Opinion
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: January 21, 2005
Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. S-99-15928-BAM. Honorable Bruce A. Markell, Bankruptcy Judge, Presiding.
Before: MARLAR, RUSSELL[ and PERRIS, Bankruptcy Judges.
Hon. Barry Russell, Chief Bankruptcy Judge for the Central District of California, sitting by designation.
MEMORANDUM
INTRODUCTION
In this case, a creditor sought to have its secured claim paid in full and its collateral, too.
Near the end of a five-year plan, the chapter 13 debtor objected to the creditor's proof of claim for the principal due under a contract for the purchase of a water softener. By that time, not only had the creditor already been paid $4,903 on its secured claim by the chapter 13 trustee, but it had already repossessed the valueless water softener in accordance with terms of the confirmation order and plan for the surrender of the collateral.
Unless otherwise indicated, chapter and section references are to the U.S. Bankruptcy Code, 11 U.S.C. § § 101-1330, and rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
The bankruptcy court sustained the objection and ordered the creditor to disgorge the difference between what it had been paid and what it should have been entitled to under the plan for its unsecured deficiency claim. Since distribution on the unsecured claims would likely be zero, the creditor appealed the bankruptcy court's order, contending that its proof of secured claim was deemed allowed and that Debtor's objection was either untimely or barred by laches.
Under these circumstances, we conclude that the bankruptcy court properly treated the extant claim as an unsecured deficiency debt, and AFFIRM the order sustaining Debtor's objection.
FACTS
In 1998, Felix Diaz (" Debtor") entered into a retail installment contract with Superior Water Systems (" Superior") to purchase a water softener for $5,912.52 including interest. Pursuant to a dealer agreement, Superior assigned the contract to American General Finance (" American General"), who financed the purchase.
In July, 1999, Debtor filed a chapter 13 petition. On his bankruptcy schedules, Debtor listed American General as an unsecured nonpriority creditor with a claim of $5,613.93, further described as " Water Softener to Surrender." However, Debtor's Statement of Intention Re: Secured Consumer Debts did not include American General, and under paragraph 1(a)--" Property to be Surrendered" --it stated " None."
American General filed a timely secured proof of claim for $4,000 plus 10% interest, based on the water softener's estimated fair market value, together with an unsecured deficiency proof of claim in the amount of $1,504.76.
Debtor's proposed plan did not provide for payment of American General's secured claim, nor did it provide for surrender of the water softener. Under paragraph 9--" Collateral to be surrendered" --it said " None." American General did not object to the plan.
The bankruptcy court confirmed the uncontested plan on October 18, 1999. The plan that was attached to the confirmation order differed from the original plan in one important respect. Paragraph 9 now states as follows:
9. COLLATERAL TO BE SURRENDERED: NONE
A. (1) To: American General Finance
(2) Collateral: water softener
Order Confirming Plan (October 18, 1999).
The confirmation order was not served upon interested parties. Nonetheless, on December 8, 1999, Superior repossessed the water softener, which had no resale value.
In August of 2000, the chapter 13 trustee (" Trustee") filed a notice of intent to pay claims. According to the notice, American General's $4,000 (plus 10% interest) secured claim was to be paid 100%. While the $1,504.76 deficiency claim was not listed, it was clear from the notice that there would be no distribution to any unsecured claimants. The notice was certified as having been mailed to Debtor. The notice provided that any objections should be made within 30 days of the date of the notice. Debtor did not file an objection within that time period.
However, two years later, in February and March of 2002, Debtor faxed a " letter of dispute" to American General, objecting to its receipt of payments. Between 2000 and 2004, American General received payments totaling $4,903.
In March, 2004, as the five-year plan drew to a close, Trustee sent a directive to Debtor calling for payment of the $7,108 plan balance. At or around the time for the 57th plan payment, Debtor filed an objection to American General's secured proof of claim and a request for turnover of all the monies it had been paid through the plan.
At the hearing on the objection, the bankruptcy court analyzed the situation under § 506(a). Since American General had repossessed the water softener, and, by its own admission, it was worthless, the bankruptcy concluded that American General's secured claim had been improperly classified and paid, and was merely an unsecured deficiency claim.
Section 506(a) provides, in pertinent part:
The order, which was entered on August 19, 2004, sustained Debtor's objection and stated, in part, that American General " must disgorge the difference between how much they would have received as an unsecured claimant less what they were paid." American General timely appealed the order.
ISSUES
1. Whether American General's secured claim was satisfied by surrender of the water softener, thus resulting in its unsecured deficiency claim.
2. Whether American General received adequate notice of the treatment of its secured claim by surrender of the collateral.
