UNITED STATES BANKRUPTCY COURT

IN RE: JEFFREY K. HILER SHELLEY R. HILER CASE NO. 94-50229

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

JEFFREY K. HILER CASE NO. 94-50229

SHELLEY R. HILER

DEBTORS

MEMORANDUM OPINION

This case is before the court on the motion of Bank One (successor in interest to Liberty National Bank and Trust Company), by counsel, to vacate or amend orders of the court entered on June 14, 1999 with respect to two claims filed in behalf of the bank in the debtors’ chapter 13 case.

FINDINGS OF FACT:

The debtors filed a joint petition for relief under chapter 13 of the Bankruptcy Code in this court on February 17, 1994.

The debtors’ chapter 13 plan, filed with the petition and served on all creditors, provided that the holder of any allowed secured claim shall retain a lien on the collateral securing the claim “until the amount for which the claim is allowed as secured is paid in full,”[1] and further that the trustee shall make periodic payments to the holder of an allowed secured claim at a rate in excess of any decrease in value of personal property securing the claim.

The plan further provided –

The holder of an allowed secured claim shall receive interest on such claim at the rate of ten percent, annual percentage rate, provided that such claimant [claim holder] shall timely file a supplemental claim for such interest upon having received payment of the secured claim from the trustee and such interest shall be paid before distribution is made to unsecured creditors. (Underscoring and bracketed words provided)

With respect to creditors holding allowed unsecured claims, the plan provided the claims of such creditors shall be paid to the greatest extent possible from payments to be made by the debtors to the trustee to fund the plan. The debtors’ plan provided they would pay to the trustee $600 per month for 60 months, or a total of $36,000. However, the percentage of payment to holders of allowed unsecured claims was undeterminable until secured claims, including interest, administrative expenses, and certain unsecured claims which were to be paid in full, were satisfied. Thus, the plan was a so-called pool plan in its treatment of holders of other unsecured claims.

Liberty National Bank, the predecessor in interest of the movant, filed two claims on which it received payments. These claims are denominated on the Claims Register as Claims No. 3 and 4.

Claim No. 3 is for the amount of $13,831.92, plus interest at the rate of 11% per annum beginning March 6, 1994[2] until paid. The collateral securing the claim is identified as a 1993 Ford Ranger in which the bank holds a perfected security interest. The claim does not state the value of the collateral securing the claim.

Claim No. 4 is for the amount of $14,850.42, plus interest at the rate of 8.50% per annum beginning March 6, 1994[3] until paid in full. The collateral securing the claim is identified as a 1992 Chevrolet Beretta in which the bank holds a perfected security interest. The claim does not state the value of the collateral securing the claim.

These claims were filed in behalf of the bank by the law firm of Mapother and Mapother on March 25, 1994.

The Chapter 13 Trustee’s Report and Recommendation on Confirmation of the Plan was filed with the court on April 15, 1994. The trustee filed an amended report on April 29, 1994. The trustee recommended that Claim No. 3 be allowed as a secured claim in the amount of $11,525.00, based on the value of the 1994 Ford Ranger. The balance of this claim was allowed as an unsecured claim in the amount of $2,306.92 for purposes of distribution under the plan. The trustee recommended that Claim No. 4 be allowed as a secured claim in the amount of $8,125.00, based on the value of the 1992 Chevrolet Beretta. The balance of the claim in the amount of $6,725.00 was allowed as an unsecured claim for purposes of distribution under the plan.

The chapter 13 trustee’s report, which was served on counsel who filed the claims for Liberty National Bank, stated that the foregoing values would be used by the trustee for the purpose of determining the allowed amount of secured claims. The report also stated that any interested party who disputed those values, could present an objection thereto at the confirmation hearing provided reasonable notice of such objection was given to the debtors and the trustee prior to the hearing on confirmation of the plan to be held on May 11, 1994.

The Chapter 13 Trustee’s Report and Recommendation which was served on counsel who filed the claims of the bank also stated –

Creditors holding allowed secured claims are entitled to a discount to the extent of the secured amount at the rate of 10% interest, and should file supplemental claims for the discount when they have received the secured amount.[4]

Thus, the bank received two notices, as set out in the debtors’ chapter 13 plan and in the Chapter 13 Trustee’s Report and Recommendation on Confirmation of the Plan, of the necessity of filing supplemental claims for accrued interest once the allowed amount of the secured claims had been paid in full.

The bank did not object to the values assigned by the chapter 13 trustee to the motor vehicles for the purpose of fixing the allowed amount of each of the secured claims of the bank.

Both debtors were employed and used the motor vehicles in question to go to and from work.

The debtors’ chapter 13 plan was confirmed by the court on May 11, 1994. The payments under the plan were implemented by a payroll deduction order directed to the wife’s employer. This order was entered March 17, 1994, a month after the case was filed and two months prior to confirmation of the plan.

The debtors made payments under the plan during four years of the five-year plan. During this period Shelley R. Hiler was off work on several occasions for health reasons and had no wages from which plan payments could be deducted. Nevertheless, the debtors managed to pay to the chapter 13 trustee $31,183.55 of the $36,000 called for by the plan. A total of $28,468.49 was paid to creditors.

According to the final accounting of the chapter 13 trustee, the allowed principal amounts of the two secured claims of Liberty National Bank were paid in full by November 30, 1997.

Liberty National Bank did not at that point in time file supplemental claims for the amount of interest that had accrued on Claims No. 3 and 4 between May 11, 1994, the date of confirmation of the plan, and November 30, 1997, the date of payoff of the allowed principal secured amount of each of the claims. The court has calculated the interest that accrued on Claim No. 3, the claim secured by a security interest in the 1993 Ford Ranger, as $2,643.83, and the interest that accrued on Claim No. 4, the claim secured by a security interest in the 1992 Chevrolet Beretta, as $1,897.15. The accrued interest for which the bank was entitled to file supplemental claims totals $4,540.98.

Because the bank did not timely file supplemental claims for the interest that had accrued on its two claims, the chapter 13 trustee commenced making payments on allowed unsecured claims, including the allowed unsecured amounts of the two claims of the bank.

The unsecured portion of Claim No. 3 that remained unpaid on November 30, 1997 was $2,306.92. The debtors’ plan provided that the unsecured portion of this claim was to be paid in full because the contract for the purchase of the 1993 Ford Ranger was co-signed by Bob Hiler, the father of the debtor Jeffrey Hiler. The unsecured portion of this claim was paid in full by the chapter 13 trustee, as provided by the plan.

The debtors’ plan also provided that “[t]he debt owed to Education Financial Services is a guaranteed student loan and will be paid in full pursuant to this plan.” Actually, the debtor Shelly R. Hiler owed two general unsecured loans to Educational Financial Services of Indianapolis, Indiana, one for $794.18 and another for $5,304.05. These loans were paid in full from disbursements made by the chapter 13 trustee in accordance with the plan.[5]

The trustee made a pro rata distribution of approximately 3% on all other allowed unsecured claims, including disbursement of $265.62 on the $6,725 unsecured portion of Claim No. 4 of the bank.

The trustee paid a total of $8,818.49 on unsecured claims. A much lesser amount would have been disbursed on these claims had Liberty National Bank timely filed supplemental claims for the interest due on the allowed principal amount of its two secured claims.

The $4,540.98 in interest that accrued on the two secured claims of the bank between May 11, 1994, the date of confirmation of the plan, and November 30, 1997, the date of payment of the allowed principal amount of the bank’s two secured claims, was less than the $8,818.49 the trustee disbursed on unsecured claims.

The bank did not receive payment of the interest on the allowed amounts of its secured claims due to the failure of the bank to comply with the provision of the plan requiring the bank to file supplemental claims for such interest in order to obtain payment of accrued interest.

On April 6, 1999 the debtors converted their joint chapter 13 case to a joint case under chapter 7 of the Bankruptcy Code. The converter petition was accompanied by amended schedules listing approximately $2,000 in medical debt incurred by Mrs. Hiler while the plan was in progress. See title 11 U.S.C. § 1305. The debtors’ superseding chapter 7 proceeding is a no-asset case.

