In re Bonanno

• Citation: 78 BR 52
• Decision Date: 22 September 1987
• Docket Number: Bankruptcy No. 85-02865G.
• Parties: In re Donn E. BONANNO, Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

78 B.R. 52 (1987)

In re Donn E. BONANNO, Debtor.

Bankruptcy No. 85-02865G.

United States Bankruptcy Court, E.D. Pennsylvania.

September 22, 1987.

Meyer Simon, Green & Simon, Glenside, Pa., for movants, Augustine Denucci and Frances Denucci.

Jack K. Miller, Philadelphia, Pa., for debtor, Donn E. Bonanno.

Edward Sparkman, Philadelphia, Pa., standing chapter 13 trustee.

OPINION

BRUCE FOX, Bankruptcy Judge:

Section 1301(a) of the Bankruptcy Code provides that, in certain situations, creditors are stayed from collection efforts against individuals who are not in bankruptcy and who are co-obligors on debts owed by a chapter 13 debtors.¹ Section 1301(c) enumerates three grounds for relief from the stay. The prior Bankruptcy Act contained no provision comparable to section 1301. The issue presented in this case is whether a creditor may obtain relief from the chapter 13 co-debtor stay pursuant to 11 U.S.C. § 1301(c)(2) after the entry of an unappealed order of confirmation of a chapter 13 plan which contains an express provision barring the creditor from exercising its rights under section 1301(c). For the reasons set forth below, I hold that the creditor in this case is not entitled to relief pursuant to section 1301(c)(2) from the chapter 13 co-debtor stay.²

I.

The debtor, Donn E. Bonnano, filed a bankruptcy petition under chapter 13 on July 12, 1985. Paragraph 9 of his chapter 13 plan provides as follows: "Confirmation of plan bars claimants from proceeding under 11 U.S.C. § 1301(c)." On July 31, 1986, the debtor filed a modified plan which incorporated by reference paragraph 9 of the original plan.³ On August 6, 1986, the court entered an order confirming the debtor's modified chapter 13 plan.

On April 13, 1987, Augustine Denucci and Frances Denucci ("the movants") filed what they termed a motion for relief from automatic stay under section 362 of the Bankruptcy Code. The movants alleged the debtor and his wife, Anna Bonnano, are indebted to them in the amount of $2,850.00 plus interest on a personal loan. They further alleged that the debtor's chapter 13 plan provides for a distribution to general unsecured creditors of approximately 42% over a period of 48 months. They requested relief in order to proceed against the debtor's wife for all amounts due them which are not proposed to be paid by the debtor through his chapter 13 plan.

At the hearing held on their motion, the movants refined their legal position somewhat and asserted that because the debtor does not propose to pay their claim in full, they are entitled to relief under 11 U.S.C. § 1301(c)(2).⁴ The debtor does not dispute that his plan does not provide for full payment of the movants' claim; however, he argues that confirmation of his plan bars relief from the stay.⁵ See 11 U.S.C. § 1327(a).⁶

II.

The policies underlying chapter 13 codebtor stay are well summarized in the legislative history:

Section 1301 is designed to protect a debtor operating under a chapter 13 individual repayment plan case by insulating him from indirect pressures from his creditors exerted through friends or relatives that may have cosigned an obligation of the debtor. The protection is limited, however, to ensure that the creditor involved does not lose the benefit of the bargain he made for a cosigner. He is entitled to full compensation, including any interest, fees, and costs provided for by the agreement under which the debtor obtained his loan. The creditor is simply required to share with other creditors to the extent that the debtor will repay him under the chapter 13 plan. The creditor is delayed, but his substantive rights are not affected.

H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 426 (1977) ("House Report"), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6381. In light of these policies, it is therefore not surprising that the Code further provides that the court can, and perhaps must, grant relief from the stay when the plan does not propose full payment of the debt subject to the provisions of section 1301(a). See House Report at 426.

The debtor concedes, as he must, that relief from stay under section 1301(c)(2) would have been mandated had the movants sought relief prior to confirmation. His position is that the movants' right to relief under that section expired when the confirmation order was entered and that, pursuant to 11 U.S.C. § 1307, they are now bound by the terms of paragraph 9 of his confirmed plan. The few courts which have considered whether the confirmation of a plan containing a provision barring collection efforts against a co-debtor precludes relief under section 1301(c)(2) have differed in their conclusions.

