Cite as: Keith M. Lundin, Lundin On Chapter 13, § 51.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
Although the responsibility to examine proofs of claim and object to the allowance of claims is assigned to the Chapter 13 trustee by 11 U.S.C. § 1302(b)(1),1 it has been held that the Chapter 13 debtor has standing to object to claims independent of the trustee.2 This makes sense because the debtor is best situated to know which claims are legitimate and in what amounts. The trustee must have the cooperation and attention of debtor’s counsel and the debtor to effectively police the allowance of claims.
On unusual facts, in Holmes v. Silver Wings Aviation, Inc.,3 the U.S. Court of Appeals for the Tenth Circuit held that a Chapter 13 debtor did not have standing to object to administrative expenses. The creditor in Holmes objected to confirmation and forced the debtor to increase payments to all creditors. The creditor then filed a request for an administrative expense. The Tenth Circuit found that the debtor lacked standing to object because the debtor’s obligation under the plan would not be changed by the outcome—the debtor would have to pay the same amount into the plan and could not show injury based only on how funds paid to the trustee would be allocated among creditors.4
The logic of Holmes is difficult to follow. Chapter 13 debtors have real interests in the allowance of administrative expenses. Administrative expenses typically are treated as priority claims in Chapter 13 cases and must be paid in full to accomplish confirmation of a plan.5 Allowance of an administrative expense can force the debtor to increase payments into the plan (if possible) or may require other adjustments when the administrative expense was not included in the original calculations. Allowance of an administrative expense affects which creditors get paid and in what order—a matter of much interest to the debtor. If payments are shifted in favor of an administrative expense, money will not be available to pay other creditors and may cause default under the plan. If the case is converted or dismissed before completion of all payments, the allowance and early payment of an administrative expense affects the debt relief realized by the debtor. The logic of Holmes could bar the debtor from objecting to claims in any case in which the debtor’s total payments into the plan will not be affected by the allowed amount of claims. This will be true in any “base” plan6 where payment into the plan is determined by the debtor’s disposable income and is not affected by the allowance of claims. Ordinarily, notice of the filing of proofs of claim is not sent to all creditors. If the debtor is without standing to object, it is not obvious that any party is positioned to police administrative and other claims in Chapter 13 cases.
Disagreeing with Holmes, the Bankruptcy Court for the Eastern District of Tennessee held in Kerney v. Capital One Finance Corp. (In re Sims)7 that Chapter 13 debtors have standing to object to claims even when total payments to the trustee will not be affected by the outcome. The plans in Sims required the debtors to make payments until a specified base or percentage, “whichever is greater,” was paid to the trustee.8 The court explained that Chapter 13 debtors have standing to object to claims under these plans even though the amount debtors must pay is not affected by claims allowance:
[T]he debtors’ plans in the instant cases are not simple base plans but are instead, “base or percentage, whichever is greater” whereby unsecured creditors receive under the plan the required percentage or the balance of the base, “whichever is greater.” . . . It has been recognized that debtors in these types of plans have “an incentive to seek the disallowance of objectionable claims” because if allowed unsecured claims turn out to be larger than indicated in the schedules to the point where the base amount will not pay the minimum percentage, the debtor will have to pay more to satisfy the percentage. . . . Undoubtedly, in this situation, a debtor would have standing to object to claims. . . . This court concludes that, even in simple base cases, the chapter 13 debtor is a party in interest with standing under § 502(a) to object to claims. . . . [U]nless the debtor has standing, claims will be “unpoliced.” . . . [W]hile a debtor may not be affected monetarily by a claim disallowance, many chapter 13 debtors . . . sincerely want to repay their creditors. . . . To hold that these debtors must stand by without any authority to raise the inappropriateness of a claim is a misunderstanding and a perversion of the chapter 13 system.9
There are some incentives for the debtor to review claims before confirmation. The length of the plan, the actual percentage paid to unsecured claim holders and the total dollars the plan will require from the debtor could change based on objections to claims. However, in jurisdictions that reach confirmation before expiration of the claims bar date,10 calculation of plans is not significantly upset by the possibility that objectionable claims will be timely filed after confirmation. Debtors need only be careful that neither the plan nor the order of confirmation precludes the debtor from later objecting to claims.11
Discussed in detail elsewhere,12 there is troubling case law concluding that confirmation truncates the claims allowance process in Chapter 13 cases—at least with respect to secured claims provided for by the plan. These decisions put a premium on reviewing claims and objecting to claims before confirmation of a plan. In districts that delay confirmation until after the claims bar date,13 debtors typically have seven months or more in which to review claims and file objections. In a district that reaches confirmation soon after the § 341 meeting,14 confirmation may happen between 40 and 50 days after the petition. Six or seven weeks is not enough time for creditors to get their claims filed or for debtors to review and object to claims. The cases precluding claims objections after confirmation misconstrue the Code and misunderstand the processing of Chapter 13 cases.15
In some jurisdictions, at the expiration of the period for filing claims, the Chapter 13 trustee prepares a “motion to allow claims,”16 stating the amount of each filed claim, stating the value of any security asserted by a creditor and disallowing any claim not filed. This motion permits the debtor and counsel an opportunity to review the claims that the trustee will pay absent objection. Failure to object to a trustee’s motion to allow claims was cited by one court as a reason to preclude a Chapter 13 debtor from later challenging the secured status of a lienholder that timely filed proof of a secured claim.17
In other jurisdictions, the debtor or counsel must physically go to the clerk’s office or to the office of the Chapter 13 trustee to review claims and determine the need for objections. Too often debtors or their attorneys do not review claims in Chapter 13 cases, leaving claims to be paid that would have been disallowed upon objection.
