In re Bentley, RI 00-109.

• Citation: 266 BR 229
• Decision Date: 05 September 2001
• Docket Number: No. RI 00-109.,RI 00-109.
• Parties: In re William BENTLEY and Kara Bentley, Debtors. William Bentley and Kara Bentley, Appellants, v. John Boyajian, Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

266 B.R. 229 (2001)

In re William BENTLEY and Kara Bentley, Debtors.

William Bentley and Kara Bentley, Appellants, v. John Boyajian, Trustee, Appellee.

No. RI 00-109.

United States Bankruptcy Appellate Panel of the First Circuit.

September 5, 2001.

COPYRIGHT MATERIAL OMITTED

Peter G. Berman and Raskin & Berman, Providence, RI, on brief for the Appellants.

John Boyajian and Boyajian, Harrington & Richardson, Providence, RI, on brief for the Appellees.

Before KENNER, FEENEY, BOROFF, U.S. Bankruptcy Appellate Panel Judges.

PER CURIAM.

I. INTRODUCTION

In their Chapter 13 plan, the Debtors proposed to pay their nondischargeable student loan obligations in full but to pay all other nonpriority unsecured claims — all of which were eligible to be discharged upon completion of the plan payments — a dividend of only three percent. The Debtors argued that such disparate treatment was justified by their desire to emerge from bankruptcy free of all prepetition debt. Upon objection by the Chapter 13 Trustee, the bankruptcy court disagreed and denied confirmation of the plan on the basis that it discriminated unfairly between the two classes of unsecured claims, in contravention of 11 U.S.C. § 1322(b)(1). For the reasons set forth below, we affirm.

II. BACKGROUND

The Debtors, William and Kara Bentley, who filed a joint petition for relief under Chapter 13 of the Bankruptcy Code on December 1, 2000, filed a Chapter 13 plan that, in relevant part, divided nonpriority unsecured creditors into two classes and proposed to treat them quite differently. The first of the two classes was comprised solely of creditors holding student loan obligations that, by operation of § 1328(a)(2) of the Bankruptcy Code, would be excepted from discharge in Chapter 13.¹ The claims in this class totaled $57,727.95, and the plan proposed to pay them in full over the life of the plan. The second class consisted of all other unsecured claims, totaling (according to the Debtors' schedules) approximately $55,000. The plan proposed to pay creditors in this class a total of $2,000, to be shared among them on a pro rata basis, yielding a dividend of 3.6 percent. The plan proposed to fund these and all other dividends with monthly payments from their future earnings over a period of sixty months.

The Chapter 13 Trustee, John Boyajian, objected to the plan on two grounds: that the plan did not provide for all the Debtors' projected disposable income received in the three-year period following confirmation to be paid into the plan, as required by 11 U.S.C. § 1325(b)(1)(B); and that the plan unfairly discriminated against the class of general unsecured creditors in contravention of 11 U.S.C. § 1322(b)(1). The Trustee and the Debtors resolved the first objection by agreement: the Debtors would increase their proposed monthly plan payments such that the total of all payments over sixty months would equal their projected disposable income for the three-year period following confirmation.² After a short, non-evidentiary hearing on confirmation of the plan, the bankruptcy judge took the "unfair discrimination" objection under advisement and, by order of July 10, 2000, denied confirmation of the plan.

In its memorandum of decision, the bankruptcy court stated that the Debtors had the burden of proving that the proposed classification of creditors, with the resulting disparity of treatment, does not discriminate unfairly, and that the determination should be based on the totality of the circumstances, including balancing the relative benefits to the debtor and creditors from the proposed discrimination. The court went on to hold that the nondischargeability of student loans does not justify the preferential treatment of student loans over other unsecured debt; such disparity of treatment is unfair and violates both the letter and spirit of § 1322(b)(1).

Upon denial of confirmation, the court notified the Debtors that, in accordance with the court's local rules, they had eleven days to file an amended plan. Within ten days of the order denying confirmation, the Debtors moved to extend the time to file an amended plan or to seek leave of the Bankruptcy Appellate Panel to appeal from the interim order denying confirmation. At the hearing on this motion, the Debtors explained to the court that they did not wish to file an alternate plan but only to appeal from the order denying confirmation of the plan they had filed, and that the best way to put the matter in an appealable posture would be for the court simply to dismiss the case. Accordingly, on October 10, 2000, the court dismissed the case, whereupon the Debtors promptly appealed from the order denying confirmation of their plan.

