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In re Szostek

argued: September 5, 1989.

IN RE FRED J. SZOSTEK, DENISE M. SZOSTEK, APPELLANTS


Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. No. 89-0156.

Mansmann, Nygaard and Aldisert, Circuit Judges.

Author: Mansmann

Opinion OF THE COURT

MANSMANN, Circuit Judge

Debtors in bankruptcy here appeal from the decision of the district court which granted a creditor's motion to revoke confirmation of a chapter 13 plan. We are asked to determine whether the secured creditor may be deemed to have accepted the plan by failing to object to it timely or, if the bankruptcy court's failure to apply provisions of 11 U.S.C.A. § 1325(a)(5)(B)(ii) (West 1979), relating to present value constitutes grounds for vacating the plan. In addition, we must determine whether the trustee in bankruptcy and the bankruptcy court are independently required to verify that a Chapter 13 plan meets all statutory requirements or whether they may rely on the lack of objection thereto.

We conclude that the district court erred by reversing the bankruptcy court's confirmed action of the debtor's plan. Although the present value provision found in § 1325(a)(5)(B)(ii) was not applied by the bankruptcy court in determining the amount of the creditor's claim, this does not constitute grounds for vacating a confirmed plan where the creditor has not timely objected to the plan. We further conclude that, although prior to confirmation the bankruptcy court and trustee do have a responsibility to verify that a Chapter 13 plan complies with the Bankruptcy Code provisions, after the plan is confirmed the policy favoring the finality of confirmation is stronger than the bankruptcy court's and the trustee's obligations to verify a plan's compliance with the Code. Therefore, we will reverse the order of the district court and remand for the issuance of an appropriate order reinstating the judgment of the bankruptcy court.

I.

On July 7, 1987, Fred and Denise Szostek filed a Chapter 13 bankruptcy petition. On August 3, 1987, the bankruptcy court issued an order scheduling the meeting of creditors, establishing a deadline for objections to the Szosteks' Chapter 13 plan and scheduling a hearing on confirmation of the plan for December 15, 1987. Pursuant to Bankr.Rules 3020(b) and 9014, the court's order stated that any objections to the confirmation of the debtor's plan shall be filed no later than ten days before the confirmation hearing. The filing deadline was thus December 5, 1987.

The Kissell Company ("Kissell"), creditor and appellee, received notice of the deadline for filing objections. On August 18, 1987, Kissell filed a secured claim, based on a purchase money mortgage in the amount of $29,242.41. A few weeks later, on September 8, 1987, the Szosteks filed an objection to Kissell's claim on the ground that Kissell had violated the Truth in Lending Act ("TILA"), 15 U.S.C.A. § 1601 et seq. in the course of the residential loan transaction and, therefore, claimed they were entitled to a $1,000 recoupment. On the same day, the Szosteks also filed their First Amended Chapter 13 Plan, which proposed payments totalling approximately $40,000.00. The plan did not, however, provide for interest to be paid on allowed secured claims, i.e., present value.*fn1 A hearing on the Szosteks' objection to Kissell's claim was scheduled for December 15, 1987, the same date as the confirmation hearing.

On October 14, 1987, Kissell filed an amended proof of claim which was in the same amount as previously requested, $29,242.41. The Szosteks subsequently filed an amended objection to Kissell's claim on the ground that the value of the mortgage exceeded the value of the home and that the secured claim had to be bifurcated into two portions, secured and unsecured. The Szosteks sought both a determination of the amount of Kissell's security interest pursuant to 11 U.S.C.A. § 506(a),(d), as well as the relief pursuant to the TILA.

Szosteks' counsel served a copy of Szosteks' First Amended Plan upon Kissell's counsel on November 16, 1987. Sometime prior to December 15, 1987,*fn2 the attorneys for the Szosteks and for Kissell had a conversation in which Kissell's counsel requested a continuance of the hearing on Szosteks' objection to Kissell's claim so that an appraisal of Szosteks' property could be obtained. During this conversation, Kissell's counsel did not request a continuance of the confirmation hearing on the plan, which was also scheduled for December 15, 1987.

Kissell's counsel later testified that he assumed that Szosteks' counsel had agreed to both postponement of the hearing on Szosteks' objection to Kissell's claim and to postponement of the confirmation hearing. Szosteks' counsel later testified that he understood the continuance request was only for the hearing on Szosteks' objection to Kissell's proof of claim.*fn3

On December 15, 1987, the bankruptcy court held the confirmation hearing as scheduled at which the Szosteks appeared, but Kissell did not. Since no objections to the plan had been filed, upon recommendation of the standing Chapter 13 trustee, the Szosteks' First Amended Plan was confirmed by the court on December 15, 1987. The confirmed plan provided for payments as follows: (1) $4,003.00 to the trustee; (2) payment in full on Kissell's allowed secured claim; and, (3) the balance to the holders of allowed unsecured claims. Subsequently, the confirmed plan provided for 100% payment on the unsecured claims. On the same date, the hearing on the Szosteks' objection to Kissell's proof of claim was continued to January 25, 1988.