Objection to claims in Chapter 13 cases is controlled by Bankruptcy Rule 3007. An objection must be in writing but need not be a complaint. A claim objection that seeks relief of the kind listed in Bankruptcy Rule 700118 becomes an adversary proceeding.19 Bankruptcy Rule 3007 requires 30 days’ notice of the hearing on an objection to a claim. It has been held that the bankruptcy court can conduct a hearing on a Chapter 13 debtor’s objection to a claim notwithstanding that the claim holder did not file a written response.20 Creditors should beware local rules in some jurisdictions that require a response to an objection to a claim, else the objection is deemed uncontested.
Bankruptcy Rule 3004 authorizes the Chapter 13 debtor to file a proof of claim on behalf of a creditor that has failed to file a proof of claim.21 The debtor has until 30 days after expiration of the normal 90-day or 180-day periods in Bankruptcy Rule 3002(c) in which to file a proof of claim on behalf of a creditor.22
There are strategic reasons for a Chapter 13 debtor to file a proof of claim on behalf of certain creditors.23 For example, if a creditor with a nondischargeable claim—child support or a student loan—does not file a proof of claim, the creditor will not receive distributions and the nondischargeable debt will grow to haunt the debtor after the completion of payments to other creditors.24 The debtor solves this problem by filing a claim for the nondischargeable debt.
The debtor can file a proof of claim on behalf of a creditor and then object to join issue with the creditor over, for example, the value of collateral, the extent of a lien or the calculation of the amount due. A strong majority of courts have held that the debtor cannot file a proof of claim on behalf of a postpetition creditor.25
1 See § 62.1 [ Review Claims, Object to Claims and File Proofs of Claim ] § 53.15 Review Claims, Object to Claims and File Proofs of Claim.
2 Kerney v. Capital One Fin. Corp. (In re Sims), 278 B.R. 457 (Bankr. E.D. Tenn. 2002) (Chapter 13 debtors have standing to object to overstated claims.); In re Dooley, 41 B.R. 31 (Bankr. N.D. Ga. 1984). See National Loan Investors v. LaPointe (In re LaPointe), 253 B.R. 496, 498 (B.A.P. 1st Cir. 2000) (Chapter 13 debtor as guarantor has standing to object to deficiency proof of claim filed by mortgage holder after foreclosure sale. “Although a guarantor may not be able to bring an action for damages where the injury to the guarantor is derivative rather than direct . . . a guarantor sitting in a defensive posture generally can assert those defenses available to the obligor. . . . In this case, the Debtor is raising the defense of unreasonableness in an objection to [the mortgage holder’s] proof of claim and as a defense in the adversary proceeding seeking a deficiency judgment. Thus, the Debtor is in a defensive position and can raise the defenses available to the primary obligor.”).
3 881 F.2d 939 (10th Cir. 1989).
