Opinion
CASE NO. 18-11912
09-24-2019
In the MATTER OF: Edward T. WALDSCHMIDT, Janet L. Waldschmidt, Debtors
Frederick W. Wehrwein, Fort Wayne, IN, for Debtors.
Frederick W. Wehrwein, Fort Wayne, IN, for Debtors.
DECISION ON OBJECTION TO CLAIM
Robert E. Grant, Chief Judge, United States Bankruptcy Court On September 24, 2019
Before we begin, a few ground rules should be identified:
1. In order to participate in a distribution under a chapter 13 plan, a creditor must have an allowed claim. In re Pajian, 785 F.3d 1161, 1163 (7th Cir. 2015) ; Fed. R. Bankr. P. Rule 3021.
2. Once filed, claims are deemed allowed unless objected to. 11 U.S.C. § 502(a).
3. If an objection is filed, the court is to determine the amount due as of the date of the petition and allow the claim in that amount except to the extent that, inter alia, "the claim is not timely filed ...." 11 U.S.C. § 502(b)(9).
4. In cases under chapter 12 and chapter 13 the court has no equitable power to allow late claims. Matter of Greenig, 152 F.3d 631 (7th Cir. 1998).
5. This is true for both unsecured and secured claims. Fed. R. Bankr. P. Rule 3002(a). Even secured creditors are bound by the claims deadline. Pajian, 785 F.3d at 1164. See also, Fed. R. Bankr. P. Rule 3002, Advisory Committee Note (2017) ("a creditor, including a secured creditor, must file a proof of claim in order to have an allowed claim").
Although Greenig was a chapter 12 case, the rules concerning the filing of claims and the extension of the claims deadline were and continue to be the same. See, Fed. R. Bankr. P. Rule 3002.
This case is about seeking an exception to these rules.
The debtor filed a petition for relief under chapter 13 on October 3, 2018. The notice of bankruptcy, issued the next day, advised all creditors that the deadline for filing a proof of claim (except for governmental units) was December 12, 2018. Despite receiving notice of this deadline, Midwest America Federal Credit Union did not file a proof of claim until March 4, 2019. In the meantime, the debtors filed a 60 month plan, in which they proposed to "maintain the current contractual installment payments" to Midwest by paying it $435 a month directly, rather than through the trustee. See, Chapter 13 Plan, filed Oct. 15, 2018, § 3.1. Only the trustee objected to confirmation of this plan, complaining about the direct payments to various creditors; that the interest being paid on claims secured by motor vehicles was too high; and that the plan did not satisfy either the best interest of creditors test or the disposable income test of § 1325. See, Trustee's Objection to Confirmation of Plan, filed Dec. 26, 2018. The hearing on confirmation was held on January 8, 2019. At that hearing – which was attended only by debtors' counsel and the trustee – the court was advised that all these objections had been resolved and the debtors and trustee would file an agreed modification to the proposed plan, which (since it would adversely affect the rights of some creditors) would need notice to creditors before it could be approved. Based upon this information, the court issued an order directing them to file the agreed modification which would be considered following twenty-one days notice to creditors, in accordance with local bankruptcy rule B-2002-2(e), and absent objection the plan, as modified, could be confirmed without further hearing. Order to File Modification and Serve Notice, dated Jan. 10, 2019. The promised modification was filed on January 24, 2019. It increases the monthly payments to the trustee, pays allowed unsecured claims in full, and insofar as Midwest is concerned provides that its secured claim "shall be paid in full at 5.5% interest through the Trustee conduit." Agreed Modification, filed Jan. 24, 2019, ¶ 1(b). There were no objections to the modification following notice to all creditors and the plan, as so modified, was confirmed on February 22, 2019.
This notice not only advised creditors of the claims deadline but also its importance by saying: "If you do not file a proof of claim by the deadline, you might not be paid on your claim. To be paid, you must file a proof of claim even if your claim is listed in the schedules that the debtor filed." Notice of Chapter 13 Bankruptcy Case, Oct. 4, 2018, § 8.
Chapter 13 debtors are required to file a proposed plan with the petition for relief or within fourteen days thereafter, even though creditors have 70 days from the petition date – 180 days for governmental units – to file their claims. See, Fed R. Bankr. P. Rule 3015(b) ; 3002(c). So, debtors must formulate their proposed plans before claims are filed or determined.
