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holding that Espinosa "definitively ruled that notice of a plan and confirmation process satisfies due process even when its effect should only be achievable by adversary process"
Summary of this case from In re ShankOpinion
CASE NO. 03-18462, SECTION A.
October 21, 2010
REASONS FOR DECISION
On August 23, 2010, the Court entered an Order and Reasons for Decision ("Ruling") disallowing the claim of Countrywide Home Loans, Inc. ("Countrywide") to the extent it exceeded $715.91. As a result of that determination, Countrywide was ordered to reimburse the Chapter 13 Trustee ("Trustee") $2,316.91 in overpayments and credit Mark A. Stewart's ("Debtor") account $1,949.61. Countrywide appealed the Ruling on several grounds. It then filed this Motion for Stay Pending Appeal.
P-108 and 109.
P-116.
Grounds for a Stay Pending Appeal
Federal Rule 62(d) provides that an appellant may obtain a stay of an order pending resolution of an appeal if a bond is provided.
Federal Rule 62 is made applicable to this proceeding by Bankruptcy Rule 7062.
This provision of Rule 62 entitles a party appealing a money judgment to an automatic stay upon posting a supersedeas bond. See Donovan v. Fall River Foundry Co., 696 F.2d 524, 526 (7th Cir. 1982); accord NLRB v. Westphal, 859 F.2d 818, 819 (9th Cir. 1988). "The posting of a bond protects the prevailing plaintiff from the risk of a later uncollectible judgment and compensates him for delay in the entry of final judgment." Westphal, 859 F.2d at 819; see also Poplar Grove Planting Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1190 (5th Cir. 1979) (policy behind supersedeas bond is to preserve "the status quo while protecting the non-appealing party's rights pending appeal").
Courts have restricted the application of Rule 62(d)'s automatic stay to judgments for money because a bond may not adequately compensate a non-appealing party for loss incurred as a result of the stay of a non-money judgment. See, e.g., Westphal, 859 F.2d at 819 (Rule 62(d) did not operate to stay an order directing compliance with NLRB subpoenas); Donovan, 696 F.2d at 526-27 (appellant not entitled to stay of order to permit OSHA inspection under Rule 62(d)); United States v. United States Fishing Vessel MAYLIN, 130 F.R.D. 684, 686 (S.D.Fla. 1990) (Rule 62(d) inapplicable because supersedeas bond would not ensure that the Government could adequately compensate claimant for the lost use of his seized commercial fishing boat "and the income that it may produce for him over the many months that its appeal may be pending on the Circuit"). Under this reasoning, the supersedeas bond requirement in Rule 62(d) serves, in money judgment cases, as a "kind-for-kind security to guarantee the judgment." United States Fishing Vessel MAYLIN, 130 F.R.D. at 686.
Hebert v. Exxon Corp., 953 F.2d 936, 938 (5th Cir. 1992).
Granting of a stay pending appeal is discretionary and may be granted on terms the court deems appropriate. The criteria for review of a stay request are:
In re Herrera, 2010 WL 148182, *1 (Bankr.W.D.Tex. 2010).
(1) the likelihood of success on the merits, (2) irreparable injury if the stay is not granted, (3) absence of substantial harm to the other parties from granting the stay, and (4) service to the public interest from granting the stay.
U.S. v. Simcho, 326 Fed.Appx 791, 793, 2009 WL 1361532, *2 (5th Cir. 2009) (quoting Hunt v. Bankers Trust Co., 799 F.2d 1060, 1067 (5th Cir. 1986)).
Likelihood of Success on the Merits
Countrywide seeks stay of the Ruling based on a likelihood of success on the merits of its appeal. This assertion is premised on several points. First, Countrywide argues that "a serious legal question is involved." Recognizing that a bankruptcy judge cannot be expected to agree that the case was decided improperly, Countrywide argues the it has a "substantial or strong case" . . ." if the appeal involves a question of law that has not been definitely addressed by a higher court." The Ruling contains two separate findings. The first is based on the res judicata effect of a confirmation order and the second, the amounts due Countrywide and proven at trial.
