In re Bowles
| Decision Date | 04 April 1985 |
| Docket Number | Bankruptcy No. 84-01537-R. |
| Citation | 48 BR 502 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re Eugene Austin BOWLES, Jr., Lena Lloyd Bowles, Debtors. |
James R. Sheeran, Esq., Richmond, Va., for debtors.
This matter came before the Court on December 26, 1984 for a hearing on confirmation of the debtors' proposed Chapter 13 modified plan filed on December 5, 1984, and it appearing to the Court at that time from a review of the plan and the record in this matter that unresolved questions existed as to the debtors' good faith in proposing their modified plan and whether or not the plan unfairly discriminated against a class of unsecured creditors, the Court took the matter under advisement and requested that the standing Chapter 13 trustee and the debtors file briefs on the issues. Simultaneous briefs having been filed by the parties on February 26, 1985, and the Court having reviewed the record and the arguments of counsel, the Court makes the following findings of fact and conclusions of law
The debtors in these proceedings are Eugene A. Bowles and Lena L. Bowles. The couple is married. On October 19, 1984, the debtors filed their joint Chapter 13 petition in bankruptcy in this Court. The Chapter 13 statement filed by the debtors indicates that the husband's present occupation is roofer and his wife's present occupation is computer operator. The debtors have scheduled in their petition secured debt totaling $80,916.59, unsecured debt totaling $52,635.28, and no tax liability owing to any governmental entity. Included in the total amount of unsecured debt listed in the petition is an unsecured obligation owing to Mrs. H.L. English, who is incorrectly listed in the petition as Mrs. G.B. English. The debtors estimated the amount owed to Mrs. English to be $30,000.
Statements by counsel for the debtors at the confirmation hearing on December 26, 1984 indicate that the obligation to Mrs. English referred to above was incurred as a result of the advancement of a sum of money from Mrs. English to Mr. Bowles in exchange for the promise that Mr. Bowles would perform some work for Mrs. English. This work was apparently never performed. As a result, a criminal action was instituted in the Richmond Circuit Court, Richmond, Virginia on charges of obtaining United States currency by false pretense. Mr. Bowles appeared and pled guilty as charged in the indictment, and by order of the state court on October 31, 1984, the court rendered its judgment suspending the imposition of a sentence pending good behavior of the defendant, Mr. Bowles, and on condition that he make restitution to Mrs. English in the amount of $50,000. This sum was payable at a rate of $10,000 per year for five years, the first $10,000 payable in two installments of $1,000 on October 31, 1984 and the balance of $9,000 paid by October 31, 1985.
Mrs. H.L. English filed a formal proof of claim in these proceedings on November 21, 1984 attaching a copy of the order of restitution. The claim is unsecured and shows a balance due of $49,000. This debt was listed in the debtors' modified Chapter 13 plan as a separate class of unsecured creditors to receive 100% of the allowed amount of the unsecured claim in deferred cash payments paid outside the plan directly to the creditor. The plan also proposes to establish a second class of unsecured creditors, which consists of all remaining unsecured creditors, each of whom will be paid 20% of the allowed amount of their unsecured claims in deferred cash payments from within the plan. The foregoing classes are designated in the plan as Class A and Class B, respectively.
The remainder of the plan provides that the debtors will pay allowed secured claims 100% of the fair market value of each creditor's collateral in deferred cash payments and that these creditors shall retain their liens. Any claim in excess of the fair market value of the collateral is paid under the plan as an unsecured claim. The plan states that there are no priority payments other than the statutory Chapter 13 trustee's fees and attorneys fees in the amount of $750. The debtors propose to fund the plan by turning over to the supervision and control of the trustee an amount approximating $400 per month for four years.1
The petition reflects that Mr. Bowles has filed a bankruptcy petition in this Court within the last six years. This petition was the individual bankruptcy of Mr. Bowles and was filed under Chapter 7 on March 5, 1983. Mr. Bowles was granted a discharge in his Chapter 7 case on November 8, 1983. The Chapter 7 trustee in those proceedings, Robert E. Hyman, filed a complaint against Mr. Bowles to have his discharge revoked and any further discharge denied for failure to include a pre-bankruptcy asset in his petition, and for his post-filing concealment of that asset and failure to turnover the property to the trustee. The trustee prevailed on his complaint thus giving this Court cause pursuant to 11 U.S.C. § 727(d)(1) and (2) to revoke the discharge. The discharge was revoked by Order entered May 4, 1984.
