Barnes v. Whelan

• Decision Date: 03 September 1982
• Docket Number: Nos. 81-1535,s. 81-1535
• Citation: 9 B.C.D. 626,689 F.2d 193
• Parties: , 8 Collier Bankr.Cas.2d 855, 9 Bankr.Ct.Dec. 626, Bankr. L. Rep. P 68,799 Wavalene N. BARNES v. Hon. Roger M. WHELAN, Bankruptcy Judge, Cynthia A. Niklas, Esq., Appellant. In re Wavalene N. BARNES, Cynthia A. Niklas, Esq., Appellant. In the Matter of Abel MONTANO, Cynthia A. Niklas, Esq., Appellant. In the Matter of Abel MONTANO, Appellant. to 81-1537 and 81-1825.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 193

689 F.2d 193

223 U.S.App.D.C. 10, 8 Collier Bankr.Cas.2d 855,

9 Bankr.Ct.Dec. 626, Bankr. L. Rep. P 68,799

Wavalene N. BARNES v. Hon. Roger M. WHELAN, Bankruptcy Judge, Cynthia A. Niklas Esq., Appellant In re Wavalene N. BARNES, Cynthia A. Niklas, Esq., Appellant In the Matter of Abel MONTANO, Cynthia A. Niklas, Esq., Appellant In the Matter of Abel MONTANO, Appellant.

Nos. 81-1535 to 81-1537 and 81-1825.

United States Court of Appeals, District of Columbia Circuit.

Argued May 4, 1982.

Decided Sept. 3, 1982.

Appeal from the United States District Court for the District of Columbia (D.C. Civil Action Nos. 80-1540, 80-2227, and 80-1728).

Cynthia A. Niklas, pro se in Nos. 81-1535 to 81-1537.

George F. Bason, Jr., Washington, D. C., for appellant in No. 81-1825 and cross-appellee in Nos. 81-1535 to 81-1537.

Before MacKINNON, Circuit Judge, ROBB, Senior Circuit Judge, and HAROLD H. GREENE, ^* United States District Judge for the District of Columbia.

Opinion for the Court filed by Senior Circuit Judge ROBB.

ROBB, Senior Circuit Judge:

In these consolidated cases the District Court reversed in part decisions of the Bankruptcy Court refusing to confirm Chapter 13 debt adjustment plans filed by appellees Wavalene N. Barnes and Abel Montano. The trustees in bankruptcy appeal, urging us to reinstate the Bankruptcy Court's decisions. Both plans provide that secured creditors or creditors holding cosigned debts receive full payment of the amounts owed them, but that other creditors receive only nominal payments. The central issue on appeal, a controversial question of bankruptcy law undecided in this circuit, is whether the "good faith" requirement for confirmation of personal bankruptcy plans under 11 U.S.C. § 1325(a)(3) bars approval of plans proposing only such nominal payments. We adhere to the traditional meaning of good faith and hold that section 1325(a)(3) does not require any particular level of repayment to unsecured creditors. We also consider the classification of claims, an issue raised by Montano as cross-appellant in No. 81-1825, and hold that Chapter 13 plans may generally classify unsecured debts based on the presence of a codebtor, but that Montano's plan as presently drafted "unfairly discriminates" between cosigned and non-cosigned debts under 11 U.S.C. § 1322(b)(1). Finally, we consider venue issues raised by both Montano and Barnes, and hold that the Bankruptcy Court improperly transferred these cases to the districts in which the debtors' domiciles are located.

Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301 et seq. (Supp. IV 1980), permits certain debtors to repay all or a percentage of their debts out of future income according to a court-approved plan. Unlike liquidation or "straight" bankruptcy under Chapter 7, 11 U.S.C. § 701 et seq., Chapter 13 does not require the debtor to surrender all non-exempt assets for distribution to creditors. Instead, the debtor makes continuing payments to creditors over a three-to-five year period. 11 U.S.C. § 1322(c). Upon completion of the plan, the Chapter 13 debtor is entitled to a broad discharge of his obligations. 11 U.S.C. § 1328(a).

Before the plan can become effective, however, it must be confirmed by the Bankruptcy Court. Section 1325(a) sets out six criteria for confirmation as follows:

(a) The court shall confirm a plan if-

(1) the plan complies with the provisions of this chapter and with other applicable provisions of this title;

(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;

(3) the plan has been proposed in good faith and not by any means forbidden by law;

(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;

(5) with respect to each allowed secured claim provided for by the plan-

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or

(C) the debtor surrenders the property securing such claim to such holder; and

(6) the debtor will be able to make all payments under the plan and to comply with the plan.

11 U.S.C. § 1325(a). If all six requirements are satisfied, the bankruptcy court must confirm the plan. H.R.Rep.No. 95-595, 95th Cong., 1st Sess. 430 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787.

