Estus, In re

• Decision Date: 15 December 1982
• Docket Number: No. 82-1121,82-1121
• Citation: 695 F.2d 311
• Parties: 7 Collier Bankr.Cas.2d 948, 9 Bankr.Ct.Dec. 1348, Bankr. L. Rep. P 68,933 In re Ronald ESTUS and Doris Estus, Debtors. UNITED STATES of America, Appellant, v. Ronald ESTUS, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 311

695 F.2d 311

7 Collier Bankr.Cas.2d 948, 9 Bankr.Ct.Dec. 1348,

Bankr. L. Rep. P 68,933

In re Ronald ESTUS and Doris Estus, Debtors UNITED STATES of America, Appellant, v. Ronald ESTUS, Appellee.

No. 82-1121.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 29, 1982.

Decided Dec. 15, 1982.

J. Paul McGrath, Asst. Atty. Gen., Washington, D.C., George W. Proctor, U.S. Atty., Little Rock, Ark., Leonard Schaitman, Howard S. Scher, Attys., Dept. of Justice, Civil Division, Washington, D.C., for appellant.

Jack Sims, P.A., Little Rock, Ark., for appellee.

Before HEANEY, Circuit Judge, STEPHENSON ^* and HENLEY, Senior Circuit Judges.

HENLEY, Senior Circuit Judge.

Creditor-appellant United States appeals from the decision of the district court upholding the bankruptcy court's confirmation of the Chapter 13 plan of the debtors-appellees Ronald and Doris Estus. Appellant, holder of an unsecured claim based on a Veterans Administration education loan, argues that the plan does not meet the good faith requirement of 11 U.S.C. Sec. 1325(a)(3). Because we cannot endorse the court's construction of the statute, we reverse and remand for additional proceedings in the bankruptcy court.

On July 9, 1980 debtors filed a Chapter 13 petition in bankruptcy. Debtors listed $10,994.20 in debts to thirty unsecured creditors including the $2,942.40 student loan from appellant and $2,268.00 in employee credit union loans. The petition and plan also listed two secured debts totaling $396.97 to Haverty's Furniture and J & J Piano, plus a mortgage secured by income-producing rental property for which debtors were five months in arrears. Debtors listed monthly expenses of $492.00 which, when subtracted from debtors' total monthly income of $745.00, left a surplus of $253.00. Debtors proposed to pay $250.00 of the surplus to the trustee for fifteen months for a projected pay-out of $3,538.67. The plan provided for payment only to the secured creditors so that after fifteen months the debts to Haverty's Furniture and J & J Piano would be fully paid and mortgage payments would be current. The plan provided for no payments to unsecured creditors.

Appellant objected to the confirmation of the plan on the ground that it was not proposed in good faith, as required by 11 U.S.C. Sec. 1325(a)(3), because the plan provided no payments to unsecured creditors. On April 20, 1981 the bankruptcy court denied and dismissed appellant's objection and confirmed the debtors' plan based on the determination that under a Chapter 7 liquidation the unsecured creditors would have received nothing. The court reasoned that "[t]he Bankruptcy Code requires that the plan provide for distribution of properties at least equal to what the creditor would receive had there been a Chapter 7 liquidation. [11 U.S.C. Sec. 1325(a)(4) ] A specific payment to unsecured creditors is not mandatory to meet the good faith requirement." In re Estus, No. LR 80-694, slip op. at 2 (Bankr.E.D.Ark. April 20, 1981).

On appeal to the district court, the ruling of the bankruptcy court was affirmed. ¹

The present provisions of Chapter 13 were enacted by Congress as a part of the Bankruptcy Reform Act of 1978. 11 U.S.C. Secs. 1301-1330. Congress perceived that a major problem under the old bankruptcy law was the inadequacy of relief provided for consumer debtors. ² See H.R.Rep. No. 595, 95th Cong., 2d Sess. 4, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 5966. New Chapter 13 was enacted to provide an effective system for dealing with consumer bankruptcies and also to encourage more debtors to attempt to pay their debts under bankruptcy court supervision. See id. at 5, reprinted in 1978 U.S.Code Cong. & Ad.News at 5966; S.Rep. No. 989, 95th Cong., 2d Sess. 13, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5799. Congress liberalized the provisions of former Chapter 13 by expanding the class of individuals eligible to use the plan, ³ by eliminating the previous requirement of unsecured creditor approval of the debtor's plan, ⁴ and by expanding the scope of the debtor's discharge upon successful completion of the plan. ⁵ In addition, Chapter 13, in contrast to Chapter 7, does not require the debtor to surrender all nonexempt assets for distribution to creditors. ⁶