By letter dated December 16, 1987, Kissell's counsel confirmed a telephone call to him from Szosteks' counsel, which advised that the hearing on the Szosteks' objection to Kissell's proof of claim had been continued to January 25, 1988. (The actual date of the telephone call is not noted in the appendix.)

Three days after confirmation of the plan and thirteen days after the deadline for filing objections to the plan, Kissell filed an objection to the Szosteks' First Amended Chapter 13 Plan and an answer to the Szosteks' objection to Kissell's proof of claim. Kissell objected to Szosteks' plan on the grounds that it failed to provide adequately for payment in full of Kissell's secured claim, i.e., it did not provide for present value. No responsive pleading by the Szosteks was required under the Bankruptcy Rules.

The hearing on Szosteks' objections to Kissell's proof of claim was held on January 25, 1988. It was at this hearing that Kissell's attorney first learned that the Szosteks' plan had been confirmed. It appears from the record that Kissell's attorney took no action to challenge confirmation of the plan at that time. Consequently, no appeal was filed within ten days of the plan confirmation as required by Bankr.Rule 8002(a), nor did Kissell's attorney seek to file any appeal after learning of the confirmed plan on January 25, 1988.

On March 21, 1988, the bankruptcy court issued a memorandum and order determining Kissell's secured claim to be $25,110.00 and its unsecured claim to be $3,132.41. The March 21, 1988 order was, in part, based upon the parties' agreement that Kissell had violated the TILA and that a $1,000.00 recoupment was appropriate. The court apportioned the recoupment between Kissell's secured and unsecured claims. As part of its order, the bankruptcy court specifically noted that any challenge to the December 15, 1987 confirmation of the Szosteks' plan was not an issue before the court.

As a result of prevailing on the TILA objection, Szosteks' counsel filed a motion for attorneys fees pursuant to 15 U.S.C.A. § 1640. Kissell opposed the motion on the ground that, as part of the parties' agreement that there was a TILA violation, Szosteks' counsel had agreed to waive attorneys fees.

On May 20, 1988, four months after learning of the plan's confirmation, Kissell filed a motion seeking dismissal of the debtors' petition, revocation of confirmation under 11 U.S.C.A. § 1330, and alternatively, modification of the plan or relief from the automatic stay.*fn4 Kissell's motion was based on alleged fraud by the Szosteks in obtaining confirmation of the plan and the contention that the plan should not have been confirmed because it did not provide for paying Kissell interest on its secured claim, i.e., present value.

The bankruptcy court held two hearings in June of 1988 on Szosteks' motion for attorneys fees and on Kissell's motion to dismiss, revoke confirmation, and modify the plan. On December 6, 1988, the bankruptcy court awarded attorneys fees and costs under TILA in the amount of $1,009.50 and denied Kissell's motion to dismiss, revoke confirmation, and modify the plan. The bankruptcy court held that Kissell's allegation that confirmation of the plan was procured by fraud was not supported by the evidence and thus, the plan was not revocable under § 1330(a).

A timely appeal was taken to the United States District Court for the Eastern District of Pennsylvania where, although the district court affirmed the finding that there was no fraud, the court reversed the bankruptcy court's order denying Kissell's motion to dismiss, revoke confirmation and modify the plan. The district court vacated confirmation of Szosteks' Chapter 13 plan and remanded the case on the basis that neither the bankruptcy court nor the trustee had fulfilled its independent obligation of insuring that the Szosteks' plan complied with 11 U.S.C.A. § 1325(a)(5). However, the district court affirmed the bankruptcy court's award of attorneys fees. The Szosteks appeal.

Since the district court sits as an appellate court in reviewing cases from the bankruptcy court, the district court is neither a finder of fact, nor is any more qualified than the court of appeals to evaluate the decision of the bankruptcy court. Consequently, our review on appeal from the district court in a bankruptcy case is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981).

II.

We are faced here with a clash between two seemingly divergent policies involved in the Bankruptcy Code. On the one hand is the policy of finality, as evidenced by § 1327, which provides that, absent fraud, confirmation of a debtor's plan binds both the debtor and the creditors. Under § 1327, a confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation. On the other hand is the language of § 1325(a) which provides that a court shall confirm a plan which meets the conditions listed in that section. The conflict resulted here when a confirmation order was entered for a plan which did not provide for the calculation of present value of the creditor's claim, a requirement of § 1325(a)(5)(B)(ii). Thus, we must determine whether, in the absence of fraud, the failure of a creditor to attend the confirmation hearing, ...


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