Opinion
Case No. 97-16155-SSM
November 4, 1998
Robert G. Mayer, Esquire, Fairfax, VA, Of Counsel for the debtor
Robert Coulter, Esquire, Alexandria, VA, Of Counsel for the IRS
Gerald M. O'Donnell, Esquire, Alexandria, VA, for Chapter 13 trustee
MEMORANDUM OPINION
This matter is before the court on (a) the motion filed by the United States of America on behalf of the Internal Revenue Service ("IRS") seeking to vacate or modify the debtor's confirmed plan, or in the alternative to dismiss the case, on the ground that the plan does not provide for payment of the IRS's timely filed priority tax claim; and (b) the motion filed by the chapter 13 trustee to dismiss for "unreasonable delay" and for failure to provide for the IRS claim. A hearing was held in open court on September 8, 1998, at which the parties presented oral argument. Because the precise issue presented is one of apparent first impression in this District, the court took the motions under advisement. For the reasons stated in this opinion, the motions will be denied.
Facts
Charles F. Joseph ("the debtor") filed a voluntary petition under chapter 13 of the Bankruptcy Code in this court on August 19, 1997. Among the liabilities listed on his petition was a disputed unsecured claim of the IRS arising from a responsible officer assessment for 1981 and 1982 "trust fund" taxes due from H F Building Maintenance Building Co. in the amount of $66,000. The schedules stated that the debtor's personal liability was barred by the applicable statute of limitations.
He had previously filed a chapter 7 petition on October 1, 1996, Case No. 96-15351-MVB. That case was dismissed after he failed to appear at the meeting of creditors.
On September 11, 1997, the debtor filed a proposed chapter 13 plan. The plan required the debtor to pay the chapter 13 trustee $50 per month for six months, followed by $850.00 per month for 30 months, plus a lump sum amount of $5,000 to be paid within ten days after confirmation of the plan, for a total funding of $30,800.00. The plan provided for the payment in full of a priority tax claim of the Virginia Department of Taxation, the direct payment of an automobile loan outside the plan, the curing through the plan of a prepetition default on the debtor's home mortgage, and a 5.8% dividend to unsecured creditors. The plan was served on all creditors, including the IRS. Two objections to confirmation were filed, one by the chapter 13 trustee, and the other by the car lender. No objection was filed by the Internal Revenue Service. After the car lender withdrew its objection, the trustee did likewise, and the plan was confirmed on November 18, 1997.
The mailing matrix filed by the debtor includes not only the IRS District Director, but also the Attorney General of the United States and the United States Attorney for the Eastern District of Virginia.
The bar date for governmental units to file proofs of claim was February 17, 1998. On January 13, 1998, the IRS filed a proof of claim as a secured creditor in the amount of $59,963.42. On February 18, 1998, it filed an amended proof of claim in the same amount, but allocated as a secured claim in the amount of $7,750.00, a priority unsecured claim in the amount of $52,203.42, and a general unsecured claim in the amount of $10.00. On May 26, 1998, the debtor filed an objection to the IRS claim on the ground that it was barred by the statute of limitations and that the notice of tax lien had been filed only in Illinois and had not been refiled in Virginia. The IRS conceded that it had no secured claim, but asserted that its entire claim, except for the $10.00 penalty, was a valid priority claim because the statute of limitations had been extended as a result of two offers in compromise submitted by the debtor. The debtor now agrees that the claim is not time barred and is a valid priority claim.
The basis of the liability is shown on the proof of claim as a civil penalty assessed July 4, 1983, for unpaid Form 941 taxes due for various quarters ending June 30, 1980 through September 30, 1982, in the amount of $11,084.67. The remainder of the nearly $60,000 claim consists accrued interest and a small penalty.