The Statement of Intention filed by the debtors on conversion to chapter 7 indicates an intention on their part to reaffirm the debts evidenced by the proofs of claim of Liberty National Bank. However, in their Statement of Intention the debtors also assert the secured claims of the bank on the two motor vehicles in question were “(paid through Chapter 13).”

On May 4, 1999, shortly after conversion to chapter 7, the debtors, by counsel, filed duplicate motions with respect to each of the claims of Liberty National Bank (Bank One) alleging that the allowed amount of each of the secured claims of the bank had been paid in full in the debtors’ chapter 13 case prior to conversion of their case to a case under chapter 7. The motions requested orders finding the motor vehicles securing the bank’s claims had been redeemed by the debtors during their chapter 13 case. The debtors also requested a finding that the balance of the indebtedness owed to the bank under the terms of the Retail Installment Contract and Security Agreement evidencing the purchase of each vehicle be found to be unsecured claims dischargeable in the debtors’ chapter 7 bankruptcy case.

The foregoing motions were noticed for hearing on June 14, 1999 and were served by mail on counsel for Bank One. There was no response in behalf of the bank to the motions. At the hearing on June 14, 1999 the court entered orders sustaining both motions.

As a result of the acquisition of Liberty National Bank and Trust Company by Bank One, the law firm of Roth, Foley, Bryant, Cooper & Holloway apparently replaced Mapother & Mapother as counsel with respect to the claims of the bank in this case, although there has been no notice of such change in representation filed in the case. Counsel for the debtor was somehow made aware of this change in representation of the bank and caused notice of the foregoing motions to be served on replacement counsel for the bank. Proper service of the May 4, 1999 motions requesting orders finding the debtors had redeemed the motor vehicles in question from the liens of the bank is not at issue.

As indicated at the outset of this memorandum opinion, this matter is now before the court on the motion of Bank One (formerly known as Liberty National Bank), to vacate or amend the orders of the court entered June 14, 1999. These orders recite that the secured claims of the bank were fully paid in the debtors’ chapter 13 case, that the balance of the claims of Bank One are unsecured debts dischargeable in bankruptcy. The orders direct the bank to release its liens on the motor vehicles in question. The motion to vacate or reconsider these orders is made pursuant to Rules 9023 and 9024 of the Federal Rules of Bankruptcy Procedure.

The court is unable to discern from the record to what extent the failure of Liberty National Bank and Trust Company or Bank One to file supplemental claims for interest may have been due to Bank One’s acquisition of Liberty National Bank and resulting change in ownership of the claims or the change in legal representation during the course of these proceedings. See Rule 3001(e), Federal Rules of Bankruptcy Procedure.

CONCLUSIONS OF LAW:

Counsel for Bank One relies on the unpublished opinion of the Sixth Circuit Court of Appeals in In re Burba, Liberty National Bank & Trust Company v. Burba, No. 93-6479 (1994). See Rule 28(g), Sixth Circuit Rules of Appellate Procedure.

Factually, the Burba case and the present case are similar.

On November 9, 1989, the Burbas filed a joint petition for relief under chapter 13 in the U.S. Bankruptcy Court for the Western District of Kentucky. The debtors listed Liberty National Bank & Trust Company as a secured creditor. The bank filed a proof of claim in the amount of $11,892.33, secured by a purchase money security interest in a 1988 Pontiac Grand Am. The bank’s claim was allowed as a secured claim in the amount of $9,775.00, with interest at the rate of 10.25% annually, based on the fair market value of the automobile, and as an unsecured claim in the amount of $2,117.33.

On July 7, 1992, approximately 32 months into their 60-month plan, the debtors voluntarily converted their case to a case under chapter 7. From monies remitted by the debtors to fund their plan the chapter 13 trustee had disbursed to Liberty National Bank $9,775.00 in satisfaction of the principal amount of the bank’s allowed secured claim, and $552.72 in partial satisfaction of the bank’s allowed unsecured claim. However, for reasons that are unclear, there had been no disbursement by the trustee to the bank in reduction of the interest that had accrued on the allowed amount of the bank’s secured claim from the date of confirmation of the plan to the date of payment of the principal amount of the bank’s allowed secured claim.

The bankruptcy court, the district court, and the court of appeals in the Burba case appear to have accepted as a basis for their opinions the assumption that the allowed amount of the bank’s secured claim had been paid in full in the chapter 13 case prior to conversion of the case to a case under chapter 7. However, as in this case, that assumption is not entirely accurate, because in a chapter 13 case a creditor holding an allowed secured claim is entitled to payment of the present value of the allowed amount of the secured claim, which can be accomplished only by immediate payment in full of the allowed amount of the creditor’s secured claim or by payment of interest when payment is deferred. The lien of the bank, as modified by the plan (reduced to the value of the 1988 Pontiac Grand Am), secured not only the value of the motor vehicle but also the interest that accrued on the allowed amount of the secured claim during the period of delay in payment. Thus, neither in the Burba case nor in the present case was the allowed amount of the bank’s lien claims paid in full as proposed by the debtors’ plans in conformity with title 11 U.S.C. § 1325(a)(5)(B)(ii), and as mandated by the orders confirming the plans, finding the plans complied with the provisions of title 11.

According to legislative history, when a debtor defaults with respect to a term of a confirmed plan, the secured creditor’s lien, as modified by the plan pursuant to title 11 U.S.C. § 1325(a)(5)(B)(i) and (ii), secures the principal amount of the allowed secured claim and accrued interest but not un-accrued interest. Thus, in the Burba case and in this case the bank’s liens as constricted in value pursuant to § 506(a) and § 1325(a)(5)(B)(i) and (ii) of title 11 had not been satisfied when the debtors converted to chapter 7, because the accrued interest on the allowed amount of the bank’s secured claims had not been paid. See Remarks of Representative Edwards and Senator DeConcini, 124 Cong. Rec. H11107 (daily ed. Sept. 28, 1978); S17423 (daily ed. Oct. 6, 1978). The foregoing legislative history also indicates that the consensual lien of a creditor which is subject to modification and is modified by a confirmed plan pursuant to title 11 U.S.C. § 1322(b)(2) and § 1325(a)(5)(B)(i) and (ii) does not thereafter secure the unsecured portion of a bifurcated claim. The lien so modified secures only the allowed amount of the secured claim plus interest that has accrued up to the date the debtor defaults on the plan, which in the Burba case and in this case, because the principal amount of each allowed secured claim was paid in full before default, would be the interest that accrued from the date of confirmation of the plan to the date of payment of the principal amount of the allowed secured claim.[6]

This is easily explained, although perhaps conceptually difficult, as indicated by case law.

New contracts for the purchase of the automobiles in question were entered into between the debtors and the bank pursuant to the debtors’ plan, based on values recommended by the trustee, which were not objected to by the bank, all of which was approved by the court’s order confirming the plan.[7] These new contracts constitute postpetition consumer debts necessary for the debtors’ performance under the plan within the meaning of title 11 U.S.C. § 1305(a)(2). Upon the debtors’ default under the plan, the bank’s claims based on these new postpetition contracts are to be determined as of the date such claims arose (the date of confirmation of the plan), and are to be allowed as if such claims arose before the date of the filing of the petition. When these claims are allowed as if they arose prepetition, they include accrued, but not un-accrued interest. The accrued interest is allowable on these deemed prepetition claims as is the accrued interest on other prepetition claims. These deemed prepetition claims do not include any portion of the unsecured deficiency claims of the bank based on the original contracts between the debtors and the bank for the purchase of the motor vehicles. Those claims were allowed as prepetition unsecured claims and remain as separately allowed in that manner.

The court of appeals in the unreported Burba decision adopts the view, supported by substantial case law, that on conversion of a chapter 13 case to chapter 7, the plan ostensibly having been abandoned by the debtor, is no longer binding on the debtor and consequently is no longer binding on creditors. The courts so holding reinforce this view by citing the fact that in a chapter 11 case the order of confirmation operates as a discharge, title 11 U.S.C. § 541(d)(1)(A), whereas in a chapter 13 case entry of the discharge may be delayed until the debtor completes payments under the plan. 11 U.S.C. § 1328(a).

