In re Linkous

• Decision Date: 14 February 1992
• Docket Number: No. 90-00608,Civ. A. No. 91-0011-D.,90-00608
• Citation: 141 BR 890
• Parties: In re Alvie Stanley LINKOUS, Debtor. PIEDMONT TRUST BANK, Appellant, v. Alvie Stanley LINKOUS, Debtor-Appellee and Laurence P. Morin, Trustee-Appellee.
• Court: U.S. District Court — Western District of Virginia

141 B.R. 890 (1992)

In re Alvie Stanley LINKOUS, Debtor.

PIEDMONT TRUST BANK, Appellant, v. Alvie Stanley LINKOUS, Debtor-Appellee and Laurence P. Morin, Trustee-Appellee.

No. 90-00608, Civ. A. No. 91-0011-D.

United States District Court, W.D. Virginia, Danville Division.

February 14, 1992.

COPYRIGHT MATERIAL OMITTED

William F. Stone, Jr., Martinsville, Va., for appellant.

Ricky G. Young, Williams, Luck & Williams, Martinsville, Va., for debtor.

Laurence P. Morin, Lynchburg, Va., trustee.

MEMORANDUM OPINION

KISER, District Judge.

This case is before me on appeal from the Bankruptcy Court. Piedmont Trust Bank ("Piedmont") has appealed the Bankruptcy Court's denial of its motions to revoke the order confirming the debtor's plan, to convert the case to Chapter 7, and to lift the stay. Piedmont contends that because of inadequate notice and procedural irregularities its claims have been improperly reduced. Both the trustee and the debtor have filed briefs in opposition.

I. STANDARD OF REVIEW

The district court, when reviewing a bankruptcy court's decision, "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed.R.Bankr.P. 8013. The court reviews findings of facts subject to a clearly erroneous standards of review, id., but a de novo standard applies to conclusions of law, Matter of Newman, 903 F.2d 1150, 1152 (7th Cir.1990). No factual issues are disputed in this appeal and, therefore, the de novo standard applies.

II. STATEMENT OF FACTS

Alvie Stanley Linkous ("Linkous") filed for Chapter 13 bankruptcy on April 26, 1990. Linkous had two loans outstanding from Piedmont. The Chapter 13 plan stated that there was an $18,000 loan secured by a mobile home and provided for the payment of $6,000 as a secured debt because the value of the mobile home was $6,000 with the remaining $12,000 unsecured. The second loan was for $4,000 and was secured by an automobile. The plan provided for similar treatment with $1,000 treated as secured and $3,000 as unsecured. The plan further provided for creditors to retain their liens only to the extent that the debt was secured and for a 10% dividend on unsecured claims.

In accordance with Federal Rule of Bankruptcy Procedure (hereinafter "Rule") 3015, Piedmont received a completed copy of Local Form 16.1, which is intended to serve as a summary of the plan, along with a notice that set the bar date for filing claims as September 4, 1990, provided for a meeting of creditors on June 6, 1990, and a confirmation hearing on June 20, 1990.

Piedmont did not attend the creditors' meeting held on June 6, 1990 or the confirmation hearing held on June 20, 1990. Without a motion by a party in interest or notice to Piedmont under Rule 3012 and prior to Piedmont filing its claims, the Bankruptcy Court bifurcated Piedmont's claims into secured and unsecured portions under 11 U.S.C. § 506(a), stripped Piedmont's liens to the values stated in the debtor's plan, and confirmed the plan on June 20. Pursuant to Rule 3002(c), Piedmont filed its proofs of claim on August 16, 1990, well within the ninety-day period following the creditors' meeting. No objections were made to either confirmation of the plan or to the filing of Piedmont's claims.

III. DISCUSSION

The myriad issues raised by the parties can best be stated as three questions: (1) Did Piedmont receive adequate notice in this case?; (2) Can a bankruptcy court bifurcate a claim under § 506(a) when the relevant proof of claim has not yet been filed and the creditor is without notice of the bifurcation hearing because no party in interest has filed a motion seeking bifurcation under 506(a)?; and (3) Is a confirmed plan that contains such bifurcated claims res judicata regarding the treatment of such claims when a party timely files its proofs of claim after confirmation and after the expiration of the period for appealing the confirmation order? After considering the relevant statutes and cases, I have decided that Piedmont lacked appropriate notice of these proceedings and that the Bankruptcy Court exceeded the scope of the confirmation hearing by making a secured status determination pursuant to § 506(a) under these circumstances. Therefore, I will reverse in part the Bankruptcy Court's denial of Piedmont's motion to revoke¹ the confirmation order, with the effect of vacating the confirmation order insofar as it affects Piedmont's claims. I will also remand the case for further proceedings before the Bankruptcy Court. Because the case is being remanded for further consideration, I will not rule on Piedmont's motions to convert to Chapter 7 and to lift the stay. I leave these issues for further consideration by the Bankruptcy Court.