Midwest filed its claim, which is secured by a lien upon a motor vehicle, on March 4, 2019, to which trustee promptly objected. The only objection is that the claim was filed after the December 12 bar date for non-governmental creditors and is therefore late. See, 11 U.S.C. § 502(b)(9). The matter is before the court to consider that objection. It has been submitted on stipulations of fact and the briefs of counsel.
As noted above, the bar date for filing claims applies to both secured and unsecured creditors. Fed. R. Bankr. P. Rule 3002(a), (c) ; Pajian, 785 F.3d at 1164. Although claims are deemed allowed unless objected to, one of the reasons a claim can be denied is that it was "not timely filed." 11 U.S.C. § 502(b)(9). The Seventh Circuit has made it quite clear that the court has no discretion to allow untimely claims and that, if objected to, an untimely claim must be denied. See, Greenig, 152 F.3d at 635 ; Pajian, 785 F.3d at 1163. The creditor acknowledges this authority but advances a number of equitable arguments as to why the trustee should be precluded from objecting to its admittedly untimely claim.
Midwest's first argument is that the trustee effectively waived any objection to timeliness by participating in the confirmation process and by her agreement to a plan modification that called for the full payment of Midwest's secured claim, particularly since that agreement was filed and noticed after the claims bar date had passed, at a time when it should have been apparent to all concerned that Midwest had not yet filed a claim. In Midwest's eyes, if the trustee was going to have a problem with the absence of a timely claim, she had to object to confirmation for that reason.
This is not an argument the court is willing to accept. To begin with, it collapses two separate processes, with two separate time lines – confirmation and the claims process – into a single procedure. See, In re Morton, 298 B.R. 301, 309-10 (6th Cir. BAP 2003) (nothing requires claims to be determined at confirmation); In re Jurado, 318 B.R. 251, 257 (Bankr. D. P.R. 2004) (no requirement that a claim be filed in order to confirm a plan). That they are designed to be separate is clear from the fact that a chapter 13 debtor is required to propose a plan long before the claims deadline passes, to say nothing of the added time it can take to investigate, object to and litigate claims issues. See, Matter of Witkowski, 16 F.3d 739,740 (7th Cir. 1994) ("For various reasons, at the time that the bankruptcy plan is submitted the exact amount of allowable claims is unknown."). Furthermore, there is no deadline for objecting to claims and when objections are filed it is at least thirty days before the court can act. In re Kolstad, 928 F.2d 171, 173-74 (5th Cir. 1991) ; Morton, 298 B.R. at 309-10 ; Fed. R. Bankr. P. Rule 3007(a). Congress intended confirmation to be on a faster track – the confirmation hearing is to be held within 20 to 45 days of the meeting of creditors. See, 11 U.S.C. § 1324(b). Depending on when that meeting is held, the claims bar date may or may not have passed at the time the court is first considering confirmation. Given the absence of a specific deadline for objecting to claims, it would be unwise to subliminally create one by conjoining claims allowance and confirmation. If the court were to do so it would happen only once. Trustees would quickly learn to routinely object to plans based upon the proposition that they contemplated paying a claim that had not yet been filed (or determined), bringing what was intended to be an expedited process to a halt, with all of the additional complications that would produce. See, In re Shank, 315 B.R. 799, 802-04 (2004). No statute or rule requires claim objections to precede confirmation, Matter of Hovis, 356 F.3d 820, 822 (7th Cir. 2004) (Chapter 11), Morton, 298 B.R. at 309-10 ; Jurado, 318 B.R. at 257, so the validity of a claim objection should not turn on the happenstance of when the confirmation hearing was held in relation to the claims bar date.
The 341 meeting is to be held 21 to 50 days after the order for relief. Fed. R. Bankr. P. Rule 2003. Most creditors have 70 days from that order to file their claims, Fed R. Bankr. P. Rule 3002(c), while governmental units have 180 days to do so. Id. at (c)(1). Once those dates have passed, debtors then have a further 30 days to file a claim for creditors that did not. Fed R. Bankr. P. Rule 3004. So, while the confirmation hearing will be held 41 to 95 days after the petition, the claims deadline will not expire until 70 to 100 days after the petition depending on whether you include the debtor's additional 30-day claim window. If governmental claims are considered, the deadline is even longer.