P-116.
The finality of the Order Confirming Chapter 13 Plan ("Confirmation Order") was upheld in part because of a recent Supreme Court case, United Student Aid Funds, Inc. v. Espinosa. While the Ruling derogated from Fifth Circuit jurisprudence, it was based on new precedent by the United States Supreme Court in Espinosa. Thus, the Ruling is in keeping with higher court precedent, not in derogation of it.
P-26.
United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367, 176 L.Ed.2d 158, 78 USLW 4207 (2010).
Countrywide asserts that Espinosa did not overrule established Fifth Circuit precedent. For the reasons set forth in the Ruling, this Court has held otherwise. This case is precisely the type of fact pattern addressed by the Espinosa decision, and Countrywide's attempts to distinguish the Espinosa ruling from its case are insufficient to warrant a finding that a reversal is likely. The United States Supreme Court held in Espinosa that a plan binds creditors to its terms if they receive notice of the plan and fail to object even if the plan's terms are directly contrary to the Bankruptcy Code ("Code"). The Espinosa Court considered a claim that was nondischargeable under the Code. An adversary proceeding was required to challenge the claim. Despite these provisions, the claim was effectively discharged by the confirmation order.
Countrywide's claim is both subject to objection and discharge. As of the confirmation date, nothing in the Chapter 13 plan ("Plan") was contrary to the law. Because Countrywide failed to file a proof of claim and failed to object, nothing in the record alerted the Court, Trustee, or Debtor to any deficiencies in Countrywide's proposed treatment. Countrywide received notice of the case, Plan, and confirmation process but failed to object to its treatment. Now after completion of the Plan and five (5) years after the finality of the Confirmation Order, Countrywide asks to be excused from the consequences of its own negligence. Under the terms of the Plan and Espinosa, Countrywide is bound by the Plan's terms and has failed to present a legally justifiable reason to excuse this consequence.
P-2.
Countrywide also asserts that this Court's findings with regard to its debt are reversible because it was "surprised" that its claim was at issue. It is completely disingenuous for Countrywide to claim "surprise" on this issue. This matter originated with Trustee's Motion to Dismiss. At the first hearing on that Motion, Countrywide asserted that its allowed claim had not been paid and, therefore, dismissal was appropriate. The Court made it very clear that the claim had not been allowed and that any order to that effect was in error. Mr. Benjamin Dean, counsel for Countrywide, was present and participated in the hearing. Subsequently, Trustee filed an Objection to Countrywide's claim ("Objection"). At both a status conference and hearing on the Objection, the Court was clear that the entire claim, not just timeliness, was under consideration. Further, following a hearing on the Objection, the Court ordered Countrywide to submit the following ("January Order"):
For this reason, Countrywide is directed to include these Reasons in its record on appeal.
P-79.
P-82.
On February 3, 2010, the Court held a status conference regarding the Objection.
The hearing was held on January 12, 2010.
(1) notices received during the case and (2) records substantiating the amounts owed under the proof of claim, including but not limited to, a complete loan history and supporting documents for all charges in a format as set forth in Jones v. Wells Fargo (In re Jones), case no. 06-1093, pleading 69.
P-87.
The January Order also stated that the Court would take the matter under advisement after submission of the briefs and documents, and that the Court reserved the right to hold an evidentiary hearing.
In response, Countrywide filed documents evidencing the assignment of the loan to Countrywide, a prepetition debt calculation, and invoices for legal fees paid to lender's counsel. In the briefs submitted by Countrywide, it argued that review of the amounts due under its claim should not be undertaken by the Court based on res judicata, laches, and collateral estoppel. The Ruling disposed of each of these arguments at length noting that if the order granting Countrywide permission to file its claim could be read to substantively allow the claim, it was in error and subject to correction. Alternatively, the Court invoked the provisions of section 502(j) to reconsider the Ruling allowing Countrywide to file its claim.
P-95.
Id. and P-106.
