Gorman v. Birts (In re Birts)
| Decision Date | 01 August 2012 |
| Docket Number | 1:12cv427 (LMB/TCB) |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | TESHIA ANTOINETTE BIRTS, Debtor. THOMAS P. GORMAN, Appellant, v. TESHIA ANTOINETTE BIRTS, Appellee. |
The trustee of the bankruptcy estate of Teshia Birts ("Birts" or "debtor") appeals the decision of the bankruptcy court confirming Birts' proposed Chapter 13 Plan ("the Plan") over the trustee's objection. For the following reasons, the Court will reverse the decision of the bankruptcy court and remand for further proceedings.
Birts filed her Chapter 13 petition on August 11, 2011 and the Plan at issue in this appeal on January 10, 2012. The five-year Plan proposes monthly payments of $317.01 to the trustee for the first 29 months to be followed by monthly payments of$540 for the remaining 31 months.1 See Appellate Record ("R.") at 59. These payments would satisfy 7% of the allowed non-priority unsecured claims by the conclusion of the Plan period. Id. at 60. In addition, the debtor proposed to continue to pay $271 a month, which is the full amount of the scheduled monthly payments due, on $31,7102 in outstanding student loans. Id. at 65 (Schedule J). By being paid outside of the Plan, these student loan payments would reduce the principal of the student loans by several thousand dollars at the end of five years.3 In contrast, if Birts paid down her student loans on a pro rata basis within the Plan along with the other unsecured debts, the principal of her student loan balance would be minimally reduced, at best, by the end of the Plan.4
The trustee objected to confirmation of the Plan, arguing that the debtor's proposed treatment of her student loans outside the Plan unfairly preferenced the student loan lender to the detriment of the other unsecured creditors, in violation of 11 U.S.C. § 1322(b)(1). After hearing oral argument, the bankruptcy court took the matter under advisement and subsequently issued a memorandum opinion ("Bankr. Mem. Op.") overruling the trustee's objection and confirming the Plan.
On appeal, a district court reverses a bankruptcy court's factual findings only where they are "clearly erroneous." See, e.g., Fed. R. Bankr. P. 8013; In re Tudor Assocs. LTD (II), 20 F.3d 115, 119 (4th Cir. 1994). Questions of law are reviewed de novo. See, e.g., In re Tudor, 20 F.3d at 119.
11 U.S.C. § 1322(b)(1) provides in relevant part:
[T]he plan may...designate a class or classes of unsecured claims, as provided in section 1122 of this title,5 but may not discriminate unfairly against anyclass so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.
Section 1322(b)(5) permits a Plan to "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due"; Birts' student loans would qualify as this type of long-term debt.
The parties agree that § 1322(b)(5) is subject to the unfair discrimination limitation described in subsection (b)(1). See In re Thibodeau, 248 B.R. 699 (Bankr. D. Mass. 2000) (). By proposing to pay her student loans outside of the Plan, Birts has designated a separate class of unsecured claims. As a result of this proposal, the student loan lender would be paidmore than three times as much in dollar amounts as the other unsecured creditors, even though the student loan debt constitutes only one-third of the total unsecured debt. See Appellant's Br. at 4. Accordingly, the question presented is whether this differential treatment constitutes "unfair" discrimination under § 1322(b)(1).
As the bankruptcy court recognized, courts have not settled on a uniform test to assess whether a classification "unfairly discriminates" within the meaning of the statute. Courts have developed two primary tests to evaluate what constitutes unfair discrimination, neither of which has been adopted by the Fourth Circuit.6 The Eighth Circuit's test has been widely applied, and includes the following factors:
In re Leser, 939 F.2d 669, 672 (8th Cir. 1991) (citing In re Wolff, 22 Bankr. 510, 512 (Bankr. 9th Cir. 1982)).
The bankruptcy courts in this district have also applied a slightly different test created in the Western District of New York, which considers:
In re Linton, 2011 Bankr. LEXIS 2939, at *3-4 (Bankr. E.D. Va. July 27, 2011) ().
The bankruptcy court below applied a hybrid version of these two tests and considered the following factors in determining whether the Plan unfairly discriminated against the general unsecured creditors:
See Bankr. Mem. Op. at 2-3 (). The Court finds that the test as proposed by the bankruptcy court includes all of the factors relevant to a reasonableness determination and was the proper test to apply to this case; however, the bankruptcy court's finding that the Plan does not unfairly discriminate against the non-student loan creditors was clearly erroneous.
The bankruptcy court found that there is a reasonable basis for the discrimination because student loans are non-dischargeable and "a strong public policy exists in favor of the federal student loan program." Bankr. Mem. Op. at 4. It is generally accepted, and the parties agree, that non-dischargeability does not by itself justify discrimination against creditors. See In re Thibodeau, 248 B.R. at 702-03 (). It is clear that Congress did not intend to give categorical distributional preference to non-dischargeable student loans, as they are not statutorily granted priority status over otherunsecured debts like, for example, domestic support and tax debts. See 11 U.S.C. § 507. Using the non-dischargeable nature of student loans as a basis for discrimination would eviscerate the detailed priority system of § 507 and make preferential treatment of student loans the rule rather than the exception.
The Court agrees with the view that there are strong policy considerations underlying the student loan program which would favor preferential treatment of student loan debt. Even the trustee conceded before the bankruptcy court that, were he a member of Congress, he would give priority status to student loans; however, that is not the law. See Bankr. Tr. at 10:1-6. In relying on the strong public policy in favor of repayment of student loans, the bankruptcy court relied on Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393 (4th Cir. 2005), in which the Fourth Circuit's analysis underscored the careful consideration courts should give to the distributional scheme established by the bankruptcy code. The Fourth Circuit was faced with the "undue hardship" exception to non-dischargeability of student loans. The court observed that, in adopting the onerous "undue hardship" standard, Congress was concerned with the viability of the student loan program; according to the court, the "heightened standard protects the integrity of the student-loan program and saves it 'from fiscal doom.'" Id. at 399-400. As with the undue hardship standard,it is the domain of Congress to weigh the relevant public policy considerations and accordingly specify the treatment of student loans in bankruptcy. By not designating student loans as priority claims under § 507, Congress has chosen not to categorically treat them differently.
Aside from student loans not being dischargeable and these policy considerations, the bankruptcy court relied only on the debtor's status as a single mother with three children in concluding that the discrimination was reasonable. The debtor has not pointed to any case law supporting her view that student loans are properly favored under these circumstances. To the contrary, the trustee has cited numerous cases highlighting the limited situations in which differential treatment of creditors is justified. For example, in In re Crawford, 324 F.3d 539, 543 (7th Cir. 2003), the Seventh Circuit explained that...
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