Opinion
No. C 01-0848 MMC
September 25, 2002
ORDER AFFIRMING JUDGMENT OF BANKRUPTCY COURT
Before the Court is appellant Trustee Michael H. Meyer's ("Trustee") appeal from the January 22, 2001 judgment entered by the bankruptcy court on its order granting a discharge to appellee, debtor Frank E. Pagano ("Debtor"). Having reviewed the briefs filed in connection with the appeal, the Court rules as follows.
The Court deems the matter suitable for decision without oral argument. Accordingly, Trustee's request for oral argument, filed March 6, 2002, is hereby DENIED.
BACKGROUND
On March 25, 1998, Debtor filed a voluntary petition for relief pursuant to Chapter 13 of the Bankruptcy Code. (Appellant's Record ("AR") Ex. 2.) On May 11, 1998, Debtor proposed a pro-tanto "pot plan," whereby Debtor would "pay the trustee the sum of $100 for 36 months or until all allowed claims are paid." (AR Ex. 5.) With respect to disbursements, the Debtor proposed the following:
From the payments so received, the trustee shall make disbursements as follows: (a) To the expenses of administration. . . . (b) To secured creditors whose claims are allowed. . . . (c) To priority creditors in the order prescribed by 11 U.S.C. § 507. (d) To unsecured creditors whose claims are allowed. Unsecured claims shall be paid Pro-Tanto Payment of approx. 13 cents on the dollar.
(Id. (emphasis in original).)
In his bankruptcy schedules, Debtor indicated that the California Uninsured Employers' Fund ("UEF") was a creditor. (AR Ex. 1.) Debtor gave notice of his proposed plan to the UEF, which did not object to confirmation. (AR Ex. 16 at 1.) On July 6, 1998, the bankruptcy court confirmed Debtor's proposed plan ("the Plan"). (AR Ex. 6.)
The UEF is a fund created by the State of California to pay certain injured workers money appropriated from the General Fund of California.See Cal. Lab. Code § 3716(a).
On August 18, 1998, the UEF filed a proof of claim for $157,910, based on a Workers Compensation Award dated January 22, 1998, and argued that its claim was entitled to priority. (AR Ex. 9.) On April 6, 2000, Debtor filed an objection to the UEF's proof of claim on the ground that said claim was not entitled to priority. (AR Ex. 12.)
Initially, Debtor objected to the UEF's claim on the basis that it was untimely and that "no debt was due and owing to [the UEF] at the time of bankruptcy filing." (AR Ex. 10.) Debtor later withdrew those objections. (AR Ex. 12.)
On May 17, 2000, while Debtor's objection to the UEF's claim was pending, the UEF moved to amend the Plan to provide that its alleged priority claim could be paid in full "as required by federal law." (AR Ex. 14 at 3.) In so moving, the UEF took the position that "[c]urrently, the Chapter 13 plan does not provide for full payment, but only payment in the amount of $100 per month for all creditors [for] a period of 36 months." (Id.) The UEF sought to modify the Plan to require that Debtor increase his monthly payments from $100 to $4,785.15, which modification would allow the UEF's claim to be paid in full. (Id.) On August 7, 2000, the bankruptcy court denied the UEF's motion to modify the Plan on the ground that "the UEF failed to demonstrate that [Debtor] would be able to make the payments." (See AR Ex. 16 at 2:25-26; Bankruptcy Court Docket No. 38.)
On August 29, 2000, the bankruptcy court issued a Memorandum re Claim of the UEF, in which the court overruled Debtor's objection to the UEF's priority status. (AR Ex. 16.) In so doing, the bankruptcy court also observed that the Plan did not provide for payment in full of priority claims and that the UEF had failed to object to the terms of the Plan prior to confirmation of the Plan. (Id.) The consequence, according to the bankruptcy court, was that UEF's "failure to object leaves it with a valid priority claim, but the claim will be discharged upon completion of the plan." (Id. at 2:19-21.) As the bankruptcy court explained:
Thereafter, on November 6, 2000, the bankruptcy court issued an order overruling Debtor's objection to the UEF's claim. (AR Ex. 17.)