P-98.
P-94 and 102. See also, Countrywide's Response to the Objection filed prior to the January 12, 2010, hearing, P-84.
P-84, p. 3-4; P-94, pp. 2-7; P-102, pp. 2-7.
P-108, pp. 17 and 19-20.
References to sections of the Bankruptcy Code are shown as "section ___."
Id. at 18-19.
Because neither the facts nor notice to Countrywide were in dispute and the parties were required to file their supporting documents in the record, the Court, in its discretion, did not hold an evidentiary hearing. Although the matter was under advisement from February 2010 to August 2010, neither Countrywide nor Trustee requested an evidentiary hearing. Countrywide was afforded due process in the consideration of its proof of claim.
Countrywide also complains that the pleadings did not challenge the amount of its claim. Federal Rule 15(b)(2), provides:
Federal Rule 15 is made applicable to this proceeding by Bankruptcy Rule 7015.
When an issue not raised by the pleadings is tried by the parties' express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. — But failure to amend does not affect the result of the trial at issue.
An issue has been tried with the implied consent of the parties when the issue was introduced at trial, evidence supporting the issue was introduced without objection, and a finding of trial by consent would not prejudice the opposing party. When the evidence offered only supports an unpleaded issue, consent to trial on the issue is presumed. In this case, Countrywide was aware from the January 12, 2010, hearing; the January Order; and the February 3, 2010, status conference that its entire proof of claim was being reviewed by the Court. Countrywide did not allege that the review was beyond the scope of the pleadings and even submitted documents required for such a determination. Evidence of its Mortgage, Assignment of Note, the history of the debt's administration, and invoices to support charges assessed were offered in its Note of Evidence. None of this evidence would have been necessary if the Court was not considering the amount of Countrywide's claim.
United States v. Shanbaum, 10 F.3d 305, 312-313 (5th Cir. 1994).
Id.
Countrywide also asserts that this Court's review of its debt was in error because the Court failed to consider the terms of its note. At the hearing on the Motion for Stay Pending Appeal, Countrywide, for the first time, alleged that a copy of the note supporting its proof of claim ("Note") was "in evidence." When questioned, counsel asserted that document 84 provided a copy of the Note and because the Court failed to consider this evidence, error had occurred.
Document 84 is a pleading, specifically Countrywide's Response to Trustee's Objection to Countrywide's Claim. The Response attached a copy of Countrywide's mortgage followed by a copy of the Note. The existence of the Note as an exhibit to a pleading raises several issues. First, what if any effect does an attachment to a pleading, unknown to exist until now, have on the Ruling? The evidence considered included Countrywide's Note of Evidence and proof of claim, both which were in evidence. The Court also reviewed the record of Countrywide's prior Motion for Relief from Stay for any evidence submitted. In all cases, the Note was not in evidence and copies were absent.
The Note was attached to a pleading following Countryside's mortgage. It was not noticed until raised at the hearing on the Motion for Stay Pending Appeal, and Countrywide failed to request a new trial under either Bankruptcy Rule 9023 or 9024. Because the matter is now on appeal, the record closed, and the Note not in evidence, the Ruling must stand.
Willie v. Continental Oil Company, 746 F.2d 1041, 1045-1046 (5th Cir. 1984); Alvestad v. Monsanto Co., 671 F.2d 908, n. 2 (5th Cir. 1982); Kirtland v. J. Ray McDermott Co., 568 F.2d 1166, 1170 (5th Cir. 1978).
It is well settled that on appeal the reviewing Court takes the record as it exists, not as the parties would have it exist. New evidence is not considered and a retrial of the case not allowed unless the trial court failed to correctly apply the law or was clearly erroneous on the facts. The facts determined by this Court are based on the evidence submitted and without resort to extrinsic documents. For this reason, it is unlikely that Countrywide will be successful on this issue.
U.S. v. Clements, 73 F.3d 1330, 1336 (5th Cir. 1996).