While the objection to the IRS claim was pending, the chapter 13 trustee filed on June 17, 1998, a motion to dismiss based on "unreasonable delay" by the debtor in resolving the IRS claim and on the apparent inability of the plan, if the objection were unsuccessful, to pay allowed priority claims in full. On July 29, 1998, the IRS filed the "Motion to Vacate Order of Confirmation, Require Modification of Chapter 13 Plan, and/or Dismiss" that is currently before the court.
Conclusions of Law and Discussion I.
The present motions vividly illustrate the tensions that exist between the chapter 13 confirmation process and the claims allowance process. Put most succinctly, a chapter 13 plan can be, and in this district commonly is, confirmed prior to the bar date for claims. Thus, a claim may be timely filed which, if allowed, would not permit a plan to be performed according to its terms or would — had the claim been brought to the court's attention at the time of confirmation — have prevented confirmation. At the same time, the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure seemingly permit an order of confirmation to be attacked only for fraud, and even then, only if a proceeding to revoke confirmation is brought within 6 months following entry of the confirmation order. It is the resolution of this conflict that lies at the heart of the present motions.
A.
The purpose of Chapter 13 is to offer a financially-strapped debtor with regular income an alternative to liquidation under Chapter 7 by allowing the debtor to keep his or her assets and to pay creditors out of future income. In re Crippin, 877 F.2d 594, 596 (7th Cir. 1989). The plan is the vehicle by which the debtor's debts are restructured or compromised and creditors are repaid. § 1322, Bankruptcy Code. In Chapter 13, only the debtor may propose a plan. § 1321, Bankruptcy Code. The plan, if not filed with the petition, is required to be filed within 15 days thereafter. F.R.Bankr.P. 3015(b). In this district, the debtor is required to serve a complete copy of the plan on all creditors and the standing chapter 13 trustee, and any objections to confirmation are required to be filed within 45 days. Local Bankruptcy Rule 3015-2. If no objection is filed, the plan is confirmed without holding a formal confirmation hearing. Although the debtor is required to commence payments to the trustee within 30 days of the filing of the plan, the trustee cannot begin making payments to creditors until the plan is confirmed. § 1326(a), Bankruptcy Code. Hence, the sooner the plan is confirmed, the sooner creditors will start receiving payments. A delay in commencement of payments is a matter of concern to any creditor, but particularly to secured creditors whose collateral may be depreciating.
Creditors desiring to be paid in a chapter 13 case are, with certain limited exceptions, required to file a proof of claim within 90 days after the first date set for the meeting of creditors. F.R.Bankr.P. 3002(c). A "governmental unit," however, has 180 days from the date the petition is filed to file a proof of claim. § 502(b)(9), Bankruptcy Code. Thus, it is entirely possible for a chapter 13 plan to be otherwise mature for confirmation long before the deadline for a state or federal taxing authority to file a proof of claim. Such tax claims, moreover, will often be entitled to priority. See § 507(a)(8), Bankruptcy Code. A chapter 13 plan is required to provide for the full payment of all priority claims, unless the holder of a particular claim agrees to a different treatment. § 1322(a)(2), Bankruptcy Code. But until the deadline for filing priority claims has passed (and any subsequent objections resolved), it may not always be apparent that the plan does not or cannot pay the allowed priority claims in full.
One solution, of course, is simply not to confirm a plan until the claims bar date has passed, and, if allowance of a particular claim would prevent a plan from being confirmed, to further delay confirmation until any objection to the claim is resolved. The obvious drawback to this approach is that payments to creditors may be held up for a protracted period. Another solution, probably preferable, would be to confirm the plan without waiting for the claims allowance process to be concluded but to include language in the confirmation order expressly permitting the confirmation order to be vacated in the event the allowed claims were inconsistent with the assumptions upon which the plan was confirmed — in effect, a provisional order of confirmation. The question before the court is whether, in the absence of any such language a confirmation order may be set aside — eight months after confirmation — because the plan does not provide for the full payment of all allowed priority claims.
B.
