Rochelle's Daily Wire

What happens in chapter 13 if a secured creditor doesn’t file a claim, and the debtor doesn’t file a claim for the creditor? There are two schools of thought.

Here’s the situation. The debtor owns a car. The plan provides for paying off the lien on the car over the life of the chapter 13 plan. However, the auto lender never files a proof of claim, and the debtor doesn’t file a claim on behalf of the lender.

The plan is confirmed. After confirmation, the chapter 13 trustee files a motion to pay the lender nothing because no one filed a claim for the auto loan. The trustee proposes to redirect the money to other creditors that would have gone to the auto lender, accelerating the payment of the claims of other creditors.

There being no objection to modification of the plan, the bankruptcy court grants the motion.

The lender awakens and files a motion to modify the automatic stay, claiming a lack of adequate protection given that the lender would be receiving no payments during the life of the plan.

Two Schools of Thought

This question was presented to Bankruptcy Judge Robert E. Grant of Ft. Wayne, Ind.

Judge Grant answered an identical question seven years ago when he wrote In re Jones, 555 B.R. 869 (Bankr. N.D. Ind. 2016). Denying a motion to modify the stay, he called the lender’s predicament a “self-inflicted wound.” Id. at 870. He explained that the lender was receiving no payments because the lender had not filed a claim.

When presented with the same issue addressed in his March 8 opinion, Judge Grant said it was a “question of whether § 1327(a) means what it says.” The section says that 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.

The lender had the chutzpah to ask Judge Grant to overrule his own holding in Jones because the bankruptcy and district courts in Wisconsin reached the opposite result in In re Weyer, 192 B.R. 612 (Bankr. W.D. Wis. 2020). Weyer believed that Jones was disregarding a secured creditor’s right to adequate protection.

Judge Grant stuck to his guns. With “all due respect” to the authors of Weyer, Judge Grant said he was giving “force to the provisions of the Code and rules concerning the need to files claims and the effect of confirming a plan.”

Why Jones Was Correct

Judge Grant based his decision on the res judicata effect of a confirmation order. He said that issues like adequate protection “become irrelevant once the plan has been confirmed and, after confirmation, grounds for relief from stay are ‘generally limited to post-confirmation defaults on the debtor’s plan,’” citing the Collier treatise among other authorities.

More particularly, he said that “adequate protection becomes irrelevant after a plan has been confirmed [because it] is only a temporary measure . . . designed to protect the creditor’s interest between the filing of the petition and confirmation of a proposed plan,” citing authorities. In other words, “the plan’s provisions for the treatment of creditors replace preconfirmation arrangements,” citing the treatise by former bankruptcy judge Keith Lundin, among other authorities.

Absent a default in carrying out the plan, Judge Grant said that Section 1327 precludes a creditor from seeking a modification of the automatic stay. “After confirmation, creditors are limited to asserting the interests provided for in the plan,” he said.

No Windfall for the Debtor

Judge Grant explained why the result might not be such a great deal for the debtor: The lien will survive bankruptcy. Instead of emerging from chapter 13 owning his car free and clear, “the debtor will have to deal [with] that lien and [the lender’s] right to enforce it at that time.”

Not filing a claim has consequences, Judge Grant said. A creditor who doesn’t file a claim doesn’t get paid under the plan. It would be “a dangerous distortion of the Code” to grant relief from the stay in favor of a creditor who didn’t file a claim, he said.

Denying the motion to modify the stay, Judge Grant said that “the fact that a statute may produce a result viewed as more favorable to one party than another is not a reason to refuse to enforce the statute.”