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Unsecured Creditor’s Post-Confirmation Claims Rejected

The 4th Circuit upholds a bankruptcy court’s rejection of an unsecured creditor’s claims in two Chapter 13 proceedings that were filed after entry of the court’s confirmation orders; we hold that debtors’ objections to the unsecured creditor’s proofs of claim are not barred by the doctrine of res judicata.

Creditor claims

It is common in a Chapter 13 proceeding that the bar date to file claims by unsecured creditors occurs after plan confirmation. In Rhodes’ case, the claim bar date was Nov. 13, 2014, almost a month after his confirmation order was entered. In the Harlings’ case, the bar date was Oct. 26, 2015, more than two months after the confirmation order. The creditor, LVNV Funding LLC, conceded in the bankruptcy court, as it does here, that its claims would ordinarily be barred by the statute of limitations.

However, LVNV interposed the defense that debtors’ objections were invalid and of no effect under the doctrine of res judicata. According to LVNV, the confirmation orders were final judgments on the validity of LVNV’s claims and therefore, res judicata preclude debtors’ later objections. The bankruptcy courts disagreed with LVNV and sustained debtors’ objections to LVNV’s claims in reliance on the reservation of rights clauses in the respective Chapter 13 plans. As a consequence, LVNV’s claims were barred by the applicable state statutes of limitations and it will not receive any distribution from debtors’ Chapter 13 estates.

Chapter 13 confirmation orders have a preclusive effect on those issues litigated by or determined at confirmation, as the plan confirmation order is a “final determination” as to those matters it actually addresses. The query before us in this case is what issues were determined by the confirmation orders and, specifically, did the bankruptcy court adjudicate the merits of any individual unsecured creditor’s claim?

The Bankruptcy Code requires the proposed plan to address at plan confirmation only the collective amount that all the Chapter 13 debtor’s unsecured creditors as a class will receive after satisfaction of any secured or priority debts. No code provision provides for the determination of the merits of an individual unsecured claim within the class of unsecured claims as part of plan confirmation. As a matter of statutory direction, the treatment of each individual secured creditor’s claim is bound up in plan confirmation, while an individual unsecured creditor’s claim is not.

Res judicata

An unsecured creditor’s claim, if filed before plan confirmation, has already been “deemed allowed” under § 502(a) without any action of the bankruptcy court. There is nothing under the Bankruptcy Code for the court to adjudicate at plan confirmation regarding an individual unsecured creditor’s claim. That matter can only arise should an objection be made under § 502.

The issue for res judicata purposes is whether the “cause of action” in the later proceeding – the validity of debtors’ objections to LVNV’s claims – was any part of the cause of action in the first proceeding, plan confirmation. As to unsecured creditors, it was not. The specific statutory structure for adjudication of objections to claims leads to the conclusion that Congress has made Chapter 13 plan confirmation and claim allowance on contested unsecured claims to be separate and distinct actions within a debtor’s bankruptcy proceeding.

Res judicata cannot apply to bar debtors’ objections to LVNV’s claims. This court’s conclusion in Covert v. LVNV Funding LLC, 779 F.3rd 242 (4th Cir. 2015), and the 7th Circuit opinion in D&K Properties Crystal Lake v. Mut. Life Ins. Co. of N.Y., 112 F.3rd 259 (7th Cir. 1997), do not compel a different conclusion.

LVNV Funding LLC v. Harling (Agee) No. 16-1346, March 30, 2017; USBC at Columbia, S.C. (Duncan) Adam C. Bach for appellant; Jane H. Downey for appellees. VLW 017-2-077, 20 pp.

VLW 017-2-077