In re Hill
| Decision Date | 28 September 2001 |
| Docket Number | BAP No. NC-01-1043-KRB. Bankruptcy No. 00-11847. |
| Citation | 268 BR 548 |
| Parties | In re Jill D. HILL, Debtor. Michael H. Meyer, Chapter 13 Trustee, Appellant, v. Jill D. Hill, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Michael H. Meyer, Santa Rosa, CA, pro se.
Michael C. Fallon, Santa Rosa, CA, for Jill D. Hill, Appellee.
Steven Johnson, Office of the U.S. Trustee, San Francisco, CA, for the U.S. Trustee, Amicus Curiae.
Before: KLEIN, RUSSELL, and BRANDT, Bankruptcy Judges.
The chapter 13 trustee appeals a plan confirmation in which the bankruptcy court excused the debtor from proving that a plan classification favoring her mother over other creditors did not discriminate unfairly. The court held in a published decision, In re Hill, 255 B.R. 579 (Bankr. N.D.Cal.2000), that the ban on unfair discrimination in 11 U.S.C. § 1322(b)(1) never, by virtue of the so-called "however" clause, applies to discrimination in favor of consumer debts with a co-obligor.
We do not reach this interesting question because the record indicates that the § 1322(b)(1) "however" clause does not apply. There is no individual who is "liable on" the relevant debt "with the debtor" within the meaning of the § 1322(b)(1) "however" clause. This makes the bankruptcy court's ruling purely hypothetical. Moreover, an essential element of proof for plan confirmation was omitted. We VACATE and REMAND.
Jill Hill filed a voluntary chapter 7 bankruptcy and soon converted to chapter 13, filing a plan providing for payment of $400 per month for 60 months ($24,000).
The schedules listed zero secured debt, zero priority debt, and unsecured debt totaling $57,306. Plan distributions would be to administrative expenses, any priority creditors, and unsecured creditors in two classes.
The first-class unsecured treatment was for "obligations on which debtor's mother Betty J. Nelson is also liable: Chase ($9,147), Chase ($3,941), Discover ($5,243), Bank of America ($6,000) which shall be paid in full." The total first-class unsecured debt was $24,331.
The second-class unsecured treatment was for "all other unsecured creditors (IRS, Wachovia, University of Utah, Phillips) which shall be paid nothing." The total second-class unsecured debt was $32,975.
Nothing in the appellate record indicates how $24,000, minus expenses of chapter 13 administration, would suffice to pay unsecured debt of $24,331 "in full."
The chapter 13 trustee objected to plan confirmation, focusing upon a legal and a procedural notice issue. The legal issue was whether a debtor proposing a chapter 13 plan with separate classifications treating co-signed unsecured debt more favorably than other unsecured debt must demonstrate that the classification does not constitute "unfair discrimination" within the meaning of § 1322(b)(1).
The chapter 13 trustee's procedural issue was whether due process considerations require written notice to creditors of the factual basis for a proposed discrimination whenever the bankruptcy court limits chapter 13 confirmation hearings to those cases in which timely objection to confirmation is filed.
The debtor's evidence supporting plan confirmation consisted of this declaration:
The court overruled the objection. Ignoring the procedural issue, it ruled that § 1322(b)(1) "clearly exempts co-debtor debt from the fairness requirement." Hill, 255 B.R. at 580.
This appeal ensued.
The bankruptcy court had jurisdiction per 28 U.S.C. §§ 1334 and 157(b)(2)(L). Our jurisdiction is per 28 U.S.C. § 158(a)(1).
The interpretation of § 1322(b)(1) is a question of law that we review de novo. McDonald v. Sperna (In re Sperna), 173 B.R. 654, 657 (9th Cir. BAP 1994).
This is a matter of statutory interpretation as to which we stumble at the threshold.
The statute in question is Bankruptcy Code § 1322(b)(1), which provides that a chapter 13 plan may:
(1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class 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.
11 U.S.C. § 1322(b)(1) (emphasis supplied).
The focus is on the emphasized "however" clause. That clause — which was added to § 1322(b)(1) in 1984 — has perplexed and divided courts as to whether it obviates, or merely qualifies, the fairness requirement.