In reaching the conclusion that on voluntary conversion from chapter 13 to chapter 7 creditors are no longer bound by the confirmed plan, the Sixth Circuit in Burba relied on Smith v. No. 2 Galesburg Crown Finance Corporation, et al., 615 F.2d 407 (7^th Cir. 1980), which in turn relied on 10 Collier on Bankruptcy, ¶ 29.07, pg. 342 (14^th Ed. 1978). The Smith case, although decided in 1980, arose under former Chapter XIII of the Bankruptcy Act. The pertinent statements in Collier apparently relied on by the Seventh Circuit in the Smith case are as follows:

…Thus, in Chapter XI, discharge occurs upon confirmation of the arrangement; accordingly, should the debtor default in any of the provisions of the arrangement, the original debt is not revived. Only that percentage of the debt for which the arrangement proposed payment remains as a liability. In Chapter XIII, however, the entire original claim would be revived because the discharge does not occur upon confirmation; rather it takes place when the plan has been consummated. Also, creditors secured other than by an estate in real property or a chattel real may be bound by the provisions of a plan under Chapter XIII to the same extent as unsecured creditors, since secured creditors may be dealt with by the plan.

10 Collier on Bankruptcy, ¶ 29.07, pg. 342 (14^th ed. 1978).[8]

…Finally, the failure of a debtor to make any deferred payments under an arrangement confirmed in a Chapter XI proceeding does not revive the original debt, and claims of creditors against the debtor are only for the unpaid amount under the arrangement. But the failure of the debtor to complete payments under a plan confirmed in a Chapter XIII proceeding prevents the entry of a discharge under Section 660, and creditors therefore have claims against the debtor for the full amount of the original debts, less payments actually received, unless a discharge is granted under Section 661 as modified by Rule 13-404(b).[9]

10 Collier on Bankruptcy ¶ 29.10, pg. 359, (14^th ed. 1978).

Unfortunately, the foregoing statements from Collier appear to conflict with Section 669(2) of the Bankruptcy Act, 11 U.S.C. § 1069(2), as added to Chapter XIII by Public Law 456 (S.2234), 82^nd Cong, 2d Sess. (1952). Section 669(2) of Chapter XIII of the Bankruptcy Act provided as follows:

Sec. 669. Where, after the confirmation of a plan, the court shall enter an order directing that bankruptcy be proceeded with –

(1) …

(2) the unsecured debts incurred by the debtor after the confirmation of the plan and before the date of the entry of the final order directing that bankruptcy be proceeded with shall, unless and except as otherwise provided in the plan, share on a parity with the prior unsecured debts of the same classes; provable in the ensuing bankruptcy proceeding, and for such purpose the prior unsecured debts shall be deemed to be reduced to the amounts respectively provided for them in the plan or the order confirming the plan, less any payment made thereunder.

11 U.S.C. § 1069 (repealed).

Identical provisions were added to Chapter XI and Chapter XII of the Bankruptcy Act in 1952. See Sec. 381 of Chapter XI and 486 of Chapter XII (repealed). See 10 Collier on Bankruptcy § 30.04 (14^th Ed. 1978); 9 Collier on Bankruptcy § 10.19 (14^th Ed. 1978).

Obviously the provisions of a confirmed Chapter XIII plan remained binding on unsecured creditors in cases where the debtor had incurred a debt after confirmation of the plan and prior to conversion to bankruptcy, which included the majority of converted cases.[10] The Chapter XIII plan also bound creditors in cases in which the debtor received a discharge under Sec. 661 of the Bankruptcy Act without completing payments under the plan.

It seems clear that in practice the order confirming a Chapter XIII composition plan in effect operated as a quasi-discharge in cases in which debtors subsequently incurred a debt prior to conversion to straight bankruptcy and likewise in cases in which debtors were granted a discharge under Sec. 661 because their inability to complete plan payments in three years was due to circumstances for which they could not justly be held accountable.

Attributing significance to the delay in entry of the discharge in Chapter XIII cases is problematical because the Supreme Court has recognized that once entered the discharge relates back to the date of commencement of the case. Local Loan Company v. Hunt, 54 S.Ct. 695 (1934). This is why under present law certain debts that arise after commencement of a chapter 13 case are deemed to have arisen prior thereto in order that the debts may be compromised or discharged in the chapter 13 case or discharged in a superseding chapter 7 case. Title 11 U.S.C. § 1305(b).

Also, prior to enactment in 1970 of Public Law 91-467, § 3, which added subdivisions f, g, and h to Section 14 of the Bankruptcy Act, the question of whether certain debts were excepted from discharge was determined by the state courts in collection actions in which the discharge had to be pleaded as an affirmative defense. The delay in entry of the discharge in Chapter XIII cases operated as additional protection of debtors from such actions in the state courts. Bank. Act, §§ 611 and 658, 11 U.S.C. §§ 1011 and 1058 (repealed). Thus, the delay in entry of the discharge perhaps had little bearing on the question of the extent to which the confirmed Chapter XIII plan remained binding of the debtor and creditors following conversion of the case from Chapter XIII to straight bankruptcy.

Moreover, although Chapter XIII had been in force approximately 40 years when the 1978 revision of the 14^th edition of Collier was scripted, the authors cite no case law in support of the proposition that on conversion from Chapter XIII to straight bankruptcy the plan is no longer binding on the debtor and therefore is not binding on creditors.

The authors do not discuss the contrary conclusion indicated by the decision in Rice v. Mimms, 291 F.2d 823 (10^th Cir. 1961), interpreting Sec. 657 of the Bankruptcy Act from which § 1327 of the Bankruptcy Code is derived. Section 657 of the Bankruptcy Act provided –

Sec. 657. Upon confirmation of a plan, the plan and its provisions shall be binding upon the debtor and upon all creditors of the debtor, whether or not they are affected by the plan or have accepted it or have filed their claims, and whether or not their claims have been scheduled or allowed or are allowable.

11 U.S.C. § 1057 (repealed).

According to the Tenth Circuit the clear intention of the latter statute was to render a confirmed plan immune from collateral attack or the retraction of money or property submitted to the settlement. In other words, on conversion of a case from Chapter XIII to straight bankruptcy the debtor under prior law was not and under § 1327 of chapter 13 of present law is not entitled to a refund of monies paid into the plan, which in the present case was $31,183.55. Certainly, the debtors in this case remain bound by the plan to that extent.

The conversion of a case from chapter 13 to chapter 7 does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief. 11 U.S.C. § 348(a). In other words, the chapter 7 case is to be administered as if the case were commenced on the date the chapter 13 case was filed. In a chapter 7 case the debtor’s future earnings are not property of the estate. 11 U.S.C. § 541(a)(6). Thus, if the chapter 13 plan were no longer binding on the debtor, the debtor would be entitled to a refund of monies paid into the plan. The chapter 7 trustee is precluded by title 11 U.S.C. § 549(a)(2) from recovering monies disbursed to creditors under the confirmed chapter 13 plan because payments to such creditors were authorized by order of the court. However, § 549(a)(2) of the Bankruptcy Code does not by its terms operate to preclude recovery of such payments by the debtor. Preclusion of recovery by the debtor of monies paid to creditors under a confirmed chapter 13 plan is a function of § 1327 of the Bankruptcy Code. Thus, it is inaccurate to state that on conversion from chapter 13 to chapter 7 the confirmed chapter 13 plan is no longer binding on the debtor and therefore is no longer binding on creditors. One court held that under Sec. 657 of the Bankruptcy Act a debtor could be required to cure a delinquency in plan payments as a condition of conversion from Chapter XIII to straight bankruptcy. In re Edwards, 73 F.Supp. 310 (D.C. S.D. Calif. 1941).

Clearly, under prior law, Sec. 657 of the Bankruptcy Act made a confirmed Chapter XIII plan binding on both the debtor and creditors of the debtor, and Sec. 659 clarified that the provisions of a composition plan remained binding on creditors of a debtor in cases in which the debtor incurred a debt after confirmation of the plan and prior to conversion from Chapter XIII to straight bankruptcy, which as a practical matter included a multitude of Chapter XIII cases.