Such an objection would be of dubious validity. If a plan satisfies the requirements of § 1325(a), the court must confirm it and has no discretion to impose additional requirements. Petro v. Mishler, 276 F.3d 375, 378 (7th Cir. 2002) ; Witkowski, 16 F.3d at 740. Nothing in § 1325(a) makes confirmation dependant upon whether certain claims have or have not been filed. See, Jurado, 318 B.R. at 257 ("there is no requirement in the Bankruptcy Code and Bankruptcy Rules that a proof of claim be filed in order to confirm a plan.").
Allowance and/or disallowance of claims is not part of the confirmation process. See, In re Witkowski, 16 F.3d at 740-41. Claims do not need to be determined or objected to before the court confirms a plan. Morton, 298 B.R. at 309 ; Shank, 315 B.R. at 808. See also, Hovis, 356 F.3d at 822. After the claims dust has settled and claim objections determined, if any adjustments need to be made, the confirmed plan can be modified. See, 11 U.S.C. § 1329(a). Indeed, one of the circumstances that may call for a modification is the failure to file claims. Witkowski, 16 F.3d at 740-44 ; Matter of Burns, 566 B.R. 918, 923 (Bankr. N.D. Ind. 2017).
It seems to be quite well accepted that confirmation of a plan does not preclude objections to unsecured claims and, as to them, confirmation and claims determination are separate and distinct proceedings which should not be conflated. See e.g., LVNV Funding, LLC v. Harling, 852 F.3d 367 (4th Cir. 2017) ; In re Haskins, 563 B.R. 177 (Bankr. W.D. Va. 2017). When it comes to the requirements of filing claims or determining the validity and amount due as of the date of the petition, both secured claims and unsecured claims are subject to the same rules.
There are also practical problems with the argument that timeliness had to be raised in connection with confirmation. It is exceedingly difficult, if not impossible, to object to the timeliness of a claim that has not yet been filed. Furthermore, although the deadline for Midwest to file a claim had passed at the time the trustee objected to confirmation (December 26, 14 days prior to the hearing) and negotiated the resolution of that objection reported at the hearing of January 8, the debtors' opportunity to file a claim on the creditor's behalf had not. Fed. R. Bankr. P. Rule 3004. Even after the debtors' 30 additional-day deadline expired, it could still have been extended based upon excusable neglect. Fed. R. Bankr. P. Rule 9006(b)(1). So, even after the court confirmed the plan as modified it was at least theoretically possible for a timely claim to be filed on Midwest's behalf. The possibility that a claim for Midwest might not have been too late makes it unwise to announce some kind of rule that trustees must object to the lack of particular claims prior to confirmation or forever hold their peace.
Adair v. Sherman, 230 F.3d 890 (7th Cir. 2000), does not require a different result. It addressed litigation in sequential actions and has no role within a single ongoing proceeding. Hovis, 356 F.3d at 822.
Midwest also argues that the terms of this particular plan relieved it of the need to file a timely claim and, since the provisions of a confirmed plan are binding, the trustee's objection is barred by res judicata. Midwest points to wording in part 1, which advises creditors that they "may need to file a timely proof of claim in order to be paid under any plan" (emphasis added) and in part 3.1, the plan's maintenance and cure provisions, that states: "In the absence of a contrary timely filed proof of claim, the amounts listed below are controlling." The creditor contends these provisions eliminate the need for a timely claim.
As for the binding effect of confirmation, the precise language of the statute is that "the provisions of a confirmed plan bind the debtor and each creditor ...." 11 U.S.C. § 1327(a). See also, Fed. R. Bankr. P. Rule 3015(g) (plan determination "about the amount of a secured claim is binding on the holder of the claim"). It says nothing about confirmation binding the trustee. That is not surprising since a plan is designed to adjust the rights of debtors and creditors and the trustee is neither. More importantly, the court is not inclined to read these plan provisions as either dispensing with claims or precluding objections to untimely claims.