In the Matter of TransTexas Gas Corp., 597 F.3d 298, 304 (5th Cir. 2010); In re Martin, 963 F.2d 809, 814 (5th Cir. 1992).
Countrywide Raises Issues on Appeal not Presented at Trial on the Merits
Countrywide raises, as an additional grounds for stay and appeal, issues that were not raised during the litigation of these proceedings. Issues not raised at trial are waived. Although not asserted by Countrywide at trial and, therefore, not addressed by the Court in the Ruling, for purposes of clarity and in connection with the ruling on this Motion, the Court will, for the record, address the likelihood of success on this issue on appeal. The Court is also mindful that Debtor is pro se and unlikely to present his case on appeal. For this reason, the Court will address issues it might dismiss out of hand were competent opposing counsel available.
In re Bradley, 501 F.3d 421, 433 (5th Cir. 2007).
Countrywide claims that the Court cited without authority a requirement that it file a claim, ignoring Countrywide's position that, "No Bankruptcy Code provision requires a secured creditor to file a proof of claim. . . . Moreover, regardless of whether a secured creditor holding a lien against a debtor's primary residence elects to file a proof of claim, the Chapter 13 plan cannot modify the secured creditor's interest, and the secured creditor's lien should pass through bankruptcy unaffected."
P-116, p. 9.
The Plan provided that secured claimants would retain their liens to secure the repayment of claims payable under the Plan. Debtor provided that $5,622.41 in matured prepetition debt would be paid under the Plan in full settlement of Countrywide's past due balance. The remaining balance of unmatured principal would be paid by Debtor directly as installments on the debt matured.
Countrywide received notice of the Plan, confirmation hearing, and deadline to object. It admitted that the Plan failed to provide for the amount it alleges was owed, but failed to object to Debtor's proposed treatment of its claim in the Plan.
In the Ruling, the Court discussed the process required by the Code for a creditor to receive distributions under a plan. The purpose of the discussion was to give context to the problems created when a secured creditor delays or fails to file a timely proof of claim. A creditor must file a proof of claim in order to receive distributions under a plan. That principle is not only contained in the Code, but confirmed by numerous cases.
See, 11 U.S.C. § 502; FRBP 3021; In re Hardgrave, 59 F.3d 166, 1995 WL 371462. *2 (4th Cir. 1995); In re Hogan, 346 B.R. 715, 719-720 (Bankr.N.D.Tex. 2006); In re Macias, 195 B.R. 659, 660-661 (Bankr.W.D.Tex. 1996).
Countrywide did not have to file a proof of claim, but the failure to file would have carried consequences in the form of missed distributions under the Plan. It did file a proof of claim, and the issue was avoided; although because it filed late, Countrywide created significant difficulty for the estate, Debtor, and Trustee.
Countrywide complains that it was not required to file a proof of claim and the Court's holding otherwise was in error. Countrywide's allegation of error simply misses the point. Countrywide filed a proof of claim. Because it filed a claim, it elected to participate in the case and is bound by the terms of the Plan. Thus, Countrywide's issue is a red herring.
Matter of Howard, 972 F.2d 639, 641 (5th Cir. 1992). (" [Republic Supply co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987)] stands for the proposition that a confirmed Chapter 13 plan is res judicata as to all parties who participate in the confirmation process.")
Countrywide also complains that the Ruling may affect its lien, something it alleges is prohibited by 11 U.S.C. § 1322(b)(2). Again, Countrywide failed to raise this issue at trial on the matter, but to the extent necessary to address the pending Motion, the Court will respond to the likelihood of success on its claim.
Section 506(d)(2) of the Bankruptcy Code states:
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless — . . .
(2) such claim is not an allowed claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
Thus, to the extent a claim is disallowed because a proof of claim was not filed or was filed untimely, the lien of the creditor survives the case. Countrywide's case is beyond the bounds of section 506(d)(2)'s application because 1) Countrywide did file a proof of claim, and 2) that claim was disallowed on substantive grounds not because it was filed late.