This court’s search for a rationale, which supports the assertion that on conversion from chapter 13 to chapter 7 claims compromised by a confirmed chapter 13 plan are fully revived, has been unproductive. It is true that, unlike the order of confirmation of a chapter 11 plan, the order confirming a chapter 13 plan does not operate to discharge an individual debtor from that portion of an unsecured claim which is not proposed to be paid under the plan. It is also true that the discharge of the debtor in a chapter 13 case occurs after the plan is consummated, or when the debtor is granted a discharge on the grounds of hardship prior to consummation of the plan, or when the debtor is granted a discharge in a superseding chapter 7 case. However, the delay in entry of the discharge in a chapter 13 case is primarily for the protection of the debtor rather than creditors.

Except as otherwise provided in the plan, confirmation of a chapter 13 plan vests all property of the estate in the debtor. 11 U.S.C. § 1327(b). This effectively terminates the automatic stay provided for by title 11 U.S.C. § 362(a) to the extent the stay protects property of the estate. 11 U.S.C. § 362(c)(1). However, the automatic stay continues in effect after confirmation of the plan to protect the debtor and property of the debtor from creditor interference that might impede consummation of the plan. 11 U.S.C. § 362(a)(1), (2), (5), (6), (7) and (8). The stay continues in effect until a discharge is granted. 11 U.S.C. § 362(c)(2)(C). Another reason for the delay in entry of the discharge in a chapter 13 case is the fact that certain postpetition debts may be dealt with by the plan and discharged in the chapter 13 case, 11 U.S.C. § 1305(c), without the necessity of converting to chapter 7 to obtain a discharge from such debts. 11 U.S.C. § 348(d).

In any event, unless the chapter 13 case is dismissed, dischargeable debts compromised by a confirmed chapter 13 plan remain dischargeable in toto under title 11 U.S.C. § 727 in the superseding chapter 7 case. Consequently, one might ask what purpose is served by a doctrine of full revival of debts on conversion from chapter 13 to chapter 7 when such debts are thereafter discharged in full in the superseding chapter 7 case.

As a practical matter, as illustrated by this case, most superseding chapter 7 cases following conversion from chapter 13 are no-asset cases in which there is no further distribution to creditors. In such cases it is immaterial whether creditors remain bound by the plan with their claims compromised accordingly or whether their claims are considered revived and allowable in full. At the other extreme, in cases in which creditors holding allowed unsecured claims would be paid in full if the assets of the debtor were liquidated in a case under chapter 7, the plan must provide for payment of the claims of such creditors in full. In the event such a case is converted to chapter 7, revival in full of claims which were never compromised is not an issue.

A chapter 13 plan which compromises debts owed to creditors holding allowed unsecured claims is confirmable only if such creditors will receive as much on their claims under the plan than they would receive if the assets of the debtor were liquidated in a case under chapter 7. 11 U.S.C. § 1325(a)(4). Consequently, the more pertinent point is that when the latter type case is superseded by a chapter 7 case in which there are funds for distribution to creditors holding allowed unsecured claims, the distribution to such creditors will be the same whether they are treated as bound by the plan and their claims allowed as compromised by the plan or are treated as not bound by the plan and their claims are allowed as fully revived.

For example, suppose a chapter 7 case which has superseded a chapter 13 case in which the confirmed plan provided for payment of 30% of the claims of creditors holding allowed, unsecured, non-priority claims. Further suppose there are three such creditors in the case holding claims in the respective amounts of $3,000, $1,500, and $500. Their claims, if allowed as compromised by the plan, would be for the respective amounts of $900, $450 and $150, and would total $1,500.

Further suppose, that after payment of expenses of administration and other priority claims, there remains $1,000 for distribution on the claims of these creditors. Each creditor would be entitled to a dividend equal to 2/3 of its claim ($1,000 ¸ $1,500 = .6666, etc.). Thus, the respective dividends payable on the claims of these creditors as compromised by the plan would be $600, $300, and $100.

Now suppose the aborted plan is no longer binding on these creditors and their claims are considered fully revived and are allowed in the respective amounts of $3,000, $1,500 and $500. These claims as revived total $5,000 which when divided into $1,000 results in a dividend of 20% payable on the claims ($1,000 ¸ $5,000 = .20). The dividends payable on the claims of these creditors under this computation are $600, $300 and $100, the same as the dividend they would receive if their claims are allowed as compromised by the aborted chapter 13 plan. Thus, the doctrine of revival in full of claims when a debtor converts from chapter 13 to chapter 7 does not appear to benefit creditors holding compromised, dischargeable, unsecured, non-priority claims.[11]

Priority claims are not affected because such claims must be paid in full in a chapter 13 case, unless the holder of a particular claim agrees otherwise. 11 U.S.C. § 1322(a).

And, of course, debts excepted from discharge remain collectible in full whether the discharge results from confirmation of a composition plan in a chapter 11 case or a discharge issued in the chapter 13 case, or in the superseding chapter 7 case. As a matter of fact, the right of creditors to object to the dischargeability of debts is enhanced when the debtor defaults on the plan because fewer debts are excepted from discharge under the super discharge the debtor receives under title 11 U.S.C. § 1328(a) on completion of the plan than under a hardship discharge granted under § 1328(b) or the discharge granted under § 727 in the superseding chapter 7 case.

Finally, with respect to creditors holding liens on real or personal property of the debtor, the interest of the debtor in such property passes to the bankruptcy estate subject to such liens. Under title 11 U.S.C. §§ 506(a) and 1322(b)(2) the rights of creditors secured by a lien in personal property of the debtor such as the motor vehicles involved in this case can be modified by reducing the reach or extent of the lien to the value of the collateral securing the creditor’s claim, which in turn determines the allowed amount of the creditor’s secured claim.[12] The balance of the claim may be dealt with as an unsecured claim for purposes of the chapter 13 plan. When the plan is confirmed the property of the estate vests in the debtor free and clear of “any” interest of “any” creditor except as otherwise provided in the plan or the order confirming the plan. 11 U.S.C. § 1327(b) and (c). At this point in time the interest of the bankruptcy estate in the motor vehicles in question vested in the debtors with the bank’s liens restricted to the allowed amounts of the bank’s secured claims, and with the bank’s liens purged from the allowed amount of the bank’s unsecured claims. When the debtors voluntarily converted their chapter 13 case to chapter 7 their interest in the motor vehicles again passed to the bankruptcy estate subject to the liens of the bank as reduced in scope and extent by the chapter 13 plan and the order confirming the plan.[13] There is not a hint of language in title 11 U.S.C. § 348 which suggests that on conversion from chapter 13 to chapter 7 the liens of the bank as contracted by the plan and the order confirming the plan are therebv expanded in reach and scope to secure the entire unpaid amount of the original claims of the bank, a condition that did not exist when the chapter 13 case was filed and probably never existed from the time the cars were driven off the sales lot. Such legerdemain, which renders meaningless section 506(a) of the Code and the action of the court in fixing the allowed amount of secured claims under that section, has no place in the adjustment of the rights of debtors and creditors in a bankruptcy case.

Section 348 of the Bankruptcy Code derives from Section 4-312 of “The Bankruptcy Act of 1973,” the bankruptcy bill proposed by the Commission on Bankruptcy Laws of the United States and introduced in the House and Senate in October of 1973 as H.R. 10792, 93^rd Cong., 1^st Sess. and S.2565, 93^rd Cong., 1^st Sess. See Report of the Commission on the Bankruptcy Laws of the United States, July 1973, Part II, pgs. 92-93. The Commission Report is reprinted in Collier on Bankruptcy, Appendix 2. The Commission notes to Section 4-312 of the bill state this section is not intended to invalidate any action taken in the superseded case before conversion to another chapter.

Section 348 of the Bankruptcy Code also derives from Rule 122 of the Rules of Bankruptcy Procedure promulgated by the U.S. Supreme Court on April 24, 1973, which, upon being approved by Congress, took effect October 1, 1973. See 93A S.Ct. 3081, 3110-3112. The Advisory Committee’s Note to the rule states “[t]he rule is not intended to invalidate any action taken in the superseded bankruptcy case before its conversion to bankruptcy.” See 12 Collier on Bankruptcy, pgs. 1-115, 14^th Ed. 1978.

