ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE.
Robert L. Woodard ("the Debtor") initiated this adversary proceeding against the City of Philadelphia ("the City") in 2013 after reopening his chapter 13 bankruptcy case — a case which was closed in 2006. The Debtor seeks to claw back from the City more than $36,000.00 the City received from the sale of 1015 South 18
The Debtor sold the Property to a third party during the course of his bankruptcy case. The sale was authorized by both the Debtor's confirmed chapter 13 plan and, on the Debtor's motion, a post-confirmation court order. The disputed payment was made in satisfaction of the City's recorded liens against the Property.
The Debtor asserts that the City's acceptance or collection of the disputed funds at the sale closing violated the automatic stay, 11 U.S.C. § 362, and the terms of his confirmed chapter 13 plan. The City disputes the Debtor's claim.
As set out below, the factual details are somewhat convoluted, but the basis for deciding this case is simple. The post-confirmation order authorizing the sale, entered at the Debtor's request, authorized payment of the amounts the Debtor now seeks to recover. Further, the payment of the City liens was not inconsistent with any provision of the Debtor's confirmed chapter plan. Consequently, I find for the City.
On March 20, 2001, the Debtor filed a voluntary chapter 13 case in this court. On April 29, 2003, the court confirmed the Debtor's Amended Chapter 13 Plan ("the Confirmed Plan"). (Ex. P-1A; Bankr. Doc. # 46). The Debtor successfully completed the Confirmed Plan and received a chapter 13 discharge on April 19, 2006. (Bankr.Doc. # 132). The case was closed on April 27, 2006.
The Debtor moved to reopen the closed bankruptcy case on August 23, 2013. (Bankr.Doc. # 134). I granted the motion to reopen, and shortly thereafter, the Debtor filed his adversary complaint. On November 11, 2013, the Debtor filed an Amended Complaint. (Adv.Doc. # 6). The City filed its Answer to the Amended Complaint on December 30, 2013. (Adv. Doc. # 9).
As of the commencement of his bankruptcy case, the Debtor owned several properties located in the City of Philadelphia. He continues to own most of these properties. (Ex. D-1, ¶ 5).
Four (4) proofs of claim were filed in the case. One (1) claim was disallowed. Another was stricken as docketed in error. The other two (2) claims were filed by First Union National Bank ("First Union") and the City. (Claims Register, Bky. No. 01-14036). Both claims were for delinquent real estate taxes on multiple properties.
First Union, as Trustee for certain bondholders, filed a secured claim in the amount of $41,159.73 on May 23, 2001.(Id.). After the Debtor objected to the claim, the court entered an Agreed Order allowing First Union's claim, but in a reduced amount: $27,802.84. (Ex. D-1 ¶ 9). The Agreed Order delineated the allowed amount of First Union's claim with respect to each of the Debtor's properties. With respect to the Property, the allowed amount was $4,204.20.
On July 9, 2001, the City filed a secured claim in the amount of $5,764.62. (Ex. D-1 ¶ 7). With respect to the Property, the allowed amount was $1,134.86. (Order dated July 19, 2005, Bankr.Doc. # 119). The City's claim was based on taxes assessed in years following the unpaid taxes listed in First Union's claim. (See Ex. D-1, ¶¶ 6-7).
The Confirmed Plan provided for the Debtor to make monthly payments to the Chapter 13 Trustee of $250.00 per month
(Confirmed Plan ¶¶ 3, 7; Ex. P-1A).
On or about June 6, 2005, the Debtor signed an Agreement of Sale to sell the Property for $100,000.00. The sale price exceeded the amount of the claims filed by First Union and the City attributable to the Property. (Ex. D-1, ¶ 11).
On June 8, 2005, the Debtor filed a motion seeking bankruptcy court approval of the sale of the Property ("the Sale Motion"). (Bankr.Doc. # 114). The court granted the Debtor's motion and approved the sale by order dated July 19, 2005 ("the Sale Order"). (Bankr.Doc. # 119).
The "Sale Order" provided, inter alia, that:
(Ex. B, attached to Ex. D-1) (emphasis added).
Settlement on the sale of the Property occurred on October 21, 2005. A copy of the settlement statement (HUD-1) prepared by the title clerk, First American Title Insurance Company, was provided to neither the Debtor nor the City prior to settlement. (See D-1, ¶ 14).
