In the
United States Court of Appeals
For the Seventh Circuit

No. 98-4094

In Re:   Diana Lynn Harvey,

Debtor-Appellant.



Appeal from the United States District Court
for the Northern District of Indiana, Fort Wayne Division.
No. 1:98-cv-182--William C. Lee, Chief Judge.


Argued April 13, 1999--Decided May 2, 2000



  Before Kanne, Rovner, and Diane P. Wood, Circuit
Judges.

  Diane P. Wood, Circuit Judge. At the time Diana
Harvey filed for protection under Chapter 13 of
the Bankruptcy Code in September 1996, she owed
$16,165 to General Motors Acceptance Corporation
for her 1993 Oldsmobile Cutlass Supreme.
Unfortunately (at least for GMAC), the car was
then worth only $9,500. GMAC had a perfected
security interest in the car, but the disparity
between the value of the asset and the total
amount of the debt made it an unsecured creditor
to the tune of $6,665.

  This case concerns the practice known in the
typically colorful bankruptcy jargon as "lien
stripping." Harvey argues that under the terms of
the Chapter 13 plan approved by the bankruptcy
court, she was entitled to have the lien on the
car removed as soon as she paid back the $9,500;
GMAC offers a number of reasons why that should
not be the case and its lien should continue
until the termination of the bankruptcy
proceeding or the satisfaction of the full debt,
whichever comes first. The district court agreed
with GMAC, but we find that GMAC’s failure to
protect its rights in a timely fashion requires
us to reverse.

I

  Harvey filed for protection under Chapter 13 of
the Bankruptcy Code on September 20, 1996. GMAC
was an "undersecured" creditor, because its
security interest in the vehicle covered only
$9,500 of the $16,165 debt. Under sec. 506(a) of
the Bankruptcy Code, 11 U.S.C. sec. 506(a), GMAC
was entitled to an allowed secured claim of
$9,500 and an unsecured residual claim of $6,665.

  Accompanying Harvey’s petition for bankruptcy
relief were two documents that are the source of
the controversy here. The first was a three page
document to which the parties refer as the "long
form plan." It proposed a weekly payment of $128
for five years (or until the general unsecured
claims were paid). It also set payment priorities
for the plan. Section 2(B) of the plan, which
appeared on the first page, provided that GMAC’s
$9,500 secured claim was to be paid prior to its
$6,665 unsecured claim. The same section that
preserved GMAC’s priority specifically mentioned
the lien that GMAC retained on Harvey’s
Oldsmobile. Through the following language, this
section provided for the stripping of the lien:
"[u]pon payment of the allowed secured claim as
indicated, any lien held by GMAC on said vehicle
shall be void and title to said vehicle shall be
released to Debtor." Finally, the plan arranged
for priority payment to another secured lender as
well as to holders of claims entitled to priority
under 11 U.S.C. sec. 507.

  Along with this detailed proposal, Harvey
submitted a single page document (the "short form
plan") that, from all appearances, summarized the
terms of the longer form. It, too, established a
$128 weekly payment for a five year period. It
then stipulated that the order of payments would
be (1) secured claims, (2) sec. 507 priority
claims, and (3) unsecured claims. Unlike the long
form, it did not mention the cancellation of
GMAC’s lien after Harvey had finished paying for
the secured portion of GMAC’s claim. Instead, it
said only that "[h]olders of allowed secured
claims shall retain the liens securing such
claims" and was silent about the treatment of a
lien after the allowed secured claim was paid in
full.