The bankruptcy judge must confirm a plan that meets the six criteria established by Congress in 11 U.S.C. Sec. 1325(a). ⁷ Appellant urges that appellee's plan which provides nothing to unsecured creditors does not meet the subsection (a)(3) requirement that the plan be proposed in good faith. Congress has not provided the courts with a definition of good faith, and the courts have stated various interpretations of the role of the good faith requirement in determining whether specific plans proposing zero or minimal payments to unsecured creditors deserve confirmation. Several courts have denied confirmation of nominal payment plans, reasoning that good faith requires substantial or meaningful payment to unsecured creditors. See, e.g., In re Heard, 6 B.R. 876, 881 (Bkrtcy.W.D.Ky.1980); In re Iacovoni, 2 B.R. 256, 267 (Bkrtcy.D.Utah 1980). ⁸ Other courts, including the bankruptcy and district courts in the present case, have rejected the imposition of a meaningful payment requirement. In main, these courts view 11 U.S.C. Sec. 1325(a)(4), which requires that creditors under the debtor's Chapter 13 plan receive "not less than the amount" that they would receive in a Chapter 7 liquidation, as the only confirmation requirement with respect to payments to unsecured creditors. See, e.g., In re Sadler, 3 B.R. 536, 536-37 (Bkrtcy.E.D.Ark.1980); In re Harland, 3 B.R. 597, 598-99 (Bkrtcy.D.Neb.1980). Since debtors are allowed generous exemptions in 11 U.S.C. Sec. 522(d), many consumer debtors have no nonexempt assets. Therefore, creditors in a Chapter 7 liquidation would receive nothing and, in many such cases, zero payments to unsecured creditors under a Chapter 13 plan would meet the "best interests" test of subsection (a)(4). See In re Scher, 4 Collier Bankr.Cas.2d 784, 798 (Bankr.S.D.N.Y.1981); In re Yee, 3 Collier Bankr.Cas.2d 388, 396 (Bankr.E.D.N.Y.1980).

Still other courts have taken a middle road approach. These courts do not automatically reject a plan which proposes nominal payments to unsecured creditors, but neither do they automatically confirm a plan as meeting the subsection (a)(3) good faith requirement if the subsection (a)(4) "best interests" test is met. Instead, these courts reason that a finding of good faith requires an inquiry, on a case-by-case basis, into whether the plan abuses the provisions, purpose or spirit of Chapter 13. See, e.g., In re Polak, 9 B.R. 502, 510 (D.C.W.D.Mich.1981); In re Long, 10 B.R. 880, 881-82 (D.C.D.S.D.1981); In re Kull, 12 B.R. 654, 658-59 (D.C.S.D.Ga.1981).

Only recently have the circuit courts entered into the good faith controversy. ⁹ Four relevant circuit court opinions, all announced in 1982, although not adopting a completely unified analysis, appear to follow the middle road, case-by-case approach. In In re Rimgale, 669 F.2d 426 (7th Cir.1982), the Seventh Circuit rejected the argument that Congress intended routine confirmation of Chapter 13 plans when the subsection (a)(4) "best interests" test was met. Id. at 431. Instead, the court instructed the bankruptcy courts to make an independent evaluation of the good faith of the debtor's plan. "This inquiry imposes a considerable responsibility on bankruptcy judges. And the conduct comprehended under the rubric 'good faith' will have to be defined on a case-by-case basis as the courts encounter various problems in the administration of Chapter 13's provisions." Id. (footnote omitted). The court further instructed that the issues of substantiality of payments and debtors' best effort should be treated as elements of good faith when courts analyze debtors' plans. Id. at 432.

Four months after the Rimgale decision, the Ninth Circuit decided the case of In re Goeb, 675 F.2d 1386 (9th Cir.1982). The Goeb court refused to impose a rigid standard that every Chapter 13 plan, to meet the requirements of good faith, must make substantial payments to unsecured creditors. Id. at 1389. In detailing the appropriate good faith analysis, the court suggested a case-by-case determination and stated:

[W]e believe that the proper inquiry is whether the [debtors] acted equitably in proposing their Chapter 13 plan. A bankruptcy court must inquire whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner. Though it may consider the substantiality of the proposed repayment, the court must make its good-faith determination in the light of all mitigating factors.

Id. at 1390 (footnote omitted).

Still later in the year, the District of Columbia Circuit addressed the good faith issue in Barnes v. Whelan, 689 F.2d 193 (D.C.Cir.1982). The Barnes court ruled that "section 1325(a)(3) does not require any particular level of repayment to unsecured creditors." Id. at 195. The court adhered to a traditional understanding of good faith as meaning honesty of intention. Using this definition, the court affirmed two nominal payment plans where there was no evidence that the debtors "engaged in any specific misconduct, did not intend to carry out the plan, proposed the plan for an improper purpose, or did anything else to bring either case within the ambit of bad faith as traditionally interpreted." Id. at 200.

Twenty days after the Barnes case, the Fourth Circuit produced a more recent, and we think persuasive, analysis of the role of good faith in determining whether a debtors' Chapter 13 plan deserves confirmation. See In re Deans, 692 F.2d 968 (4th Cir.1982). Similar to earlier circuit opinions, the Fourth Circuit refused to adopt a per se rule of substantial payment as an element of good faith. In its analysis of...