3. Whether Debtor's objection was either untimely or barred by laches.
STANDARD OF REVIEW
We review issues of law under the de novo standard, and findings of fact for clear error. Shook v. CBIC (In re Shook), 278 B.R. 815, 820 (9th Cir. BAP 2002). Questions of adequate notice for purposes of due process are also reviewed de novo. Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997); Educ. Credit Mgmt. Corp. v. Repp (In re Repp), 307 B.R. 144, 148 (9th Cir. BAP 2004). A bankruptcy court's interpretation of a chapter 13 plan is a conclusion of law that is also reviewed de novo. See N.Y. City Employees' Retirement Sys. v. Sapir (In re Taylor), 243 F.3d 124, 128 (2d Cir. 2001).
We review for an abuse of discretion the court's exercise of its equitable authority, such as its decision whether or not to apply the doctrine of laches. Shook, 278 B.R. at 820.
DISCUSSION
A. Plan's Treatment of American General's Secured Claim
American General contends that its secured proof of claim was deemed allowed and should have been paid through the plan. Indeed, Trustee's notice of intent to pay claims was proof that it was treated that way under the plan. We agree that the secured claim was deemed allowed, but disagree that payment was proper.
Section 502(a) provides, in material part, 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." 11 U.S.C. § 502(a).
Under § 1325(a)(5), a debtor's proposed chapter 13 plan must either provide that the secured creditor retain its lien and be paid the value of its claim over the life of the plan or, in the alternative, that the debtor surrender the secured property.
The plan, as filed, did not address any treatment for American General's secured proof of claim. However, the confirmed plan stated that Debtor would surrender the water softener to American General.
Section 1325(a)(5)(C) permits a chapter 13 debtor to satisfy an allowed secured claim provided for by the plan by surrendering the property securing the claim. Ordinarily, the creditor would then have only a deficiency claim remaining against the estate in a sum equal to the difference between the amount which would be received upon liquidation or foreclosure and the total amount of the debt. Such deficiency claim is, by operation of § 506(a), a general unsecured claim. See In re Mason, 315 B.R. 759, 761-62 (Bankr. N.D. Cal. 2004) (at any time after surrender of collateral, a lienholder's claim becomes a wholly unsecured claim by operation of § 506(a)); 8 Collier on Bankruptcy ¶ 1325.06[4], p. 1325-41 to 42 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2004) (" The applicable provisions of the Uniform Commercial Code control the disposition of collateral surrendered under section 1325(a)(5)(C) with the result that the holder of an allowed secured claim would be entitled to an allowed unsecured claim for the amount remaining due the holder after an appropriate disposition of the surrendered collateral, unless the debtor and the holder otherwise agree or unless the collateral was accepted by the creditor in full satisfaction of the entire claim in accordance with U.C.C. Revised § 9-620 or other applicable nonbankruptcy law.").
But see Chrysler Fin. Corp. v. Nolan (In re Nolan), 232 F.3d 528, 535 (6th Cir. 2000) (chapter 13 debtor cannot modify the plan after confirmation to surrender a car and treat any deficiency as an unsecured claim under § 506(a)).
The evidence that Trustee distributed the funds to American General was not dispositive of American General's claim status because the plan was subject to the court's interpretation. A reorganization plan should be construed basically as a contract. See Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 588 (9th Cir. 1993).
Trustee's notice was not a final order allowing American General's claim as a secured claim. Therefore, a reconsideration of the claim under § 502(j) was not implicated.
Here, the bankruptcy court determined that American General's claim was improperly paid as a secured claim. This conclusion was correct because the confirmed plan provided for surrender of the water softener, and American General, through Superior, immediately after confirmation, repossessed the collateral. The court then applied § 506(a) to determine that the filed claim was, in fact, wholly unsecured. This was the correct approach. Under § 506(a), the estate no longer had an interest in the property, and American General was free to liquidate its collateral. See 11 U.S.C. § 506(a) (creditor has a secured claim " to the extent of the value of such creditor's interest in the estate's interest in such property"). Because the collateral was repossessed, but valueless, American General's entire claim was left unsecured. Moreover, American General was estopped to claim that it should be paid as a secured creditor when in fact it repossessed its collateral and sold it, or retained it.
B. Notice
American General maintains that it was unfair to deprive it of the payments under the plan because it did not receive notice of the confirmation order, and the original plan did not contain the surrender provision.
Before a creditor's rights may be adversely affected by a chapter 13 plan, the creditor must receive adequate notice and an opportunity to be heard in a manner sufficient to meet due process concerns. See Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers, Inc.), 293 B.R. 489, 500 (9th Cir. BAP 2003) (chapter 11 plan could affect creditor's claim only if specific notice was provided that would satisfy due process concerns); Shook, 278 B.R. at 824-25.