  Harvey’s plan was confirmed on November 27,
1996, without objection--including, most
importantly for our purposes, any objection to
the lien-stripping provision. She began making
payments shortly thereafter, but in February 1997
she requested and received a temporary suspension
while she was on maternity leave. This suspension
was to last until May 30, at which point Harvey
was to continue repayment. Instead, she again
fell behind, and on January 15, 1998, she filed
an Application to Modify and a First Modified
Chapter 13 Plan. The new proposed plan would have
reduced her weekly payment by $8 from $128 to
$120, but it made no change in the treatment of
GMAC’s lien spelled out in the November 1996
plan.
  It was at this juncture that GMAC first
objected to the lien stripping terms of the plan.
GMAC claimed that it had never received page one
of Harvey’s original long form plan, which was
where section 2(B) was to be found. The
bankruptcy court must have found this a strange
assertion, since the numbers "2" and "3" that
appear prominently on the bottom of the pages of
that GMAC conceded it received should have put it
on notice that something was probably missing. In
any event, the court found that GMAC received
both plans in their entirety. Since GMAC does not
argue on appeal that this finding was clearly
erroneous, we take as an established fact that it
received all of Harvey’s original long form plan.

  Nevertheless, on consideration of Harvey’s
motion to modify her plan, the bankruptcy court
decided to construe the long form and short form
as creating two distinct plans. Next, it decided
not to apply the usual rule precluding a
collateral attack on a confirmed plan, because it
could not tell which plan was confirmed. This
confusion, the court believed, was Harvey’s
fault, because she did not make it clear on
September 20, 1996, whether the court was
confirming the long or the short plan. Applying
the principles that bankruptcy plans are to be
treated as contracts and interpreted under state
law, see Hillis Motors, Inc. v. Hawaii Auto.
Dealers’ Ass’n, 997 F.2d 581, 588 (9th Cir.
1993), and that ambiguity in a contract should be
construed strictly against the drafter, see Fresh
Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1132 (Ind.
1995), the court decided that Harvey should bear
the consequences of any uncertainty about which
plan was confirmed. And those consequences were
dire: if the confirmed plan had been the short
form version, there was no lien-stripping
provision and Harvey had no case. This rationale
led the bankruptcy court to grant GMAC’s motion
to dismiss the action. The district court
affirmed, agreeing with the bankruptcy court’s
ambiguity analysis and concluding that if Harvey
could extinguish GMAC’s lien prior to completion
of her payment schedule, it would undermine the
purposes of Chapter 13.

II

  The practice of lien stripping gives rise to a
set of difficult questions under bankruptcy law.
Whether lien stripping over a creditor’s
objection is permitted prior to the completion of
a Chapter 13 plan remains an open question. See,
e.g., In re Talbot, 124 F.3d 1201, 1209 n.10
(10th Cir. 1997). GMAC argues that it should not
be permitted, relying principally on the Supreme
Court’s analysis of Chapter 7 of the Bankruptcy
Code in Dewsnup v. Timm, 502 U.S. 410 (1992),
which held that a Chapter 7 debtor could not
strip down its creditors’ liens on real property
to the value of the collateral. In GMAC’s view,
there is no reason to treat Chapter 13 and
personal property differently. Were the opposite
rule to prevail, GMAC foresees abusive debtor
practices: a cagey debtor could begin under
Chapter 13, strip a creditor’s lien, then convert
to Chapter 7 as allowed by 11 U.S.C. sec. 1307
and thwart the Dewsnup rule. Lien stripping would
also, in GMAC’s opinion, undermine its rights
under sec. 349 of the Bankruptcy Code, under
which its lien is reinstated in the event
Harvey’s case is dismissed.

  Harvey counters by pointing to 11 U.S.C. sec.
1322(b)(2) (allowing a modification of the
secured creditors’ rights) and sec. 1325(a)(5)
(allowing confirmation of plans that protect
allowed secured claims), which she thinks can be
read together to allow lien stripping. She
further notes that there is no policy problem
here since, under her plan, GMAC gets everything
that it has a right to expect. If, instead of
restructuring under Chapter 13, Harvey simply
defaulted, GMAC could seize the car and get
$9,500. Harvey would then still owe $6,665
(assuming a deficiency judgment were allowed).
GMAC would collect its $6,665 along with all of
the other unsecured creditors. Harvey notes that
her plan produces precisely the same result--
GMAC retains the lien on the car until it
receives $9,500, at which point it joins all of
Harvey’s other unsecured creditors and hopes for
the best.

