Goeb, In re

• Decision Date: 03 May 1982
• Docket Number: No. 80-5569,No. 79-03326-M,80-5569,79-03326-M
• Citation: 675 F.2d 1386,6 C.B.C.2d 1208
• Parties: , 6 Collier Bankr.Cas.2d 1208, 9 Bankr.Ct.Dec. 175, Bankr. L. Rep. P 68,702 In re Julian Roosevelt GOEB and Jane Alma Goeb, Debtors. In re Julian Roosevelt GOEB and Jane Alma Goeb, Plaintiffs-Appellants, v. Harry W. HEID, Chapter 13 Trustee, Defendant-Appellee. Bankruptcy
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1386

675 F.2d 1386

73 A.L.R.Fed. 1, 6 Collier Bankr.Cas.2d 1208,

9 Bankr.Ct.Dec. 175, Bankr. L. Rep. P 68,702

In re Julian Roosevelt GOEB and Jane Alma Goeb, Debtors.

In re Julian Roosevelt GOEB and Jane Alma Goeb, Plaintiffs-Appellants, v. Harry W. HEID, Chapter 13 Trustee, Defendant-Appellee.

No. 80-5569.

Bankruptcy No. 79-03326-M.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 2, 1981.

Decided May 3, 1982.

Louise D. Malugen, Dunn & Malugen, San Diego, Cal., for plaintiffs-appellants Jerry Michael Suppa, San Diego, Cal., on brief.

Eric V. Benham, Thompson, Sullivan, McGrath & McDonald, San Diego, Cal., for defendant-appellee.

Appeal from the United States Bankruptcy Court for the Southern District of California.

Before CHOY and SCHROEDER, Circuit Judges, and HATTER, ^* District Judge.

CHOY, Circuit Judge:

Julian and Jane Goeb appeal from the bankruptcy court's refusal to confirm their Chapter 13 bankruptcy plan. Section 1325(a), 11 U.S.C., instructs bankruptcy courts to confirm Chapter 13 plans that satisfy six conditions. ¹ In this case, the court held that the Goebs' plan satisfied all but the condition imposed by subsection (a)(3), that "the plan has been proposed in good faith and not by any means forbidden by the law." Because the court misapplied the good-faith requirement, we reverse and remand for further consideration of the Goebs' plan.

I. Facts

The Goebs proposed a five-year plan to repay their debts under Chapter 13. They owe $64,967 to secured creditors under deed-trust obligations on their home;. $11,851 to priority creditors, consisting mostly of taxes left unpaid from an unsuccessful and now defunct business; and $20,597 to numerous unsecured creditors. Under the plan, they would pay secured and priority creditors in full but unsecured creditors only one cent on the dollar.

Following the confirmation hearing, the bankruptcy court found:

(T)he primary purpose of their Chapter 13 plan is the restructuring of their tax obligations so as to enable them to pay off their taxes over the five-year life of the plan (pursuant to 11 U.S.C. § 1322(a)(2)).... The debtors are concerned that the IRS will not go along with any voluntary plan outside of Chapter 13's protective umbrella.

The court also found that the Goebs cannot afford larger payments to the unsecured creditors and that, had the Goebs filed for straight bankruptcy under Chapter 7 of the Code, the unsecured creditors would not have received a larger amount. But because the Goebs did not intend to substantially repay their unsecured debts, the court held that they had proposed their plan in bad faith and therefore did not satisfy § 1325(a)(3). In re Goeb, 4 B.R. 735, 736-37 (Bkrtcy.N.D.Cal.1980).

II. Issues

This appeal raises two issues concerning the good-faith requirement of § 1325(a)(3) which this court has not yet resolved:

1. In order to be proposed in good faith, must a Chapter 13 plan provide for the substantial repayment of unsecured claims?

2. If not, what findings must a bankruptcy court make before deciding whether a Chapter 13 debtor acted in good faith?

III. Discussion

A. The Substantial-Repayment Requirement

To determine whether debtors who use Chapter 13 must provide for the substantial repayment of unsecured creditors, ² we begin with the language of § 1325(a). Congress did not specially define "good faith," and the term by itself is sufficiently ambiguous to tolerate many interpretations. Absent some compelling reason, however, we hesitate to infer from it an inflexible requirement like the one applied by the court below. Had Congress wished to require all Chapter 13 debtors to substantially repay unsecured creditors, it could have spoken explicitly.

Congress did explicitly set a minimum repayment level in § 1325, but not one requiring substantial repayment. Subsection (a)(4) requires that the amount to be paid on each unsecured claim cannot be "less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7." The presence of an explicit statutory standard (which the Goebs met) strongly suggests that Congress did not intend to substitute a more rigorous standard when it imposed a general good-faith requirement.

