IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 91-3595

In the Matter of: WALTER HOWARD and VERLEAN HOWARD, Debtors.

SUN FINANCE COMPANY, INC., Appellant,

versus

WALTER HOWARD and VERLEAN HOWARD, Appellees.

Appeals from the United States District Court for the Eastern District of Louisiana

( September 8, 1992 )

Before HIGGINBOTHAM and DUHÉ, Circuit Judges and HUNTER,* District Judge.

HIGGINBOTHAM, Circuit Judge:

We deal in this case with the effect of a confirmed

reorganization plan under Chapter 13 of the Bankruptcy Code on a

secured creditor who fails to object to the plan before

confirmation. We conclude that a Chapter 13 plan which purports

to reduce or eliminate a creditor's secured claim is res judicata

as to that creditor only if the debtor has filed an objection to

the creditor's claim. If no objection is filed to a secured

* Senior District Judge of the Western District of Louisiana, sitting by designation. claim, the creditor is entitled to rely upon its lien and not

participate in the bankruptcy proceedings. Accordingly, we

reverse the judgment of the district court and remand for further

proceedings consistent with this opinion.

I.

The facts in this case are undisputed. Sun Finance Company,

Inc. held a secured mortgage in the amount of $4,590.47 on two New

Orleans properties owned by the Howards. On May 21, 1990, the

Howards filed a Chapter 13 bankruptcy petition and plan. The plan

described the Sun Finance claim as disputed. The Howards listed as

an asset an action against Sun for unfair and deceptive trade

practices. The plan provided that Sun would be paid $500 of its

secured debt in full compromise of the Howards' claimed action

against Sun and Sun's lien would be lifted.

Sun was listed as a secured creditor in the Howards'

bankruptcy and received notice of the filing of the petition, the

creditors' meeting, and the plan confirmation hearing. The notice

of the creditors' meeting and the confirmation hearing contained

the following summary of the plan: "The plan proposes payments of

$64.00 monthly to the Trustee with unsecured claims to be paid

100.00% over approximately 36 months." At no time did Sun receive

a copy of the plan itself or actual notice that its claim had been

compromised to $500. Sun filed a proof of claim before the

confirmation hearing. The Howards did not file an objection to

Sun's proof of claim. Sun did not participate in the confirmation

proceedings beyond filing its proof of claim. No objection was

2 made to the plan's confirmation and the bankruptcy court confirmed

it on July 10, 1990.

When Sun did not receive the payments which it anticipated, it

filed a motion to lift the automatic stay in order to permit it to

foreclose on its note and mortgage. The bankruptcy court refused

to lift the stay, ruling that the confirmation of the plan was res

judicata to the issues raised in Sun's motion because Sun failed to

object to the plan prior to confirmation.

The district court affirmed the ruling of the bankruptcy

court.

II.

The Howards assert in defense of the district court's judgment

that the confirmation of a Chapter 13 plan has a res judicata

effect as to all issues decided in the plan. Therefore, they

argue, Sun is bound by the plan's provision that their secured

claim is offset by the Howards' claims against Sun. On its face,

§ 1327(a) of the Bankruptcy Code gives a Chapter 13 reorganization

plan a sweeping binding effect on all creditors. It provides that

"the provisions of a confirmed plan bind the debtor and each

creditor, whether or not the claim of such creditor has objected

to, has accepted, or has rejected the plan."

(a).

Property which passes through the plan vests in the debtor "free

and clear of any claim or interest of any creditor provided for by

the plan." § 1327(c).

Provisions of the bankruptcy code cannot be read in isolation

but should be interpreted in light of the remainder of the

3 statutory scheme. United Savings Assoc. v. Timbers of Inwood

Forest,

(1988); In re Southmark (Southmark Corp.

v. Southmark Personal Storage, Inc.),

(Bankr.

N.D. Tex. 1992). Several provisions of the bankruptcy code provide

special procedures to protect secured creditors and their liens.

Section 502(a) provides that "a claim or interest, proof of which

is filed under Section 501 of this title, is deemed allowed, unless

a party in interest . . . objects." Section 506(a) further

provides that the value of a secured claim must be determined in

conjunction with any plan that would affect the creditor's

interest. A timely-filed proof of claim constitutes prima facie

evidence of the validity and amount of the claim. B.R. 3001. To

rebut a proof of claim, the debtor must file an objection under

B.R. 3007. Sun asserts that because no objection was made to its

timely-filed proof of claim, § 502(a) requires that it be deemed

allowed under the plan. Because the proper procedure for objecting

to Sun's proof was not followed, Sun asserts, the plan cannot

effectively reduce the amount of their lien.

We have addressed the effect of the confirmation of a Chapter

13 plan on creditors who fail to object to the confirmation twice

before. Sun finds support for its position in In re Simmons,

(5th Cir. 1985). In Simmons, a creditor who had perfected

a statutory lien was incorrectly listed in the debtor's plan as an

unsecured creditor. The creditor indicated that he would approve

the plan, but added the proviso that he must be listed as a secured

creditor. The creditor did not object to the plan at the

4 confirmation hearing and his status under the plan was never

corrected. The debtor argued that because the creditor had failed

to object to the plan's confirmation he was bound by its terms and

his lien was therefore invalid. We disagreed, holding that a

Chapter 13 plan may not substitute for an objection to a secured

creditor's proof of claim. Once the creditor has filed a proof of

claim, "the Code and the Rules clearly impose the burden of placing

the claim in dispute on any party in interest desiring to do so by

means of filing an objection."

. A secured creditor is

therefore not bound by a plan which purports to reduce its claim

where no objection has been filed.

The Howards rely on our decision in Republic Supply Co. v.

