by Patrick Hruby, Esq.

Brock & Scott, PLLC

USFN Member (AL, CT, FL, GA, KY, ME, MD, MA, MI, NH, NJ, NC, OH, PA, RI, SC, TN, VT, VA)

            Recently, the Bankruptcy Court for the Northern District of Indiana was faced with the issue of what happens when a secured creditor fails to file a proof of claim but remains bound by the terms of a confirmed plan. In the case of In re Matter of Flores, 649 B.R. 534 (Bankr. N.D. Ind. 2023), the secured creditor, which held a lien on a motor vehicle, failed to file a proof of claim or object to the debtor’s plan that proposed to pay the claim in full over the life of the plan with interest, despite having notice of the bankruptcy case. The debtor also failed to file a claim on behalf of the secured creditor as permitted by the Federal Rules of Bankruptcy Procedure Rule 3002.

            Several months after confirmation of the plan, without a filed claim on which to distribute, the Chapter 13 trustee filed a motion to redirect the funds that were intended to be distributed to the secured creditor through the plan to the debtor’s unsecured creditors. That motion was unopposed, and the bankruptcy court entered an order which provided that the secured creditor would receive $0.00 distribution from the bankruptcy estate for failure to file a claim. While that motion was pending, instead of responding, the secured creditor filed a motion for relief from stay, alleging that it was not adequately protected because it was not being paid through the plan.

            The bankruptcy court, relying on its precedent from In re Matter of Jones, 555 B.R. 870 (Bankr. N.D. Ind. 2016), denied the motion for relief. Calling the situation a “self-inflicted wound,” the court explained that there was no cause to grant relief for lack of adequate protection when the creditor’s failure to file a proof of claim caused it to not receive payments in the bankruptcy case. Further, the court explained, adequate protection was a pre-confirmation remedy that was only meant to be a temporary measure to protect a creditor between the filing of the petition and confirmation. As such, following plan confirmation, the grounds for relief are “generally limited to post-confirmation defaults of the debtor’s plan.”

            The court also noted that confirmation of the plan is res judicata and bars issues that could have been raised prior to confirmation from being raised following confirmation (i.e., a creditor’s treatment under the plan). The result is that the confirmation order “bars a secured creditor from seeking relief from the [automatic stay] absent a post-confirmation default in carrying out the plan.”

            The Court noted that its conclusion was not a windfall for the debtor as the secured creditor’s lien remains intact and the debtor will have to address that lien following completion of the plan. For a claim secured by a motor vehicle, this is only a mildly comforting result as the collateral will continue to lose value over the life of the plan. A mortgage creditor may take more solace in the fact that its lien will survive the bankruptcy case, as property values generally increase over time, but risks and expenses will still be present.

            As the bankruptcy court succinctly stated, “[n]ot filing a claim has consequences.” A secured creditor facing a scenario where it does not get paid over the life of a Chapter 13 plan, which could last up to 60 months, is not good; especially when it could have been avoided by filing a proof of claim. The bankruptcy court in this case noted that a secured creditor cannot fail to participate in the case and expect the debtor to file a claim on its behalf. Secured creditors questioning whether to file a proof of claim should likely err on the side of caution; or, at a minimum, contact counsel to discuss.

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USFNews - August 9