IN RE REGIONAL BLDG. SYSTEMS, INC.

• Decision Date: 22 July 2000
• Docket Number: No. 93-5-7521-JS.,93-5-7521-JS.
• Parties: In re REGIONAL BUILDING SYSTEMS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Maryland

251 B.R. 274 (2000)

In re REGIONAL BUILDING SYSTEMS, INC., Debtor.

No. 93-5-7521-JS.

United States Bankruptcy Court, D. Maryland.

July 22, 2000.

Jay G. Ochroch, Prince Altee Thomas, Fox, Rothschild, O'Brien & Frankel, LLP, Philadelphia, PA, for Universal Suppliers, Inc.

Richard Goldberg, Shapiro & Olander, Baltimore, MD, for Debtor.

Debra Lee Allen, Linda V. Donhauser, Miles & Stockbridge P.C., Baltimore, MD, for the Plan Committee.

Karen H. Moore, Baltimore, MD, Assistant U.S. Trustee.

DECISION RE MOTION OF UNIVERSAL SUPPLIERS, INC. FOR AMENDMENT OF JUDGMENT PURSUANT TO FED.R.CIV.P. 59(e)

S. MARTIN TEEL, Jr., Bankruptcy Judge, Sitting by Designation.

This is a contest between Universal Suppliers, Inc. ("Universal") and the Plan Committee which is administering the property of the bankruptcy estate of the debtor, Regional Building Systems, Inc. ("RBS"), pursuant to a confirmed chapter 11 plan ("the Plan"). Universal has moved for amendment of the judgment sustaining an objection of the Plan Committee to the classification of Universal's claim as a secured claim pursuant to RBS's schedules. For the following reasons, the motion will be denied and Universal's lien will be treated as extinguished by 11 U.S.C. § 1141(c) and the claim-preclusive effect of the Plan under 11 U.S.C. § 1141(a).

Universal says it neglected through oversight to assert its lien prior to confirmation of the Plan. But the order confirming the Plan cannot be vacated under the liberal provisions of Fed.R.Civ.P. 60 to permit belated assertion of Universal's lien. The order confirming the Plan could be revoked only if the order "was procured by fraud." 11 U.S.C. § 1144. Universal has not elected to commence the adversary proceeding required to pursue such revocation. See Fed.R.Bankr.P. 7001.

Instead, Universal argues that the Plan should not be held to have extinguished its lien under 11 U.S.C. § 1141(c) unless the Plan specifically mentioned the lien, and, alternatively, that the Plan does not bind Universal, based on due process grounds. The court rejects both arguments.

I

The court will accept Universal's factual assertions as true for purposes of deciding the objection without actually deciding whether the assertions are accurate.

In 1992, Universal and RBS entered into a consignment agreement whereby RBS granted Universal a security interest in certain materials used in the construction of homes (the "Collateral"). The security interest included the proceeds realized from the utilization of the Collateral by RBS. Subsequently, Universal filed financing statements to perfect its security interest in the Collateral pursuant to Maryland's version of the Uniform Commercial Code.

In November 1993, RBS filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code (11 U.S.C.). RBS's Schedule D, filed in December 1993, listed Universal as the holder of a $358,871.71 claim, secured by collateral with a value of zero.¹ Accordingly, under 11 U.S.C. § 1111(a), the claim was deemed one for which a proof of claim had been filed. However, under 11 U.S.C. § 506(a),² the claim, as scheduled, was only entitled to allowance as an unsecured claim even though RBS acknowledged that a lien existed and even though Schedule D is entitled "Creditors Holding Secured Claims."³

An official committee of unsecured creditors was formed. Universal was a member of the committee. On several occasions, counsel for the committee acknowledged to Universal's representative that Universal held a secured claim, and informed him that if matters were discussed regarding unsecured claims that conflicted with Universal's secured interest, he would be asked to remove himself from the conversation. So Universal was fully aware that it had a lien claim in the case. And Universal had reason to pay attention to the lien: RBS's estate has substantial funds against which Universal now asserts its lien.⁴

Nevertheless, Universal failed to assert its lien until after the court had confirmed the Plan, which made no provision for Universal's lien. Universal points to upheaval in its own affairs as leading to this failure. In December 1995, Universal itself became a debtor under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Pennsylvania. Neither the former management of Universal nor its general corporate counsel informed Universal's bankruptcy counsel about the consignment agreement or the financing statements. In August 1996, Universal filed two separate proofs of claim in RBS's bankruptcy case asserting an unsecured nonpriority claim in the aggregate amount of $358,871.71 (the same amount as RBS had scheduled), thus implicitly acquiescing in RBS's view (see n. 3, supra) that Universal's claim, though supported by a lien, was not entitled to be treated as an allowed secured claim.⁵

In May 1997, almost nine full months after Universal filed its proofs of claim, the court entered an order confirming the Plan. The Plan did not provide for Universal to retain any lien.