Most courts hold that separately classified co-obligor debts must still clear the § 1322(b)(1) unfair discrimination hurdle. The consequence is that the "however" clause permitting co-obligor debts to be treated "differently" is more in the nature of a qualification to the application of the unfair discrimination analysis than an exemption from it. See, e.g., Ramirez v. Bracher (In re Ramirez), 204 F.3d 595, 596 (5th Cir.2000); Chacon v. Bracher (In re Chacon), 202 F.3d 725, 726 (5th Cir. 1999); Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320, 328-30 (E.D.Wash.1994); In re Cheak, 171 B.R. 55, 58 (Bankr.S.D.Ill.1994); KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY: 3D § 150.1 n. 3 (2000) (gathering cases).
A minority of courts, including the bankruptcy court in this appeal, conclude that the "however" clause excuses compliance with the § 1322(b)(1) ban on unfair discrimination. In re Dornon, 103 B.R. 61, 64-65 (Bankr.N.D.N.Y.1989); LUNDIN, § 150.1 n. 2 (gathering cases).
A few courts think the debate of little consequence because overreaching in favor of co-obligors can be dealt with under the good faith requirement of 11 U.S.C. § 1325(a)(3). Dornon, at 64; In re Hill, 261 B.R. 495, 497-98 (Bankr.N.D.Fla. 2001).
While we have not heretofore decided the narrow question of the impact of the § 1322(b)(1) "however" clause on the fairness requirement, we have consistently recognized that the section's ban on unfair discrimination implies that some discrimination is permissible and have applied an oft-used, but much-criticized, list of factors as pertinent to evaluating the inherently subjective question of unfairness:
(1) whether the discrimination has a reasonable basis; (2) whether the debtor can carry out a plan without the discrimination; (3) whether the discrimination is proposed in good faith; and (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination . . . i.e., does the basis for the discrimination demand that this degree of differential treatment be imposed?
Amfac Distrib. Corp. v. Wolff (In re Wolff), 22 B.R. 510, 512 (9th Cir. BAP 1982); Sperna, 173 B.R. at 658. But see Stephen L. Sepinuck, Rethinking Unfair Discrimination in Chapter 13, 74 AM. BANKR.L.J. 341, 359 (2000) ().
If we were to disagree with the bankruptcy court and conclude that the § 1322(b)(1) "however" clause merely informs or qualifies, rather than preempts, the fairness analysis, we would need to reverse and remand so that the trial court could decide whether the particular discrimination is unfair. We must first, however, deal with a preliminary obstacle that turns out to preclude a decision on that question of law.
The threshold question is whether the § 1322(b) "however" clause applies in the first instance. On the record before us, it is apparent that the clause has not been shown to apply in this case and that the bankruptcy court incorrectly premised confirmation on a hypothetical question.
The § 1322(b)(1) "however" clause does not apply in a particular case unless three essential elements exist: there must be "consumer debt" that is "consumer debt of the debtor" and as to which there is "an individual who is liable on such consumer debt with the debtor." 11 U.S.C. § 1322(b)(1).
The debtor, as the chapter 13 plan proponent, has the burden of proof on all elements of plan confirmation. Wolff, 22 B.R. at 512.
If the debtor does not prove facts sufficient to establish the application of the § 1322(b) "however" clause, then, under any view of the law regarding the effect of that clause on the unfair discrimination ban, a chapter 13 plan that separately classifies some unsecured debts for better treatment than other unsecured debts cannot be confirmed unless the debtor proves that there is no unfair discrimination. In re Riggel, 142 B.R. 199, 204 (Bankr. S.D.Ohio 1992).
The term "consumer debt" is statutorily defined to mean debt incurred by an individual "primarily for a personal, family, or household purpose." 11 U.S.C. § 101(8).
It is settled in this circuit that the purpose for which the debt was incurred affects whether it falls within the statutory definition of "consumer debt" and that debt incurred for business ventures or other profit-seeking activities does not qualify. Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th Cir.1988).
The record is silent as to the purpose of the debt. The evidence to support the existence of consumer debt is limited to some probabilistic inference from the fact that most personal credit card debt is consumer debt. Thus, the evidence to support this element is, at best, thin.
Although the term "consumer debt of the debtor" is not separately defined, the language necessitates focus upon the precise liability "of the debtor."
There are two pertinent questions. First, who is the creditor? Second, what is the nature of the liability?
Here, the sole evidence of record was the debtor's declaration...
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