MICHAEL E. ROMERO, Bankruptcy Judge.
THIS MATTER comes before the Court on the Complaint for Declaratory Relief (the "Complaint") and Motion for Entry of Default Judgment Against Sally J. Zeman, in Her Capacity as Standing Chapter 13 Trustee (the "Motion") filed by the Debtor and Plaintiff herein, Daniel Joseph Diaz (the "Debtor").
The Debtor filed his chapter 13 bankruptcy petition and plan (the "Plan") on June 10, 2010. The Plan used the standard chapter 13 form adopted in this district and referred to as LOCAL BANKRUPTCY FORM 3015-1.1 (the "Form Plan"). Included as part of the Form Plan is a provision addressing post-confirmation modifications. The provision is designated as Part VIII and is titled "Post-Confirmation Modification" ("Part VIII"). Part VIII provides:
The Debtor included the Part VIII language in his Plan, but inserted the words, "Not Applicable" or "N/A" in the relevant blanks.
The above proviso incorporated as Part V.G.3 of the Plan is a construct of the Debtor. It is not drawn from the Form Plan adopted by this district nor referenced or otherwise suggested in that form's official commentary.
On July 15, 2010, the Trustee filed an Objection to Motion to Confirm Chapter 13 Plan (the "Objection") arguing, in part:
On November 9, 2010, the Debtor filed an Amended Plan (the "Amended Plan"), again noting Part VIII was "Not Applicable."
The Debtor initiated this adversary proceeding after the filing of the Trustee's initial Objection, but before the Amended Plan was on file. In his Complaint, the Debtor states Part VIII of the Form Plan violates the Bankruptcy Code and the Bankruptcy Rules. The Debtor further argues the Trustee's decision to object to Part VIII when marked "not applicable," and then withdraw her objection later when other objections are resolved, precludes a debtor from having an opportunity to fully litigate the propriety of Part VIII. Nonetheless, the Debtor argues the Trustee's initial filing of the objection obligates a debtor to respond to that objection as if the Trustee will pursue her argument to its conclusion.
By Order entered April 14, 2011, the Court found the relief requested in the Complaint and Motion extraordinary and atypical of adversary proceedings before this Court.
In the Complaint and Motion, the Debtor asserts three primary arguments:
• Congress and the Supreme Court permit bankruptcy courts to promulgate their own local rules for the purpose of administering cases. However, local rules may not conflict or substantially interfere with rights reserved and assigned by the Bankruptcy Code;
• The Court is without standing to require debtors to accommodate post-confirmation proofs of claim with a post-confirmation modification; and
• Although the Court has only requested that Debtors brief the issue of listing Paragraph VIII of the plan as "Not Applicable," the issue is inextricably intertwined with the concept of res judicata.
Specifically, the Debtor argues § 1329(a) states a post-confirmation modification of the plan may be requested by the "debtor, the trustee, or the holder of an allowed unsecured claim;"
The Debtor also argues LOCAL BANKRUPTCY RULE 3015-1 and LOCAL BANKRUPTCY FORM 3015-1.1 are inconsistent with, and contradict § 1327(a), which provides:
The Debtor argues LOCAL BANKRUPTCY RULE 3015-1 allows creditors to sit on their rights, not objecting to confirmation, with knowledge the Debtor will be forced to modify the plan post-confirmation to provide for their claims. The Debtor describes this as getting "two bites at the apple," when §§ 1327(a) and 1329(a) give creditors only one.
This Court benefits from the wisdom of two of its sister divisions which recently addressed the issues now presently before this Court.
Gordon focuses on three categories of caselaw interpreting the effect of a confirmed plan on the rights of secured creditors. The three categories are loosely identified as the "majority position," the "alternate process (res judicata)," and the "middle of the road (due process)." Those categories can be described in their salient terms as follows:
• Majority Position: The chapter 13 plan confirmation is not, by itself, sufficient to alter a secured creditor's lien rights. Liens pass through a bankruptcy unaffected, thus permitting a secured creditor to elect not to participate in a bankruptcy case and instead rely on its lien rights. In order to alter lien and/or claim rights, a debtor must invoke some process other than plan confirmation, such as the claims allowance process or a separate adversary proceeding.
• Alternate Process (Res Judicata): A secured creditor's failure to object to a plan can result in modification of a claim or a lien. A secured creditor who elects not to participate in a bankruptcy case or file a plan objection does so at its own risk, because a plan can and may modify the creditor's lien. Cases in this category acknowledge the claims allowance process, but characterize it as an "alternate" process to determine a secured claim, and stress secured creditors cannot rely on this alternative and ignore the confirmation process without risking modification of their rights.
• Middle of the Road (Due Process): A lien may be modified through the confirmation process, but only if the creditor receives adequate notice that its lien would be adversely affected by the proposed modified plan.
After considering those three interpretations, Gordon appears to have adopted a hybrid of the "alternate process" and "middle of the road" lines of cases and approved the debtors' plan. That Court agreed with those cases "giving emphasis to the res judicata effect of a properly served plan.
Gordon concluded the debtors' striking of Part VIII and use of "non-standard language" in Part V, positing an inference contrary to Part VIII, was permissible and consistent with the Bankruptcy Code. Specifically, Judge Brown stated, "Thus, the Court agrees with Debtors that, to the extent [LOCAL BANKRUPTCY FORM 3015-1.1 Part VIII] amounts to a bankruptcy court order to modify a confirmed Chapter 13 plan, it is inconsistent with the [Bankruptcy] Code and invalid."