At oral argument, the trustee took the position that chapter 13 confirmation orders are always, in effect, provisional, and that the court is therefore always free to require plan modification or to dismiss a case if the assumptions upon which the plan were confirmed prove to be incorrect. Such an argument, however, does violence to, and totally ignores, the plain language of § 1327, Bankruptcy Code, which clearly makes confirmation of a chapter 13 plan determinative of the rights of the debtor and his or her creditors:
(a) 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.
(emphasis added). As explained by a leading commentator:
Upon becoming final, the order confirming a chapter 13 plan represents a binding determination of the rights and liabilities of the parties as ordained in the plan. Absent timely appeal, the confirmed plan is res judicata and its terms are not subject to collateral attack. The res judicata effect of confirmation may be eliminated only if confirmation is revoked, or if the case is later dismissed or converted to another chapter.
8 Collier on Bankruptcy ¶ 1327.02[1], at 1327-3 (Lawrence P. King, ed., 15th ed. rev. 1997); see also United States v. Richman (In re Talbot), 124 F.3d 1201, 1209 (10th Cir. 1997) (citing Collier). The burden is on a creditor to object to a plan that contains objectionable or ambiguous terms; otherwise, parties assume the risk that they will be bound by them. In re Haynes, 107 B.R. 83, 86 (Bankr. E.D. Va. 1989) (Bostetter, C.J.) (chapter 13 plan with no provision for postpetition interest on secured claim); In re Szostek, 886 F.2d 1405, 1408 (3rd Cir. 1989) ("[A]lthough prior to confirmation the bankruptcy court and trustee do have a responsibility to verify that a Chapter 13 plan complies with the Bankruptcy Code. . . . after the plan is confirmed the policy favoring the finality of confirmation is stronger than the bankruptcy court's and the trustee's obligations to verify a plan's compliance with the Code."); Barry v. BA Properties, Inc. (In re Barry), 201 B.R. 820, 823 (C.D. Cal. 1996); In re Ferrante, 195 B.R. 990, 993 (Bankr. N.D.N.Y. 1996); In re Rincon, 133 B.R. 594, 598 (Bankr. N.D. Tex. 1991); 8 Collier on Bankruptcy ¶ 1327.02[l][a], at 1327-4. also Trulis v. Barton F.3d 685, 691 (9th Cir. 1995) (chapter 11 plan releasing third parties); Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987) (chapter 11 plan releasing guarantor); Eubanks v. F.D.I.C., 977 F.2d 166, 171 (5th Cir. 1992) (order confirming debtor's chapter 11 plan precluded him, on basis of res judicata, from bringing lender liability claim against a bank whose claim was allowed by the plan; " [a] bankruptcy court's confirmation order is binding and final, and we accord it the weight of a final judgment for res judicata purposes."). Furthermore, once a plan is confirmed, a creditor is limited to those rights that are provided by the plan. Talbot, 124 F.3d at 1209 n. 10; Anaheim Sav. and Loan Assoc. v. Evans (In re Evans), 30 B.R. 530, 531 (B.A.P. 9th Cir. 1983); 8 Collier on Bankruptcy ¶ 11327.02[1][b], at 1327-4.
In this circuit, a limited but important exception to the res judicata effect of confirmation is that a chapter 13 plan provision for the avoidance of a creditor's lien is ineffective to extinguish the lien unless a separate proceeding is brought for that purpose. Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995) (confirmation of chapter 13 plan that failed to treat creditor's claim as secured did not avoid creditor's lien); see also Piedmont Trust Bank v. Linkous (In re Linkous), 990 F.2d 160 (4th Cir. 1993) (bifurcation of a secured creditor's claim under § 506, Bankruptcy Code, requires more than disclosure in plan; the creditor must be notified that a hearing is going to be held and that the interest of the creditor may be affected.) Thus, had the IRS's claim been secured, as it originally asserted, confirmation would not have affected its right, after the plan was completed, to enforce its lien. It is now conceded, however, that the IRS does not have a secured claim.
