Beard, In re

• Decision Date: 12 April 1995
• Docket Number: No. 93-3596,93-3596
• Citation: 45 F.3d 113
• Parties: , 32 Collier Bankr.Cas.2d 1415, 26 Bankr.Ct.Dec. 791, Bankr. L. Rep. P 76,339 In re Bill Brandon BEARD and Peggy Jane Beard, Debtors. M. Scott MICHEL, United States Trustee for Region 9, Appellant, v. Bill Brandon BEARD and Peggy Jane Beard, Debtors-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 113

45 F.3d 113

63 USLW 2445, 32 Collier Bankr.Cas.2d 1415,

26 Bankr.Ct.Dec. 791, Bankr. L. Rep. P 76,339

In re Bill Brandon BEARD and Peggy Jane Beard, Debtors M. Scott MICHEL, United States Trustee for Region 9, Appellant, v. Bill Brandon BEARD and Peggy Jane Beard, Debtors-Appellees.

No. 93-3596.

United States Court of Appeals Sixth Circuit.

Argued April 29, 1994.

Decided Jan. 18, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied April

12, 1995.

Paul W. Bridenhagen, Office for U.S. Trustees, Bruce G. Forrest (briefed), Civ. Div., Appellate Staff, Sushma Soni (argued), U.S. Dept. of Justice, Civ. Div., Washington, DC, for plaintiff-appellant.

Charles W. Ewing (argued and briefed), Hilliard, OH, for defendants-appellees.

Jeffrey Mark Kellner, Worthington, OH, Bruce G. Forrest, U.S. Dept. of Justice, Washington, DC, for Frank Pees, Chapter 12 Trustee for Southern Dist. of Ohio, Eastern Div., amicus curiae.

Before: KENNEDY and BOGGS, Circuit Judges; and HILLMAN, District Judge. ^*

BOGGS, Circuit Judge.

This appeal stems from a Chapter 12 family-farm bankruptcy and reorganization. The district court, in confirming the plan, affirmed the bankruptcy court's decision to permit the debtors to remit payments directly to an undersecured creditor, without having to transfer the funds to that creditor through the bankruptcy trustee. The two lower courts recognized that, by granting the debtors the right to make these direct remittances and thus to bypass the standing trustee, the debtors would thereby avoid having to pay certain statutory fees that the standing trustee would normally receive in the course of administering the Chapter 12 bankruptcy estate. The trustee appeals. Because we hold that payments made on the secured portion of an undersecured debt are equivalent to payments made on a fully secured debt, we affirm.

I

In every Chapter 12 bankruptcy case, ¹ a trustee is appointed pursuant to 28 U.S.C. Sec. 586; see also 11 U.S.C. Sec. 1202(a). Here, M. Scott Michel, the United States trustee for Region 9, appointed Frank M. Pees to serve as the "standing trustee" for the implementation of Bill and Peggy Beard's Chapter 12 bankruptcy reorganization. ² The standing trustee's role in a family-farm reorganization, such as the Beards' undertaking here, primarily involves collecting the debtors' postpetition income and making proper payments, in accordance with the plan, to the waiting creditors. 11 U.S.C. Secs. 1222(a)(1), 1226(a); see also Robert L. Jordan & William D. Warren, Bankruptcy 28 (2d ed.1989). Consequently, the trustee in a Chapter 12 bankruptcy plays a much less active role than does the trustee in a Chapter 7 personal-liquidation bankruptcy. See, e.g., Jordan & Warren, ibid. Still, the Chapter 12 standing trustee's role may be significant, in that the statute allows the bankruptcy court, after confirming the debtor's reorganization plan, to order all parties who will be furnishing the Chapter 12 debtor with postpetition income to forward their payments directly to the trustee rather than to the debtor. In that way, the trustee may efficiently process the postpetition payments to the creditors. 11 U.S.C. Sec. 1225(c).

Besides handling the debtor's funds and assuring the smooth processing and repayment of the debtor's outstanding obligations, a Chapter 12 trustee typically has additional responsibilities during the course of administering the reorganization plan. Id. Sec. 1202(b); see also id. Secs. 704(2),(3),(5),(6),(7),(9); 1106(a). Among these various duties, he must participate actively in any subsequent hearing that concerns the valuation of debtor property that is subject to a lien, id. Sec. 1202(b)(3)(A), or that concerns the modification of the debtor's confirmed reorganization plan, id. Sec. 1202(b)(3)(C). He must be prepared, if so requested by the court, to investigate the debtor's activities and business. Id. Secs. 1202(b)(2); 1106(a)(3),(4). He must prepare a documented written report and account of his administration of the case. Id. Secs. 1202(b)(1); 704(9).