Contrary to Countrywide's assertion, its lien was not modified by either the Court or the Plan. The Court found that Countrywide failed to fully establish its debt or claim in the case. The Court determined on the evidence the amount due to Countrywide on its proof of claim for prepetition defaults addressed by the Plan was $715.91. The Plan provided that Countrywide would retain its lien to secure the allowed amounts payable to Countrywide under the Plan. Debtor estimated those amounts to be $5,622.41 because Countrywide had not filed a proof of claim when confirmation was considered. At the conclusion of these matters, the allowed amount due Countrywide was determined to be $715.91 for prepetition arrearages. The unmatured principal debt not due on the filing date remained unaffected by the Plan and Ruling as did the lien securing its repayment. However, as to the prepetition defaults, Countrywide cannot claim what is not due from the Debtor, lien or no lien.
The Court did not disturb the amounts due Countrywide for debt maturing postpetition, the vast majority of Countrywide's debt. The only portion of Countrywide's debt affected by the Ruling was the amount matured and past due, or necessary to cure Debtor's default at the time of filing.
La.C.C. Art. 3282 states, "Mortgage is accessory to the obligation that it secures. Consequently, except as provided by law, the mortgagee may enforce the mortgage only to the extent that he may enforce any obligation it secures." La.C.C. Art. 1762 explains that a natural obligation is created, "When a civil obligation has been extinguished . . . or discharged in bankruptcy. . . ." La.C.C. Art. 1761 provides, "A natural obligation is not enforceable by judicial action. . . ."
Countrywide also argues that regardless of this Court's Ruling and the confirmed Plan, its lien, and by implication its debt, rides through this case unaffected by the Ruling. It also argues that section 1322 supports its position because a plan cannot modify its rights.
Countrywide's position might be appropriate in a chapter 7 context, but not in a case pending under chapter 13 or 11. Several cases in the context of a chapter 7 liquidation have held that a secured claimant's lien passes through the bankruptcy case's administration unaffected by the discharge. This conclusion is drawn from the provisions of section 524(a)(2) and (3):
Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992); In re Hamlett, 322 F.3d 342 (4th Cir. 2003); In re Warner, 146 B.R. 253 (N.D.Cal. 1992); In re Doviak, 161 B.R. 379 (Bankr.E.D.Tex. 1993).
(A) a discharge in a case under this title — . . .
(2) operates as an injunction against the commencement or continuation of any action, . . . to collect, recover or offset any such debt as a personal liability of the debtor;
(3) operates as an injunction against the commencement or continuation of an action . . . to collect or recover from property of the debtor . . . acquired after the commencement of the case. . . .
In the context of a chapter 7 liquidation case, a discharge operates to discharge a debtor's personal liability and shields property acquired post-filing from execution. By extension, all assets existing on the petition date are subject to the claims of creditors. Since all prepetition assets are administered and liquidated by the trustee during the case, in theory no assets, save exempt ones, would remain in a debtor's possession at the conclusion of the case. In reality, a trustee may abandon a non-exempt asset if encumbered beyond its value by a secured claim. In that case, the lien of the secured claimant remains and the debt is owed in rem from its value.
See, Long v. Bullard, 117 U.S. 617, 620-21, 6 S.Ct. 917, 29 L.Ed. 1004 (1886) (In a liquidation case, liens on unadministered property pass through bankruptcy unaffected). U. S. National Bank in Johnstown, et al v. Chase National Bank of New York City, et al, 331 U.S. 28, 33, 67 S.Ct. 1041, 1044, 91 L.Ed. 1320 (1947) (A secured claimant must participate in a bankruptcy if its collateral is within the administration and possession of the trustee or risk losing its lien).
However, chapter 13 and 11 cases pose a different consequence for the secured claimant. Under sections 1141 and 1327, the confirmation of a plan binds any creditor whether or not such creditor has accepted the plan. Confirmation vests all estate property in the debtor free and clear of all claims and interests of creditors except as provided by the plan. Thus, the terms of the plan control and affect secured claimants, including the survival of their liens.
