In re Keach

• Citation: 243 BR 851
• Decision Date: 27 January 2000
• Docket Number: BAP No. RI99-055.
• Parties: In re David Sampson KEACH, Debtor. David Sampson Keach, Appellant, v. John Boyajian, Chapter 13 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

243 B.R. 851 (2000)

In re David Sampson KEACH, Debtor.

David Sampson Keach, Appellant, v. John Boyajian, Chapter 13 Trustee, Appellee.

BAP No. RI99-055.

United States Bankruptcy Appellate Panel of the First Circuit.

January 27, 2000.

Peter G. Berman, Raskin & Berman, Providence, RI, on brief, for Appellant.

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

Before: QUEENAN, HAINES, and BOROFF, Bankruptcy Judges.

QUEENAN, Bankruptcy Judge.

A debtor files under Chapter 7, is unsuccessful in an attempt to convince the court that his largest creditor holds a contract claim rather than a nondischargeable fraud claim, and also fails in his efforts to convert the case to Chapter 13. He then files under Chapter 13 to obtain the broader discharge available there for fraud claims. This second filing occurs after his general Chapter 7 discharge enters but while the prior case remains open. In his Chapter 13 plan the debtor proposes to devote all his disposable income to paying priority tax debt in full and a 5% dividend on the fraud claim. Has he proposed the plan in bad faith because of the 5% dividend and the occurrence of one or more of these prior events? That is the question here. It is one which has caused a split among circuits and is unresolved in this circuit. We hold none of these facts is indicative of bad faith. Because the bankruptcy court thought otherwise and denied confirmation, we vacate the court's order and remand.

I. FACTUAL BACKGROUND

The bankruptcy court's findings and the record disclose the following. David Sampson Keach (the "Debtor") operates a home construction business as a sole proprietor. In 1989 he entered into an agreement with Claire L. Kuzniar ("Kuzniar") to remodel her summer cottage and convert it into a year round residence. Before the project was completed, Kuzniar complained of defects in the home's construction and design. She insisted upon their correction. When the parties could not agree, the Debtor walked off the job after having been paid $70,000.

Kuzniar sued in state court under counts for breach of contract and unfair and deceptive trade practices. In the subsequent jury trial the judge instructed the jury it could find the Debtor liable for unfair and deceptive trade practices if it found he had misrepresented his level of expertise and had effectuated a "bait and switch" with respect to the parties' written contract. The jury returned a verdict for Kuzniar on both counts. It awarded aggregate compensatory damages of $76,000 under both counts, and punitive damages of $30,000 under the count for unfair and deceptive trade practices. Judgment entered.

A month later the Debtor and his wife filed a Chapter 7 petition without appealing the judgment. Kuzniar countered by filing an adversary proceeding in the bankruptcy court requesting judgment declaring her debt nondischargeable as a debt for "false pretenses, a false representation, or actual fraud" within the meaning of section 523(a)(2) of the Code. She then filed a motion for summary judgment, urging the court to apply principles of issue preclusion based on the state court trial. Rejecting the Debtor's contention that issue preclusion should not apply because the jury had not found the required scienter, the bankruptcy court granted the motion. See In re Keach, 204 B.R. 851 (Bankr.D.R.I.1996). The Debtor took no appeal. He instead gave notice of conversion of the case to Chapter 13. On Kuzniar's motion, the court entered an order striking the notice to convert on the ground the amount of the Debtor's liabilities at the filing date made him ineligible for Chapter 13. The Debtor unsuccessfully attempted to appeal.¹ His discharge soon entered, discharging him of all debt except the Kuzniar debt and certain federal income tax debt.²

The Debtor's attempted appeal of the order denying conversion consumed about a year from the time the court declared the Kuzniar debt nondischargeable. Kuzniar, understandably, declined to wait. She obtained a judgment lien upon the Debtor's home and scheduled a sheriff's sale of the property. On February 11, 1998, shortly before the scheduled sales date, the Debtor commenced the present Chapter 13 case, thereby imposing an automatic stay of the sale. The prior Chapter 7 case had at that time not yet been closed, apparently because of the Debtor's appellate efforts. His Chapter 13 schedules listed the Internal Revenue Service as an unsecured priority claimant in the sum of $28,596 for income taxes owed for 1993 through 1997. Total unsecured debt was scheduled at $188,813, of which $180,000 was the Kuzniar claim, which had grown with interest.³