There is nothing in the language of section 348 to suggest it should be interpreted differently from Rule 122 which was in effect from October 1, 1973 until October 1, 1979, a period of six years before the Bankruptcy Code took effect. The evolutionary history of section 348 suggests a confirmed chapter 13 plan remains binding on the debtor and creditors after conversion of the case to a case under chapter 7, except that thereafter the debtor is no longer obligated to fund the plan from the debtor’s future income. The observation in Smith v. Galesburg Crown Finance Corporation, 615 F.2d 407, 411, fn. 9 (7^th Cir. 1980), that holding creditors bound by a chapter 13 plan after conversion to straight bankruptcy would be inconsistent with Rule 122 does not comport with the Advisory Committee’s note to the rule.

As exemplified by § 549(b) of the Bankruptcy Code, 11 U.S.C. § 549(b), Congress knew very well how to reinstate avoided liens upon dismissal of a case. This suggests Congress knew very well how to undo an order bifurcating a claim and fixing the allowed amount of the secured and unsecured portions of the claim, when a case was converted from chapter 13 to chapter 7, if such were the intention of Congress. The judge-made law to the effect that the action of a debtor voluntarily converting a case from chapter 13 to chapter 7 operates to set aside the order confirming the debtor’s plan appears to be without statutory foundation.

Although a chapter 13 plan must provide for submission of such portion of the debtor’s future earnings to the supervision and control of the trustee as is necessary for the “execution” of the plan, in order to be confirmable the plan must also comply with the provisions of chapter 13, one of which permits the debtor to convert the case to a case under chapter 7 at any time. 11 U.S.C. §§ 1322(a)(1), 1325(a)(1), 1307(a). Thus, the right of a debtor to voluntarily convert the case to a case under chapter 7 at any time is inherently part of every confirmed chapter 13 plan. There is no compelling reason why the debtor’s exercise of the right to seek relief under chapter 7 should operate to set aside the order confirming the plan in all respects or to set aside orders implementing the plan. For example, earnings from services performed by the debtor after the case is converted to chapter 7 are no longer property of the estate. 11 U.S.C. § 541(a)(6) and §1306(a)(2). Nevertheless, an order entered pursuant to § 1325(c) directing the debtor’s employer to deduct plan payments from the wages of the debtor for remittance to the chapter 13 trustee remains in effect until set aside by the court. And there is no reason why an order bifurcating a creditor’s claim and allowing the claim as partially secured and partially unsecured should not remain in full force and effect after conversion of a case from chapter 13 to chapter 7, or why an order entered in a chapter 7 case fixing the allowed amount of a secured claim for the purpose of implementing the debtors’ redemption rights under title 11 U.S.C. § 722, should not remain in full force and effect if the debtor voluntarily converts the case to a case under chapter 13.

Under title 11 U.S.C. § 502(a) claims are determined as of the date of the filing of the petition and the conversion from chapter 13 to chapter 7 does not change that date. 11 U.S.C. § 348(a). Of course, after conversion of a case the court may for cause reconsider an order allowing a claim. However, if the claim has been properly allowed in the first instance, reconsideration of the claim after conversion of a case from chapter 13 to chapter 7 as suggested in Burba should not result in a change in the manner in which the claim is allowed. There is no authority in the Code for fixing the allowed amount of a claim except as of the date of the filing of the petition. In the Burba case the bankruptcy court re-allowed the bank’s claim as of the commencement of the case which meant the bank was not entitled to interest because interest does not accrue on an undersecured claim in a chapter 7 case. Thus, re-allowing the claim possibly harmed rather than helped the claimant, a consequence which the court seemingly was attempting to avoid in the Burba case.

The court recognizes that chapter 13 of title 11 applies only in cases under chapter 13. 11 U.S.C. § 103(b). However, chapter 5 of title 11, including subchaper 1, which deals with creditors and claims applies in both chapters 7 and 13. 11 U.S.C. § 103(a). Accordingly, there is no inconsistency in concluding that orders allowing claims in a chapter 13 case remain in full force and effect after conversion of the case to a case under chapter 7.

Thus, when a creditor’s claim is bifurcated in a chapter 13 case and the creditor’s lien as modified by the plan secures the present value of the collateral, which includes interest that accrues thereon prior to conversion of the case to a case under chapter 7, the creditor’s claim remains secured to that extent after conversion of the case to chapter 7. The plan remains binding on the debtor and the creditor to that extent, but the creditor’s lien as modified by the plan does not secure the unsecured portion of a bifurcated claim. This is the general rule that ordinarily should apply and would apply in this case except for the failure of the bank to timely file a supplemental claim for the interest that accrued on its claim from the date of confirmation of the plan to the date of payment in full of the principal amount of its allowed secured claim.

A creditor holding an allowed secured claim in a chapter 13 case is entitled to adequate protection as a condition of continuation of the automatic stay against enforcement of the creditor’s security interest in the collateral securing the claim. 11 U.S.C. § 362(d)(1). From monies paid into the plan by a debtor the chapter 13 trustee generally makes periodic cash payments in excess of the depreciation in value of the collateral to a creditor holding such a claim and for payment of interest that accrues on the allowed amount of the secured claim. This is why a creditor holding an allowed secured claim in a chapter 13 case often is paid ahead of creditors holding allowed unsecured claims, although the Code permits payment of creditors holding secured and unsecured claims concurrently. 11 U.S.C. § 1322(b)(4). Payment of unsecured creditors concurrently with secured creditors may be the exception because the debtor’s payments into the plan may not be large enough to allow payment of creditors holding allowed unsecured claims concurrently with creditors holding allowed secured claims. As a result, in practice, creditors holding allowed secured claims often are paid ahead of creditors holding both priority and non-priority allowed unsecured claims, in a manner that parallels the payment of claims of creditors in a chapter 7 case.

Payment up front of creditors holding allowed secured claims in chapter 13 cases ultimately may benefit creditors holding allowed unsecured claims, because expeditious satisfaction of the allowed amount of secured claims minimizes the accrual of interest to be paid on such claims and may leave more money for distribution on unsecured claims, at least in those cases in which the plan is consummated.

In this particular case the interest on the bank’s allowed secured claims would have been paid in full prior to any distribution to creditors holding allowed unsecured claims had the bank complied with the provisions of the plan and timely filed supplemental claims for the accrued interest, once the allowed principal amount of each of its secured claims was paid.

Not having received payment of the accrued interest on the allowed amount of its secured claims because of its failure to comply with the provisions of the plan, the bank argues that upon the debtors’ voluntary conversion of their chapter 13 case to a case under chapter 7, the bank is no longer bound by the plan; that the bank’s liens are no longer restricted by the provisions of the plan to the allowed amount of its secured claims in the chapter 13 case plus accrued interest; that the bank’s liens as revived now secure the entire balance due on each debt.

The fallacy of this argument, if not heretofore sufficiently explained hereinabove and in footnote 11, is illustrated by the facts of this case with respect to the bank’s security interest in the 1993 Ford Ranger. The secured and unsecured portions of this claim were paid in full, the unsecured portion having been paid to protect the co-signer, the father of the debtor Jeffrey Hiler. In other words, the $11,525 allowed secured amount of this bifurcated claim was paid in full and the allowed unsecured amount of $2,306.92 of the claim was paid in full. It is Hornbook and statutory law that interest does not accrue on a secured claim in a chapter 7 case unless the collateral securing the claim is of sufficient value to cover payment of both principal of the claim and accrued interest. Vanston Bondholders Protective Comm. v. Green, 329 U.S 156, 67 S.Ct. 237, 91 L.Ed. 163 (1946). Section 506(b) of the Bankruptcy Act, 11 U.S.C. § 506(b), codifies the holding in Vanston in part. On conversion to chapter 7, if this claim were reallowed as of the date of commencement of the case as dictated by sections 348 and 502 of the Code, the allowed amount of the claim will have been paid in full. The only thing that will not have been paid is the postconfirmation interest that accrued on the claim during the chapter 13 case. Such postpetition interest would not be allowable in this chapter 7 case because of the inadequate value of the collateral securing the claim. Thus, the bank would not be entitled to postpetition interest in any amount on this claim unless the plan is still binding on the debtor, in which event the bank would be entitled to interest in the amount of $2,643.83. However, if the plan is binding on the debtor, it should be binding on the bank as well.