This appeal encompasses two distinct Chapter 13 plans filed by two debtors, Wavalene N. Barnes and Abel Montano. In February 1980 Montano filed a debt adjustment plan with the United States Bankruptcy Court for the District of Columbia. ¹ Montano is employed as a clerk at the World Bank in the District of Columbia and earns a net income of $948 per month. His plan listed expenses of $749 per month for himself, his wife, and one dependent child, leaving an excess of approximately $200 per month available for repayment of his debts. His unsecured indebtedness totalled $31,507, and there were no secured creditors. Montano's plan proposed monthly payments of $200, the full amount available, to be applied as follows: (1) one hundred percent payments to the unsecured creditors with claims guaranteed by cosigners, totalling approximately $7,000; and (2) one percent payments to the remaining unsecured creditors, with claims totalling $24,500.

Before deciding whether the plan should be confirmed the Bankruptcy Court ruled that venue was proper only at the debtor's domicile in Virginia, not at his place of employment in the District of Columbia. In re Abel Montano, Bankr. No. 80-00071 (Bankr.D.D.C. April 8, 1980) (unpublished memorandum opinion). Over Montano's objection the court ordered that the case be transferred to the Eastern District of Virginia, but stayed the transfer pending appeal of the venue ruling. The Bankruptcy Court then proceeded to the merits, and on June 2, 1980 issued an opinion denying confirmation of Montano's plan. In re Montano, 4 B.R. 535 (Bkrtcy.D.D.C.1980). The court ruled that in order to satisfy the "good faith" requirement of 11 U.S.C. § 1325(a)(3), the debtor must propose "a plan of meaningful repayment," adding "(t)he court, in determining 'meaningfulness,' will look at each plan on a case-by-case basis, weighing both the interests of creditors and the debtors in light of the rehabilitative goals of Chapter 13." Montano, 4 B.R. at 539. The court concluded that Montano's plan, offering one hundred percent repayment to creditors holding cosigned debts and only one percent to all others, "fails to propose meaningful repayment ...." Id. The Bankruptcy Court also rejected Montano's attempt to treat debts guaranteed by cosigners more favorably than non-cosigned debts, ruling "a plan may classify only on the basis of substantial similarity" between claims, and that the "mere existence of a co-debtor is not legally sufficient to justify separate classification." Id. at 537. The court denied confirmation on both the "good faith" and classification grounds.

Wavalene Barnes, the other debtor in these appeals, filed her debt adjustment plan in December 1979. She is employed as a government secretary and earns $749 per month net income. Her monthly expenses total $658, leaving $91 in disposable income. Her debts are as follows: $3500 owed to the Treasury Federal Credit Union, secured to the extent of $1750 by the debtor's automobile; a secured debt of $710 owed to the Marcy Avenue Homebuyers Association; and approximately $6250 in other unsecured debts, mostly credit card obligations. Under her plan, Barnes proposed to repay these debts at the rate of $91 per month, providing one hundred percent to the secured creditors but only one percent to the unsecured creditors.

On April 25, 1980 the Bankruptcy Court ordered Barnes' case transferred to the District of Maryland on the basis of improper venue, again staying the transfer pending final disposition of her appeal. In re Wavalene Barnes, Bankr. No. 79-00293 (Bankr.D.D.C. April 25, 1980) (unpublished order). On July 30, 1980 the Bankruptcy Court denied confirmation of Barnes' plan. In re Wavalene Barnes, 5 B.R. 376 (Bkrtcy.D.D.C.1980). Relying on the earlier opinion in the Montano case, the court ruled that Barnes' one percent repayment to unsecured creditors was not in "good faith," even though Barnes was devoting her entire disposable income to the plan. The court also ruled that Barnes underestimated her expenses and would be unable to meet all the payments under the plan, thus failing the "feasibility" requirement of 11 U.S.C. § 1325(a)(6). The court concluded that confirmation should be denied and the proceeding converted to a Chapter 7 liquidation. Barnes, 5 B.R. at 379.

Both cases were appealed to the District Court. On April 22, 1981 the District Court reversed on the issue of good faith, stating "nothing in the Bankruptcy Code suggests that 'good faith' as used in section 1325(a) was intended to depart from the term's traditional meaning of honesty in fact or honesty of intention." In re Wavalene Barnes, 13 B.R. 997, 999 (D.D.C.1981). The District Court concluded that Barnes' plan "offered repayment to the maximum extent she honestly believed she was capable (and therefore) met Chapter 13's good faith requirement." Id. at 1000. As for Montano's plan, however, the District Court agreed with the Bankruptcy Court that 11 U.S.C. § 1122(a) did not allow separate treatment solely on the basis that certain debts were guaranteed by a cosigner. Id. The District Court ruled that Montano's classification also failed because it discriminated unfairly between...