In this appeal, we are asked to determine the effect of a bankruptcy court's confirmation of a "wage earner plan," under Chapter 13 of the Bankruptcy Code, on a creditor's statutory lien. The debtor instituted the instant adversary action in bankruptcy court, seeking cancellation of the lien notice filed of record by the creditor. The bankruptcy court refused to cancel the lien, holding in part that the lien continued to be valid after confirmation of the plan. The district court affirmed this holding. Because we hold that confirmation of the debtor's Chapter 13 plan did not have the effect of lifting the creditor's statutory lien, we affirm.
Facts and Proceedings Below
Benjamin P. Simmons contracted to have J.T. Savell, a plumber, perform certain work on Simmons' homestead. The work, which included the purchase and installation of plumbing fixtures, was begun on December 26, 1978, and completed on June 8, 1979, with the cost totalling $3,537.75.
On May 1, 1980, Savell filed a notice of construction lien with the Chancery Clerk of the First Judicial District of Hinds County, Mississippi, for the labor and materials furnished on the plumbing contract. Thereafter, on May 14, 1980, Savell filed in state court a Declaration to Enforce Lien on Real Property ("declaration to enforce lien") against Simmons, the Independent Life and Accident Insurance Company (ILA), and the Administrator of the Small Business Administration (SBA),
On June 9, 1980, Simmons filed a petition for relief in the United States Bankruptcy Court for the Southern District of Mississippi under Chapter 7 of the United States Bankruptcy Code (Code), 11 U.S.C. ch. 7. On July 30, 1980, Savell filed a proof of claim identifying his claim as secured by a construction lien. Savell appended exhibits to the proof of claim, including copies of the original invoice, the lien notice, and the declaration to enforce lien pending in state court. Simmons then petitioned for conversion of his case to one under Chapter 13 of the Code, 11 U.S.C. ch. 13. The bankruptcy court ordered such conversion on September 3, 1980. On September 29, 1980, Simmons filed a petition and plan under Chapter 13. The plan listed the debt to Savell as unsecured but disputed, making reference to the state court action to enforce the lien. The plan proposed a deferred 10% cash payout to unsecured creditors. On November 18, 1980, Savell again filed a proof of claim, which indicated that his claim was secured by a statutory lien and which again incorporated as exhibits copies of the invoice, the lien notice, and the declaration to enforce lien. Again the claim made specific reference to the state court action to enforce the lien. Paragraph 11 of the proof-of-claim form called for Savell as claimant to indicate whether he accepted or rejected the plan.
The bankruptcy court, on May 26, 1981, entered an order confirming Simmons' plan. The order recites that no objections to confirmation of the plan were considered and that no one other than the trustee and Simmons' attorney appeared at the confirmation hearing. On July 28, 1981, the trustee filed a motion to allow claims, which listed Savell's claim as unsecured and which provided that the listed claims would be deemed allowed for the purpose of distribution unless objection was made by a party in interest within thirty days. Savell filed no objection to this motion. Savell has received payments under the plan since confirmation, but Savell insists that the checks have not been cashed.
On August 2, 1982, Simmons filed the instant adversary action in bankruptcy court, seeking an order that Savell cancel the lien notice and an award of attorney's fees for Savell's wilful failure to cancel the lien. Savell answered and counterclaimed, seeking a judgment that his claim was secured, relief from the automatic stay to enforce his lien, and an award of attorney's fees.
After a hearing, on December 8, 1982, the bankruptcy court refused to cancel Savell's lien and further held that the lien, which was perfected before Simmons filed his original petition in bankruptcy, was valid and enforceable, could not be avoided, and entitled to full satisfaction. In an opinion filed on February 22, 1983, the bankruptcy court reasoned that statutory liens are recognized as secured claims against a debtor in bankruptcy so long as the lien is not subject to avoidance under 11 U.S.C. § 545. Section 545, the court continued, does not describe a situation when a lien "can be avoided because the debt is included in the plan and the creditor fails to object." Further, the court rejected Simmons' theories under 11 U.S.C. § 1327 that Savell's failure to object to the plan constituted a waiver of his rights under the lien or that confirmation of the plan had the effect of vesting the homestead in Simmons free and clear of the lien. Simmons appealed the decision to the United States District Court for the Southern District of Mississippi and applied for a stay of execution of the judgment pending appeal, which was granted on December 29, 1982.