In this respect, the United States is no different than any other creditor and is bound by the terms of a confirmed plan. See Dept. of Air Force v. Carolina Parachute Corp., 907 F.2d 1469, 1473-74 (4th Cir. 1990). In Carolina Parachute, the government had not appealed an order confirming a chapter 11 plan which allowed assumption of a government contract notwithstanding the government's argument that assumption was prohibited by the Anti-Assignment Act. In a subsequent appeal from an injunction by the bankruptcy court that prohibited the government from terminating the contract, the Fourth Circuit, although reversing one portion of the bankruptcy court's ruling and remanding for reconsideration of the injunction, squarely held that the order confirming the plan was res judicata with respect to the issue of assumption. Id.
C.
The binding effect of an order confirming a chapter 13 plan is, to be sure, not absolute. In particular, the Bankruptcy Code expressly permits a confirmed plan to be modified, on the motion of the debtor, the trustee, or an unsecured creditor, to increase or decrease the payments to creditors:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to —
increase or reduce the amount of payments on claims of a particular class provided for by the plan
Section 1329, Bankruptcy Code (emphasis added). See Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989) (bankruptcy court did not err in requiring increased monthly payment and extending plan term on creditor's motion based on substantial and unanticipated increase in debtor's income). Courts have divided as to whether a threshold showing of a change in financial circumstances is required before a modification of a plan is allowed under § 1329(a)(1). See In re Klus, 173 B.R. 51, 57-58 (Bankr. D. Conn. 1994) (noting that some courts require no showing of a change in financial circumstances before modification is permitted while others reason that the doctrine of res judicata limits the permissible grounds for modification). In Arnold, the Fourth Circuit followed those courts that required a showing of changed circumstances. Arnold, 869 F.2d at 243 ("The doctrine of res judicata bars an increase in the amount of monthly payments only where there have been no unanticipated, substantial changes in the debtor's financial situation."). This view is also supported by a leading commentator, who explains:
[Section 1329(a)] is intended to carry the ability-to-pay standard forward to any modifications of the plan, allowing upward or downward adjustment of plan payments in response to changes in the debtor's circumstances that substantially affect the ability to make future payments. . . . In view of this congressional purpose, the right of the trustee or the holder of an unsecured claim should be limited to situations in which there has been an unanticipated substantial change in the debtor's income or expenses that was not anticipated at the time of the confirmation hearing. As to other matters, the confirmation order should be considered res judicata insofar as the matters do not relate to a change in the debtor's ability to pay[.]
8 Collier on Bankruptcy ¶ 1329.03, at 1329-5 to 6 (Lawrence P. King, Ed., 15th ed. rev. 1997) (footnotes omitted) (emphasis added).
In the present case, there is no evidence of a change in the debtor's financial circumstances. But even if this court were to ignore or distinguish Arnold and conclude that § 1329(a) is not limited to situations involving a debtor's changed financial circumstances, the IRS's motion, to the extent it seeks to compel the debtor to modify his plan to provide for full payment of the filed priority claim, could nevertheless not be granted. One of the conditions for modification of a confirmed plan is that the modified plan comply with the requirements of § 1325(a). See § 1329(b)(1), Bankruptcy Code. Section 1325(a)(6) in turn requires the court to find that "the debtor will be able to make all payments under the plan and to comply with the plan." In the present case, the debtor is already paying into the plan his entire disposable income for 36 months, for a total plan funding of $30,800.00. Even if the court were to require extension of the plan term to 60 months, the additional $20,400 in funding would bring the total only to $51,050. After deducting the trustee's statutory commission of approximately $4,500, the secured mortgage arrearage claim (with interest) of approximately $21,000, and the Virginia Department of Taxation priority claim of approximately $835, the plan could not possibly provide for full payment of the IRS's nearly $60,000 priority claim. Since the court cannot find that the modification proposed by the IRS is feasible, the motion, to the extent it seeks to compel plan modification, must be denied.
