Cite as: Keith M. Lundin, Lundin On Chapter 13, § 120.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Confirmation is the bright line in the life of the Chapter 13 case at which all the important rights of creditors and responsibilities of the debtor are defined and after which all rights and remedies must be determined with reference to the plan. Once the confirmation order becomes final, the effect of confirmation is comprehensively described in § 1327 of the Code. Modeled after § 11411—the Code section that defines the effects of confirmation in Chapter 11 cases—§ 1327 describes three fundamental effects of confirmation of a Chapter 13 plan: (1) the binding effect in § 1327(a);2 (2) the vesting effect in § 1327(b);3 and (3) the free and clear effect in § 1327(c).4
There is a long history of reported decisions recognizing the special finality of confirmation orders in reorganization cases.5 Section 1327 borrows heavily from that tradition, and principles of statutory construction, logic and well-worn policy all point to the conclusion that confirmation orders in Chapter 13 cases should have the same powerful binding, vesting and free and clear effects as confirmation orders do in Chapter 11 cases. Some courts almost get there.6 But a great number of reported decisions hedge the plain language of § 1327 with limitations, exceptions and conditions not found in reported Chapter 11 cases interpreting § 1141.7
There are several possible explanations for this lack of respect for § 1327. In the early days of the 1978 Code, it was easy enough to blame the hesitation to embrace § 1327 on the newness of the powers of Chapter 13 debtors to modify the rights of secured claim holders.8 But with time, you get the sense from the reported decisions that a confirmation order in a Chapter 13 case cramming down a used pickup truck just isn’t entitled to quite the firmness of effect due an order cramming down a multimillion-dollar plant or equipment financier in a Chapter 11 case. There is nothing in the Code to suggest this distinction, but size seems to matter in the reported cases finding smaller effects in § 1327.
Maybe it’s the speed of Chapter 13 cases: confirmation in many districts outruns other processes, such as the allowance of claims. The confirmation process in Chapter 13 cases resolves debtor-creditor issues that are traditionally addressed by bankruptcy courts in other procedural contexts. Some courts just aren’t comfortable accommodating the different routes to the same place that have emerged in Chapter 13 practice.
Underlying many of the reported decisions that fail to give full statutory effect to confirmation orders in Chapter 13 cases is the sense that the volume of Chapter 13 cases and the speed at which they move creates (too) many opportunities for creditors to stumble. Many courts almost paternalistically (mis)interpret § 1327 to protect creditors from failing to protect themselves from the effects of confirmation. The net effect was that in some circuits debtors and creditors couldn’t count on § 1327 to produce finality of rights and responsibilities in Chapter 13 cases with great enough certainty to ensure a reliable and efficient Chapter 13 program.
But there was a hopeful sign from the Supreme Court in 2010. In United Student Aid Funds, Inc. v. Espinosa,9 discussed in detail below,10 a unanimous Supreme Court forcefully affirmed that a creditor with adequate notice cannot collaterally attack a confirmation order in a Chapter 13 case—even if there were legal and procedural errors in the bankruptcy court. Prior to Espinosa, the uncertainty that resulted from judicial limitations on the effects of confirmation under § 1327 increased the cost of Chapter 13 for debtors and creditors and distorted the natural selection of chapters by consumer bankruptcy attorneys. Over the long run, the growth and success of Chapter 13 programs depend on a plain reading of the effects of confirmation under § 1327. There is hope that Espinosa signals revival of respect for the effects of confirmation under § 1327 in Chapter 13 cases.
1 11 U.S.C. § 1141 provides in part:
(a) Except as provided in subsections (d)(2) and (d)(3) of this section, the provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor, whether or not the claim or interest of such creditor, equity security holder, or general partner is impaired under the plan and whether or not such creditor, equity security holder, or general partner has accepted the plan.
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
(c) Except as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.
2 See § 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors.
3 See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.
4 See § 231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4 11 U.S.C. § 1327(c): Free and Clear Effect on Liens.
5 See, e.g., Stoll v. Gottlieb, 305 U.S. 165, 59 S. Ct. 134, 83 L. Ed. 2d 104 (Dec. 19, 1938) (Confirmation of plan of reorganization that released guaranty in case under § 77B of the Bankruptcy Act of 1898 had res judicata effect on state court collection action against guarantor.); In re Robert L. Helms Constr. & Dev. Co., 139 F.3d 702, 704 (9th Cir. Mar. 19, 1998) (en banc) (“A confirmed reorganization plan operates as a final judgment with res judicata effect.”).
6 See cases discussed beginning at § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors.
7 See discussion beginning at § 121.1 Overview.
8 11 U.S.C. §§ 1322(b)(2), 1325(a)(5). See discussion beginning at § 74.1 General Rules before BAPCPA.
9 130 S. Ct. 1367, 176 L. Ed. 2d 158 (Mar. 23, 2010), aff’g 553 F.3d 1193 (9th Cir. Dec. 10, 2008) (Kozinski, Tashima, Smith).
10 See §§ 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors and 233.1 [ Notice and Due Process Considerations, Including Claims Allowance and Valuation ] § 121.2 Notice and Due Process Considerations, Including Claims Allowance and Valuation.