In re Heard

• Decision Date: 07 November 1980
• Docket Number: Bankruptcy No. 38000966.
• Citation: 6 BR 876
• Parties: In re Bettie Elizabeth HEARD, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Kentucky

6 B.R. 876 (1980)

In re Bettie Elizabeth HEARD, Debtor.

Bankruptcy No. 38000966.

United States Bankruptcy Court, W.D. Kentucky.

November 7, 1980.

COPYRIGHT MATERIAL OMITTED

G. William Brown, Louisville, Ky., trustee.

Jan Morris, Joseph S. Elder, II, Legal Aid Society, Louisville, Ky., for debtor.

MEMORANDUM AND ORDER

MERRITT S. DEITZ, Jr., Bankruptcy Judge.

Here we further contribute to the growing body of literature on "good faith" as an essential component of a Chapter 13 plan for the adjustment of debts. The adverb "further" should be read in its full federal context, for this "good faith" case is the first to be decided in this district.¹

Specifically at issue is the so-called "nominal payment" plan, in which unsecured creditors are paid little or nothing in the debtor's effort toward rehabilitation. The Court's duty is to determine whether such a plan is "in good faith" as required by Sec. 1325 of the Bankruptcy Code.²

The two simple words, "good faith", have precipitated a judicial stampede in search of their meaning. Over a hundred thousand words, in 49 published opinions from 27 federal districts, have been dedicated to the quest for definition.³ Citing every authority imaginable, and some, such as Romeo and Juliet and The Federalist Papers, which are unimaginable,⁴ bankruptcy judges have sought to cloak the ethereal concept with tangible garb.

With reasoning which ranges from surgical precision to tortured convolution, courts have approved, and disapproved, plans for the repayment of unsecured creditors from zero percent to 70 percent of the amounts of their claims.

This surfeit of deliberation, this cacophony of opinion, this polyglot of wisdom, is troublesome to the mind. A judge, when confronted with an unsettling point of first impression, would better resort to common sense than to sophisticated logic or contrived reasoning. Oliver Wendell Holmes said it:

"The very considerations which judges most rarely mention, and always with an apology, are the secret root from which the law draws all the juices of life. I mean, of course, considerations of what is expedient for the community concerned."⁵

If, in today's mercantile community, one were to ask a creditor, "Would you rather receive nothing of what you are owed, or one per cent of it?" he would likely reply, "It makes no difference". If the debtor were asked whether he would prefer to pay none of his debt or one percent of it, the same response would be predictably forthcoming.

Now if that makes common sense, we will with this opinion depart from the Babel of the reported decisions, to simply but resolutely declare that:

1. The nominal payment plan in this case was not proposed in good faith and will not be confirmed;

2. In no factual circumstance which we can presently envision would a "zero plan" or "one percent plan" be acceptable to this Court; and

3. The greater the percentage of debt proposed to be paid, the stronger the presumption of good faith; the lesser the percentage, the more intense must be the inquiry of the Court into the issue of good faith.

The Facts of the Case

The substance of the debtor's plan provides for full payment of allowed secured claims, and payment of only one percent of unsecured claims. The debtor has made use of the lien avoidance remedy provided in 11 U.S.C. § 522(f) to relegate to unsecured status the claims of creditors who held non-possessory, non-purchase money security interests. The claims totalled $2,843.07.

Of the two remaining secured claims, one amounts to only $99.95. The other, held by General Motors Acceptance Corporation (GMAC) is in the amount of $8,040.48. It represents a security interest in the debtor's 1979 Chevrolet Impala. Because in bankruptcy a claim is secured only to the extent of the value of the property,⁶ GMAC's claim was reduced from $8,048.48 to $4,550.00, the value of the automobile. The difference of $3,490.48 is treated as unsecured. The debtor has also used Chapter 13 to force GMAC to redeem the debt.

The debtor proposes to pay the trustee $160 a month. Her take-home pay is $580 per month and her itemized budgetary expenses total $415, which, when the payments under the plan are included, will total $575. She will be left $5 per month for contingencies not otherwise provided for in her budget.

The practical effect of the plan is to deal with only one creditor, GMAC. The bulk of the payment the trustee receives will be used to pay for the debtor's automobile. The secured claims total approximately $4,650, all but $100 of which is held by GMAC. The unsecured debt totals $7,086, of which approximately $6,300 was rendered unsecured under bankruptcy law by lien avoidance and reduction of the secured claims to the value of the property.