4 Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939 (10th Cir. 1989). See also GMAC v. Dykes (In re Dykes), 10 F.3d 184 (3d Cir. 1993) (Debtors are not “persons aggrieved” by the order of confirmation where the number and amount of payments required by the plan as confirmed are identical to the provisions of the plan proposed by the debtors, and only the allocation of those payments was changed by the order of confirmation. The debtors’ plan proposed monthly payments of $120 over 48 months, with the first 10 payments to be distributed to the debtors’ attorney. GMAC objected to confirmation on the ground that its collateral—a 1986 Pontiac—would depreciate if GMAC were required to wait 11 months before receiving its first payment under the plan. The bankruptcy court sustained GMAC’s objection and then confirmed an amended plan in which the debtors’ counsel and GMAC would share each monthly payment until counsel was paid in full, and thereafter GMAC would receive the entire $120 per month. The debtors appealed, seeking reinstatement of the original plan so that debtors’ counsel could be paid in full ahead of GMAC. Court cites Holmes v. Silverwings Aviation, Inc., 881 F.2d 939 (10th Cir. 1989), with approval.). But see Hardgrave v. La Rock (In re Hardgrave), 59 F.3d 166 (4th Cir. 1995) (unpublished) (In a footnote, Chapter 13 debtor has standing to object to “untimely” or “informal” claim of an unsecured creditor where allowance of the claim would affect plan payments required of the debtor.).
6 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
7 278 B.R. 457 (Bankr. E.D. Tenn. 2002).
8 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
9 278 B.R. at 483–84.
10 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
11 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. See, e.g., Hildebrand v. Hays Imports, Inc. (In re Johnson), 279 B.R. 218 (Bankr. M.D. Tenn. 2002) (Confirmation does not preclude trustee’s complaint to avoid a security interest under §§ 547 and 549 when lienholder filed proof of claim after confirmation that revealed an avoidable security interest.). Compare Marlow v. Sweet Antiques (In re Marlow), 216 B.R. 975 (Bankr. N.D. Ala. 1998) (Confirmation of plan that treated judgment creditor as a secured claim holder, coupled with debtor’s failure to object to trustee’s motion to allow claims, is fatal to postconfirmation action to avoid the judgment lien and disallow the lienholder’s secured claim.).
12 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.
13 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
14 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
15 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. See, e.g., Adair v. Sherman, 230 F.3d 890 (7th Cir. 2000) (A secured claim filed before confirmation without objection cannot be attacked after confirmation with respect to the value of collateral.).
16 The Code and Bankruptcy Rules do not require such a motion, but this throwback to practice under the former Bankruptcy Act prevails in many places.
17 Marlow v. Sweet Antiques (In re Marlow), 216 B.R. 975, 980–81 (Bankr. N.D. Ala. 1998) (Confirmation order and order allowing claims bar debtor’s postconfirmation preference action to avoid a prepetition judgment. Creditor recorded its judgment two months before Chapter 13 petition. Creditor filed a proof of claim asserting secured status. Confirmed plan provided payment for allowed secured claim holders. Chapter 13 trustee filed a motion to allow claims that listed the judgment creditor as a secured claim holder. Debtor did not object. Six months after the order allowing claims, debtor filed adversary proceeding to avoid the judgment lien as a preference. Distinguishing Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995), and citing Spartan Mills v. Bank of America Illinois, 112 F.3d 1251 (4th Cir. 1997), “Marlow knew about her preference claim when she filed her petition, scheduled the claim of Malornis without reserving the right to attack the validity of the claim postconfirmation, and failed to object to the claim within the time prescribed by the order allowing claims. The rights of the debtor and Malornis were established by the confirmation order and order allowing claims which were entered without objection or appeal. Marlow is now bound by the terms of her confirmed chapter 13 plan and the order allowing claims to provide for the claim of Malornis as a secured judgment lienholder in her case.”).
18 Fed. R. Bankr. P. 7001 requires an adversary proceeding, for example, “to determine the validity, priority or extent of a lien.”
19 Fed. R. Bankr. P. 3007.
20 Beard v. United States Trustee (In re Beard), 188 B.R. 220 (W.D. La. 1995) (Bankruptcy Rule 9014 does not preclude the bankruptcy court from conducting a hearing on the debtors’ objection to a claim notwithstanding that the claim holder failed to file a written response to the objection.).
21 See §§ 285.1 [ Timing, Form, Superseding and Amended Claims ] § 134.1 Timing, Form, Superseding and Amended Claims before 2005 and 286.1 [ Strategic Considerations: When to File Claims for Creditors ] § 134.3 Strategic Considerations: When to File Claims for Creditors.
22 Fed. R. Bankr. P. 3004.
23 See § 286.1 [ Strategic Considerations: When to File Claims for Creditors ] § 134.3 Strategic Considerations: When to File Claims for Creditors.