In a memorandum opinion and order dated October 9, 1984, the district court affirmed the bankruptcy court's holding that Savell's construction lien remained valid after confirmation of the Chapter 13 plan. The district court, holding that a perfected construction lien is not enforceable under Mississippi law until judgment is entered pursuant to Miss.Code Ann. §§ 85-7-141 to -151, reversed the bankruptcy court's determination that the lien was enforceable and remanded the case to the bankruptcy court for the purpose of itself adjudicating the issue of enforceability or directing the parties to proceed with the action pending in state court, the resolution of which would require the adjudication of this issue.
Simmons appeals the decision of the district court regarding the validity of Savell's lien after the confirmation of Simmons' Chapter 13 plan. The district court's decision to remand the issue of enforceability to the bankruptcy court is not appealed by either party.
On appeal, the parties continue to propound the same arguments that have carried them to this pass. Simmons contends that Savell has waived his right to the lien recorded against Simmons' homestead. Simmons emphasizes the central place of the wage earner plan in facilitating Congress' purpose for Chapter 13 — viz., encouraging individual debtors to reorganize rather than liquidate by using future income to satisfy at least a portion of their outstanding obligations to creditors. Once Simmons' plan was confirmed, Simmons continues, Savell was bound by the terms of the plan, which listed Savell's claim as unsecured. After all, Savell raised no objection to confirmation and had in fact "accepted" the plan although noting an objection to the classification of his claim as unsecured. Under section 1327, the order of confirmation vests all of the property of the estate in the debtor free and clear of any claim or interest of any creditor provided for by the plan. Construing the terms "claim or interest" to include a lien, Simmons concludes that the confirmation of his
Savell responds with three arguments. First, Savell maintains that the Code, particularly section 545, which governs the avoidance of statutory liens, does not authorize the avoidance of a statutory lien simply because the debtor listed the purported lienholder's claim as unsecured and the lienholder did not object to confirmation of the plan. Second, Savell asserts that his proof of secured claim should have been deemed allowed and treated by the plan as such because no objection to the proof of claim was ever filed by the debtor or any party in interest. Finally, notwithstanding Simmons' assertion to the contrary, confirmation of the Chapter 13 plan cannot have the effect of lifting liens on property of the estate. The debtor could not be vested by the act of confirmation with any greater interest in the property of the estate — i.e., property unencumbered by a lien — than had been vested in the estate when the petition in bankruptcy was originally filed.
An understanding of the codal structure for the allowance or disallowance of creditors' claims is critical to a proper understanding and analysis of this case. Section 501(a) of the Code permits a creditor to file a proof of claim. Although the filing of a proof of claim may be a prerequisite to the allowance of certain claims, no creditor is required to file a proof of claim. H.R.Rep. No. 595, 95th Cong., 1st Sess. 351 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6307 [hereinafter cited as House Report]; S.Rep. No. 989, 95th Cong., 2d Sess. 61, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5847 [hereinafter cited as Senate Report]. A proof of claim should be filed only when some purpose would be served. 3 Collier on Bankruptcy ¶ 501.01, at 501-3 (15th ed. 1985). For example, "filing may prove necessary when the claim incorrectly appears in the debtor's schedules or when the schedules list the claim as disputed, contingent or unliquidated." Id. The filing of a proof of claim might also be required by a request for a determination of the secured status of a claim under section 506 and allowance or disallowance under section 502. Otherwise, proof of a secured claim need not be filed. Bankr.R. 3002 advisory committee note ("A secured claim need not be filed or allowed under § 502 or § 506(d) unless a party in interest has requested a determination and allowance or disallowance under § 502."). Under Bankruptcy Rule 3001, which delineates the basic essentials of a proof of claim, a proof of secured claim should be filed in writing, executed by the creditor or the creditor's authorized agent, and should be accompanied by the writing on which the secured claim is based and by evidence that the security interest has been perfected. In a Chapter 13 case, the proof of claim should be filed with the clerk of the court in which the case is pending within ninety days after the first date set for a meeting of creditors. Bankr.R. 3002.
The Code provides that "[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects."