The trustee recommended that we deny confirmation of the plan because it was not proposed in "good faith". We concur.

* * * * * *

In what may appear to be a momentary digression, we will swiftly return to the point.

The automobile is a major stage set in the bankruptcy drama. Its acquisition, often beyond the means of its purchaser; its maintenance, similarly costly; its use and abuse, leading to uninsured accidents; and its absence, preventing its owner from earning a living at a distance: All of these attributes bring its driver to these portals.

This is such a case. This is not a meaningful effort in good faith to repay creditors. This is an effort to keep the car, nothing more.⁷

The State of the Law

Section 1325 of the Bankruptcy Code compels court approval of a Chapter 13 plan if certain conditions are met. The court must be satisfied that the debtor will be able to make all payments under the plan and comply with the plan,⁸ and the unsecured creditors must not receive less under the plan than what they would have if the debtor's estate were liquidated under Chapter 7.⁹

But compliance with these monetarily quantifiable requirements does not automatically warrant confirmation of the plan. Section 1325(a)(3) compels the debtor to propose the plan in good faith-a requirement which is hardly as precise and determinable as the minimal payment requirements of Sections 1325(a)(4) and (6).

Several courts have firmly announced that a plan's offered payments should not be a factor in considering good faith, and that so long as the unsecured creditors would receive an amount under the plan that is not less than what they would have gotten in a Chapter 7 liquidation, the plan should be confirmed.¹⁰ By adopting this posture, courts have confirmed "plans", a word which in those cases is surely stretched to its fullest,¹¹ which provide for no payments whatsoever to unsecured creditors.¹²

But as the legislative history indicates, repayment is a sine qua non of a Chapter 13 plan. Accordingly, equating repayment of claims to the "good faith" requirement ensures that the general creditors in a Chapter 13 plan will be fairly dealt with. Perhaps the best index of good faith in a Chapter 13 plan is the quintessence of the plan itself-the payments proposed to be made.

Good faith is nowhere defined in the Code, nor could it realistically be. But one commentator has concluded that "the good faith inquiry is directed to whether or not there has been an abuse of the provisions, purpose, or spirit of Chapter XIII in the proposal or plan".¹³ The "purpose" or "spirit" of Chapter 13, as gleaned from both the legislative history and from the broad discharge provisions of the Code, is to provide the debtor with an effective and court-protected method for the meaningful repayment of his debts.

When the Code was adopted, the Chapter 13 debtor became endowed with previously unheard of power to shape his plan in a manner in which he might see fit. Under the old Act, the heavy anvil of the creditors' right to veto a plan loomed over the debtor. Further, the Chapter 13 debtor is permitted to discharge debts that would otherwise be nondischargeable in Chapter 7, and may seek an unlimited number of Chapter 13 discharges without regard to time limitations for doing so.

With this freedom comes attendant responsibilities, including, most importantly, the responsibility to deal with creditors fairly and honestly by repaying them a substantial portion of what they are owed.

This thought is supported by the legislative history of the Code. Congress anticipated substantial preservation, not derogation, of creditors' claims. The enactment of Chapter 13 was premised on creditor, as well as debtor, satisfaction. That is evident in the following passage from the House Report:

The purpose of Chapter 13 is to enable an individual under court supervision and protection, to develop and perform under a plan for the repayment of debts over an extended period. In some cases, the plan will call for full repayment. In others, it may offer creditors a percentage of their claims in full settlement.

. . . The benefit to creditors is self-evident: their losses will be significantly less than if their debtors opt for straight bankruptcy.¹⁴

And as the following Senate Report indicates, Congress apparently overestimated the deterrence to minimal payment plans that 11 U.S.C. § 727(a)(9)¹⁵ would provide.

The new chapter 13 will permit almost any individual with regular income to propose and have approved a reasonable plan for debt repayment based on the individual\'s exact circumstances. As in current law, 100 percent payment plans will be encouraged by the limitation on availability of a subsequent discharge in section 727(a)(8) Section 727(a)(9) as enacted. This kind of plan has provided great self-satisfaction and pride to those debtors who complete them and at the same time effect a maximum return to creditors. The limitation of § 727(a)(8) will also provide a slight brake on the wholesale filings of Chapter 13\'s by small businessmen who wish to avoid some of the restrictions of Chapter 11. It is also necessary to prevent Chapter 13 plans from turning into mere offers of

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