In Chapter 13 cases, exceptions to dischargeability are listed in § 1328(a) and do not include priority taxes. This is because § 1322(a)(2) requires plans to provide for the payment in full of priority taxes. This statutory scheme makes it clear that when a Chapter 13 plan does not provide for full payment of priority taxes, the issue is to be raised by objection to the plan before the plan is confirmed. The order confirming the plan is a judgment, with res judicata effect even if it contains improper provisions. In re Pardee, 193 F.3d 1083, 1086 (9th Cir. 1999). There is no provision in the Bankruptcy Code for the setting aside of confirmed plans, except pursuant to § 1330 on grounds not applicable here.
(Id. at 2:9-16 (emphasis in original).) The bankruptcy court also stated that "unless this court orders otherwise pursuant to a proper motion or adversary proceeding [to revoke confirmation pursuant to Rule 7001(5)], this case will not be dismissed and the unpaid portion of the UEF's claim will not survive [Debtor's] discharge." (Id. at 3:1-3 and n. 2.)
On November 6, 2000, after Debtor completed the 36 monthly payments required under the Plan, Debtor moved for entry of an order of discharge pursuant to 11 U.S.C. § 1328. (AR Ex. 18.) Both the Trustee and the UEF opposed the discharge, arguing that the bankruptcy court should interpret the Plan to require that Debtor pay priority creditors in full. (AR Exs. 19, 20.) Under the objecting parties' proposed interpretation of the Plan, Debtor would be entitled to discharge only upon payment in full of the UEF's priority claim, not upon completion of payments totaling $3,600.
On January 16, 2001, the bankruptcy court, in a memorandum decision, rejected the proposed interpretation of the Plan offered by the Trustee and the UEF and granted Debtor's motion for discharge. (AR Ex. 23.) Consistent with its memorandum decision filed August 29, 2000, the bankruptcy court interpreted the Plan as providing that all claims, including those entitled to priority, were to be fully satisfied from the Debtor's monthly payments of $100 for the 36-month period. (Id.) In addressing the UEF's argument that Debtor had not completed the payments required under the Plan, the bankruptcy court stated:
The UEF objects on the grounds that its priority claim has not been paid in full, even though it stood by silently while the plan was confirmed and never, during the three-year life of the plan, sought revocation of confirmation or dismissal of the case.
Had the UEF opposed confirmation, the court would not have confirmed the plan. However, once a plan is confirmed it is binding even if it contains improper terms. In re Ivory, 70 F.3d 73, 75 (9th Cir. 1995); In re Pardee, 193 F.3d 1083, 1086 (9th Cir. 1999). Had the UEF sought timely revocation of confirmation or made a motion to dismiss the case before [Debtor] completed his payments, the court would have considered the matter and might have granted relief. However, the UEF did neither. It took no action beyond filing of its claim, even though it knew that [Debtor's] payments could never satisfy more than a small percentage of the claim.
(Id. at 2:2-12.)
On January 22, 2001, the order granting discharge was filed, and judgment was entered thereafter on the same date. (AR Ex. 25.) On February 1, 2001, Trustee filed a timely notice of appeal from the judgment. (AR Ex. 26.)
STANDARD OF REVIEW
A reviewing court reviews the bankruptcy court's conclusions of law de novo. See In re Holm, 931 F.2d 620, 622 (9th Cir. 1991). A bankruptcy court's interpretation of the text of a Chapter 13 plan is a conclusion of law. See In Re Taylor, 243 F.3d 124, 128 (2nd Cir. 2001).
DISCUSSION
A. Standing
As a threshold matter, Debtor argues that Trustee lacks standing to appeal because "the effect of the Order Confirming the Debtor's Chapter 13 Plan and the effect of the Order Granting the Debtor a Discharge (the order appealed from) affects only the rights of the State of California as it pertains to its claim." (See Appellee's Br. at 3:26-4:1.) Standing is a jurisdictional requirement subject to review at any stage of litigation. See In re Than, 215 B.R. 430, 434 (B.A.P. 9th Cir. 1997).
A Chapter 13 trustee is "saddled" with a wide range of powers and duties. See In re Andrews, 49 F.3d 1404, 1408 (9th Cir. 1995). In that regard, a trustee may, "if advisable, oppose the discharge of the debtor." See 11 U.S.C. § 704(6); see also In re Clark, 927 F.2d 793, 795-96 (4th Cir. 1991) (holding that where trustee had statutory authority under the Bankruptcy Code to move for dismissal of a debtor's Chapter 7 petition, trustee also had standing to appeal bankruptcy court's denial of motion to dismiss).