Shortly after the settlement date, on October 25, 2005, the title clerk delivered the seven (7) checks to the City in the aggregate amount of $40,756.79 for the following City claims:
(Ex. D-1, ¶¶ 16-17).
The Settlement Statement indicated that the Chapter 13 Trustee received net proceeds of $56,690.01. (See Ex. C, attached to Ex. D-1). From this amount, the Trustee distributed approximately $30,000.00 to the Debtor. (N.T. at 43; 89 and 90). The Debtor apparently expected to receive "a lot more" than the $30,000.00 from the Trustee as a result of the sale of the Property. (N.T. at 89). Despite this, the Debtor did not contest the amount of the sales proceeds that he received. (N.T. at 90).
The Debtor disputes the propriety of the following distributions made to the City from proceeds of the sale of the Property in October 2005:
The Debtor asserts that the City's acceptance of these payments violated several subsections of the automatic stay, as well as the terms of the Confirmed Plan.
The Debtor first contends that the City's acceptance of the settlement checks and use of such proceeds toward the four (4) judgments/liens violated several sections of 11 U.S.C § 362(a)-(1), (2), (3), (4), (5) and (6).
It is unnecessary, however, to parse each subsection of § 362(a) and consider these issues. Even if a stay violation occurred, the Sale Order controls the outcome.
The Sale Order, which was granted on the Debtor's motion and entered post-confirmation in accordance with the Confirmed Plan, provided that the "proceeds should be distributed to all taxes and other unavoidable liens of taxing authorities." All of the payments received were on account of unavoided (and presumably unavoidable) liens held by the City, a taxing authority and thus, were authorized by the Sale Order.
I conclude that, although the Sale Order did not expressly grant relief from the automatic stay to permit the City to collect its secured claims that were not included in its proof of claim, the Sale Order effectively operated as an order granting limited relief from the automatic stay. See 11 U.S.C. § 362(d). There is simply no other way to look at it. I cannot interpret the Sale Order as authorizing the payment of specified claims secured by liens and then hold the recipient of those payments in contempt for violation of the automatic stay, because it accepted the very payments authorized by the Sale Order. That would be absurd. The Sale Order implicitly and necessarily modified the automatic stay. Thus, the City's acceptance of the settlement proceeds on account of its unavoided liens, authorized by the Sale Order, was proper.
The Debtor also argues that the City's actions violated the Confirmed Plan because the City's distribution should have been limited to the amount of the allowed proof of claim attributable to the Property. Therefore, according to the Debtor, the distributions were improper.
The Debtor's argument emanates from the fact that the City did not include those other liens and judgments listed on the HUD-1 in its proof of claim. In other words, the City did not file what one might describe as a "comprehensive" proof of claim for all of its claims that were secured by the Property. Its proof of claim was limited to real estate taxes. The Debtor suggests that a creditor should not be entitled to "pick and choose" which claims are included in a proof of claim, and as a result, the City should disgorge the money it received on account of the liens and judgments not included in its proof of claim.
Respectfully, I disagree.
A secured creditor is not required to file a claim and failure to do so does not divest the creditor of its lien. In re Mansaray-Ruffin, 530 F.3d 230, 235 n. 4 (3d Cir.2008). If a creditor does not participate in the bankruptcy process, and does not file a proof of claim, its lien passes through the bankruptcy unaffected. Estate of Lellock v. Prudential Insurance Co. of America, 811 F.2d 186, 189 (3d Cir.1987); In re Olick, 517 B.R. 549, 562 (Bankr.E.D.Pa.2014). Stated slightly differently, if a lien is not addressed and
Thus, a secured creditor might decide that participation in the bankruptcy process is not in its best interest and therefore, make a conscious choice not to seek a distribution from the estate, instead relying on its collateral to provide for satisfaction of the underlying debt at some point in the future. Such a creditor exercises this choice by not filing a proof of claim. If the creditor does not file a proof of claim, the case law is clear that its lien passes through. If the debtor finds that prospect unsatisfactory, it is incumbent on the debtor to take some action to compel the creditor's participation in the chapter 13 rehabilitation plan. A chapter 13 debtor has ample tools to do so by: filing a claim on the creditors's behalf, see Fed. R. Bankr. P. 3004; expressly providing for the creditor's claim in a plan that binds the creditor to its terms, see 11 U.S.C. § 1327(a); or instituting a contested matter or adversary proceeding to challenge the validity of or otherwise alter the status of the creditor's secured claim, see 11 U.S.C. § 506(a); Fed. R. Bankr. P. 3012, 7001(2).