Although American General is correct that it had no notice of the surrender provision contained in the confirmation order, it obviously had notice that it repossessed its collateral. Had it received proper notice of the confirmation order, there would have been no grounds to object to the surrender of its collateral. Therefore, it was not prejudiced by the lack of notice and its due process rights were not violated.
The plan without the surrender provision did not deal with the secured claim. Therefore, the claim objection process governs the amount of the claim.
C. Timeliness and Laches
American General contends that the bankruptcy court erred in considering Debtor's objection because it was either untimely or barred by the equitable doctrine of laches.
American General argues that Debtor's objection was untimely because it was filed beyond the 30-day objection period provided in Trustee's notice of intent to pay claims. The notice and opportunity to object was part of the fulfillment of the chapter 13 trustee's duties to distribute payments " in accordance with the plan as soon as practicable, " under § 1326(a).
However, the time for claim objections is governed by Rule 3007. We held, in Shook:
Rule 3007 provides:
To date, there has been no case law in the Ninth Circuit prohibiting postconfirmation claim objections. Rule 3007 does not provide a time limit for objections to proofs of claims, and such an objection may be filed at any time. Bitters v. Networks Elec. Corp. (In re Networks Elec. Corp.), 195 B.R. 92, 101 (9th Cir. BAP 1996).
Shook, 278 B.R. at 828.
We see no reason to deviate from this flexible interpretation of Rule 3007, which would allow Debtor's postconfirmation objection. In addition, there are equitable considerations present here.
American General maintains that Debtor's claim objection was barred by the equitable doctrine of laches. It cites, for support, the panel's Shook opinion, in which we held that the debtors' claim objection, filed four and one-half years after plan confirmation, was barred by laches. To succeed on this affirmative defense, American General " was required to present evidence of an inexcusable delay in the exercise of a known right, and that it was thereby prejudiced." Shook, 278 B.R. at 830.
Debtor did not object to Trustee's notice of intent to pay American General 100% of its secured claim. Although Debtor alleged that he did not receive the notice, the notice expressly certified that a copy was sent to Debtor. In any event, Debtor conceded that he knew about the payments. He alleged, without citation to the record, that he contacted the Trustee's office " when the first Statement of Payments was received . . . ." Appellee's Brief (December 10, 2004), p. 1. In 2002, he faxed two letters to American General demanding that the payments cease. Nothing was done to bring the matter to the court's attention, however, until after Debtor received the Trustee's directive to pay additional plan funds in March, 2004, and Debtor filed his written claim objection.
The facts of this case are distinguishable from those in Shook. In Shook, the creditor filed a proof of secured claim, which was deemed allowed, and the plan and confirmation order were silent concerning the treatment of its claim. The trustee noticed an intent to pay the creditor's claim as a secured claim through the plan, and the debtors failed to object to that treatment. Then the debtors requested, and were given, a release of lien by the creditor. Four and one-half years later, they objected to the claim and demanded a turnover of the funds paid to the creditor, contending that the claim was unsecured. We applied laches, in part, because the creditor was prejudiced by the delay and release of its lien, in reliance on the debtors' request and the payments under the plan. Shook, 278 B.R. at 831 & n.17.
Here, American General is as much to blame as Debtor for the delay. American General knew that the water softener had been surrendered and repossessed, but it took the money anyway. It got a windfall, in a legal sense, as well as an economic one. Therefore, American General is not prejudiced by being required to disgorge up to $4,903 which it received in addition to its collateral.
Moreover, the pro per Debtor faxed a " letter of dispute" to American General, in 2002, and believed that American General would resolve the matter. When it did not, and Debtor was directed to pay the $7,108 plan balance which included the balance of American General's purported secured debt, Debtor took the ultimate step of filing his claim objection in bankruptcy court.
Thus, Debtor neither unduly delayed nor avoided his responsibilities to the extent the debtors did in Shook. Therefore, it would have been improper to bar Debtor's claim objection on grounds of laches, and the bankruptcy court did not abuse its discretion in refusing to do so.
CONCLUSION
American General continued to accept plan payments on its secured proof of claim after its collateral had been surrendered. This conduct was inequitable because American General was thereafter entitled to only an unsecured deficiency claim. By retaining the collateral and being paid as if it was secured, it in effect received double payment. It could not seek to bar Debtor's timely claim objection under the doctrine of laches when it had not been prejudiced. Therefore, we AFFIRM the order sustaining Debtor's claim objection in its entirety.
(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . .
Our case does not involve a plan modification. Therefore, policy concerns about reclassification of a secured claim are not at issue.
An objection to the allowance of a claim shall be in writing and filed. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession and the trustee at least 30 days prior to the hearing. If an objection to a claim is joined with a demand for relief of the kind specified in Rule 7001, it becomes an adversary proceeding.