The provisions in question are part of the standard provisions of the national form plan. Since the Northern District of Indiana has not adopted a local form for a chapter 13 plan, see, Fed. R. Bankr. P. Rule 3015.1, debtors must use the national form and they are prohibited from altering the wording of its standard provisions. Fed R. Bankr P. Rule 3015(c) ; 9009(a). The national form and the rule mandating its use were adopted at the same time as the changes to Bankruptcy Rule 3002(a) clarifying that even secured creditors must file a claim and are subject to the claims bar date. The court very much doubts that the same committee that adopted a rule requiring secured creditors to file claims would simultaneously mandate the use of a form plan that relieved them of the need to do so. If the provisions of a confirmed plan would allow the court or creditors to dispense with the need to file claims, Rule 3002 would be worded much differently. Compare, Fed. R. Bankr. P. Rule 3006(b)(1) ; (c)(2) (In a chapter 11 case, scheduled creditors need not file a claim unless listed as disputed, unliquidated or contingent). Furthermore, to interpret these (unalterable) plan provisions so as to preclude objections to untimely claims would create an impermissible conflict between § 502(b)(9) and the form plan, and arguably make the form plan unconfirmable. See, 28 U.S.C. § 2071 (procedural rules must be "consistent with Acts of Congress"). The court is not inclined to read the provisions of the national form plan as either dispensing with the need to file claims or precluding objections to untimely claims.
A second aspect of Midwest's argument concerning the binding effect of confirmation relates not to the standard provisions of the form plan but to the language of the agreed modification addressing its treatment. The modification states that its secured claim "shall be paid in full at 5.5% interest through the Trustee conduit." Agreed Modification, filed Jan. 24, 2019, ¶ 1(b). Since confirmation is binding, and after confirmation the trustee is required to distribute payments in accordance with the confirmed plan, 11 U.S.C. § 1326(a)(2), Midwest contends the trustee's objection is foreclosed. This is the same argument the Seventh Circuit rejected in Greenig, 152 F.3d at 635. That decision also involved the impact of plan provisions upon the claims bar date. There a Chapter 12 debtor's proposed plan recognized United Feeds as "an unsecured creditor holding an allowed claim" which would receive payments from the debtors in accordance with an attached schedule that included United. Id. at 632. Relying on the fact that it was listed in the confirmed plan as having an allowed claim, United Feeds did not file a claim within the time required. Id. at 632. In appealing the district court's decision that its late claim should be denied, United argued that the binding effect of the confirmed plan which provided for payments on account of its claim excused the late filing. The court of appeals rejected the argument. Instead, it held " § 502(b)(9) bars untimely proofs of claims where none of the 3002(c) exceptions apply" and the bankruptcy court does not have the equitable power to allow a late claim outside the exceptions stated in that rule. Id. at 634-35. Neither equitable circumstances nor the provisions of a confirmed plan circumvent the need for filing a timely proof of claim. Greenig, 152 F.3d at 636. If a confirmed plan could not salvage an untimely claim in Greenig it should not do so here.
The arguments concerning res judicata and the binding nature of a confirmed plan also overlook the opportunity for post confirmation modification and the circumstances that might call for a change to a confirmed plan. Just because a plan has been confirmed does not mean that it is immutable. Section 1329 recognizes that a confirmed plan may need to be modified and provides both the means and the purposes for such a change. 11 U.S.C. § 1329(a). This statutory provision demonstrates a clear intent that a strict application of the doctrine of res judicata does not apply to confirmed plans. Witkowski, 16 F.3d at 744-46. Indeed, one of the circumstances that might prompt the need for modification is the failure to file claims. Id. 740-41. See also, Burns, 566 B.R. at 923. Res judicata does not bar the trustee's objection to Midwest's untimely claim.