With respect to the bank’s claim secured by a security interest in the 1992 Chevrolet Beretta, the $8,125.00 principal amount of the bank’s allowed secured claim has been paid in full and $265.62 was paid on the allowed amount of the bank’s unsecured claim of $6,725.42, leaving a balance due and unpaid of $6,459.80. The court has found the amount of interest that accrued on this claim during the period of payment of the principal amount of the claim during the chapter 13 case to be $1,897.15. Thus, the issue is whether the bank’s lien on this car secures only the unpaid accrued interest of $1,897.15, or the entire unpaid balance of $6,459.80 due on the debt, or both. Under title 11 U.S.C. § 1325(a)(5)(B)(i) and (ii) the bank’s lien secures only the unpaid interest of $1,897.15.

This court is of the opinion that the bank would have been entitled to interest payments totaling $4,540.78 had the bank timely filed supplemental claims for such interest as required by the plan. Because of the failure of the bank to timely file supplemental claims for interest, dividends in the total amount of $8,818.49 were disbursed to creditors holding unsecured claims. The court is of the opinion the chapter 13 plan remains binding on the debtors and the bank, and that the bank has waived its right to such interest payments by its failure to file supplemental claims for interest as required by the plan. In re Anderson, 179 F.3^rd 1253 (10^th Cir. 1999); In re Pardee, 193 F.3^rd 1083 (9^th Cir. 1999). To hold otherwise would be grossly unfair to the debtors by holding them responsible for payment of interest that would have been paid except for omissions of the bank. In re Szostek, 886 F.2d 1405 (3^rd Cir. 1989). The bank did not object to the plan requirement that it file supplemental claims for interest.

It could be argued that requiring the bank to file supplemental claims for interest was an impermissible or unlawful provision of the plan that should be unenforceable. However, the Supreme Court has held that unless timely objected to an impermissible provision of a plan is binding on the parties once the plan is confirmed. Stoll v. Gottleb, 305 U.S. 165, 170-171, 59 S. Ct. 134, 83 L. Ed 104 (1938); see also In re Ivory, 70 F.3rd 73 (9^th Cir. 1995); In re Taffi, 68 F.3rd 306, 310 (9^th Cir. 1995); In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 462 (6^th Cir. 1991); Matter of Pence, 905 F.2d 1107 (7^th Cir. 1990); Lawrence Tractor Co. v. Gregory, 705 F.2d 1118, 1121 (9^th Cir. 1983); In re Kentucky Lumber Co., 860 F.2d 674, 679 (6^th Cir. 1988). Provision was made for preferential payment of interest to the bank and the bank was in a better position to compute accrued interest based on the date payments were credited to reduce the principal amount of the debt.

This court is reasonably convinced the decision in Dewsnup v. Timm, 112 S. Ct. 773 (1992) is inapplicable to the facts of this case.

In Dewsnup, a chapter 7 case, the Supreme Court held –

… that § 506(d) does not allow petitioner (the debtor) to “strip down” respondents’ lien, because respondents’ claim is secured by a lien that has been fully allowed pursuant to § 502….

Id., at page 778.[14]

In the present case the bank’s secured claims were not fully allowed. Pursuant to the recommendation and request of the chapter 13 trustee on notice to the bank, and after a hearing, the bank’s liens were stripped down to the value of the collateral and the bank’s claims were allowed as partially secured and partially unsecured in the chapter 13 case. There are no grounds for reconsidering in the debtors’ superseding chapter 7 case the manner in which the claims have been previously allowed.

Title 11 U.S.C. § 502(a) provides –

(a) a claim or interest, proof of which has been filed under section 501 of this title, is deemed allowed, unless a party in interest … objects.

According to legislative history “[t]he Rules and case law will determine who is a party in interest for purposes of allowance. The case law is well developed on this subject today….” (H. Rept. No. 95-595 to accompany H.R. 8200, 95^th Cong. 1^st Sess. (1977) pp. 353-355), reprinted in Collier on Bankruptcy, Appendix 2.

Rule 3007 of the Federal Rules of Bankruptcy Procedure provides –

An objection to the allowance of a claim shall be in writing and filed. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession and the trustee at least 30 days prior to the hearing. If an objection to a claim is joined with a demand for relief of a kind specified in Rule 7001, it becomes an adversary proceeding.

The rule does not address the issue of who qualifies as a party in interest for purposes of objection to a claim. The Advisory Committee Note to the rule recognizes the automatic allowance of a claim not objected to and that, while creditors may make objections to the allowance of a claim, the demands of orderly and expeditious administration have led to a recognition that the right to object is generally exercised by the trustee. Rule 3012 of the Federal Rules of Bankruptcy Procedure recognizes the authority of the court on motion of a party in interest to determine the value of a claim secured by a lien on property in which the estate has an interest.

We know from the facts of the Dewsnup case the trustee did not object to the creditor’s secured claim and in fact contemplated abandonment of the estate’s interest in the two tracts of real estate securing the claim, on the grounds there was no equity in the property that would inure to the benefit of creditors holding general unsecured claims. The bankruptcy court ruled Mrs. Dewsnup had no equity in the property and therefore did not have an exempt interest in the property. In re Dewsnup, 87 B.R. 676 (Bkrtcy. D. Utah 1988).

There are numerous cases holding that on such facts the debtor in a chapter 7 case is not a party in interest and therefore does not have standing to object to the allowance of a creditor’s claim. In re Kieffer-Nickes, Inc., 226 B.R. 204 (8^th Cir. BAP 1998); In re Quatre “C” Corp., 197 B.R. 965 (D.C. S.D. Tex. 1996); Caserta v. Tobin, 175 B.R. 773 (D.C. S.D. Fla. 1994); In re Sobiech, 131 B.R. 917 (D.C. S.D.N.Y. 1991)[15]; In re Sun Ok Kim, 89 B.R. 116 (D.C. Hawaii 1987); In re Drost, 228 B.R. 208 Bankr. N.D. Ind. 1998); In re Costello, 184 B.R. 166 (Bankr. M.D. Fla. 1995); In re Woods, 139 B.R. 876 (Bankr. E.D. Tenn. 1992); In re Coleman, 131 B.R. 59 (Bankr. N.D. Tex. 1991); In re Olsen, 123 B.R. 312 (Bankr. N.D. Ill. 1991); In re Rabgak,, 79 B.R. 960 (Bankr. E.D. Pa. 1987); In re Umbles Drew-Hale Pharmacy, Inc., 80 B.R. 421 (Bankr. N.D. Ohio 1987); In re Nefferdorf 71 B.R. 217 (D.C. E.D. Pa. 1984).

As indicated by the cases cited in In re Olson, 123 B.R. 312 (Bankr. N.D. Ill. 1991), a debtor in a liquidation bankruptcy case under the Bankruptcy Act did not have standing as a party in interest to object to a creditor ‘s claim except perhaps to protect the debtor’s interest in exempt property or unless the objection would benefit creditors generally or result in surplus assets to be returned to the debtor. Kapp v. Naturelle, Inc., 611 F.2d 703, 706-707 (8^th Cir. 1979). Apparently no such facts existed in the Dewsnup case. Moreover, the exemption provisions of the Code cannot be utilized to avoid a consensual lien on an exempt interest in real estate. 11 U.S.C. § 522(f).

The debtor did not object and probably did not have standing to object under section 502(b)(1) to the allowance of the secured party’s claim in Dewsnup. Nor did the trustee or any creditor object. There being no objection, the claim was deemed allowed as filed (as fully secured) and passed through bankruptcy in that manner unaffected by the bankruptcy.