Accordingly, the Trustee has standing to appeal the order granting Debtor a discharge.
B. Merits of Appeal
If a proposed bankruptcy plan is confirmed by the bankruptcy court without objection, the plan becomes binding on all parties and "is res judicata as to all issues that could have been litigated at the confirmation hearing." See In re Pardee, 193 F.3d 1083, 1087 (9th Cir. 1999) (holding confirmed Chapter 13 plan containing provision inconsistent with Bankruptcy Code was binding on creditors where no party had objected to that provision prior to confirmation or appealed the confirmation order). As a consequence, the burden is on the creditor to object to confirmation of a plan that contains provisions which do not comply with the Bankruptcy Code, and, in the absence of such objection, the creditor will be bound by those provisions. See 11 U.S.C. § 1327(a) (providing "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"); In re Szostek, 886 F.2d 1405, 1408-14 (3rd Cir. 1989) (holding where creditor failed to object to confirmation of plan "which did not provide for the calculation of present value of the creditor's claim, a requirement of § 1325(a)(5)(B)(ii)," creditor was bound by terms of confirmed plan).
The Bankruptcy Code provides that a Chapter 13 plan must provide for the full payment of all priority claims. See 11 U.S.C. § 1322(a)(2). Here, Debtor's proposed plan, which neither the Trustee nor the UEF opposed prior to confirmation, did not include a provision for the full payment of priority claims. After confirmation of the Plan, had the UEF timely sought revocation, or made a motion to dismiss, the bankruptcy court indicated it would have considered the matter and might have granted relief. (See AR, Ex. 23 at 2:7-10.) Neither the Trustee nor the UEF, however, sought revocation or moved to dismiss. Having failed to take those steps, and having failed to object to the terms of the Plan prior to confirmation, the Trustee is now bound by the provisions of the Plan and may not attack the Plan on the ground that its provisions are contrary to law. See Pardee, 193 F.3d at 1086.
Pursuant to § 1330(a), a party in interest may move to revoke an order of confirmation under § 1325 within 120 days after the date of entry of such order. See 11 U.S.C. § 1330(a).
Trustee, in apparent acknowledgment of the res judicata effect of the order confirming the Plan, argues instead that the Plan should be interpreted to require that Debtor pay priority claims in full. In other words, Trustee asserts, the Bankruptcy Court erred by interpreting the Plan as not requiring Debtor to pay priority claims in full. Specifically, Trustee argues the Plan must be interpreted to require Debtor to pay priority claims in full because the Plan does not "provide for an unambiguous treatment" of the UEF's claim. (See Appellant's Opening Br. at 11.)
In support of this argument, Trustee relies on In re Miller, 253 B.R. 455 (Bankr. N.D. Cal. 2000). In Miller, the bankruptcy court examined whether the language contained in a Chapter 11 plan was "sufficiently clear" so as to discharge statutorily non-dischargeable post-petition interest.See id. at 459-60. The court found that, as a result of two provisions that appeared to treat the discharge of post-petition interest differently, the plan was ambiguous as to whether the interest was discharged. See id. at 458. Applying general rules of contract interpretation, the bankruptcy court found that the plan's ambiguity could not be "resolved through the doctrine that a contract must be construed as a whole to give effect to all parts" see id., and, as a consequence, "[t]he ambiguity in the plan should be resolved against the Debtor because Debtor drafted the plan." See id. at 459. In resolving the ambiguity against the debtor, the court interpreted the plan as not discharging the post-petition interest claims at issue. See id. at 460. As a separate reason for its decision to construe against the debtor, the court noted that the debtor, in seeking "to enforce what is in substance the waiver of a statutory right," was required to use contract language "so clear that the intention to waive the right is unmistakeable," and that the debtor had failed to do so. See id. Miller, however, is distinguishable. In Miller, two apparently contradictory provisions rendered the debtor's plan ambiguous as to whether the debt at issue would be discharged. Here, Trustee cannot point to conflicting language in the Plan, but only to the lack of a provision requiring Debtor to pay priority claims in full. The Plan provides that payments are to be disbursed "[t]o priority creditors in the order prescribed by 11 U.S.C. § 507." (See AR Ex. 5.) 11 U.S.C. § 507 specifies the types of claims entitled to priority and the order of priority, but does not address the extent to which priority creditors are to be paid. As to the extent of payment, the text of the Plan plainly provides that Debtor must make 36 monthly payments of $100, and that such payments will satisfy "all" claims. (See id.) In short, the subject Plan contains no ambiguity as to the extent of payment to be made on priority claims. Accordingly, the bankruptcy court's interpretation of these two provisions as limiting the recovery on UEF's priority claim to a maximum of $3,600 was not erroneous.