The Debtor's initial Chapter 13 plan, filed on March 5, 1998, proposed to pay the priority federal income taxes in full, through monthly payments of $700, and to make a $13,000 lump sum payment on all other claims.⁴ On September 22, 1998, the court denied confirmation because it believed the plan was not feasible and was not proposed in good faith. See In re Keach, 225 B.R. 264 (Bankr.D.R.I.1998). The Debtor then filed an amended plan reflecting an upward adjustment on priority tax debt to $35,769, which was to be paid in full through 60 monthly payments of $600. The amended plan proposed paying nonpriority unsecured debt, including the Kuzniar claim, by a $10,000 payment to the Chapter 13 trustee within three days after confirmation.⁵ Kuzniar objected to the amended plan, contending it was not proposed in good faith. The Chapter 13 trustee objected on grounds of lack of good faith and lack of feasibility. At the evidentiary confirmation hearing the trustee withdrew his objection as to feasibility.⁶ No party contended the Debtor was not devoting all his projected three year disposable income to plan payments. The court again denied confirmation, this time solely on the ground the plan was not proposed in good faith.

II. BANKRUPTCY COURT'S DECISION

In denying confirmation on bad faith grounds the bankruptcy court in both its decisions considered eleven nonexclusive factors which, as we shall see, a number of courts have employed to test good faith.⁷ In its first decision, which the court incorporated into its second, the court emphasized six factors it thought indicative of bad faith:

1. The filing of the Chapter 13 petition before the Chapter 7 case having been closed.

2. The "nominal" dividend.

3. The Debtor\'s misrepresentation (apparently through counsel) that two judicial liens on his home had been avoided in the Chapter 7 case.

4. The absence of any change in the Debtor\'s circumstances between the Chapter 7 and Chapter 13 filings.

5. The bulk of the debt being nondischargeable.

6. The Debtor seeking to accomplish in the Chapter 7 and Chapter 13 cases together a result that would not be possible in either alone.

The court particularly focused on the second and fifth factors, stating: "Under his plan, Keach will pay his $35,000 priority tax debt, and the mortgage on his $250,000 house, but will pay virtually nothing to the defrauded creditor, Claire Kuzniar, whose claim exceeds $180,000."⁸ The court also expressed displeasure with the Debtor's testimony, saying: "He defers to his accountant and his wife, and we do not have an adequate picture of what is fact and what is fiction when it comes to the Debtor's budget."⁹ In criticizing the Debtor's testimony the court did not find the Debtor had misrepresented facts concerning his budget, only that he could not provide these facts.

In summary, prescinding from this testimony and reducing the decision to its essential elements, the bankruptcy court had three grounds for its conclusion that the plan was not proposed in good faith: (1) the nondischargeability of the Kuzniar debt in Chapter 7, (2) the 5% dividend paid on it, and (3) the filing of successive Chapter 7 and Chapter 13 petitions. The Debtor contends these matters are not indicia of bad faith.

III. MEANING OF REQUIREMENT OF "GOOD FAITH" PLAN PROPOSAL

Section 1325 of the Code contains the requirements for confirmation of a chapter 13 plan.¹⁰ Among them is this seemingly innocuous condition: the plan has been proposed in good faith and not by any means forbidden by law. . . .

11 U.S.C.A. § 1325(a)(3) (Law.Co-op.1987).

In the absence of contrary evidence, and there is no relevant legislative history, Congress presumably used the phrase "good faith" in its ordinary sense. Webster says it means "a state of mind indicating honesty and lawfulness of purpose."¹¹ Black offers this definition: "Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage, and an individual's personal good faith is concept sic of his own mind and inner spirit and, therefore, may not conclusively be determined by his protestations alone. . . ."¹² Black notwithstanding, there is one statutory definition which has broad commercial application. The Uniform Commercial Code defines good faith as "honesty in fact in the conduct or transaction concerned."¹³

Decisions under Prior Act

That the good faith mandate of section 1325 imposes a standard of simple honesty is confirmed by decisions under the prior Bankruptcy Act. The prior Act contained a similar requirement of good faith in the proposal of a plan under its Chapter XIII.¹⁴ There is no reported case law construing this good faith confirmation requirement.¹⁵ But many decisions applied the Act's mandate of good faith plan proposal which was contained in other chapters.¹⁶ In all these decisions the courts used the phrase in its ordinary sense of honesty. Occasionally, a party would try to expand its meaning by alleging there was a lack of good faith when a debtor asserted rights under bankruptcy law. In In re Koch,¹⁷ for example, the debtor was accused of bad faith in...