In re Baker

• Decision Date: 03 July 1991
• Docket Number: Bankruptcy No. 89-30570-C.
• Citation: 129 BR 127
• Court: U.S. Bankruptcy Court — Western District of Texas
• Parties: In re David L. BAKER, Debtor.

129 B.R. 127 (1991)

In re David L. BAKER, Debtor.

Bankruptcy No. 89-30570-C.

United States Bankruptcy Court, W.D. Texas, El Paso Division.

July 3, 1991.

Jerry Tanzy, El Paso, Tex., for debtor.

R. Glen Ayers, Jr., Cox & Smith, Inc., San Antonio, Tex., for trustee, Ms. Phyllis Bracher.

MEMORANDUM DECISION

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for further consideration, upon remand by the district court for further consideration of the good faith issue under Section 1325(a)(3) of the Bankruptcy Code, the objection of Phyllis Bracher, the standing Chapter 13 Trustee for the Western District of Texas, El Paso Division, to confirmation of the Debtor's Chapter 13 plan. Upon consideration of the materials submitted, including an amicus curiae brief submitted by Marion A. Olson, the standing Chapter 13 Trustee for the San Antonio Division of this district, the appellate briefs filed by the parties in the district court, the order of remand, and testimony taken and arguments made at the hearing, the court now enters this decision disposing of this matter.

BACKGROUND FACTS AND POSITIONS OF THE PARTIES

David L. Baker ("Debtor") filed for Chapter 13 relief in July of 1989.¹ The Debtor submitted a Plan which proposed to pay net disposable income over three years, yielding a dividend of approximately ten percent to unsecured creditors.

At the initial hearing on confirmation, the Trustee testified that all of the prerequisites for confirmation were present, including the commitment of all the Debtor's disposable income for thirty-six months. 11 U.S.C. § 1325(b). The Trustee did not recommend confirmation, however, because, in her view, the plan had not been presented in good faith, in turn because the debtor could repay all of his creditors in full, or at least a significantly higher portion thereof, if the plan term was extended beyond thirty six months to sixty months. The Trustee maintained that the Debtor's refusal to amend his plan accordingly demonstrated that the plan was not proposed in good faith. 11 U.S.C. § 1325(a)(3). The court (the Honorable Ronald B. King presiding) agreed, and denied confirmation. The United States District Court reversed and remanded because the record did not provide an adequate analysis of the issue of good faith.

The Trustee has stated in both this hearing and the prior hearing, as well as in her appeal that the Chapter 13 Trustee in El Paso, Texas, for public policy reasons, has strongly encouraged the use of 100% plans for many years. Frequently, to have a plan as close to 100% payout as possible, the Trustee will encourage debtors to make use of the full five year payout period that may be available, upon a proper showing of cause, under Chapter 13. 11 U.S.C. § 1322(c). The Trustee argues that, if the Chapter 13 program is to be successful and is to work any "rehabilitation" of the Debtor (including a restoration of the Debtor's credit rating), plans should provide significant recovery for unsecured creditors. Otherwise, she says, Chapter 13 becomes merely a debt collection procedure for secured creditors, with unsecured creditors realizing little or no benefit, an outcome entirely inconsistent with clearly expressed congressional policy which favors the use of Chapter 13 over Chapter 7, primarily for the benefit of unsecured creditors.² The Trustee concludes that "three year plans which do not pay a significant percentage of the unsecured obligations are not in `good faith' where the debtor, by paying over five years, could significantly increase the recovery for unsecured creditors."³

The Debtor responds that the Trustee's recommendations impose a sub rosa rule that all composition (i.e., paying less than 100% to unsecured creditors) cases must extend beyond thirty-six months and, as such, effectively amends the Bankruptcy Code by imposing a requirement not found in the Code. Debtor further asserts that the court may not so legislate under the guise of statutory construction. The Debtor concludes that the court may of course view the issue of "good faith" on a case-by-case basis, but that a blanket rule that all composition plans which stop at thirty-six months are proposed in bad faith amounts to impermissible judicial legislation.

