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#2108

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

PHILLIP GALE SANDERS, PATRICIA ANN SANDERS,

DEBTOR(S)

CHAPTER 13

NO. 94-41256-13

ORDER DENYING CONFIRMATION OF THE DEBTORS' PLAN

This case is before the Court on the standing chapter 13 trustee's objection to the confirmation of the debtors' plan. Trustee William H. Griffin appears pro se. The debtors appear by counsel Lynn D. Lauver. The Court has reviewed the relevant pleadings and is now ready to rule.

The trustee complains that parts of the plan violate provisions of the Bankruptcy Code or Rules, or cases previously decided by this Court. He contends that certain language in the plan: (1) would permit the plan to run longer than generally allowed by this Court's prior decisions; (2) would require him to distribute plan funds to pay the debtors' counsel in full before any distributions to creditors are made; (3) would cause secured creditors who fail to file a claim to lose their liens even though they would not be paid amounts promised by the plan; and (4) appears to try to avoid liens pursuant to §522(f) without any motion being filed and separate notice and opportunity for hearing being given to the affected creditors. The debtors respond that the trustee has misread the language or intent of the plan, or that the trustee's position is legally incorrect.

It is unknown whether much of the language to which the trustee objects applies to any creditor in this case. With the Court's approval, the trustee has promulgated a standard chapter 13 plan for debtors to use in hopes of easing the administrative burden ever-changing plan formulations place on him and creditors, and ultimately increasing creditors' understanding of plan provisions and reducing litigation over plan terminology. As much as anything, the trustee objects to this plan's deviation from the standard because of the increased uncertainty and confusion it may cause. However, since no rule or order requires debtors to use the trustee's preferred form, the Court will discuss each of the challenged provisions.

DISCUSSION

1. Length of Plan

The debtors' plan states:

Payments to the trustee shall be made in installments conforming to the debtor's pay periods over a period of not longer than 5 years from the date of confirmation of plan in such amounts as my [sic] be required to provide for payment of all costs of administration, the payment in full of all claims entitled to priority as defined in §507 the present value of all allowed secured claims and an amount not less than _-0-_% to each allowed unsecured claim.

As the trustee is aware, this Court has stated orally at confirmation hearings that the longest a chapter 13 case should run is sixty-one and one-half months because the plan is due within fifteen days of the filing of the petition, the first payment is generally due within thirty days of the filing of the plan, and payments may not be made over a period that is longer than five years. See 11 U.S.C.A. §§1321, 1322(c), and 1326(a)(1); Fed.R.Bankr.P. 3015(b); see also In re Cobb, 122 B.R. 22 (Bankr.E.D.Pa. 1990). Although a debtor may obtain permission to file a plan more than fifteen days after filing the petition or to commence making payments more than thirty days after filing the plan (such permission was not sought in this case), the duration of the plan cannot be measured from the date of confirmation, which may be delayed for some time, as it has been in this case. A plan provision of this nature is inappropriate. The trustee's objection to this paragraph of the debtors' plan is sustained.

2. Fees for Debtors' Counsel

The debtors' plan also states:

Trustee will pay administrative claims first, secured creditors next, then priority debts and all other claims thereafter and may pay any claim or class of claims coordinately with any other that does not increase the debtor's liability.

Since the debtors' attorney fees are an administrative expense, §503(b)(2), the trustee believed that the debtors' counsel was seeking to be paid before their secured and priority creditors. Although the debtors assert that various provisions of the Bankruptcy Code give administrative claims priority over other claims in the order of payment, they agree that the trustee may pay counsel coordinately with the secured and priority claims if he determines that administrative claims should not be paid first.

In this case, as the trustee points out, two creditors have claims secured by depreciating property. The trustee's policy is to pay counsel over twenty-four months where the debtors intend to pay enough to allow concurrent payments to the secured creditors. The Court believes that chapter 13 is available so that debtors can adjust debts they owed prepetition but could not pay timely or in full. If the debtors' plan were approved but they defaulted after confirmation, it would be possible that the debtors, their counsel, and the trustee, but not their creditors, would have benefited from the filing, a result the framers of the Bankruptcy Code could not have intended. The trustee's objection to this provision is sustained.

3. Treatment of Secured Creditors

The debtors' plan contains the following language:

SECURED CREDITORS: Pay the value as set forth below plus appropriate discount factor.

VALUE

Ford Motor Credit_____ $17,000.00___

Norwest Financial_____ $500.00______

. . . .

Secured creditors or creditors claiming to have lien(s) in any property of the estate or property of the debtor who file only an unsecured claim or who do not file any timely claim waive and release any lien or claim of lien in property of the debtor or property of the estate.