Despite all this, courts have vigorously debated whether "good faith" should be construed to require the substantial repayment of unsecured creditors in order to maintain the integrity of Chapter 13. ³ Some, like the court below, impose the requirement because "(o)therwise, a Chapter 13 case becomes nothing more than a Chapter 7 case without its attendant provisions." In re Goeb, 4 B.R. at 736. They fear a windfall to the debtor at the expense of his unsecured creditors. ⁴ Other courts insist that an implied substantial repayment requirement would undermine Congress' effort to give as many debtors as possible a fresh start through Chapter 13's liberal discharge provisions, see In re Barnes, 13 B.R. 997, 999-1000 (D.D.C.1981), and to make explicit the prerequisites for proceeding under Chapter 13, see In re Thebeau, 3 B.R. 537, 539 (Bkrtcy.E.D.Ark.1980). Although both views have some merit, neither is so persuasive as to cause us to strain the language of the statute. ⁵

During this controversy, Congress has not sat by idly. A bill entitled "The Bankruptcy Amendments Act of 1981" was passed in the Senate and is before the House Committee on the Judiciary. S. 863, 97th Cong., 1st Sess. (1981). Section 128(b) of the bill would add a new condition on the confirmation of a Chapter 13 plan under 11 U.S.C. § 1325(a), that "such plan represents the debtor's bona fide effort" to repay his creditors. The purpose of the proposed change, the Senate Committee on the Judiciary reports, is to resolve the confusion surrounding the meaning of "good faith" in § 1325(a)(3). S.Rep.No. 150, 97th Cong., 1st Sess. 18 (1981). We find this proposed change significant. First, it shows that Congress recognizes that some courts believe the current conditions for confirmation are inadequate. We therefore need not fear that the problem will persist through mere oversight. Second, by proposing a more flexible "bona fide effort" test, the bill shows that the quandary can be resolved without resort to a substantial-repayment requirement. ⁶

In conclusion, we decline to impose a substantial-repayment requirement because (1) it is contrary to the language of the statute, (2) whether it would best further the purposes of the Bankruptcy Code is uncertain, and (3) Congress is aware of the perceived deficiency in § 1325(a). Rather than set a rigid standard under the guise of interpreting "good faith," we deem it advisable to apply the law as written and wait for Congress to create, if it chooses, further conditions for the confirmation of Chapter 13 plans. Cf. Cap Santa Vue, Inc. v. NLRB, 424 F.2d 883, 887 (D.C.Cir.1970) (manipulation of a different statutory good-faith requirement was also found improper).

B. Factors for Determining Good Faith

Having concluded that § 1325(a)(3) does not impose a substantial-repayment requirement, we must decide whether the court below made sufficient factual findings to enable us to determine whether the Goebs proposed their plan in good faith. All we know is that (1) the Goebs intended to pay one hundred percent on secured and priority claims but only one percent on unsecured claims, (2) they could not afford larger payments, (3) the unsecured creditors would not have received larger payments under Chapter 7, and (4) the Goebs' primary purpose for electing Chapter 13 was to restructure the payment of delinquent taxes in order to avoid trouble with the IRS.

Our task is to attempt to define "good faith." ⁷ We are impeded not only by it being an ambiguous term that resists precise definition in any case, but also by the lack of authoritative guidance on its meaning in § 1325(a)(3). Congress did not explain "good faith." There is neither a statutory definition nor an explanation of its meaning in the legislative history of the 1978 Code. See 5 W. Collier, Bankruptcy P 1325.01(2)(C) (15th ed. 1981). The pre-1978 Bankruptcy Act contained a provision very similar to § 1325(a)(3). ⁸ But again, Congress did not explain "good faith" in that context.

There is also no controlling case law. Neither the Supreme Court nor this court has considered under the present or past bankruptcy laws whether a Chapter 13 plan was proposed in good faith. Indeed, the meaning of the term was not in dispute until the recent advent of the controversy over a substantial-repayment requirement.

One case that we do find instructive is American United Mutual Insurance Co. v. City of Avon Park, 311 U.S. 138, 61 S.Ct. 157, 85 L.Ed. 91 (1940). In Avon Park, the Supreme Court interpreted a condition on the confirmation of a bankruptcy plan under former Chapter IX, that "the offer of the plan and its acceptance are in good faith." 11 U.S.C. § 403(e)(5) (repealed in 1976). Although the Court did not formulate a precise definition, it focused on "(e) quity and good conscience" in finding that the acceptance had not been made in good faith. The primary explanation for this focus was:

As this Court stated in Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 455 (60 S.Ct. 1044, 1053, 84 L.Ed. 1293): "A bankruptcy court is a court of equity, § 2, 11 U.S.C. § 11, and is guided by equitable doctrines and principles except in so far as they are inconsistent with the Act.... A court of equity may in its discretion in the exercise of the jurisdiction committed to it grant or deny relief upon performance of a condition which will safeguard the public interest." And see Pepper v. Litton, 308 U.S. 295, 304, (60 S.Ct. 238, 244, 84 L.Ed. 281) et seq. These principles are a part of the control which the court has over the whole process of formulation and approval of plans of composition or reorganization, and the obtaining of...