A. Notice

Regarding the issue of notice, the only documents that Piedmont received concerning the bankruptcy — the summary of the plan and the confirmation notice — contain several flaws. First, the summary provided to Piedmont differs to such a degree from the plan itself that, as a matter of law, it cannot constitute a "summary" as provided for in Rule 3015. The document that accompanied the notice was deficient in several respects: 1) it inaccurately stated the amount Piedmont would receive under the plan; 2) it inaccurately stated the amount of monthly payments to the trustee; 3) it inaccurately stated that the duration of the plan was three years instead of five years; 4) it stated that the schedules listed secured debts in the amount of $24,000 but made no mention that the plan proposed to treat only $7,000 of those debts as secured; and 5) it made no mention that the valuation of property was an issue in the case.

Second, the confirmation notice did not fix the time for filing objections to confirmation. This notice is mandated by the Rules. See Fed.R.Bankr.P. 2002(b).

Third, the confirmation notice — the only notice to Piedmont — did not mention that valuation issues under § 506 for the purpose of reducing Piedmont's claims and liens would be addressed in conjunction with the confirmation hearing. This third flaw is, in itself, fatal. As the D.C. Circuit observed: "The content of the notice must reasonably inform the recipient of the nature of the upcoming proceeding. Failure to meet this element renders the notice defective." In re Auto-Train Corp., 810 F.2d 270, 278-79 (D.C.Cir.1987) (citations omitted) (discussing notice for contested matters).

Of course, values are considered at every Chapter 13 confirmation hearing when the plan is evaluated under § 1325. But the nature of that proceeding is different from a proceeding that bifurcates a creditor's claim or strips a creditor's lien after a valuation, which are considered contested matters. See Fed.R.Bankr.P. 9014; see also 9 Collier on Bankruptcy ¶ 7001.051 (15th ed. 1991) (discussing this issue). First, the confirmation hearing, in itself, is not an adversary proceeding or even a contested matter. See Matter of Beard, 112 B.R. 951, 955 (Bankr.N.D.Ind.1990); Matter of Dues, 98 B.R. 434, 440 (Bankr. N.D.Ind.1989); 5 Collier on Bankruptcy ¶ 1324.013 (noting that an objection to confirmation gives rise to a contested matter). Second, the Fourth Circuit recently stressed the importance that the courts should make a valuation under § 506 in light of the purpose of the valuation. See In re Balbus, 933 F.2d 246, 252 (4th Cir. 1991) (examining valuation for the purpose of determining if the debtor is eligible for Chapter 13 relief under § 109(e)). Therefore, the values considered under § 1325 are not necessarily interchangeable with the results of a valuation under § 506 because that valuation concerns a different purpose. In light of the different nature and purpose of the proceedings, notice of a confirmation hearing alone is defective to the extent it attempts to include notice of a § 506 valuation hearing for the purpose of bifurcating a creditor's claim or stripping a creditor's lien.

Piedmont contends that it was entitled to specific notice under Rule 3012 that § 506 valuation issues would be addressed at the confirmation hearing. Piedmont primarily relies on In re Calvert, 907 F.2d 1069 (11th Cir.1990), which supports its position. The trustee asserts that Rule 3012 is merely an additional permissive way for the issue to be presented to the court and that there is no case authority to support the position that Rule 3012 is a mandatory prerequisite to valuation and the resulting confirmation. The trustee, however, has not cited any case authority for this proposition. Rule 3012 reads:

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

The permissive aspect of Rule 3012 lies in the discretion of the court to deny a motion for valuation. See In re Thurston, 130 B.R. 541, 542 (Bankr.W.D.Mo.1991); In re Washington Mfg. Co., 128 B.R. 198, 204 (Bankr.M.D.Tenn.1991). Aside from the verb "may" that confers this discretion on the court, there is nothing to indicate that Rule 3012 is, as the trustee urges, merely optional. The cases addressing Rule 3012 generally indicate that it is the appropriate route for valuation proceedings. See, e.g., In re Calvert, 907 F.2d at 1072; In the Matter of Sandy Ridge Dev. Corp., 881 F.2d 1346, 1354 & n. 20 (5th Cir.1989); In re Crestwood Co., 127 B.R. 213, 215 (E.D.Ark.1991); In re Landing Assocs., Ltd., 122 B.R. 288, 291 (Bankr.W.D.Texas 1990); In re Hermansen, 84 B.R. 729, 735 (Bankr.D.Colo.1988); In re Wilkins, 71 B.R. 665, 668-69 (Bankr.N.D.Ohio 1987). Elementary rules of statutory construction — expressio unius est exclusio alterius — lead to the same result. Rule 3012 does not, however, require a separate hearing. As § 506 itself indicates, the valuation hearing can take place in conjunction with the confirmation hearing.

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