It would seem strange that a chapter 7 debtor without standing under section 502(b) and Rule 3012 to object to the secured creditor’s claim would have standing to initiate an adversary proceeding to “strip down” the secured creditor’s consensual lien on two tracts of farmland in which the debtor did not have an equitable or exempt interest.

In Gaglia v. First Federal Sav. & Loan Ass’n., 889 F.2d 1304 (3^rd Cir. 1989), the court attached significance to the fact that paragraph (1) of subsection (d) of section 506 was deleted from the Code by the 1984 amendments. As originally enacted paragraph (1) of subsection (d) instructed that a lien securing a claim against the debtor passed through bankruptcy unaffected unless a party in interest requested the court determine and allow or disallow such claim under section 502 of title 11. It would appear the deleted language was superfluous because section 502(a) provides a proof of claim filed under section 501 is deemed allowed unless objected to by a party in interest. Consequently, if a creditor files a claim asserting a lien on property of the debtor the lien passes through bankruptcy unaffected unless a party in interest objects. The party in interest requirement remains extant in section 502(a) of title 11 and in Rule 3012 of the Federal Rules of Bankruptcy Procedure.

Under section 502(b) of the Bankruptcy Code the amount of a claim is determined as of the date of the filing of the petition. On that date, by reason of the filing of the petition, all of the debtor’s legal and equitable interest in property passes to the bankruptcy estate. Therefore, on the petition date a chapter 7 debtor is not a party in interest except as provided in section 522, which protects the debtor’s exempt interest in property that passes to the estate, or section 722, which accords the debtor the right to redeem certain personal property from a lien securing a consumer debt. A chapter 7 debtor is not on the date of the filing of the petition a party in interest entitled to object to consensual liens granted by the debtor on real estate in which the debtor has no equitable interest by virtue of the fact the liens exceed the value of the real estate, as in the Gagalia and Dewsnup cases. The subsequent abandonment of the real estate does not alter the moment in time, the petition date, which is the reference date for allowing or disallowing a claim. See Justice Scalia’s dissent in Dewsnup, at pgs. 785-786. See Howard, Dewsnupping the Bankruptcy Code, Journal of Bankruptcy Law and Practice, July/August 1992, Vol. 1, No. 5, pg. 513, at pgs. 530-31.

Despite the obtuse, semantical arguments of counsel in Dewsnup, the difference between the majority and the dissenting justices appears to center on the question of whether section 506(a) operates automatically on a filed and deemed allowed claim or whether the section is passive unless triggered by an objection to the claim by a party in interest, a party with standing to object. The decision of the majority is consistent with the long line of cases hereinabove cited holding that on the facts of the case the debtor was not a party in interest with standing to object to the lienholder’s claim. The dissenters were of the view that 506(a) operates automatically as of the petition date on a deemed allowed claim [see Justice Scalia’s dissenting opinion pg. 785, column 2, lines 24-27], which, if true, perhaps would have conferred on the debtor standing to enforce the section.

In Dewsnup the Supreme Court did not comment on Rule 3012 (former Rule 306 (d)) which authorizes valuation of security.

The court may determine the value of a claim secured by a lien on property in which the estate has in interest on motion of any party in interest and after hearing on notice to the holder of the secured claim and any other entity as the court may direct.

Rule 3012, Federal Rules of Bankruptcy Procedure.

The existence of this rule casts doubt on the observation in Dewsnup that there is no legislative history indicating that Congress intended to change the rule that liens pass through bankruptcy unaffected. Rule 3012, which was approved by the Supreme Court and adopted by Congress, is more than legislative history. It’s the law. The long-standing pre-Code rule as codified by § 506(d) is that a lien passes through bankruptcy unaffected only if there is no request by a party in interest for the court to determine the value of the collateral securing the lien.

The court has discussed the circumstances under which the debtor may be a party in interest who may move pursuant to Rule 3012 for a valuation of security in a chapter 7 case, i.e., to protect or recover an exempt interest of the debtor in property as authorized by § 522 or to redeem an exempt or abandoned item of personal property intended primarily for personal or household use as authorized by § 722, or if disallowance of the claim might result in surplus assets refundable to the debtor. Otherwise, the debtor in a chapter 7 case is not a party in interest with respect to disposition of property of the estate or the proceeds thereof.

The status of an individual debtor in a chapter 13 case in which the debtor is voluntarily committing future income to payment of claims of creditors is different. A chapter 13 debtor has standing to object to the validity and amount of claims the debtor is agreeing to pay, including standing to request valuation of collateral which serves as the basis for fixing the allowed amount of a secured claim. The decision of the Supreme Court in the Rash case cited in footnote 1 to this opinion makes that perfectly clear.

Be that as it may, in the present case the objection to the allowed amount of the bank’s secured claims was initiated by the chapter 13 trustee in his report and recommendation with respect to confirmation of the plan. There can be little doubt that the chapter 13 trustee who was responsible for proper disbursement of monies in the case was a party in interest with standing to object to the allowed amount of the bank’s secured claims. 11 U.S.C. § 1302(b)(1) and (2). Section 1302(b)(1) incorporates § 704(5) of the Code. The bank did not protest the valuation proposed by the trustee on the basis of which the bank’s claims were paid under the plan. By failing to object the bank agreed to the valuation, and on conversion of the case to chapter 7 the chapter 7 trustee and the debtor, as well as the bank, are bound by the valuation.

Assuming that on conversion of the case to a case under chapter 7 there might have been some basis for the chapter 7 trustee to seek reconsideration of the allowed amount of the bank’s secured claims, such reconsideration should not result in a change in the valuation of the motor vehicles securing the claims because claims are allowed as of the date of the filing of the petition, and it is the valuation of the motor vehicles on that date which is controlling. There is no statutory authority for valuing security other than as of the date of commencement of the case. These valuations are the law of the case on the basis of which postpetition interest accrued in favor of the bank on the allowed amount of the bank’s secured claims.

The court has little difficulty in concluding that the security interests of the bank, as modified pursuant to title 11 U.S.C. § 1322(b)(2) and limited by title 11 U.S.C. § 1325(a)(5)(B)(ii), secured the allowed amount of each of the bank’s secured claims plus the interest that accrued thereon from the date of confirmation of the plan until payment of the principal amount of the allowed secured claims.

On the facts of this case the interest that accrued on these claims would have been paid to the bank had the bank timely filed supplemental claims for the interest once the principal amount of each claim was paid.

The inaction of the bank resulted in monies in excess of the amount required to pay the accrued interest being disbursed instead to creditors holding unsecured claims, some of which claims are dischargeable in bankruptcy and some of which were nondischargeable claims that would have survived bankruptcy. The failure of the bank to file supplemental claims for interest operated to the detriment of the debtors. For this reason the court concludes as a matter of law the bank has waived its claims for interest by reason of its failure to comply with the provisions of the confirmed plan.

The proper administration of chapter 13 cases requires rethinking of the notion that on conversion of a case from chapter 13 to chapter 7 the provisions of a confirmed plan are no longer binding on the debtor and therefore should not be binding on creditors. The court has demonstrated the plan remains binding on the debtor, otherwise the debtor would be entitled to a refund of all monies paid into the plan. In fairness, creditors should likewise remain bound by the plan, which is why the interest claims of the bank should be denied in this case.

The proposition that the bank’s lien, the principal amount of which was paid in full in this case, is somehow revived and now secures the unsecured portion of the bank’s claims is rejected. As previously pointed out by the court, the unsecured portion of one of the claims has been paid in full. Allowing the bank’s lien as modified by the confirmed plan pursuant to title 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5)(B)(ii) to secure the unpaid, unsecured portion of the bank’s other claim would be contrary to legislative history. Such double lien dipping may be harmful to creditors holding unsecured claims and thwarts the rehabilitative purpose of the bankruptcy laws.

