The Fourth Circuit held definitively that res judicata does not bar a debtor from objecting to allowance of unsecured claims after confirmation of a chapter 13 plan.
The litigation was brought by LVNV Funding LLC, a company that buys stale claims where collection is barred by the statute of limitations.
In consolidated appeals directly to the Fourth Circuit from the bankruptcy court, LVNV had filed its claims before confirmation. LVNV did not object to confirmation, nor did the debtors object to the claims before confirmation. The claims were therefore “deemed allowed” at the time of confirmation under Section 502(a).
After confirmation, but before the completion of payments under the plans, the debtors objected to allowance of the claims based on the statute of limitations. Relying on the principle of res judicata, the creditor contended that the confirmation orders were final judgments on the allowance of the claims, barring later objections.
The bankruptcy court did not buy the argument, nor did the Fourth Circuit in a March 30 opinion by Circuit Judge G. Steven Agee. He said that LVNV’s theory “does not satisfy the requirements for the application of res judicata and contradicts the plain language of the Bankruptcy Code.”
Judge Agee pointed out that plan confirmation and the filing of claims are on different schedules. Under Section 1324, plan confirmation is 20 to 45 days after the Section 341 meeting. The claims bar date, on the other hand, is 90 days after the first meeting, under Bankruptcy Rule 3002(c). Consequently, the bar date is usually after confirmation in a typical chapter 13 case.
Turning to the law, Judge Agee said that res judicata bars relitigation of matters that were actually and necessarily litigated previously. In confirming a chapter 13 plan, he said the bankruptcy court need only determine under Section 1325(a)(4) whether the funds available for unsecured creditors under the plan exceed what the class would receive in chapter 7.
“No provision of the Bankruptcy Code,” he said, “provides for the determination of the merits of an individual unsecured claim.” Since confirmation does not entail ruling on the validity of an individual unsecured claim, res judicata does not bar a claim objection after confirmation.
Section 502(a) does not change the result, just because a claim is deemed allowed. Judge Agee said there was nothing for “the bankruptcy court to adjudicate at plan confirmation” because there is “no deadline for the initiation of” a claim objection under the “plain text of the relevant rules and statute.” He went on to say, “Nothing in the Bankruptcy Code ties contested matters for unsecured claims to a timeline related to plan confirmation.”
Res judicata does not bar a claim objection after confirmation, Judge Agee said, because a confirmation order is not a “‘prior judgment,’ final or otherwise, ‘on the merits’ as to any individual unsecured creditor’s claim.”
On March 24, the Fifth Circuit held in Kipp Flores Architects LLC v. Mid-Continent Casualty Co. that an uncontested proof of claim in a “no asset” chapter 7 case cannot be grounds for invocation of res judicata against a third party. In that case, the Fifth Circuit rested its decision on Section 502, evidently assuming that res judicata applied.
Using the Fourth Circuit’s analysis, the Fifth Circuit could have reached the same result with an analysis of the elements of res judicata. To read ABI’s discussion of Kipp Flores, click here.