III

  It is a well-established principle of bankruptcy
law that a party with adequate notice of a
bankruptcy proceeding cannot ordinarily attack a
confirmed plan. 11 U.S.C. sec. 1327(a). See also
In re Greenig, 152 F.3d 631, 635 (7th Cir. 1998);
Spartan Mills v. Bank of America Illinois, 112
F.3d 1251, 1255 (4th Cir. 1997); Chemetron Corp.
v. Jones, 72 F.3d 341, 346 (3d Cir. 1995). The
reason for this is simple and mirrors the general
justification for res judicata principles--after
the affected parties have an opportunity to
present their arguments and claims, it is
cumbersome and inefficient to allow those same
parties to revisit or recharacterize the
identical problems in a subsequent proceeding.

  This is especially true in the bankruptcy
context, where a confirmed plan acts more or less
like a court-approved contract or consent decree
that binds both the debtor and all the creditors.
Bringing the various creditors’ interests to the
table once is difficult enough; permitting one of
the creditors to launch a later attack on a
confirmed plan would destroy the balance of
interests created in the initial proceedings.

  To avoid this problem, GMAC asserts that the
very filing of two plan documents (the long form
and the short form) created an ambiguity with
respect to lien treatment that, under Indiana
contract law principles, should be construed
against Harvey because she drafted the documents.
The first problem with this argument is that it
assumes that Indiana law is the proper referent
for a bankruptcy plan. This is the approach the
bankruptcy court took, following the Ninth
Circuit’s decision in Hillis Motors, Inc., 997
F.2d at 588. We are not at all sure this is
correct, however, in light of the federal nature
of bankruptcy, the strong need for uniformity of
approach, and the analogy one could draw to the
treatment of federal court consent decrees. On
the last point, see, e.g., Firefighters Local
Union No. 1784 v. Stotts, 467 U.S. 561, 574
(1984); United States v. ITT Continental Baking
Co., 420 U.S. 223 (1975). It seems more likely to
us that something analogous to the four-corners
principle that applies to federal consent decrees
ought to govern interpretation of plans confirmed
by the bankruptcy court. Nevertheless, the
parties have not made an issue of this point in
the present case, nor do we think that
application of the four-corners principle or some
other federal rule would make a difference to the
outcome; we therefore leave further exploration
of this problem to another day.

  Even if ambiguity in the identity of the plan
that was confirmed were enough to trump the
bankruptcy principle of repose, this is not the
case for applying such a rule. Harvey’s short
form tracks the long form in all material
respects. More importantly, there is a
fundamental defect in GMAC’s case. GMAC failed to
lodge a proper objection to the existence of the
two plans before the bankruptcy court acted. GMAC
argues that this lapse did not lead to waiver of
its position here, because Harvey caused the
confusion. It contends that since both the short
and long forms were entitled "Chapter 13 Plan"
and both were signed by Harvey, it could not be
sure which of the two plans Harvey was actually
submitting for confirmation. But we do not see
why Harvey’s initial responsibility for the
existence of the two plans relieved GMAC of the
duty of pointing out the problem to the court.
The general rule is that a party in contract
litigation must raise all claims--including those
related to ambiguity--during the first litigation
concerning that contract. See, e.g., Xantech
Corp. v. Ramco Industries, Inc., 159 F.3d 1089,
1092 (7th Cir. 1998); Packer, Thomas, & Co. v.
Eyster, 709 N.E.2d 922, 928 (Ohio App. Ct. 1998);
Johnson v. Anderson, 596 N.E.2d 1146, 1148 (Ind.
App. Ct. 1992). By analogy, GMAC’s opportunity
came and went when it first had notice of the
alleged ambiguity about which plan was really
confirmed and what its terms may have been. GMAC
could have raised the same points that it now
asserts during the original confirmation
proceedings.