The trustee contends that secured creditors' rights in collateral cannot be altered by a plan. The debtors contend that the trustee is mistaken and that Bankruptcy Code §§502, 506, 1325(a)(5), and 1327 support their position that a secured creditor's lien is lost if the creditor's claim is not filed and allowed.

Where secured creditors' claims have not been filed before the confirmation hearing, this Court's practice has been to require the debtor or the trustee to file claims for them before the confirmation order may be entered. This practice was adopted for administrative and equitable reasons. Federal Rule of Bankruptcy Procedure 3021 permits the trustee to distribute money only to creditors whose claims have been allowed. Although the Code and Rules establish procedures for allowing filed claims, there is no provision for unfiled claims to be allowed. See §501 and 502; FRBP 3002(a), 3007, 3008 & 9014. Since the debtors' plan calls for specific secured creditors to be paid, the trustee cannot carry out the plan until those creditors' claims are filed. In addition, this Court confirms many plans before the time for filing claims has expired, so requiring debtors to file claims for the secured creditors they said they would pay lets the trustee begin making distributions under the plan as soon as it is confirmed.

Although it is the minority view, this Court believes that the most natural reading of §1327, coupled with the fact that, in chapter 13 at least, all claims must be filed to be allowed, leads to the conclusion that confirmation of a plan that provides for a secured creditor's claim extinguishes the creditor's lien unless a proof of its claim is filed. See 2 Lundin, Chapter 13 Bankruptcy, §§6.12, 6.13, & 6.14 (2d ed. 1994). Unfortunately, Rule 3002(a) says only that unsecured creditors and equity security holders must file a proof of claim to have their claims or interests allowed, leaving the negative inference that secured creditors need not do so, despite the wording of §1327. To make matters worse, most if not all plans filed with this Court state, as does this one, that the debtors intend to pay named secured creditors a specified amount. Secured creditors must travel an excessively difficult path to discover that their liens will be extinguished if no proof of their claims are filed. The Court has concluded the equitable solution to the hidden problem facing secured creditors is to require the debtors, who have acknowledged the secured debts and promised to pay something on them, to protect the creditors' right to be paid under the plan by filing proofs of claim for them, as permitted by §501(c), within the time fixed by Rule 3004.

The debtors appear to believe that even if no claim is filed for the secured creditors named in their plan, the loss of the creditors' liens is not unfair because the trustee will nevertheless pay the creditors the amounts specified in the plan. This belief overlooks Rule 3021's mandate that the trustee pay only allowed claims and the fact there is no provision for allowing unfiled claims. Nor could the debtors try to get the creditors paid while extinguishing their liens by filing their claims as other than secured. Such claims would undoubtedly be allowed only as unsecured claims, and could only be paid the same proportion as other unsecured claims. To seek to pay a greater share on such unsecured claims would constitute unfair discrimination in violation of §1322(b)(1), and §1325(a)(1) would preclude confirmation of the debtors' plan, at least in the absence of notice to the other unsecureds of, and their failure to object to, this discriminatory treatment.

The plan provisions addressed in this section are contrary to the Court's practice, and the trustee's objection to them is sustained. If the secured creditors do not file claims prior to the confirmation hearing, the debtors or trustee will be required to file claims on their behalf in the amounts specified, presumably in good faith, in the debtors' plan.

4. §522(f) Lien Avoidance

The debtors' plan also provides:

All liens avoidable under 11 U.S.C. § 522 (f) are avoided for the benefit of the debtor [sic].

The trustee contends that Bankruptcy Rules 4003(d) and 9014 require §522(f) lien avoidances to be commenced by motion and treated as contested matters. The debtors concede this is correct for known liens, but argue they included this provision to address liens not known to them which creditors may try to assert at a later time. They seem to indicate the provision also helps insure that creditors who fail to file proofs of claim lose their liens.

If a debtor in good faith lists a creditor as unsecured and the creditor receives notice and an opportunity for hearing but fails to object, when the debtor's plan is confirmed, the creditor is bound by it, and pursuant to §1327, at some time the property returns to the debtor free of the lien. If the creditor files a secured claim, the debtor must file a motion to avoid the lien. On the other hand, if, as the debtors posit, the secured creditor is unknown and so not listed or given notice, the question would arise whether the constitutional requirement of due process of law would preclude extinguishing the lien, regardless of the language used in the plan. On its face, the provision attempts to avoid liens through a different procedure than that authorized by the Bankruptcy Rules. As explained by the debtors, the provision attempts to accomplish a feat of dubious validity. The Court will not approve a plan that tries to do either. The trustee's objection is sustained.

CONCLUSION

For these reasons, the debtors' plan as proposed must be denied confirmation.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this 11th day of January, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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