See, In re Ahern Enterprises, Inc., 507 F.3d 817, 822 (5th Cir. 2007) (" 11 U.S.C. § 1141(c) provides the default rule that a confirmed Chapter 11 plan voids liens not specifically preserved."); In re Penrod, 50 F.3d 459 (7th Cir. 1995). Four conditions must be met for a lien to be voided under section 1141(c): (1) the plan must be confirmed; (2) the property that is subject to the lien must be dealt with by the plan; (3) the lien holder must participate in the reorganization; and (4) the plan must not preserve the lien. Ahern, 507 F.3d at 822.
[U]nless the plan of reorganization, or order confirming the plan, says that a lien is preserved, it is extinguished by the confirmation. This is provided, we emphasize, that the holder of the lien participated in the reorganization. If he did not, his lien, would not be "property dealt with by the plan," and so the section would not apply.
Penrod, 50 F.3d at 463. "Although the requirement that a secured creditor participate in the reorganization proceeding is a judicial gloss on section 1141(c), participation ensures that the secured creditor has notice of the plan and its potential effect on the creditor's lien." Ahern, 507 F.3d at 823 (citing Penrod at 462). Ahern and Penrod are chapter 11 cases but their principles are equally applicable to chapter 13 as sections 1327 and 1141 are virtually identical in all material respects.
Countrywide cites In re Simmons for the proposition that a chapter 13 plan may not affect the claims of secured creditors. While the Simmons opinion does contain this declaration, Countrywide has presented it out of context. In Simmons, the debtor confirmed a plan which treated a secured claim as unsecured. The claimant had filed a secured proof of claim and objected to confirmation. The plan was confirmed over the objection and no appeal was taken. When the debtor sought enforcement of the plan's terms, the Fifth Circuit refused. Because the Code provides that a lien may be removed by adversary proceeding, the Fifth Circuit concluded that the procedural safeguards of notice and due process were not met in the confirmation process. As a result, the secured position of the claimant could not be reduced to unsecured status by confirmation. Simmons was decided prior to Espinosa and was based on a finding that notice of a plan was insufficient to satisfy its due process concerns. In a more recent decision, In re Chesnut, the Fifth Circuit clarified the limitations of the holding in Simmons. In Chesnut, a debtor scheduled a secured claim encumbered by the separate property of his nonfiling spouse. In a separate appeal, the Fifth Circuit had held that the scheduling of the asset arguably created an interest in the bankruptcy estate. Following that ruling, the debtor proposed a plan that paid the lender with interest on its claim. The plan also provided that upon completion of payments, the lien would be released. The creditor received notice of the plan and confirmation process but did not object. After completion of the plan's payments, the debtor demanded release of the lien. The creditor refused claiming additional sums were due under the note over and above those paid under the plan. The creditor also aruged that since the lien encumbered the nonfiling spouse's property, the plan could not effect a release of the lien against her interests. The Fifth Circuit held:
In re Simmons, 765 F.2d 547 (5th Cir. 1985).
Id. at 557.
In re Chestnut, 356 Fed.Appx. 732, 2009 WL 4885018 (5th Cir. 2009).
. . . [R]es judicata applies to the confirmed Chapter 13 plan in this case. While the Supreme Court's decision in Traveler's Indemnity Co. v. Bailey[, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009)] did not involve a Chapter 13 plan, the text of the Bankruptcy Code supports the application of res judicata to such plans:
The provisions 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.
11 U.S.C. § 1327(a); . . . 8 Collier on Bankruptcy ¶ 1327.02[1][a] (Alan N. Resnick et. al. eds., 15th ed. Rev. 2009) ("The binding effect of the confirmation order . . . [makes i]t . . . incumbent upon creditors . . . to review the plan and object to the plan if they believe it to be improper; they may ignore the confirmation hearing only at their peril."). We are also aided in this decision by the consequences to the Chapter 13 Trustee system were we to undo the finality of a confirmed and completed Chapter 13 plan at the behest of a creditor that had notice of the plan and an opportunity to object.