The court does note that § 1322(a)(2) permits the holder of an allowed priority claim to consent to some treatment other than full payment through the plan. Accordingly, this opinion should not be read as foreclosing the IRS from seeking a plan modification under § 1329 that would be feasible based on its agreement to accept less than full payment of its priority claim through the plan.
D.
In addition to seeking plan modification under § 1329, a creditor aggrieved by confirmation of a chapter 13 plan may potentially proceed under § 1330(a), Bankruptcy Code, which permits an order confirming a plan to be revoked "if such order was procured by fraud," but only if the request is made "within 180 days after the date of the entry of an order of confirmation." In the present case, not only is the present motion brought more than 180 days after entry of the order of confirmation, there is not the slightest evidence or even suggestion that confirmation was procured by fraud. Accordingly, § 1330(a) provides no basis for relief.
E.
Since neither § 1329 nor § 1330(a) is applicable under the facts of the present case, the only other potential avenue for attacking the confirmation order is Federal Rule of Bankruptcy Procedure 9024, which, with certain limitations, incorporates Federal Rule of Civil Procedure
60:Rule 60 Fed.R.Civ.P. applies in cases under the Code except that
(1) a motion to reopen a case under the Code or for the reconsideration of an order allowing or disallowing a claim against the estate entered without a contest is not subject to the one year limitation prescribed in Rule 60(b),
(2) a complaint to revoke a discharge in a chapter 7 liquidation case may be filed only within the time allowed by § 727(e) of the Code, and
(3) a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144, § 1230, or § 1330.
(emphasis added). Rule 60 in turn provides in relevant part as follows:
(b) On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or
(6) any other reason justifying relief from the operation of the judgment.
The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken.
Thus, F.R.Bankr.P. 9024 expressly limits the applicability of Rule 60 with respect to confirmation orders and specifically permits a complaint to revoke an order confirming a plan in a chapter 13 case to be filed only within the time allowed by § 1330, Bankruptcy Code. As noted above, § 1330(a) requires that a "request" to revoke an order confirming a plan be brought "within 180 days after the date of the entry of an order of confirmation[.]" The question that is not specifically addressed by Rule 9024 — and which is central to the present motions — is whether a creditor or the chapter 13 trustee may seek relief from a final confirmation order under Rule 9024 on grounds other than fraud, and, if so, whether such relief may be granted when the motion is filed more than six months after entry of the confirmation order.
Although Rule 9024 requires that any proceeding to revoke a confirmation order be brought within the "time" specified in § 1330, Bankruptcy Code, which is to say, within six months of the entry of the order of confirmation, it does not in express terms state that relief may be decreed only for the reason stated in § 1330. To be sure, to allow attacks on a confirmation order under Rule 9024 on grounds other than the sole ground stated in § 1330(a) would arguably make the statute something of a nullity. At the same time, it is difficult to believe that Congress, in drafting § 1330, or the Supreme Court, in adopting Rule 9024, intended to prevent bankruptcy courts from granting relief from confirmation orders for any of the various weighty reasons for which a federal court may set aside a final judgment in a civil action. While the matter is not wholly free from doubt, the court concludes that Rule 9024 may be used to grant relief from a confirmation order on grounds other than fraud. Such grounds, moreover, would potentially include — either under the rubric of "mistake" or "any other reason justifying relief" — the failure of the plan to provide for a timely filed claim in those circumstances where the plan was confirmed prior to the expiration of the claims bar date.
That said, the plain language of Bankruptcy Rule 9024 nevertheless clearly limits the "reasonable time" otherwise permitted for relief under Rule 60 and precludes any Rule 9024 attack on a confirmation order, whatever the grounds, more than six months after the order is entered on the docket. As noted above, the IRS's motion to vacate in this case was filed more than eight months after entry of the order of confirmation. Even if this court is incorrect in its reading of Rule 9024, and a strict six month limitation does not apply, the court would nevertheless be unable to find that the motion to vacate was brought within a "reasonable" period of time. Not only did the IRS wait until eight months after entry of the order of confirmation, it waited until more than six months after it filed its claim, at which point it surely it should have been aware of the conflict between its claim and the plan.