ANALYSIS

Section 1322 provides, in relevant part, that ". . . . the plan may not provide for payments over a period that is longer than three years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than five years." 11 U.S.C. § 1322(c). The Code thus defines the standard term for Chapter 13 plans as three years, and makes five year terms discretionary. The statute, by its terms, thus does not require a person to file a five year plan. To the contrary, the debtor must obtain permission and make a showing of "cause" before the plan term can be extended beyond three years. 11 U.S.C. 1322(c).⁴

Section 1325 in turn provides, in relevant part, that ". . . . the court shall confirm a plan if . . . the plan has been proposed in good faith. . . ." 11 U.S.C. § 1325(a)(3) (emphasis added). "Good faith" is neither defined in the Bankruptcy Code nor discussed in the legislative history. In re Nittler, 67 B.R. 217, 221 (D.Kan.1986), (quoting Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427, 431-32 (6th Cir. 1982). The meaning of "good faith" in Section 1325(a)(3) has engendered no small body of case law from the courts. Flygare v. Boulden, 709 F.2d 1344, 1346 (10th Cir. 1983); see 5 L. King, Collier on Bankruptcy ¶ 1325.01c at 1325-8.6 (15th ed. 1982) ("With the possible exception of the `adequate protection test,' the controversy concerning good faith under Chapter 13 has resulted in more litigation than any other issue to have arisen during the year immediately following the effective date of the Bankruptcy Code"). The meaning of "good faith" is critical to the ultimate resolution of this case.

No less than seven circuits have considered what is meant by good faith, but all seven have formulated a "middle road" approach. Matter of Chaffin, 836 F.2d 215, 217 (5th Cir.1988); In re Kitchens, 702 F.2d 885 (11th Cir.1983); In re Estus, 695 F.2d 311 (8th Cir.1982); In re Deans, 692 F.2d 968 (4th Cir.1982); In re Barnes, 689 F.2d 193 (D.C.Cir.1982); In re Goeb, 675 F.2d 1386 (9th Cir.1982); In re Rimgale, 669 F.2d 426 (7th Cir.1982). None of these cases find the amount of the payment dispositive of the issue. Flygare, 709 F.2d at 1347; In re Estus, 695 F.2d at 315-16; but see In re March, 83 B.R. 270 (Bankr. E.D.Pa.1988).

The Eighth Circuit set out eleven factors it found relevant to the good faith inquiry in Chapter 13 cases:

1) the amount of the proposed payments and the amount of the debtor\'s surplus;

2) the debtor\'s employment history, ability to earn and likelihood of future increases in income;

3) the probable or expected duration of the plan;

4) the accuracy of the plan\'s statements of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;

5) the extent of preferential treatment between classes of creditors;

6) the extent to which secured claims are modified;

7) the type of debt sought to be discharged and whether any such debt is nondischargeable in Chapter 7;

8) the existence of special circumstances such as inordinate medical expenses;

9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;

10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and

11) the burden which the plan\'s administration would place upon the trustee.

In re Estus, 695 F.2d 311, 315-16 (8th Cir.1982); Flygare v. Boulden, 709 F.2d 1344, 1347 (10th Cir.1983). More recent cases also utilize a multifactor test to evaluate "good faith." See In re Caldwell, 895 F.2d 1123 (6th Cir.1990); In re Lawson, 93 B.R. 979 (Bankr.N.D.Ill.1988); In re Rose, 101 B.R. 934 (Bankr.S.D.Ohio 1989); In re Jacobs, 102 B.R. 239 (Bankr.E.D.Okla. 1988). The multifactor approach is consistent with the Fifth Circuit's more general "totality of the circumstances" test, simply giving courts (and practitioners) guideposts about what circumstances in particular are relevant to the issue. Of course, the good faith inquiry is fact-sensitive, and so must be made on a case-by-case basis. See Matter of Chaffin, 836 F.2d 215, 217 (5th Cir. 1988); Public Finance Corp. v. Freeman, 712 F.2d 219, 221 (5th Cir.1983); In re Smith, 848 F.2d 813 (7th Cir.1988); In re Goeb, 675 F.2d 1386, 1390 (9th Cir.1982); In re Warner, 115 B.R. 233, 238 (Bankr. C.D.Cal.1989).

The amount of payment and respective plan term is indeed one relevant factor. In re Estus, supra. In the Fifth Circuit, however, it can never by itself be dispositive. Matter of Chaffin, 836 F.2d at 217. We are obligated in this circuit to look at the totality of the circumstances, and the plan term is but one of those circumstances. A per se rule linking the term of the plan to the bona fides of the plan is wrong as a matter of law.

The debtor is correct in cautioning this court to avoid a foray into judicial legislation. See In re Bruce, 96 B.R. 717, 721 (Bankr.W.D.Tex.1990) ("the scope of a bankruptcy judge's role . . . is to interpret and apply the statute, not to rewrite it"). The warning is especially appropriate when the statutory signals run so strongly counter to the direction urged by the trustee here. The language and structure of the statute all point to an assumption on Congress' part that the appropriate term for the average chapter 13 plan would be three years, and that five year plans would be the exception rather than the rule. See 11 U.S.C. §§ 1322(c), 1325(b). Observed the House Report:

. . . In certain areas of the country, inadequate supervision of debtors attempting to perform under wage earner plans have (sic) made them a way of life for certain debtors. Extensions on plans, new cases, and newly incurred debts put some debtors under court

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