Id. at 4.
Because debtor had filed a proof of claim on the creditor's behalf and paid the amount of that claim through his plan, the Court held that an adversary proceeding was unnecessary to release the lien. The claim had been paid in full as filed, therefore, release of the lien was proper. It was incumbent upon the creditor to object to the proof of claim or plan if the amount was incorrect. Having received notice of both without objection, the creditor was bound to the plan's terms.
Chesnut was decided prior to Espinosa, and in dicta, the Fifth Circuit reaffirmed that process or notice continued to matter in connection with the release of liens including the necessity of filing an adversary proceeding if the plan provided for less than full payment on the claim. However, this rationale was based on the assumption that notice of a chapter 13 plan's terms and confirmation process could never substitute for the notice required in an adversary process. Espinosa overruled that assumption.
Id. at 5-6.
Espinosa has settled any dispute regarding the effect of a final order of confirmation on creditors. Assuming actual notice of the plan, confirmation hearing, and objection deadlines, the United States Supreme Court held that claims may be modified or discharged by the terms of a plan if the claimant fails to object and the confirmation order becomes final. Espinosa definitively ruled that notice of a plan and confirmation process satisfies due process even when its effect should only be achievable by adversary process. Debtor's Plan set the amount of Countrywide's arrearage, provided for its repayment, and, on completion, discharged the debt and the lien securing the arrearage claim.
Section 1327 provides:
(a) The provisions 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.
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all the property of the estate in the debtor.
(c) Except as otherwise provided in the plan or the order confirming the plan, the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan.
In keeping with the provisions of section 1327, this Plan vested all property of the estate in Debtor on confirmation. The liens of claimants were preserved to protect the repayment of sums provided for in the Plan. On completion of the Plan, prepetition debts were discharged and the liens securing their repayment released. Debts that matured after the filing of the case remained unaffected by the Plan as did the liens to secure their repayment.
Due process was satisfied through notice of the Plan and confirmation hearing. The same procedural safeguards requiring a debtor to institute a separate adversary proceeding in order to challenge the claim existed in favor of the Espinosa creditor. In fact, unlike Countrywide, the Espinosa creditor's debt was presumed to be nondischargeable. The Espinosa claimant was neither required to file a proof of claim, nor defend its status, unless challenged by adversary process.
Countrywide attempts to distinguish Espinosa from this case based on the character of the debt involved. Countrywide argues that the provisions of section 1322 prohibit modification of its debt. It maintains that because of these prohibitions, a plan modifying its rights is unenforceable. If in fact the Plan did modify Countrywide's rights in contravention of section 1322, it was incumbent upon Countrywide to object. Instead, with actual knowledge of all pertinent facts and timely notice, Countrywide allowed the Plan to be confirmed and the Confirmation Order to become final. Five (5) years after the fact, it seeks to escape the Plan's effect.
A judgment is not void, for example, simply because it is or may have been erroneous. Hoult v Hoult, 57 F.3d 1, 6 (1st Cir. 1995); 12 J. Moore et al., Moore's Federal Practice, 60.44[1][a], pp. 60-150 to 60-151 (3d ed. 2007). . . . Similarly, a motion under Rule 60(b)(4) is not a substitute for a timely appeal. Kocher v. Dow Chemical Co., 132 F.3d 1225, 1229 (8th Cir. 1997).
Espinosa, 130 S.Ct. at 1377.
In Espinosa, the Supreme Court held:
United's response-that it had no obligation to object to Espinosa's plan until Espinosa served it with the summons and complaint the Bankruptcy Rules require, . . . is unavailing. Rule 60(b)(4) does not provide a license for litigants to sleep on their rights. United had actual notice of the filing of Espinosa's plan, its contents, and the Bankruptcy Court's subsequent confirmation of the plan. In addition, United filed a proof of claim regarding Espinosa's student loan debt, thereby submitting itself to the Bankruptcy Court's jurisdiction with respect to that claim. See Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) ( per curiam). United therefore forfeited its arguments regarding the validity of service or the adequacy of the Bankruptcy Court's procedures by failing to raise a timely objection in that court.