The procedure for objecting to a claim is established in part by Bankruptcy Rule 3007, which provides:
The objection to a claim initiates a contested matter unless the objection is joined with a counterclaim asking for the kind of relief specified in Bankruptcy Rule 7001.
In the case sub judice, neither the trustee nor Simmons filed an objection to Savell's proof of secured claim before confirmation. Simmons' Chapter 13 plan, which listed Savell's claim as unsecured but disputed, cannot be deemed to constitute such an objection. The purpose of filing an objection is to join issue in a contested matter, thereby placing the parties on notice that litigation is required to resolve an actual dispute between the parties. See Bankr.R. 9014 advisory committee note. An objection to a proof of claim filed in accordance with Rules 3007, 9004, and 9014 clearly places in issue the allowance or disallowance of that claim as filed. The parties are put on notice that the objection will have to be resolved before a final determination is made as to the allowance or disallowance of the claim. In contrast, the filing of a Chapter 13 plan does not initiate a contested matter. When a plan is filed with the petition, as permitted under Rule 3015, it is unlikely at that time that creditors have even contemplated filing proofs of claims. When the creditor files a proof of claim subsequent to the filing of the plan, the Code and the Rules clearly impose the burden of placing the claim in dispute on any party in interest desiring to do so by means of filing an objection.
In the case at bar, Savell's proof of claim, although filed after Simmons petitioned
Rule 3007 establishes no time limit for objecting to the allowance of a claim. Nevertheless, section 502(b) provides that, in the absence of an objection by a party in interest, a proof of claim is deemed allowed. We must determine then when a secured claim, proof of which has been timely filed in a Chapter 13 case, must be allowed.
This issue was presented to the court in In re Hartford, 7 B.R. 914 (Bankr.D.Me.1981). In that case, after the claimant filed a proof of secured claim and no party in interest objected to the claim, the debtors' Chapter 13 plan, which listed a claimant as a "long term claimant," was confirmed. The claimant moved for reconsideration of the confirmation order, seeking to have its claim allowed as secured rather than to be listed as a "long term claimant." In resolving the issue as to when a proof of secured claim must be deemed allowed, the court made reference to two sections of the Code applicable to Chapter 13 cases both of which clearly require a determination of a claim's status before confirmation of a Chapter 13 plan.
In particular, the court reasoned that "[s]ection 506(a), made applicable to Chapter 13 cases by section 103(a), requires, as to each allowed secured claim, a valuation of the creditor's security in conjunction with a hearing on confirmation of the Chapter 13 plan."
11 U.S.C. § 1325(a)(5) (emphasis added). Hence, under sections 506(a) and 1325(a)(5), a proof of secured claim must be acted upon — that is, allowed or disallowed — before confirmation of the plan or the claim must be deemed allowed for purposes of the plan. See 11 U.S.C. § 502(a). We find this reasoning of the court in In re Hartford persuasive.
Hence, because no objection was filed before confirmation of Simmons' Chapter 13 plan, Savell's claim should have been deemed an allowed secured claim for purposes of confirmation.
A bankruptcy court is required to confirm a proposed wage earner plan if the plan satisfies the six requirements set out in section 1325. 11 U.S.C. § 1325(a); see House Report, supra, at 430; Senate Report, supra, at 142. Section 1325(a)(5), excerpted above, essentially provides that, before a plan can be confirmed: (1) all secured creditors must accept the plan; (2) the plan must provide that a secured creditor who does not accept the plan retain his lien and that the value, as of the effective date of the plan, of property to be distributed under the plan is not less than the allowed amount of the claim;
At the outset, it is probably true that confirmation of Simmons' Chapter 13 plan was improper because it did not provide for Savell's claim as an allowed secured claim, but instead listed it as unsecured. Regardless, in the case at bar, none of the three circumstances described in section 1325(a)(5) can be said to exist. First, although Simmons alleges that Savell accepted the proposed wage earner plan as evidenced by the "X" he typed in the box denominated "Claimant accepts," his appending the typewritten objection to the scheduling of his claim as unsecured is tantamount to a rejection of the plan. Certainly a creditor's avowed acceptance of all portions of a wage earner plan, except the plan's treatment of his own claim, to which he expressly objects, cannot constitute an acceptance of the plan for purposes of section 1325(a)(5)(A).