The IRS, moreover, has offered no explanation of why, once it filed its claim, it did not move sooner to vacate confirmation of a plan that failed to provide appropriately for that claim. The only apparent explanation is that no one was minding the store. Mere sloth or inattention is not a meritorious ground for relief under Rule 9024, particularly as the relief now sought by the IRS would have a significant adverse effect on the debtor. As discussed above, it does not appear that the debtor could propose any plan that would pay the IRS priority claim in full. Thus, the only alternatives would be dismissal or conversion to chapter 7. In either event, the debtor would be deprived of the opportunity to save his house by curing the mortgage arrearage over time, which is a remedy available in chapter 13 but not in chapter 7 or outside bankruptcy.
As noted above, the IRS could agree to some other treatment, but there was no suggestion at oral argument that it was willing to do so.
III.
Only brief comment is necessary concerning the trustee's argument that the case should be dismissed because of "unreasonable delay by the debtor that is prejudicial to creditors." To put the matter succinctly, there is not even a hint in the record that the debtor has failed to take any required action in a timely manner. The debtor received one brief extension at the outset of the case to file schedules and a plan, both of which were filed prior to the scheduled meeting of creditors. After the automobile lender and the trustee objected to confirmation, the debtor resolved the objections by negotiation, and an order confirming the plan was entered approximately two months after the plan was filed with the court. The record does not disclose when the debtor was first made aware of the filed IRS claim, but there is no suggestion that it was brought to counsel's attention much earlier than May 26, 1997, the date he filed an objection to the claim and concurrently set the matter for the earliest permissible hearing date. The objection to claim appears to have been diligently negotiated both by the debtor and the IRS and has resulted in entry of an order resolving the dispute. In short, there is simply no support in the record for the argument that the debtor has been guilty of unreasonable delay.
IV.
There remains, finally, the trustee's assertion, echoed by the IRS, that conditions subsequent to confirmation require dismissal. Essentially, the argument is that § 1322(a)(3) requires payment of allowed priority claims in full; that the plan does not do so and cannot be modified to provide for such payment; and hence the case should be dismissed.
A.
Both the trustee and the IRS suggest that the plan's failure to provide for full payment of timely-filed priority claims constitutes " termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan," which is one of the listed grounds for dismissal or conversion of a chapter 13 case. § 1307(c)(8), Bankruptcy Code (emphasis added). The court, however, concurs with the debtor that § 1307(c)(8) only applies where a plan contains a "condition" which, if not satisfied, would cause termination of the plan prior to the completion of payments. The plan confirmed in this case is simply devoid of any "condition" relating to payment of the IRS claim, and § 1307(c)(8) therefore has no applicability.
B.
Nevertheless, even though the precise reason urged by the trustee and the IRS is not among the grounds specifically listed in §§ 1307(c)(1) through (c)(10) as a basis for dismissal or conversion, the court is not limited to those grounds. Section 1307(c) allows a chapter 13 case to be dismissed or converted, whichever is in the best interest of creditors, for "cause," and the enumerated grounds are illustrative rather than exclusive. See § 102(3), Bankruptcy Code. Accordingly, the question is whether "cause" to dismiss a case can include failure of a confirmed plan to provide for full payment of an allowed priority claim, notwithstanding that the time to seek revocation of the order of confirmation has passed.
The IRS cites to three cases from other jurisdictions to support its argument that a confirmed chapter 13 plan that fails to provide for full payment of allowed priority claims is "nugatory" and requires that the case be dismissed if the plan cannot be modified to pay such claims in full. In re Escobedo, 28 F.3d 34 (7th Cir. 1994); Ekeke v. United States, 133 B.R. 450 (S.D. Ill. 1991); In re Driscoll, 57 B.R. 322 (W.D. Wisc. 1986).