Rule 60(b)(4) strikes a balance between the need for finality of judgments and the importance of ensuring that litigants have a full and fair opportunity to litigate a dispute. Where, as here, a party is notified of a plan's contents and fails to object to confirmation of the plan before the time for appeal expires, that party has been afforded a full and fair opportunity to litigate, and the party's failure to avail itself of that opportunity will not justify Rule 60(b)(4) relief. We thus agree with the Court of Appeals that the Bankruptcy Court's confirmation order is not void.
Id. at 1380. The Supreme Court also stated, "We acknowledge the potential for bad-faith litigation tactics. But expanding the availability of relief under Rule 60(b)(4) is not an appropriate prophylaxis." Id. at 1382.
The holding of Espinosa is directly applicable. Nothing distinguishes its findings from this case. The protections of section 1322, if applicable, are nothing more than a statutory benefit conferred on Countrywide, no greater in force or effect than those afforded a student loan claimant whose debt is protected from discharge. Just as the student loan claimant lost its protections based on res judicata, so Countrywide's rights might suffer because it failed to object.
Finally, Countrywide argues that original allowance of its claim modifies the holding in Espinosa. This position is also without merit. In Espinosa, as in Simmons and Howard, the three (3) claimants filed proofs of claim none of which had been challenged and were deemed allowed at confirmation. Despite admonitions in the Code to the contrary, each plan failed to properly provide for the claimant's debt. Of course, this Debtor's failure was not due to oversight or by purposeful design, but Countrywide's own failure to provide the correct amount due. What distinguishes the results in Simmons, Howard, and Espinosa is not the character of the debts involved, but the courts' view of due process and, specifically, proper notice.
In conclusion, in Simmons and Howard, the Fifth Circuit held that the notice under the confirmation process can never substitute for the required institution of an adversary proceeding and the issuance of a summons. Under Simmons and Howard, notice of a plan and confirmation hearing would never constitute sufficient notice under Mullane v. Central Hanover Bank Trust Co. Espinosa has held otherwise.
Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 315, 70 S.Ct. 652, 657 (1950).
Espinosa stands for the principle that notice of a plan and the confirmation process is sufficient to satisfy due process because it is notice "reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."
Espinosa, 130 S.Ct. at 1378 (quoting Mullane, 339 at 315).
The Confirmation Order is res judicata. Countrywide received adequate notice under Mullane and Espinosa and is bound by the terms of the Plan. Those terms include a discharge of its prepetition debt and release of the lien securing that debt on completion of the Plan.
The Likelihood of Irreparable Harm
The Court agrees that Countrywide may suffer irreparable harm by having to pay Trustee prior to resolution of the appeal. If Countrywide pays Trustee, and that payment is disbursed to other creditors, Countrywide may not be able to get back the funds should it prevail on appeal.
Harm to Others
If a stay pending appeal were issued, there would be little harm to Trustee or creditors. While the amounts due by Countrywide to the estate will pay off debt, creditors have already received substantially full repayment.
However, the effect of a stay on Debtor is not so clear. Debtor's discharge was delayed for ten (10) months while these issues were litigated. Although Debtor's discharge has been separately entered, and is not the subject of a stay request, it is on appeal. Countrywide has maintained that a stay of that order is not required because this Court is free to revoke Debtor's discharge at anytime. Without deciding the correctness of this position, potentially a stay of this Ruling jeopardizes Debtor's discharge. Debtor has completed his Plan and is entitled to discharge. Further delay is harmful to his interests.
Service to the Public Interest From Granting the Stay
Countrywide has not offered a reason that the public interest will be served if the stay is granted and the Court has not found one.
Conclusion
For the above reasons, the four criteria for granting a stay have not been satisfied. Court will not stay the Ruling. An Order in accord with these Reasons shall be separately rendered.
New Orleans, Louisiana, October 21, 2010.