Therefore, because the requisites of section 1325(a)(5) were not satisfied with regard to Simmons' proposed Chapter 13 plan, it was erroneously confirmed. Nevertheless, the order confirming Simmons' plan is not before us in this appeal. We are called upon, however, to determine what effect the confirmation of the plan may have had on Savell's lien. It is to this issue that we now direct our attention.
Section 1327 describes the effect of confirmation:
11 U.S.C. § 1327.
Simmons contends that under section 1327(a) all creditors, including Savell, are bound as to all issues actually decided by the order of confirmation as well as all issues that could have been decided at the hearing on confirmation, citing In re Lewis, 8 B.R. 132 (Bankr.D.Idaho 1981). Simmons urges that one of the effects of Savell's being bound by the confirmed Chapter 13 plan, which treats Savell's claim as unsecured, is a lifting of the lien from the homestead. In particular, Simmons relies upon the language of subsections 1327(b) and (c), which provide that the order of confirmation vests all of the property of the estate in the debtor free and clear of any "claim or interest" of any creditor unless otherwise provided in the plan or order of confirmation. Hence, Simmons concludes, upon confirmation, the homestead passed to Simmons free and clear of the lien. We do not agree.
In facing this precise contention in In re Honaker, 4 B.R. 415 (Bankr.E.D.Mich.1980), the court noted that section 1327 relates only to property of the estate as defined in sections 541 and 1306(a). Said the court:
4 B.R. at 416-17.
Such a result would fare no better under the particular facts of the case at bar. It would be anomalous indeed were
Only recently has the Seventh Circuit through Judge Posner recalled the long line of cases allowing "a creditor with a loan secured by a lien on the assets of a debtor who becomes bankrupt before the loan is repaid to ignore the bankruptcy proceeding and look to the lien for satisfaction of the debt." In re Tarnow, 749 F.2d 464, 465 (7th Cir.1984).
It is clear under the Code that any statutory lien that is valid under state law remains valid through bankruptcy unless invalidated by some provision of the Code. Section 545 delineates those circumstances in which a trustee may avoid a statutory lien.
Simmons asserts that Savell's lien is void under section 506(d) of the Code. At the time the instant action was filed, section 506(d) read:
11 U.S.C. § 506(d) (1982) (emphasis added).
Simmons contends, however, that, under section 1327(a), he and each creditor, including Savell, are bound by the terms of the confirmed Chapter 13 plan, which provided for Savell's claim as unsecured. He relies on In re Lewis, 8 B.R. 132 (Bankr.D.
28 B.R. at 540 (citations and footnotes omitted) (emphasis in original). The factual posture of the case at bar, involving no express provision of a Chapter 13 plan proposing to avoid the lien, presents an even more compelling case for upholding the clear congressional intent to permit liens to pass through a bankruptcy case unaffected.
The Seventh Circuit's discussion of section 506(d) in In re Tarnow is instructive. The court read section 506(d) as providing that the bankruptcy court will determine the validity of a lien only when a party in interest seeks such a determination and
Id. at 466-67. Further, the Seventh Circuit found that Congress' recent amendment of section 506(d)
To hold that confirmation of Simmons' repayment plan had the effect of dissolving Savell's statutory lien because the validity of his secured claim could have been decided at the confirmation hearing, had a party in interest requested the court to do so, would require us to ignore the rule of Long v. Bullard and to read section 506(d) out of the Code.
For the foregoing reasons, the judgment of the district court is affirmed.
[A] proceeding in a bankruptcy court (1) to recover money or property, except a proceeding under § 725 of the Code, Rule 2017, or Rule 6002, (2) to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d), (3) to obtain approval pursuant to § 363(h) for the sale of both the interest of the estate and of a co-owner in property, (4) to object to or revoke a discharge, (5) to revoke an order of confirmation of a chapter 11 or chapter 13 plan, (6) to determine the dischargeability of a debt, (7) to obtain an injunction or other equitable relief, (8) to subordinate any allowed claim or interest except when subordination is provided in a chapter 9, 11, or 13 plan, (9) to obtain a declaratory judgment relating to any of the foregoing, or (10) to determine a claim or cause of action removed to a bankruptcy court.
11 U.S.C. § 506(d). The instant action was filed before the effective date of this amended provision.