In Escobedo, a chapter 13 plan requiring payments by the debtor of $25.00 per month for 36 months was confirmed without objection. 28 F.3d at 34. The trustee filed a late "objection" to the confirmed plan, requesting that the court allow for the repayment of $24,158 in administrative and tax claims. Id. The court allowed the additional claims, subject to the debtor's right to object within ten days. Id. The debtor did not object to the claims, but also did not modify the plan to account for them. Id. The debtor apparently did, however, continue to make plan payments beyond the 36-month term of the plan. Id. Five years after the plan's confirmation, the trustee petitioned the bankruptcy court to modify or dismiss the plan, and the bankruptcy court dismissed the case. Id. The Seventh Circuit, in affirming, reasoned that under § 1325(a)(1), Bankruptcy Code, a plan may not be confirmed unless it complies with all applicable requirements of the Bankruptcy Code, and repayment in full of all allowed priority claims is, under § 1322(a)(2), a mandatory provision that cannot be absent from a confirmed plan. Id. at 35. Accordingly, the court held that plan confirmation had no res judicata effect as to the omitted priority claims. Id. Escobedo has apparently been followed by only one reported decision; and its reasoning has been criticized by Great Lakes Higher Education Corp. v. Pardee (In re Pardee), 218 B.R. 916, 926 (B.A.P. 9th Cir. 1998), which observed that the holding in Escobedo "is contrary to overwhelming . . . authority and the general principle upholding the preclusive effect of final orders." As the Pardee court explained, even if a plan contains a provision at variance with the requirements of the Bankruptcy Code and should not have been confirmed, nevertheless "once confirmed, the Plan was not `nugatory' but was binding on the parties pursuant to § 1327(a) and the well-established principle that a party that fails to appeal a final order cannot collaterally attack that order." Id.
In re Goude, 201 B.R. 275 (Bankr. D. Or. 1996). Goude, however, is distinguishable from the present case in one important respect. The plan in Goude expressly provided for the trustee to pay "Debts entitled to priority under and in the order prescribed by § 507 of the Bankruptcy Code." The plan in this case — which the court notes fully conforms to the standard form of chapter 13 plan mandated by Local Bankruptcy Rule 3015-2(A) — states: " The following priority creditors will be fully paid by deferred cash payments, unless the holder of a claim agrees to be treated differently: . . . Va. Dept. of Taxation[.]" Plan § B-3-B (emphasis added). The IRS is not included in the list of priority creditors to receive payment.
In Ekeke, the IRS, prior to confirmation, had filed a timely proof of claim for $104,410, which was in excess of the then-limit (for chapter 13 eligibility purposes) of $100,000 in unsecured claims. See § 109(e), Bankruptcy Code. For reasons that are not clearly stated in the opinion, the debtor's plan was nevertheless somehow confirmed, but the bankruptcy court subsequently dismissed the case based on the debtor's statutory ineligibility for chapter 13 relief and also based on a finding that the "plan was not made in good faith and constituted subterfuge, and an attempt to defraud the bankruptcy court." Ekeke, 133 B.R. at 452. In the present case, by contrast, there is no question that the debtor meets the eligibility requirements of § 109(e), that the plan was submitted in good faith, and that plan confirmation was not obtained through "subterfuge" or fraud. As discussed above, the debtor, though aware of the unpaid taxes, had a reasonable basis for believing that collection was barred by the applicable statute of limitations. The taxes were fully disclosed on the schedules, as was the debtor's basis for disputing liability. That debtor's counsel was incorrect in his legal analysis does not constitute a subterfuge or fraud.
