D. Arizona Bankruptcy Court Discusses Split Re Whether the Confirmation of a Chapter 13 Plan Should Be Given Res Judicata Effect

In re Wegscheid, Slip Copy, 2007 WL 274361 (Bkrtcy. D. Ariz. Jan. 29, 2007):

The Ninth Circuit has held that the confirmation of a Chapter 13 plan should be given res judicata effect, and that the failure of a creditor to object to confirmation of a plan precludes the creditor from subsequently challenging the provisions of the plan. [FN12]

FN12. Great Lakes Higher Education Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir.1999) (a confirmed plan will be recognized as final even if the provisions of the plan would not be permitted by the Code).

Pardee is controlling here. Having failed to object to a plan that clearly and unequivocally stated its lien was wholly unsecured and therefore modifiable, Irwin cannot now challenge that plan provision.There is a split among the circuits on this issue, because the Fifth Circuit holds that a Chapter 13 plan may have the res judicata effect of reducing or eliminating a creditor's secured claim only if the debtor had filed an objection to the creditor's claim. The Fifth Circuit's holding in Howard is inapplicable here for at least three reasons. First, it is at least implicitly rejected by the analysis in Pardee, and Pardee establishes the law in this circuit. Second, the debtor here in fact did object to Irwin's secured claim, so even if Howard were the law it would seem to permit the lien stripping on these facts. Finally, Howard seems to confuse two or perhaps three entirely different processes in a bankruptcy case. Claim allowance is one process that may result in a determination of whether a claim is wholly secured, partially secured or wholly unsecured. Bankruptcy Rule 3012 provides this procedure as part of the claim allowance process. But claim allowance is entirely distinct from confirmation of a plan that determines how an allowed claim is to be treated. For example, Code § 1325(5)(A) provides that even if a claim is wholly secured (which might have been determined in the claims allowance process), it can be treated in any fashion if the secured creditor "has accepted the plan." At minimum, this makes clear that acceptance of treatment is distinct from allowance of a claim. In effect, the Fifth Circuit's Howard rule engrafts an additional procedure and an additional requirement that simply does not exist in § 1325(5)(A)--that there have been an objection to the claim (and perhaps even a ruling on the objection favorable to the debtor). Similarly, it confuses two different kinds of orders a bankruptcy court may enter: an order allowing or disallowing a claim under § 502, and an order confirming a plan that is binding on all creditors pursuant to § 1327(a).

We disagree with the Fifth Circuit that a debtor must file an objection to a creditor's claim before a confirmed plan will be given res judicata effect. The plain language of §§ 1325(a)(5)(A) and 1327(a) simply do not support engrafting an additional requirement of a claim objection. And because there is no ballot for acceptance of a Chapter 13 plan and no Rule defining the method of acceptance as there is for acceptance of a Chapter 11 plan, [FN15] a failure to object after receipt of adequate notice must be regarded as acceptance of a Chapter 13 Plan for purposes of § 1325(a)(5)(A).