Thursday, February 9, 2017

Objection to Proof of Claim Not Barred by Res Judicata

A Virginia bankruptcy court recently ruled that an objection to a proof of claim was not barred by the doctrine of res judicata when an order of confirmation was entered prior to the objection being filed.  In re Haskins, No. 15-60644 (W.D. Va. Jan. 27, 2017) [Dkt No. 31].  The creditor, a debt buyer, filed its unsecured proof of claim prior to confirmation of the debtor’s Chapter 13 plan.  The proof of claim conformed with the requirements of Rule 3001 of the Bankruptcy Rules of Procedure, including the provisions requiring the creditor to state the date of the last transaction and the date of last payment.  On its face, the proof of claim disclosed the claim was time barred.  The debtor’s Chapter 13 plan was confirmed after the filing of the proof of claim.  Three months later, the debtor objected to the debt buyer’s proof of claim as time barred.  At the hearing, the debt buyer contended the confirmation of the debtor’s Chapter 13 plan had a res judicata effect on the disposition of the claim and the objection should be denied on that basis.

In upholding the objection to the claim, the court first noted the distinction between the treatment of secured and unsecured claims in the context of a Chapter 13 confirmation.  Secured claims are individually treated and valued.  By contrast, unsecured claims are treated collectively with no consideration given to each claim’s individual value.  Instead, unsecured claims are treated in a single class and the plan must provide a pool of funds to be distributed pro rata to the class.  In keeping with this, the Bankruptcy Code provides a mechanism by which secured claims may be challenged in conjunction with confirmation of the plan.  There is no similar mechanism for unsecured claim.  The court therefore concluded that the debtor did not have a statutory mechanism to initiate a proceeding to determine the allowed amount or validity of an unsecured claim until the proof of claim is filed.

The court continued its analysis by reviewing the conclusive nature of a confirmation order. The court took notice that “[s]ection 1327 of the Bankruptcy Code provides that ‘[t]he 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.’”  Id. at p.9.  Confirmation, therefore, has a “preclusive effect foreclosing relitigation of ‘any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.’”  Id. (emphasis supplied).  The court therefore concluded that the confirmation order only precludes an issue or matter which was previously litigation or determined by confirmation.

Turning to the facts of the case, since the court did not at confirmation determine the amount of each general unsecured claim, it concluded that the issue of the claim’s validity had not been previously litigated, particularly since the deadline to file proofs of claim was subsequent to the deadline to object to confirmation.  Moreover, given that neither the claims process set forth in 11 U.S.C. 502 nor the objection process set forth in Rule 3007 set a deadline for objecting to a proof of claim, providing a confirmation order with a res judicata effect as to an objection to a general unsecured claim would “conflate the confirmation process with the claims allowance process.” Id. at p. 12.    The court therefore determined that the objection was not precluded by res judicata. 

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