At the hearing on confirmation of the debtors' modified Chapter 13 plan on December 26, 1984, the Court raised sua sponte the issues of whether the plan's designation of separate classes of unsecured creditors proposing to pay a single creditor in Class A 100% of its claim while proposing to pay creditors in Class B only 20% of their allowed unsecured claims was unfair discrimination prohibiting this Court from confirming the plan pursuant to 11 U.S.C. §§ 1322(b)(1) and 1325(a)(1), and whether debts scheduled in a prior bankruptcy in which the discharge has been revoked can subsequently be discharged in a Chapter 13 proceeding, and if not, whether confirmation should be denied on grounds that the plan was not proposed in good faith pursuant to 11 U.S.C. § 1325(a)(3).
The requirements for confirmation of a Chapter 13 plan are contained in 11 U.S.C. § 1325(a).2 The Court is required to confirm a Chapter 13 plan if, and only if, all six of the requirements of subsection (a) of § 1325 have been met. See In re Cooper, 3 B.R. 246 (Bankr.S.D.Cal.1980). In this regard, the Court is under an independent duty to verify that the plan does in fact comply with the law irrespective of the lack of objection by creditors or the Chapter 13 trustee. Consequently, although no objections to confirmation have been filed by any party in interest in this matter, this Court has nevertheless independently endeavored to examine the plan for compliance with the applicable provisions of Title 11.3
In order for a Chapter 13 plan to be confirmable under § 1325(a)(1), it must comply with § 1322 relative to the contents of a plan. Among the permissible optional contents of a plan are the classification of certain creditors under § 1322(b)(1),4 which allows the debtor to designate a class or classes of unsecured claims in the manner provided in § 1122 of Title 11,5 but prohibits the debtor from unfairly discriminating against any class so designated. In Chapter 13, the Bankruptcy Code does not prohibit all discrimination between classes of unsecured creditors, just that discrimination which is unfair. In re Gay, 3 B.R. 336 (Bankr.D.Col.1980).
In the case currently before the Court, the debtors designate two classes of unsecured claims "A" and "B" which they differentiate by proposing to pay Class A in full and Class B 20% of their allowed unsecured claims. Class A consists of only one creditor, Mrs. H.L. English, with a claim of $49,000 arising out of an order of restitution from a state criminal proceeding wherein the debtor, Mr. Bowles, pled guilty to obtaining United States currency by false pretense. The debtors' attempt to justify their discrimination against all other unsecured creditors in Class B by maintaining that if such restitution is not made in full, the state court will impose a jail sentence on Mr. Bowles for his crime. For the reasons which follow, however, this Court must conclude that the debtors' justification is not sufficient to enable this Court to make a finding that the proposed Chapter 13 plan does not unfairly discriminate against Class B creditors.
In the case of In re Gay, 3 B.R. 336 (Bankr.D.Col.1980), the debtor proposed a Chapter 13 plan with two classes of unsecured creditors. One class consisted of those creditors to whom the debtor had issued insufficient fund checks and was to be paid in full. The other class of unsecured creditors, consisting of the remainder of unsecured claims, was to be paid 2% of their allowed claims. The debtor's major justification for such discrimination lay in the fact that the holders of short checks had the option of proceeding criminally against the debtor. Id. at 338. The debtor argued that if restitution were made to these creditors, the debtor could avoid prosecution for these crimes. In deciding that the proposed classification was unfairly discriminatory, the court in Gay held that it rests in the bankruptcy court's sound discretion as to whether or not a proposed classification violates § 1322(b)(1). In exercising that discretion, the court rejected the debtor's proposed justification and stated that it was speculative as to whether a criminal prosecution and possible sentence would impair the debtor's ability to perform under the plan.
Another significant case was In re Blackwell, 5 B.R. 748 (Bankr.W.D.Mich. 1980). In Blackwell the debtor's Chapter 13 plan proposed two classes of unsecured creditors. One class, consisting of the debtor's landlord, was to be paid in full while a second class, consisting of all other unsecured creditors, was to receive only 5% of their allowed claims. The issues were whether the proposed plan discriminated against the class receiving only 5% and whether the plan was proposed in good faith. The court found that four...
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