The leading case supporting the debtor's position is In re Betts, 8 B.R. 799 (Bankr.S. D.Ohio 1981). In Betts, the court denied a creditor's section 1301(c)(2) motion on the basis of a confirmed plan containing a provision equivalent to that of paragraph 9 of the confirmed plan in the instant case. In its discussion, the court recognized that the provision effectively "broadened" the scope of the chapter 13 co-debtor stay and then considered whether the provision might be ineffective as inconsistent with section 1301(c). See 11 U.S.C. § 1322(b)(10).⁷ The court held that, given the rehabilitative purposes of chapter 13, there was no inconsistency. Central to the court's reasoning was its recognition that the plan resulted in a mere postponement of and not a total denial of the creditor's rights against the co-debtor. The court also stated that the plan, once confirmed, bound the creditor. Accord, In re Weaver, 8 B.R. 803 (Bankr.S. D.Ohio 1981).⁸

In contrast, in In re Britts, 18 B.R. 203 (Bankr.N.D.Ohio 1982), the court granted a creditor relief under section 1301(c)(2) notwithstanding the confirmation of a plan which restricted its right to pursue the co-debtor. The court employed the same analytic framework as in Betts, focusing on whether the plan provision was permissible under 11 U.S.C. § 1322(b)(10). The Britts court reached the opposite conclusion and held that "protection of co-debtors beyond the provisions of Section 1301 of the Bankruptcy Code is inconsistent with the spirit of the Bankruptcy Code, and in particular with the intent of Section 1301." 18 B.R. at 206. The court reasoned that the plan provision improperly extended bankruptcy protection to individuals who have not filed for relief under the Code and contravened Congress' intent, under section 1301, to preserve creditors' substantive rights against co-debtors. The court held that a plan provision which limits a creditor's right to proceed against a co-debtor may bind only a creditor which affirmatively accepts the debtor's plan. The court did not discuss, or even cite, section 1327.

In my view, by focusing on section 1322(b)(10), neither Betts nor Britts, analyzed the correct issue. The question here is not whether a plan may permissibly contain a provision which expands the scope of section 1301, see In re Crompton, 73 B.R. 800, 804 (Bankr.E.D.Pa., 1982) (objection to confirmation of plan which proposed to expand the co-debtor stay sustained), but rather, once a plan containing the potentially objectionable provision has been judicially confirmed, whether the court order binds the creditors.⁹ In short, the answer to the question must be found under section 1327(a), not section 1322(b)(10). Or, as one court has put it, "the question boils down to this: Does § 1327(a) mean what it says?" In re Evans, 22 B.R. 980, 982 (Bankr.S.D.Cal.1982), aff'd, 30 B.R. 530 (9th Cir.Bankr.1983).

As a general rule, the order of confirmation is "res judicata as to all justiciable issues decided or which could have been decided at the hearing on confirmation." In re Flick, 14 B.R. 912, 918 (Bankr.E.D. Pa.1981), quoting In re Lewis, 8 B.R. 132 (D.Idaho 1981); accord, e.g., In re Brown, 76 B.R. 1013 (Bankr.E.D.Pa.1987). In its most straightforward application, section 1327 bars a creditor from relitigating whether the confirmed plan satisfies the requirements of section 1322 and 1325. See Matter of Gregory, 705 F.2d 1118 (9th Cir.1983) (creditor may not challenge good faith of debtor's plan, see 11 U.S.C. § 1325(a)(3), after confirmation of plan); In re Hebert, 61 B.R. 44 (Bankr.W.D.La.1986) (confirmation order bars Internal Revenue Service from asserting that debtor's plan does not comply with section 1322(a)(2)); In re Risser, 22 B.R. 868 (Bankr.S.D.Cal.1982) (even though court now recognizes that plan does not comply with section 1322(b)(5), confirmation order is binding and precludes grant of relief from stay). See also 11 U.S.C. § 1141; Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987) (in chapter 11 case, provision of reorganization plan which contained provision releasing guarantors from liability and which was confirmed without objection is res judicata in separate collection action by creditor against the guarantor).¹⁰ As the Ninth Circuit succinctly stated in Matter of Gregory:

The failure to raise an objection at the confirmation hearing or to appeal from the order of confirmation should preclude an attack on the plan or any provision therein as illegal in a subsequent proceeding."

705 F.2d at 1121.

Courts have also generally held that section 1327 precludes a creditor from obtaining relief from the automatic stay based on pre-confirmation events. "The issues of adequate protection, lack of equity and necessity for a successful rehabilitation of the Chapter 13 debtor were all res judicata as of the confirmation of the plan," even though no time limit is specified in the Code by which creditors must seek relief under section 362(d). In re Evans, 30 B.R. 530 (9th Cir.Bankr.1983); accord, e.g., In re Pizzulo, 33 B.R. 740 (Bankr.E.D.Pa. 1983); In re Risser. These holdings while based primarily on the plain language of section 1327 and principles of finality, also are premised, at least implicitly, on a recognition of the rehabilitative function of ...