As indicated, the court does not believe the decision in Dewsnup is applicable. The courts, including the court of appeals for this circuit in the Burba case, have recognized Dewsnup does not apply in chapter 13 cases. In re Bartel, 212 F.3^rd 277, 291, fn. 21 (5^th Cir. 2000); In re McDonald, 205 F.34d 606, 614 (3^rd Cir. 2000); In re Valenti, 105 F.3^rd 55 (2d Cir. 1997); In re Bellamy, 962 F.2d 176, 182-183 (2d Cir. 1992). That chapter specifically authorizes bifurcation of claims secured by a security interest in property other than real property that is the debtor’s principal residence. Bifurcation of claims is also authorized by Rule 3012, as promulgated by the Supreme Court and approved by Congress. There is no statutory or equitable basis for undoing bifurcation of a claim that has occurred pursuant to a confirmed chapter 13 plan merely because the debtors have voluntarily converted their case to a case under chapter 7.

The Dewsnup holding is not applicable in a chapter 7 or chapter 13 case in which there has been a timely objection to a claim, including objection to the value of collateral securing the claim, by a party in interest pursuant to title 11 U.S.C. § 502(b) and Rule 3012 as in this case. In Patterson v. Shumate, 504 U.S. 756, 112 S. Ct. 2242 (1992), decided five months after Dewsnup and during the same term, the Supreme Court, according to Justice Scalia, backtracked unanimously from the methodology it had used in interpreting the phrase “allowed secured claims” in § 506(d) of the Code in Dewsnup. See the concurring opinion of Justice Scalia 112 S. Ct. 2242, at 2250-51. For a critique of Dewsnup see Howard, “Dewsnupping the Bankruptcy Code,” Journal of Bankruptcy Law and Practice, July/Aug. 1992, Vol. 1, No. 5, pg. 513.

The Sixth Circuit apparently agrees that § 1327 of the Bankruptcy Code, 11 U.S.C. § 1327, precludes relitigation not only of issues raised at the hearing on confirmation of a chapter 13 plan but also any issue that could have been raised prior to confirmation. See the cases cited in the court’s unpublished opinion in In re Welch, 1998 W.L. 7739999 (6^th Cir. 1998).

One could say that the issue of whether the liens of the bank, which were reduced (contracted) to the value of the automobiles in question upon confirmation of the plan, would be automatically elongated (expanded) to cover the entire debt if the debtors converted to chapter 7, is an issue that could have been raised prior to confirmation of the plan, with the result the bank is now barred from raising the issue in this superseding chapter 7 case. However, the answer to the question is rather simple. The date of commencement of this superseding chapter 7 case is the same as the date of the commencement of the chapter 13 case (11 U.S.C. § 348), and the reach of the bank’s liens determined by the value of the collateral securing the liens is fixed as of that date. 11 U.S.C. § 502(b). There is no provision in the Code that confers a rubber-like quality to the liens securing allowed secured claims whereby as the lien debt is paid down while payments to unsecured creditors are on hold the liens slowly expand to cover the allowed unsecured portion of the creditor’s claim. If this were true, an allowed secured claim could never be satisfied and the lien ordered released during the chapter 13 case or in the superseding chapter 7 case until the entire debt is fully satisfied or the collateral surrendered to the creditor, which would render the provision of § 506(a) for the bifurcation of claims meaningless.

Dated this _____ day of September 2000

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

Lisa Koch Bryant, Esq.

Helene Gordon Williams, Esq.

Ronald E. Butler, Esq,

J. James Rogan, Esq.

Beverly M. Burden, Esq.

U.S. Trustee

[1] In a chapter 13 case, when a claim is bifurcated as permitted by title 11 U.S.C. § 506(a), we are instructed by title 11 U.S.C. § 1325(a)(5)(B) that, with respect to each allowed secured claim provided for by the plan, the plan must provide that the holder of such claim (the allowed secured claim) shall retain a lien securing such claim (the allowed secured claim, not the entire claim) and must receive as of the effective date of the plan the present value of the allowed secured claim from payments to be distributed under the plan, which requires payment of interest that accrues on the allowed amount of the secured claim during the period of delay in payment. Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879 (1997); United Carolina Bank v. Hall, 993 F.2d 1126 (4^th Cir. 1993); In re Hardzog, 901 F.2d 858, 860 (10^th Cir. 1990); Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982). In the case before the court there is no dispute about the value of the collateral or the interest rate.

[2] This date is several weeks after the commencement of the debtors’ chapter 13 case on February 17, 1994.

[3] Id. As indicated elsewhere in this opinion, interest does not accrue on undersecured claims between the petition date and the date of confirmation of the plan. See fn. 6.

[4] This makes sense only if the allowed amount of the secured claim is conceived of as including interest that accrues during the period of payment of the principal amount of the claim.

[5] There was no objection by creditors or the chapter 13 trustee to such preferred treatment of these nonpriority unsecured claims.

[6] The Supreme Court has held interest does not accrue on an undersecured claim between the date of commencement of a reorganization case and the date of confirmation of the plan. United Sav. Ass’n. v. Timbers of Inwood Forest, 108 S.Ct. 626 (1988). Thus, in the present case the secured creditor is entitled to interest only from the date the order confirming the plan and fixing the allowed amount of the creditor’s secured claim based on the value of the collateral. The right to receive interest continues until the allowed principal amount of the secured claim is paid.

[7] Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427, 429, fn. 2 (6^th Cir. 1982).

[8] Under the Bankruptcy Act secured creditors were not dealt with by a Chapter XI plan. Title 11 U.S.C. §§ 306(1), 307(2) and 357 (repealed).

[9] This section was the forerunner of the hardship discharge provided for by § 1328(b) of the Bankruptcy Code.

[10] Life goes on after confirmation of a repayment plan. The incurrance of post-confirmation debt, particularly medical debt by individual debtors, was a fact of life which the foregoing legislation recognized. In the present case conversion to chapter 7 occurred because of Mrs. Hiler’s health problems and post-confirmation medical bills which she had incurred.

[11] If a debtor should win the lottery after confirmation of a composition plan, the trustee or the holder of an allowed unsecured claim can request modification of the plan. 11 U.S.C. § 1329.

[12] Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879 (1997); United Carolina Bank v. Hall, 993 F.2d 1126 (4^th Cir. 1993); In re Hardzog, 901 F.2d 858, 860 (10^th Cir. 1990); Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6^th Cir. 1982).

[13] On the filing of the original chapter 13 petition the contracts between the debtors and bank for the purchase of the vehicles were terminated, but not the perfected liens securing the debt evidenced by the agreements. The confirmation of the plan created new contracts between the debtors and the bank for the purchase of the vehicles pursuant to which the debtors were to pay the bank the present value of the vehicles on a delayed basis, which required payment of interest on the allowed amount of the bank’s secured claims. The allowed unsecured portions of the bank’s claims were not included in the new contracts for the purchase of the vehicles.

The conversion of the case to chapter 7 left the bank’s reconfigured lien on the motor vehicles intact in the same manner as the filing of the original chapter 13 petition had left the bank’s liens on the motor vehicles intact. However, originally, the bank’s claims were undersecured because the motor vehicles were not of sufficient value to pay the principal amount owing and interest that had accrued on each debt on the date the chapter 13 petition was filed. The bank’s reconfigured liens secured payment of the new contractual debts created by confirmation of the plan for the payment of the allowed amount of the bank’s secured claims plus interest that accrued thereon prior to conversion from chapter 13 to chapter 7 bankruptcy. Presently, the vehicles remain of sufficient value to secure payment of the postpetition interest that accrued on the new contracts created by confirmation of the plan. Ordinarily this interest would have to be paid to redeem the vehicles except for the fiasco on the part of the bank in failing to file supplemental claims for the interest as required by the plan.

[14] As the court observed in Matter of Pence, 905 F.2d 1107 (7^th Cir. 1990), Long v. Bullard, 117 U.S 617, 6 S. Ct. 917, 29 L. Ed. 1004 (1886) stands for nothing more than the proposition, now codified in 11 U.S.C. § 506(d), that unless action is taken to avoid a lien, it passes through a bankruptcy proceeding.

[15] In this case the district court cites 8 Collier on Bankruptcy ¶ 3007(2) (15^th Ed. 1990). Perhaps the more definitive statement of the law appearing in 3 Collier on Bankruptcy ¶ 502.01(2) (15^th Ed. 1991) may not have been published at the time the opinion was written.