On the other hand, if a secured creditor files a proof of claim or the debtor provides for the creditor's claim in the plan, § 1325(a)(5) sets forth criteria for treatment of secured claims in chapter 13 plans. Then, upon confirmation of a chapter 13 bankruptcy plan, both the debtor and the creditors are bound by its terms, 11 U.S.C. § 1327(a), In re Szostek, 886 F.2d 1405, 1408 (3d Cir.1989), and plan confirmation also has res judicata effect, In re Michael, 436 B.R. 323, 329 (Bankr. M.D.Pa.2010) (citing Szostek, 886 F.2d 1405).
Reduced to its core, the Debtor contends that a proof of claim filed by a creditor who holds multiple, independent claims secured by a bankruptcy debtor's property must include all of its claims in the proof of claim. Implicit in the argument is the notion that a creditor who fails to include all of its secured claims in its proof of claim (or who fails to file multiple proofs of claim for all of the separate claims) effectively waives its rights with respect to the unfiled claims, presumably based on provisions of the debtor's confirmed plan that bind the creditor to accept payment on its filed claim in full satisfaction of all of its secured claims. See Thomas, 497 B.R. at 204-05 (stating a hypothetical where this might occur).
The Debtor's argument here fails for at least two (2) independent reasons.
First, the Debtor has cited no legal authority that suggests that a creditor must file a proof of claim (or multiple claims) for all of its claims secured by a particular property that is property of bankruptcy estate. Nor do I find any compelling policy reason for judicially engrafting such a requirement on to the statute. As stated above, a chapter 13 debtor has ample tools "to bring a secured creditor into a bankruptcy case" and bind the creditor to the terms of a confirmed chapter 13 plan. And, to the extent the Debtor's argument is based on the notion that it is unfair to allow the creditor to "hold back" on filing a "comprehensive" secured claim because a debtor may be unaware of the some of the distinct debts secured by the lien, I am not sympathetic. A simple title search prior to the filing of the case or even confirmation of the plan would permit a debtor to
Second, and equally compelling, the Confirmed Plan, on its face, did not contain language that purported to bind the City to accept payment of its filed claim in full satisfaction of all claims secured by the Property it might hold. Paragraph 4.B. of the Confirmed Plan defines Class 2 as only "secured claims for real estate taxes and water and sewer lines held by [the City]." The Confirmed Plan did not classify or provide in any way for
In this case, the "pass-through" status of the City's unfiled secured claims changed only because the Debtor sold the Property and provided for their payment in the Sale Order, an order that the Debtor submitted to the court and that the court entered. Thus, the Sale Order and the payment to the City were not inconsistent with the Confirmed Plan; the use of the sale proceeds to pay liens that were not provided for in the Confirmed Plan in the court-authorized sale of the Property and did not violate, but merely supplemented, the Confirmed Plan.
In the absence of any violation of the terms of the Confirmed Plan, there is no basis to grant the Debtor any relief.
For the reasons set forth above, I will enter judgment in favor of the City of Philadelphia. An appropriate order follows.
(a "receivables supervisor" in the City Department of Revenue). The parties also offered additional exhibits into evidence.
Many of the exhibits are documents that were filed in connection with the Debtor's main bankruptcy case. Some of those documents were filed before the activation of the court's electronic filing system. Where the documents are currently available on the court's electronic docket, I will cite to the court docket. Otherwise, I will cite to the exhibit notations used for the hard copy documents offered into evidence at trial.
I am unpersuaded by the Debtor's challenge to the validity of the City liens. The first argument lacks any legal foundation or authority and requires no discussion. As for the second argument, the Debtor's unfocused testimony and supporting documents did not establish a convincing relationship between prior judgments and the later amended returns. Therefore, he did not meet his burden of proving that the judgments for unpaid taxes were later resolved by his amended tax returns.
Therefore, my analysis in the remainder of this Memorandum is limited to the Debtor's claims for violation of the automatic stay and the Confirmed Plan.