Shoaf,

(5th Cir. 1987), to support their position

that confirmation of a Chapter 13 plan is res judicata against any

creditor who fails to object to its confirmation. The bankruptcy

court in Shoaf included in a Chapter 13 plan a provision

invalidating a guaranty by a third party in favor of one of the

creditors. That creditor objected to the provision in one hearing,

but failed to object to the plan at the final confirmation hearing.

Although the bankruptcy court was without statutory authority to

release the guaranty in the plan, we held that the plan

confirmation was nonetheless res judicata on the issue of the

validity of the plan provision affecting the guaranty.

The apparent tension between Simmons and Shoaf reflects no

more than the difficulty in striking a workable balance between the

interest in the protection of secured creditors and the interest in

5 finality for Chapter 13 debtors. To the extent that these cases

might be in conflict, we would be bound to follow Simmons as the

earlier decision of this court on the subject. Broussard v.

Southern Pacific Trans. Co.,

(5th Cir. 1982)

(en banc). We believe, however, that when properly read, these

cases are not in conflict.

A secured creditor "with a loan secured by a lien on the

assets of a debtor who becomes bankrupt before the loan is repaid

may ignore the bankruptcy proceeding and look to the lien for

satisfaction of the debt." Simmons,

, quoting In re

Tarnow,

(7th Cir. 1984). In other words, a

secured creditor may remain outside the bankruptcy proceedings

until an interested party objects to his allowed secured claim.

This right to stay outside the bankruptcy process by relying solely

on the value of one's lien would be meaningless, however, if the

creditor's claim can be compromised away without further notice and

he is bound by that compromise. Strict adherence to the

requirement that an objection be filed to challenge a secured claim

is necessary to protect this important interest under the Code.

In light of these concerns, Shoaf stands for the proposition

that a confirmed Chapter 13 plan is res judicata as to all parties

who participate in the confirmation process. The general

applicability of res judicata to bankruptcy plan confirmations must

give way, however, to the interest of the secured creditor, as we

recognized in Simmons, in being confident that its lien is secure

unless a party in interest objects to it. Unlike the creditor in

6 this case, the holder of the guaranty in Shoaf was not a secured

creditor of the debtor entitled to the protection of §§ 502(a) and

506. The immediate importance of that distinction is demonstrated

by the fact that the Shoaf court found it unnecessary to cite

Simmons. Thus, Simmons represents a limited exception to the

general rule of Shoaf based upon the competing concerns expressed

in the bankruptcy code.

The Howards point to the Third Circuit's decision in In re

Szosteck,

(3d Cir. 1989) to support their position

that Sun is bound by the terms of the confirmed plan. A closer

reading of Szosteck, however, demonstrates that it is consistent

with our holding. The key to Simmons is the requirement that a

claim be objected to before the creditor loses its ability to rely

upon its lien for relief. In Szosteck, the debtor had filed an

objection to the creditor's claim before the confirmation hearing

was scheduled.

. The filing of an objection is all

that Simmons requires. Once a debtor has objected to a claim, the

creditor is on notice that full participation in the confirmation

proceedings is required or its lien will be at risk.

Applying Simmons to the facts in this case, we find that the

confirmation of the Chapter 13 plan does not bar Sun from seeking

enforcement of its lien. Sun's timely filed proof of claim was

never objected to and Sun did not participate in the confirmation

of the Howards' plan. Accordingly, we will reverse the judgment of

the district court.

7 We decline to hold, as the Howards urge, that any flaw in the

provisions of a Chapter 13 plan may be objected to after

confirmation. Such a holding would, as Shoaf recognizes, step too

hard on the debtors' interest in finality after the confirmation of

a Chapter 13 plan. We hold only that a debtor who wishes to

challenge the amount of a secured claim either by asserting a

counterclaim or offset against it or by disputing the amount or

validity of the lien must file an objection to the creditors' claim

in order to put the creditor on notice that it must participate in

the bankruptcy proceedings. A Chapter 13 plan may by its very

nature change the terms of payment and otherwise modify the terms

of the debt underlying the lien. Creditors are put on notice of

the possibility of these types of modifications by notice of the

filing of a Chapter 13 proceeding and must object to the

confirmation of a plan in order to prevent their effect. These

plan provisions will be final as to all creditors in those respects

because they do not conflict with other provisions of the

bankruptcy code. See Matter of Pence,

(7th Cir.

1990) (allowing Chapter 13 plan to avoid lien where "plan treats

the secured claim in a fair and equitable manner, providing for

full payment of the debt.").

We do not believe that requiring a Chapter 13 debtor to file

an objection to a secured claim before reducing the amount of the

claim represents a substantial additional burden on the ability of

debtors to obtain a fresh start. We do not agree with the Howards

that requiring an objection to a claim before it can be reduced

8 through a Chapter 13 plan would require a debtor to check daily

with the clerk to see if a proof of claim has been filed. The

Howards knew that they were using the plan to reduce the amount of

Sun's secured claim. To qualify as a Chapter 13 debtor, an

individual must owe "noncontingent, liquidated, unsecured debts

that aggregate less than $100,000 and noncontingent, liquidated,

secured debts of less than $350,000."

(e).

Individual debtors with relatively small debt loads can be expected

to know what their secured debts are and whether their plan will

reduce or eliminate a secured creditor's lien. The burden of

filing a written objection to those claims is not onerous. A

secured creditor with notice that the debtor is objecting to its

claim must participate in the bankruptcy proceedings to protect its

rights. As we see it, the dispute over the secured claim may be

resolved in most cases before confirmation of the plan without

delay.

III.

Sun also asserts that the cursory summary of the plan's

provisions denied Sun due process. We decide this case on other

grounds and do not reach this issue.

REVERSED and REMANDED.

9