Plan terms such as the provision here at issue, "pay to the trustee the sum of $100 for 36 months or until all allowed claims are paid," have been interpreted to mean that the specified periodic payments shall be made for the specified period or until all allowed claims are paid in full, "whichever shall occur first." See In re Cheatham, 78 B.R. 104, 106 (Bankr. E.D. N.C. 1987).
The second basis of the Miller decision is equally inapplicable to the instant Plan. Miller, as noted, concerned a Chapter 11 plan where the debt at issue was expressly excepted from discharge by the Bankruptcy Code, see 11 U.S.C. § 523(a), and where the Code further expressly provided that confirmation of a Chapter 11 plan does not discharge such excepted debt. See 11 U.S.C. § 1141(d)(2). Under such circumstances, the bankruptcy court in Miller held that, if the debtor sought to discharge a debt that would otherwise be nondischargeable in a Chapter 11 proceeding, it was necessary for the debtor to include in his plan language clearly indicating a waiver of such nondischargeability. In Chapter 13 cases, by contrast, the statutory exceptions to dischargeability do not include priority taxes, a distinction noted by the bankruptcy court. (See AR, Ex. 16, 2:9-10.) Thus, even applying the reasoning set forth in Miller, Debtor's plan was not required to specifically provide for the discharge of priority tax claims on less than full payment.
The UEF had argued, and the bankruptcy court agreed, that the UEF's claim was a "priority tax." (See AR 16.)
Trustee also relies on In re Goude, 201 B.R. 275 (Bankr. D. Or. 1996), in which the bankruptcy court interpreted the text of a Chapter 13 plan to implicitly include a provision requiring full payment of priority claims, even though the plan included no such express language. See id. at 277. In so interpreting the plan, the bankruptcy court relied on In re Escobedo, 28 F.3d 34 (7th Cir. 1994). In Escobedo, the Seventh Circuit held that an order confirming a Chapter 13 plan, where the plan did not include a provision requiring full payment of priority claims, was "nugatory," and had "no res judicata effect as to the omitted priority claims." See id. at 35. In Pardee, however, the Ninth Circuit rejected the holding of Escobedo, and by necessary extension, the holding inGoude. See Pardee, 193 F.3d at 1086-87.
Lastly, Trustee argues that Debtor's conduct before the bankruptcy court was "inconsistent with the position that the debtor intended in his Chapter 13 plan to limit the payment of priority claims to $3,600." (See Appellant's Opening Br. at 8-9.) Trustee notes that after the UEF filed its proof of claim, Debtor objected on the grounds that he owed nothing to the UEF (see AR Ex. 10), and also on the ground that the UEF's claim was not entitled to priority status. (See AR Ex. 12). Trustee argues that if Debtor believed the Plan discharged all priority claims after payment of $3,600, then it would have been immaterial for Debtor to object either to the existence of the claim or to the claim's priority status. This argument is unavailing. The Court will not speculate as to Debtor's state of mind. Further, even if Debtor in fact held such belief, Trustee fails to offer any authority to support the argument that Debtor's subjective belief is relevant. Additionally, Trustee overlooks the UEF's understanding, directly expressed in its motion to amend, that the Plan "does not provide for full payment, but only payment in the amount of $100 per month for all creditors [for] a period of 36 months." (See AR Ex. 14 at 3). Finally, assuming, arguendo, that a party's subjective intent could properly be considered for purposes of interpreting ambiguous plan provisions, the Court has found the instant Plan is not ambiguous.
In sum, Debtor has completed the 36 monthly payments of $100 as required under the Plan. Because the Plan, as confirmed, does not require Debtor to pay priority claims in full, Debtor has completed all payments required under the Plan. Accordingly, the bankruptcy court did not err by granting Debtor's motion for a discharge pursuant to § 1328.
CONCLUSION
For the reasons expressed, the judgment of the bankruptcy court is AFFIRMED. The Clerk shall close the file.