In Driscoll, the debtor filed a chapter 13 plan that proposed to pay the trustee $21 per month for 36 months. The IRS filed a proof of claim for $16,266, of which $15,156 was claimed as secured, $970 as priority, and $140 as a general unsecured claim. The court provisionally confirmed the plan and expressly reserved for later decision a ruling on the status of the tax claims. Driscoll, 57 B.R. at 323. The debtor made all the payments under the plan and then brought a motion that sought, in effect, to avoid the IRS's tax lien on his exempt property and to obtain a ruling that any remaining amounts due on the tax claims were discharged. Id. at 324. The debtor did not dispute the dollar amount of the claimed taxes, but merely argued that he was entitled to invoke the trustee's power under § 545(2), Bankruptcy Code, to avoid the Federal tax lien. The court held that a chapter 13 debtor may not invoke a trustee's avoidance powers except to the limited extent authorized by § 522(h), Bankruptcy Code. Since § 522(h) lien avoidance did not extend to statutory liens, the court ruled that the debtor had no basis for avoiding the IRS's lien. Based on the fact that approval of the debtor's plan had been "provisional" and "conditional" upon a final determination as to the IRS claims, and since "a plan which does not provide for the full payment of priority and secured claims is not confirmable," the court held that confirmation would be revoked "to avoid circumvention of the clear requirements of the Code." Id. at 328. The clear and obvious distinction between Driscoll and the present case is that confirmation in Driscoll was expressly "provisional." By contrast, there is nothing in the order confirming the present plan that even remotely suggests that the order was not final or that its finality was dependent upon the ultimate resolution of filed claims. It was, of course, always open to the IRS and the chapter 13 trustee, in light of the fact that the bar date for governmental claims had not yet passed at the time the plan was otherwise mature for confirmation, to have objected to confirmation unless the order was made provisional, but no such objection was raised.
V.
In the present case, had the plan expressly contained language to the effect that all allowed priority claims would be paid in full, the subsequent allowance of a priority claim that could not be paid from the available plan funding would arguably constitute "cause" for dismissal or conversion if the debtor were unwilling or unable to modify the plan to provide for such payment. As noted above, however, the plan in the present case does not contain a general undertaking to pay allowed priority claims in full but instead specifically lists the priority claims to be paid. That list does not include the priority claim later filed by the IRS. If the plan were simply ambiguous, the court would follow the rule that ambiguous plan provisions are construed so as to comport with, rather than contravene, express provisions of the Bankruptcy Code. In re Jankins, 184 B.R. 488, 492 (Bankr. E.D. Va. 1995) (chapter 11 plan that was silent on whether interest would be paid on priority tax claims would be construed to include requirement for such interest). However, the court is unable to discern any ambiguity in the language of Section B-3-B of the debtor's plan.
The plan was served on the IRS, and the IRS did not object to confirmation, nor did it seek an order postponing confirmation or request that confirmation be made provisional. Under settled principles, the order confirming the plan was res judicata as to all issues that could have been raised in connection with confirmation, except for the debtor's ability to pay in the event of changed financial circumstances. No appeal was taken from the order of confirmation, nor was any action brought within six months of confirmation, either under § 1330, Bankruptcy Code, or F.R.Bankr.P. 9024, to revoke or vacate the order of confirmation. That order is therefore now final. It would indeed be odd if "cause" to dismiss a chapter 13 case could exist simply because a priority creditor waited until a confirmation order was no longer subject to attack to complain that the plan did not fully pay its claim, and the plan did not otherwise expressly, or by fair implication, undertake to pay the claim in full. Of course, as the holder of an allowed claim, the IRS will receive the same dividend as any other unsecured creditor. Whether, at the conclusion of the plan, the unpaid balance of its claim would be discharged or would remain as a liability of the debtor is an issue the court need not and does not reach at this time.
A determination as to the dischargeability of a particular debt requires an adversary proceeding. F.R.Bankr.P. 7001.
A separate order will be entered denying the IRS's motion to vacate or modify the debtor's plan, or in the alternative to dismiss, as well as the trustee's motion to dismiss.