For his various activities on behalf of the reorganized estate, the trustee is paid a fee by the estate. That fee is set by the Attorney General for each trustee subject to a statutory limit that permits the trustee to receive up to ten percent of the first $450,000 in aggregate payments that the debtor transfers through the trustee to creditors under the reorganization plan's terms. Thereafter, the trustee may receive no more than three percent of all additional debtor-to-creditor payments that are made through him, after the aggregate amount of payments transferred under the plan exceeds $450,000. 28 U.S.C. Sec. 586(e)(1)(B)(ii). In this case, the district court decided that the trustee's availability to transfer the debtors' payments to one secured creditor, and to the secured portion of an undersecured creditor's claim, would be unnecessary for the estate's successful reorganization, and therefore would be a service not worth reimbursing. In allowing the debtors to make their payments to those two creditors directly, without having to go through the trustee, the court spared the reorganizing "family farm" the need to pay trustee's fees for such services. Because the debtors were permitted to bypass the trustee when making payments on the approximately $90,000 secured portion of the undersecured claim, the standing trustee lost the opportunity to receive as much as $9,000 in fees over the course of the reorganization period.

The United States trustee has appealed the decision of the two lower courts. He contends that the fees that Chapter 12 debtors must pay to a standing trustee represent more than a mere middleman's commission for passing along payments in reorganization. Rather, he contends, the fee schedule serves a Congressional purpose by properly reimbursing standing trustees for the various responsibilities that they perform, and that they must stand ready to perform, in the course of administering a Chapter 12 reorganization.

II

We engage in plenary review of an appeal from a bankruptcy decision rendered by a district court. See In re Zick, 931 F.2d 1124, 1126 (6th Cir.1991).

The Beards proposed a "disposable income plan" to the bankruptcy court, under which they would remit all scheduled payments directly to four categories of their creditors. The plan proposed direct payments for: (1) the fully secured $38,241 claim of Farm Credit Services Corporation ("FCSC"); (2) the $89,788 secured portion of Farmers' Home Administration's ("FmHA") undersecured $912,530 claim; (3) the claims of Perry and Fairfield Counties for approximately $19,000 in unpaid back property taxes; and (4) various postpetition administrative expense claims, as well as approximately $5,000 in attorney's fees.

The bankruptcy court, affirmed by the district court, decided to permit direct debtor-to-creditor payment of the first listed class of secured claims and to deny similar direct transfers for the last two classes, 134 B.R. 239. Those decisions are not at issue here. ³ Thus, this appeal centers upon whether a Chapter 12 debtor may directly pay the secured portion of an undersecured creditor's claim. ⁴

In reaching his decision to allow the debtors to make direct payments on the secured portion of their undersecured debt to FmHA, the bankruptcy judge acknowledged that two competing lines of case law have emerged on this question. Two circuits have held that a Chapter 12 debtor may not bypass the trustee when making payments on impaired debts. In re Schollett, 980 F.2d 639 (10th Cir.1992), and In re Fulkrod, 973 F.2d 801 (9th Cir.1992), aff'g 126 B.R. 584 (9th Cir. BAP 1991). ⁵ Nevertheless, in this case, the bankruptcy court found more persuasive two decisions that have been published within this circuit, In re Overholt, 125 B.R. 202 (S.D. Ohio 1990), and In re Pianowski, 92 B.R. 225 (Bankr.W.D. Mich.1988), upholding direct debtor-to-creditor payments on such debt.

In Pianowski, the court looked carefully at Chapter 12's legislative history:

Chapter 12 was created by Congress because many family farmers ... cannot qualify under Chapter 13 because their debts exceed the statutory limits.... Further, the possible Chapter 11 relief to family farmers is often "needlessly complicated, unduly time-consuming, inordinately expensive and, in too many cases, unworkable." ... Chapter 12 is intended to "give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land." In Chapter 12, it is intended that family farmers will receive "important protection from creditors"; however, Chapter 12 is also intended to prevent abuse of the bankruptcy system and to ensure farm creditors will receive fair debt repayment treatment.

92 B.R. at 232 (quoting H.R. Conf. Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249).

Based on its reading of the legislative history and policy reasons that underlie Chapter 12, the Pianowski court crafted an extensive list of thirteen "non-exclusive factors" that a court may "consider" when determining whether to grant a debtor's request to bypass the trustee and the attendant fee. Among the main considerations, these factors consider a debtor's sincerity in filing for Chapter 12 protection, the prospects that the proposed reorganization will succeed, the respective creditors' willingness to be paid directly by the debtor, and the creditors' capabilities of monitoring and acting to enforce the debtor's adherence to the reorganization plan's schedule of payments. See generally 92 B.R. at 233-34.

In applying the above factors, the court must carefully balance an individual debtor's needs and desires to succeed in his or her reorganization efforts, a creditor's rights in preserving its property interest and receiving fair repayment of its indebtedness, and society's interests in an efficient, economical and non-abusive bankruptcy...