III. ARGUMENTS ON APPEAL

On appeal, the Debtors urge this Panel to adopt the minority position on unfair discrimination in favor of student loan creditors: discrimination against a class of creditors is fair and permissible under § 1322(b)(1) if and to the extent that it furthers an articulated, legitimate interest of the debtor; and a debtor's interest in emerging from bankruptcy free of nondischargeable student loan obligations, and thus with a fresh start, is legitimate. In addition, they argue, the discriminatory scheme they propose is consistent with the preferential treatment that (they contend) Congress itself prescribes by mandating priority treatment for student loans.

In response, the Chapter 13 Trustee stands principally on the reasons that the bankruptcy judge articulated in support of his decision. The Trustee adds only that the decision below should also be upheld for the further reason that the Debtors are capable of paying all claims in full during the course of a five-year Chapter 13 plan. They could do this, the Trustee contends, by devoting not only three years' disposable income to the plan (as their plan proposes) but a full five.

IV. JURISDICTION AND TIMELINESS

The Bankruptcy Appellate Panel has jurisdiction over this appeal, as an appeal from a final judgment of a bankruptcy judge, by virtue of 28 U.S.C. § 158(a)(1) and (c)(1). The order denying confirmation of the proposed Chapter 13 plan was not itself a final order because the Debtors remained free to propose an alternate plan (which, if confirmed, might have mooted the issues arising from the order now on appeal). Lewis v. Farmers Home Admin., 992 F.2d 767, 772-74 (8th Cir.1993) (order denying confirmation of a Chapter 13 plan without dismissing the case is not a final order); Simons v. Federal Deposit Ins. Corp. (In re Simons), 908 F.2d 643, 644-45 (10th Cir.1990) (same); Maiorino v. Branford Savings Bank, 691 F.2d 89, 91 (2d Cir.1982) (same); In re Lievsay, 118 F.3d 661, 662 (9th Cir.1997) (order denying confirmation of chapter 11 plan is interlocutory); but see In re Bartee, 212 F.3d 277, 282-84 (5th Cir.2000) ("In the case of a denial of confirmation of a plan, we look to whether or not the order was intended to serve as a final denial of the relief sought by the debtor"; because the record indicated that court did not intend to conduct further proceedings and regarded the matter has having been finally resolved, the denial of confirmation of the Chapter 13 plan was deemed a final order). Even under the "flexible rule of finality" set forth in Bartee, the order denying confirmation in this case would be interlocutory, not final, because Judge Votolato's order denying confirmation clearly contemplated further proceedings — it specified the period within which the Debtors were to file an alternative plan — and therefore was not intended as a final denial of the relief sought by the Debtors. In re Bartee, 212 F.3d at 283 ("If the order was not intended to be final — for example, if the order addressed an issue that left the debtor able to file an amended plan (basically to try again) — appellate jurisdiction would be lacking."). The order became final when, upon being notified that the Debtors did not intend to seek confirmation of an alternate plan, the court dismissed their case.³ Therefore, the Debtors' notice of appeal, filed within ten days of the order of dismissal, was a timely appeal from the order denying confirmation and, accordingly, we have jurisdiction over their appeal from that order. Simons v. Federal Deposit Ins. Corp. (In re Simons), 908 F.2d at 645 (rejection of debtors' proposed plan may be considered on appeal from a final judgment dismissing the underlying petition or proceeding).

V. STANDARD OF REVIEW

We are asked in this appeal to review a determination that a provision in the Debtors' Chapter 13 plan "discriminates unfairly" against a class of unsecured creditors, in contravention of 11 U.S.C. § 1322(b)(1). The fairness of a discriminatory provision depends on the nature of the discrimination and the circumstances in which it is proposed. Because the determination requires a proper balancing of considerations that vary greatly from case to case, it is necessarily entrusted to the discretion of the bankruptcy judge and subject to review for abuse of discretion. "Abuse occurs when a material factor deserving significant weight is ignored, when an improper factor is relied upon, or when all proper and no improper factors are assessed, but the court makes a serious mistake in weighing them."⁴ On appeal, the Debtors challenge only the judge's failure to consider or to give proper weight to one factor: their interest in emerging from Chapter 13 without further obligation on their nondischargeable student loans. The relevance and weight of this factor are issues of law, which we review de novo. In re LaRoche, 969 F.2d 1299, 1301 (1st Cir.1992). See In re Groves, 39 F.3d 212, 214 (8th Cir.1994) (application of "unfairly discriminates" standard may involve little more than exercise of discretion but, where court was required to determine whether nondischargeability of student loan justified discrimination against general unsecured creditors, the appeal presented primarily...