Occasionally, a debtor may place a provision in a chapter 13 plan that is contrary to the Bankruptcy Code and the plan is confirmed without objection. It has been a long-held belief that a creditor’s failure to object to the confirmation of a chapter 13 plan waives any objection to the plan once the plan is confirmed. This position is supported by the legal concept of res judicata (i.e., the binding effect of a court order), and the following language in §1327:
A(a) The provision 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.
In order to obtain confirmation, however, the Code states that a chapter 13 plan must comply with the provision of chapter 13 and with the other applicable provisions of title 11 [§1325(a)(1)]. Moreover, the plan must be proposed in good faith and not by any means forbidden by law. [§1325(a)(3)]. Thus, provisions placed in chapter 13 plans that are contrary to specific provisions of the Code should doom confirmation of a chapter 13 plan.
With the changes recently made by Congress to chapter 13 in BAPCPA, courts now are dealing with the issue of whether the absence of an objection by a creditor can be deemed “implied acceptance” of a plan containing a provision that appears to be contrary to provisions of BAPCPA. This issue came to light in two recent cases where a debtor’s chapter 13 plan provided to bifurcate a secured claim under §506 for a vehicle financed within 910 days of filing.
The so-called “hanging paragraph” found after §1325(a)(9) added by BAPCPA limits the ability of an individual debtor to cram down a 910-day vehicle loan. In In re Montoya, 341 B.R. 41 (Bankr. D. Utah 2006), the debtor’s plan proposed to cram down a 910-day vehicle loan. The secured creditor did not file an objection. The chapter 13 trustee and the debtor contended that the secured creditor’s failure to object to confirmation of a chapter 13 plan containing a cramdown of a 910-day claim constituted acceptance of the plan. The court in Montoya rejected this argument, stating that “a plan should not be used as a sword to change the explicit provisions of the Code to what the parties wish Congress had drafted.” The court referenced the case law, which considers the absence of a creditor’s objection to a chapter 13 plan to be implied consent, but found these cases missed the point:
The concept of implied acceptance of an otherwise compliant plan, or even voting on similar provisions in chapter 11, however, is quite different from proposing a plan intentionally inconsistent with the Code and then waiting for the trap to spring on a somnolent creditor. Creditors are entitled to rely on the few unambiguous provisions of the BAPCPA for their treatment. They should not be required to scour every chapter 13 plan to insure that provisions of the BAPCPA specifically inapplicable to them will not be inserted in a proposed plan in the debtor’s hope that the improper secured creditor treatment will become res judicata.
The court in Montoya supported its denial of confirmation by pointing to §1325(a)(1), which provides that “the court shall confirm a plan if the plan complies with the provisions of this chapter and with the other applicable provisions of this title.” the judge in Montoya found that a bankruptcy judge “has an affirmative duty to review and ensure that the plan complies with the Code even if creditors fail to object to confirmation. This offending provision presents no less a bar to confirmation than failing to pay priority claims in full, proposing a plan in bad faith or proposing a plan that is not feasible.” The court concluded that trying to insert an impermissible provision into a chapter 13 plan (such as the proposed cramdown of a 910-day vehicle claim) “is not an option.” The court noted that its opinion did not preclude a debtor and secured creditor from agreeing to a cramdown for a 910-day vehicle claim. The court also stated in a footnote that it was not addressing the issue of whether a secured creditor’s filing of a bifurcated proof of claim constituted “expressed acceptance or some sort of waiver of the provisions of the hanging paragraph.”
The analysis in the Montoya case was followed by a bankruptcy court in Kentucky. In In re Montgomery, 341 B.R. 843 (Bankr. E.D. Ky. 2006), the secured creditor actually filed an objection to a debtor’s chapter 13 plan proposing a cramdown of a 910-day vehicle loan, but the objection was not timely filed. The court nevertheless denied confirmation of the plan and adopted the holding in Montoya.
There is no doubt that some debtors and their counsel will place provisions into a chapter 13 plan that (either implicitly or explicitly) do not comply with the requirements of the Code (e.g., a provision ignoring In re Till and providing for an interest rate of 2 percent on a secured claim paid over time through a plan). Notwithstanding the position taken by courts in the above two cases, secured creditors must be vigilant. A thorough review of each chapter 13 plan by secured creditors is imperative.