The Supreme Court's decision in Espinosa does not call for a different result. See, United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). There the Court was dealing with a challenge to a confirmed plan, coming years after the plan had been confirmed, fully performed and the debtor discharged, based upon the argument that the confirmation order was void under Rule 60(b)(4) of the Federal Rules of Civil Procedure. Espinosa, 130 S. Ct. at 1374. The Court held that it was not, concluding that a judgment is void for the purposes of Rule 60(b)(4) only in the "rare instance where a judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard." Espinosa, 130 S.Ct. at 1377. Neither situation applies here. More importantly, Espinosa is readily distinguishable because it involved a challenge to the validity of the court's order confirming the debtor's plan. That is not what the trustee is doing here. The trustee is challenging Midwest's claim; she is not challenging the validity of the plan, the order confirming it or seeking to undo any of the plan's provisions. If she is not successful, the claim will be allowed, the plan will remain undisturbed and as the holder of an allowed claim Midwest will be entitled to share in a distribution. If she is successful, Midwest's claim will be denied, but the plan will still remain undisturbed. Either way, a decision concerning Midwest's claim will not change the terms of the confirmed plan; something else will have to happen before that occurs.
As noted above, it is important to distinguish the claims process from the mechanism by which claims are paid. See, In re Brown, 2015 WL 6394920 (Bankr. N.D. Ind. 2015). Confirmation concerns only the latter. Determining the validity and amount of the claims to be paid is part of the claims process of § 502 and can proceed separately from confirmation. Cf. Hovis, 356 F.3d at 823 ("a plan promising to pay all valid claims need not imply that any given claim is valid").
While confirmation does require the court to determine the value of liens upon debtor's property, see, 11 U.S.C. §§ 506(b) ; 1325(a)(4); Fed. R. Bankr. P. Rule 3012(b), this is largely a function of the value of the property itself and can proceed upon the assumption that the claims those liens secure are valid, with their actual validity determined later if objected to.
As a final argument, Midwest suggests that since the plan pays all creditors in full objecting to its claim solely on the basis of timeliness is not a reasonable exercise of the trustee's discretion. The argument appears to be derived from the trustee's duties listed in § 1302(b)(2) and § 704(a)(5): "if a purpose would be served, examine proofs of claim and object to the allowance of any claim that is improper." 11 U.S.C. § 704(a)(5). See, In re Miranda, 269 B.R. 737, 742 (Bankr. S.D. Tex. 2001) (hypothesizing reasons why a trustee might or might not object to untimely claims).
In passing upon the validity of a claim objection the court should not second guess or review the wisdom of the trustee's decision to object. Instead, its inquiry should be limited to the merits of the objection itself and the claim allowed or disallowed based upon the standards set out in § 502(b)(1) - (9). Moreover, the court can imagine a number of reasons why a trustee might find it appropriate to object to untimely claims even when the plan pays all creditors in full: it impresses upon creditors the need to file claims and, if they do not, upon debtors the importance of filing a claim on a creditor's behalf if they want a particular creditor to be paid; it avoids the possibility that a post confirmation modification might the reduce debtor's plan payments and the resulting distribution to unsecured creditors; as well as avoiding the increased litigation that would come from eroding enforcement of the claims deadline. See, In re Cade, 552 B.R. 800, 806 (Bankr. S.D. Ohio 2014) (court not persuaded that objection to untimely claim serves no purpose); In re Brooks, 370 B.R. 194, 203 (Bankr. C.D. Ill. 2007) (strict adherence to the claims deadline promotes fairness by applying the rules equally to all creditors, eliminates incentives to ignore that deadline, and reduces late claims litigation). The court is not without sympathy for Midwest's position. The plan, as modified and confirmed, pays it and all other creditors in full and appears to be sufficiently funded to do so. So, it does seem a bit strange to deny the claim only because it was filed late. Yet given the clarity with which the Seventh Circuit has spoken to the issue – outside the circumstances of Rule 3002(c), the deadline for filing claims "may not be circumvented either by the existence of a confirmed plan or by the presence of equitable considerations," Greenig, 152 F.3d at 636 – any other exceptions must be fashioned by the court of appeals, not the trial court. But see, In re Wulff, 598 B.R. 459 (Bankr. E.D. Wis. 2019) (Chapter 12); In re Kitzerow, 573 B.R. 766 (Bankr. W.D. Wis. 2017) ; In re Hrubec, 544 B.R. 397 (Bankr. N.D. Ill. 2016) (all finding reasons that timely claims were not necessary). "Deadlines may lead to unwelcome results, but they prompt parties to act and they produce finality." Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S.Ct. 1644, 1648, 118 L.Ed.2d 280 (1992).
The trustee's objection is sustained and claim number 16, filed by Midwest America Federal Credit Union will be denied. An order doing so will be entered.