can be unworkable or cumbersome in jurisdictions where
confirmation occurs before the claims bar date. The debtor has nothing to object to and the confirmed plan
loses its finality. And a per se rule that the confirmation process controls can lead to abuse of the process
and a severe result for creditors, who would face the burden of obtaining or ensuring receipt of every plan
filed in every case in which they have a claim.

The "due process" approach provides a flexible framework that looks to the totality of the
circumstances to determine whether the creditor received adequate notice of the debtor's proposed
treatment of the claim. Such approach allows the court to consider a creditor's sophistication, the amount
of their involvement in the bankruptcy proceeding as well as the creditor's reliance on the claims
allowance procedures as demonstrated by a proof of claim filed before plan confirmation. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Basham, 167 B.R. 903, 908 (Bankr. W.D. Mo. 1994)</a>.

At their most basic, many of the rulings under the three viewpoints focus on interaction, i.e., whether
the parties are communicating with each other to ensure neither is blindsided, so that the confirmation
process runs smoothly and efficiently. Optimistically, one court has summed up a solution:

The court would hope that debtors' counsel will work with creditors and their counsel to determine
the proper amount of arrearages prior to confirmation. Then this issue would not come before the
court on a regular basis.<a href="#6" name="6a">6</a>

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Howard, 972 F.2d 639 (5th Cir. La. 1992)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> Id. at 94. <a href="#2a">Return to article</a>

<a name="3">3</a> "All parties should know that, in order for the court to determine whether payments are adequate, a valuation of the collateral
will necessarily take place. The notice before the confirmation hearing of the plan summary received by [the creditor]...provided it with
sufficient notice before the confirmation hearing of the fact that the payments under [the] proposed plan were clearly insufficient to
fully repay the car and the mobile home loan." Linkous at 165. <a href="#3a">Return to article</a>

<a name="4">4</a> "The law is constantly seeking finality. A single bankruptcy court may handle hundreds of cases filed under chapter 13 each week.
Their orderly disposition depends on the finality of confirmed plans. Chapter 13 cases will overburden the courts if a creditor may
ignore the confirmation process and later mount a collateral attack on the payments it is to receive under the confirmed plan. The
language of the Bankruptcy Code clearly states that an order confirming a chapter 13 plan may only be revoked if procured by fraud."
Id. at 166. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1072</a>.

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Scott, 229 B.R. 811 (Bankr. E.D. Okla. 1999)</a>.

Journal Authors

Alane A. Becket

Journal Date

Saturday, July 1, 2000 - 12:00