The Plan, however, did specifically address the property upon which Universal might assert a lien. Universal was granted limited rights to share in that property, albeit not lien rights: in short, Universal became entitled (with other general unsecured creditors) to receive, after payment of certain other claims, a pro rata distribution from the estate's funds and the proceeds of the liquidation of the estate's other property.⁶

The Plan Committee was formed under the Plan to administer the properties dealt with by the Plan. In October 1997, the Plan Committee filed an objection to the classification of Universal's claim as a secured claim pursuant to RBS's Schedule D. Universal opposed the objection, contending that pursuant to its consignment agreement with RBS, Universal acquired a security interest in certain goods, and that the Plan Committee holds funds representing the proceeds of those goods.

In December 1997, more than 7 months after confirmation of the Plan, Universal filed an amended proof of claim asserting a secured claim of over $740,000. The amended claim attempts to reclassify Universal's claim as secured and seeks as part of the claim more than $380,000 in interest, fees, and other charges, in addition to the $358,871.71 originally claimed.

As noted previously, although the Plan Committee's objection was to the classification of the claim as secured on RBS's schedules, both parties are in agreement that the issue here is whether Universal should be permitted to assert its lien claim against the proceeds held by the Plan Committee.

II

At the outset, it is important to clarify what this dispute does not involve. The court never determined that Universal's lien was worthless. Accordingly, the issue is not whether the court proceeded in a procedurally improper fashion to determine that Universal's lien was worthless. That thus distinguishes this case from cases in which the debtor, failing to bring an adversary proceeding to determine the validity, priority, or extent of the creditor's lien as required by F.R.Bankr.P. 7001, proceeded instead to have the plan declare the lien to be worthless. Deutchman v. Internal Revenue Service (In re Deutchman), 192 F.3d 457, 460 (4th Cir.1999) (part II(B)); Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92-93 (4th Cir.1995) (part II(A)).

III

Instead, the issue is whether, regardless of the validity, priority, or extent of Universal's lien, § 1141(c) and the doctrine of claim preclusion bar Universal from asserting that lien against the proceeds of estate property being administered pursuant to the confirmed Plan. The court considers first § 1141(c).

Section 1141(c) is an exception to the general rule, noted in Cen-Pen, 58 F.3d at 92, and Deutchman, 192 F.3d at 460, that liens pass through the bankruptcy process unaffected. Section 1141(c) provides:

(c) Except as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors....

Chapter 11 is the chapter primarily employed to reorganize businesses. Chapter 11 plans may (and as a matter of practical experience almost always do) deal with property of the estate. See 11 U.S.C. § 1123(a)(5)(A) (plan may authorize "retention by the debtor of all or any part of the property of the estate"), (B) ("transfer of all or any part of the property of the estate"), and (D) ("sale of all or any part of the property of the estate"). Moreover, plans sometime deal with property exempted from the estate under § 522. See § 1123(a)(6) (permitting exempted property to be used, sold, or leased under a plan if the debtor consents). Plans do not always deal with all property of the estate that existed under 11 U.S.C. § 541 upon the filing of the case. Occasionally, for example, selected properties may be abandoned under 11 U.S.C. § 554(a). Or estate property may have become exempt under 11 U.S.C. § 522(l) and the debtor may have elected not to dedicate the property to the plan.

But when a property is dealt with by a plan, the effect of § 1141(c) is plain: after confirmation of the plan, the creditor's liens on that property are extinguished if not expressly preserved. See, e.g., In re Penrod, 50 F.3d 459 (7th Cir. 1995); Minstar, Inc. v. Plastech Research, Inc. (In re Arctic Enters., Inc.), 68 B.R. 71, 79-80 (D.Minn.1986); Board of County Comm'rs v. Coleman Am. Properties, Inc. (In re American Properties, Inc.), 30 B.R. 239, 246 (Bankr.D.Kan.1983).

Section 1141(c) applies here. First, there has been an order confirming the Plan. Second, the proceeds⁷ to which Universal looks for satisfaction of its claim were dealt with by the Plan: Universal wants those funds distributed to it pursuant to its lien instead of being distributed in the manner provided by the Plan. Third, §...