  If GMAC was genuinely uncertain about the
combined effect of the short and long forms (a
total of four pages), it was obligated to raise
this issue with the bankruptcy court prior to the
original plan confirmation. (Note that even under
GMAC’s rejected excuse that it did not receive
page 1 of the long form, it is still clear that
GMAC knew that more than one form was before the
court, because it received pages 2 and 3. Its
duty to object thus arose even on its own view of
the facts.) As the bankruptcy court noted in In
re Haynes, 107 B.R. 83, 86 (Bankr. E.D. Va.
1989), "[i]t is obvious, however, that a creditor
should seek to resolve any ambiguities,
regardless of how slight, in view of [the binding
effect of a confirmed plan.]" An objection would
have allowed the bankruptcy judge to evaluate the
submissions and to decide whether it had one plan
with a summary, or two distinct plans.

  Forcing parties to raise concerns about the
meaning of Chapter 13 filings at the original
confirmation proceedings does not impose an
unreasonable burden on bankruptcy participants.
Quite the contrary--it is perfectly reasonable to
expect interested creditors to review the terms
of a proposed plan and object if the terms are
unacceptable, vague, or ambiguous. As this court
said in In re Pence, 905 F.2d 1107, 1109 (7th
Cir. 1990), a creditor is "not entitled to stick
its head in the sand and pretend it would not
lose any rights by not participating in the
proceedings." See also In re Andersen, 179 F.3d
1253, 1257 (10th Cir. 1999) ("A creditor cannot
simply sit on its rights and expect that the
bankruptcy court or trustee will assume the duty
of protecting its interests."); In re Szostek,
886 F.2d 1405, 1414 (3d Cir. 1989) (stating that
creditors must take an active role in protecting
their rights). Nor is this a situation like that
presented in In re Escobedo, 28 F.3d 34 (7th Cir.
1994). As the Escobedo court made clear, its
refusal to apply res judicata principles in that
case resulted from the fact that the debtor’s
original plan failed to comply with the mandatory
provisions of 11 U.S.C. sec. 1322(a)(2). The
modification of a secured creditor’s rights--the
issue here--is allowed but not required under
sec. 1322(b).
  The district court suggested that the only
result of Harvey’s decision to file multiple
documents was to confuse the court and potential
creditors. Perhaps this is true. Or perhaps, as
Harvey suggested at oral argument, some trustees
prefer the short form in order to facilitate easy
case management and recordkeeping. Maybe the
simultaneous filing of a short and a long form is
helpful in many cases but inappropriate in
Harvey’s case. Or maybe this practice is always
useless at best, confusing at worst. No matter--
the point is that GMAC had to raise these
arguments at the initial confirmation proceedings
since it already had notice of the ambiguities on
which it now hopes to rely.

  We do not mean to suggest that a party may
never claim in a subsequent proceeding that a
provision of a Chapter 13 plan is ambiguous and
should be read one way or another. It may be the
case that an approved plan contains a term that
raises an unexpected problem at some point in the
future. No party to a bankruptcy plan
confirmation proceeding can be expected to
envision every foreseeable circumstance that
could require a court to construe a particular
plan provision. Here, in contrast, the ambiguity
about which GMAC was complaining was one that was
readily identifiable during the original
confirmation proceedings. After all, as GMAC
points out, 11 U.S.C. sec. 1321 requires
submission of "a [singular] plan." A debtor is
not allowed to have two plans confirmed; thus,
the question whether Section 2(B) of the long
form was part of the plan to be confirmed was a
problem that should have been apparent to any
reasonably diligent creditor.

   In sum, we hold that if GMAC had doubts as to
what plan was being confirmed in the 1996
proceedings, it should have alerted the
bankruptcy court to the ambiguity at that time,
not 16 months later. We add that our resolution
of this appeal on waiver grounds makes it
unnecessary for us to express an opinion on
whether GMAC could have been forced to accept
lien stripping in a Chapter 13 proceeding over
its objection; we leave that complex subject for
another day. The judgment of the district court
is

REVERSED.