The Court in Butcher considered six factors in its review of the effect of a confirmed
• The Court's Duty is to Read the Different Sections of the Bankruptcy Code in Harmony: There is no irreconcilable contradiction between a speedy chapter 13 plan confirmation and the claim allowance process set out in §§ 501 and 502. Nothing in chapter 13 prevents a court from confirming a chapter 13 plan in accordance with the accelerated time frame set forth in the BAPCPA amendments without cutting off a creditor's right to receive payment based on a timely filed and allowed proof of claim.
• Part VIII Does Not Exceed the Court's Rule-Making Authority Because it Does Not Violate § 1329: Although § 1329 does not permit a court to seek modification of a confirmed plan, it is incumbent upon bankruptcy courts to avoid confirming plans that do not comply with the Bankruptcy Code. Absent Part VIII, courts could confirm plans which impermissibly modified a creditor's rights before filing a claim. To avoid this result, § 105(a) grants the Court broad authority to take steps necessary to "prevent an abuse of process."
• Section VIII Does Not Conflict with the Res Judicata Effect of a Confirmed Plan: It is the terms of the of the confirmed plan which bind the parties. The terms of the Form Plan require a debtor to substantiate his version of a claim by prosecuting an objection to a timely filed and allowed claim where the proof of claim differs from the plan term, by conforming the plan to the proof of claim, or by negotiating a resolution satisfactory to both parties. That obligation is binding upon debtors by operation of res judicata and § 1327 under the current Form Plan.
• By Eliminating Part VIII, Debtors' Plan Violates §§ 501 and 502, and FED. R. BANKR.P. 3002: Proofs of claim may be timely filed after plan confirmation. For the court to confirm a plan not containing a saving provision such as Part VIII would illegally modify a claim secured by the debtor's principal residence in contravention of § 1322(b)(2). To conclude otherwise would be to abrogate the claim filing, objection, and allowance process set out in §§ 501 and 502 and Rule 3001 et seq. Additionally, cutting off a creditor's rights through the plan confirmation process would also abrogate Rule 3002(a) because the deadline for filing proofs of claim set forth in the Court's corresponding notice to creditors upon the filing of a chapter 13 case would be rendered disingenuous and misleading. Moreover, this position shifts the claim objection burden to creditors by forcing a creditor to object to a proposed plan rather than requiring a debtor to object to a presumptively allowed claim. This shift in burden would make the presumption of the validity of a properly filed claim meaningless.
• Language Incorporated in Violation of the Local Rules and Part VIII: Part V of the Form Plan allows the debtor to list "Other" provisions not included in the form. If permitted to insert language in Part V that is contrary to Part VIII,
Based on the foregoing, Butcher rejected the debtors' arguments, as well as the reasoning underlying the decision in Gordon, and denied confirmation of the debtors' plan. It concluded:
As mentioned above, this adversary proceeding presents issues of law identical to those raised in Gordon and Butcher. The Court has carefully reviewed those opinions and finds their reasoning instructive in its own deliberation.
In Gordon, Judge Brown accepted the debtors' treatment of Part VIII as "not applicable" and concluded the language in Part V of the debtors' plan was permissible and not inconsistent with the Bankruptcy Code.
While the specific language may be satisfactory, using the plan process to adjudicate claims issues is a license for mischief and may result in the approval of a plan with a provision inserted by counsel which is contrary to anything authorized by the Bankruptcy Code. Such a scenario recently came before the U.S. Supreme Court in United Student Aid Funds, Inc. v. Espinosa.
In Butcher, Judge Tallman rejected the debtors' attempt to jettison the claims process and emphasized the harmony required to give effect to all processes prescribed by the Bankruptcy Code, the Bankruptcy Rules, and the Local Bankruptcy Rules and Forms of this district.
After reviewing the well-reasoned opinions of its colleagues in this district, the dictates of the Bankruptcy Code and Rules, the Proposed Rule and associated committee comments presently before Congress, as well as the policy considerations underlying this district's adoption of LOCAL BANKRUPTCY RULE 3015-1 and LOCAL BANKRUPTCY FORM 3015-1.1, and particularly its Part VIII, this Court agrees with the reasoning set forth in Butcher and adopts its analysis and conclusion for purposes of this proceeding.
Accordingly, it is hereby
ORDERED the Debtor's Motion for Entry of Default Judgment Against Sally J. Zeman, in Her Capacity as Standing Chapter 13 Trustee is DENIED; and it is further
ORDERED the Plaintiff's request for declaratory judgment finding that Local Bankruptcy Rule 3015-1(a)(1) and Local Bankruptcy Form 3015-1.1, Section VIII, are invalid is DENIED.
In support of the Proposed Rule, the Advisory Committee noted, "This is a new rule." It is added to aid in the implementation of § 1322(b)(5), which permits a chapter 13 debtor to cure a default and maintain payments on a home mortgage over the course of the plan." The Advisory Committee went on to say, "In order to be able to fulfill the obligations of § 1322(b)(5), a debtor and the trustee have to be informed of the exact amount needed to cure any prepetition arrearage, see Rule 3001(c)(2), and the amount of the postpetition payment obligations. If adopted by Congress, the Proposed Rule will be effective as of December 1, 2011. The Proposed Rule is not only timely, it is on point with the challenges presented in Gordon and Butcher, as well as in this adversary proceeding. Indeed, it is clear from the Proposed Rule, adopted by our Supreme Court and recommended to Congress, that issues concerning the intersection of §§ 1322(b)(5), 501 and 502, and Rules 3001 et seq. must be reconciled and given equal effect through the chapter 13 plan process.
