In re Lawson, Bankruptcy No. 88 B 05179.
| Decision Date | 05 December 1988 |
| Docket Number | Bankruptcy No. 88 B 05179. |
| Citation | 93 BR 979 |
| Parties | In re James D. LAWSON, II, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Neil F. Hartigan, Atty. Gen. of Illinois by Richard K. Nowell, Revenue Litigation Div., Chicago, Ill., for Scholarship Com'n.
Robert Marsh, Wheaton, Ill., for debtor.
Jack McCullough, Chicago, Ill., Chapter 13 trustee.
This case is before the court for confirmation of the debtor's Chapter 13 plan, a matter within the core jurisdiction of the court pursuant to 28 U.S.C. § 157(b)(2)(L). For the reasons stated below, confirmation is denied, on the ground that the plan unfairly discriminates between two classes of unsecured claims.
On March 26, 1988, James D. Lawson, II, filed a petition for relief under Chapter 13 of the Bankruptcy Code, Title 11, U.S.C. ("the Code"). According to the schedules attached to his petition, Lawson is a radio broadcaster, working two jobs, with no dependents. The schedules also indicate that, in March, Lawson had secured debt on two automobiles, and unsecured debt of $25,868, including student loans of $7,331. Lawson proposed to discharge his debts through a 60 month plan, providing a 10% payment to all of the unsecured creditors.
On May 4, 1988, a proof of claim was filed by the Illinois State Scholarship Commission (the "Scholarship Commission"), stating that the amount Lawson owed on his student loans was $7,646.72. The documents attached to the proof of claim reflect (1) that Lawson executed three $2,500 notes, guaranteed by the State of Illinois, to finance his education at a small private college during the 1982-83, 1983-84, and 1985 school terms, (2) that Lawson executed another note, in January of 1986, consolidating the prior loans, and requiring payment of the $7,500 principal, at 9% interest, in equal installments over 120 months, and (3) that the 1986 note was later endorsed over to the Scholarship Commission. It appears that Lawson made 14 of the monthly payments on the note, but made no payments after April, 1987.1 It also appears that the proof of claim calculated the interest due on the note as of the date the proof was prepared rather than the date the petition was filed.2
On June 28, 1988, Lawson filed an amended set of schedules and an amended plan. The schedules show monthly take-home pay of $1,724.40 and monthly expenses of $1,415; the plan proposes that one of the automobiles be surrendered, and provides for 60 monthly payments of $309. The most significant change is that the plan now classifies the unsecured debt. While all other unsecured creditors would continue to be paid 10% of their claims, the student loan is now proposed to be paid in full. If the amended plan had provided for all of the unsecured creditors to be paid pro rata, without classification, each creditor would have received a payout of about 37%.3
The amended plan came before the court for a confirmation hearing on August 25, 1988. The standing trustee recommended confirmation, there were no objections, and the debtor did not appear. Prior to the hearing, the court questioned whether the classification of unsecured debt proposed by the plan conformed to the requirement of Section 1322(b)(1) of the Code, and allowed the parties an opportunity to submit authority on the question. The standing trustee and the Scholarship Commission submitted such authority. The debtor did not. No party submitted any evidence on the issue. The court took the matter under advisement, and, pending the court's decision, Lawson has made the payments proposed by his amended plan.
Under Section 1324 of the Code, the court "shall" hold a hearing on confirmation of a Chapter 13 plan, and parties in interest "may" object to confirmation. Thus, the court has the duty of reviewing proposed Chapter 13 plans, at a confirmation hearing, whether or not there is any objection to confirmation. In re Chaffin 836 F.2d 215, 216 (5th Cir.1988) (); In re Harris, 62 B.R. 391, 393 n. 1 (Bankr.E.D.Mich.1986); In re Bowles, 48 B.R. 502, 505 (Bankr.E.D.Va.1985). Lawson's amended plan in this case is therefore subject to the court's independent scrutiny.
Section 1325(a) of the Code sets forth six requirements for confirmation of Chapter 13 plans; the first of these requirements is relevant here. Section 1325(a)(1) provides that a plan must comply "with the provisions of this chapter and with the other applicable provisions of this title," and so incorporates the provisions of Chapter 13 dealing with classification of claims, Sections 1322(b)(1) and (a)(3). These sections read, in pertinent part, as follows:
Lawson's amended plan, on its face, raises a question of compliance with Section 1322(b)(1). The plan both designates classes of unsecured claims, and discriminates between them: the claim of the Illinois Scholarship Commission, based on Lawson's unpaid student loans, is to be paid in full; all other unsecured claims are to be paid 10%. The question is whether this discrimination is "unfair," so as to violate Section 1322(b)(1) and thus preclude confirmation under Section 1325(a)(1).
The test of fairness. The Bankruptcy Code does not provide any definition of the phrase "discriminate unfairly," as used in Section 1322(b)(1), and the decisions applying the section have not been consistent. See 3 Norton Bankr.L. & Prac. § 74.04 (1987 printing) (collecting cases). Part of the reason for this disparity in the decisions may be the rather imprecise test that many of the decisions have employed to assess the fairness of a discriminatory classification. As noted in In re Todd, 65 B.R. 249, 253 (Bankr.N.D.Ill.1986):
There are several difficulties with this "four factor" test, some of which are noted in In re Furlow, 70 B.R. 973, 977-78 (Bankr.E.D.Pa.1987), and In re Green, 70 B.R. 164, 166 (Bankr.W.D.Ark.1986). Perhaps most significantly, the third factor, which questions the good faith underlying a proposed classification, is repetitive of a distinct requirement for confirmation, under Section 1325(a)(3), that a plan be "proposed in good faith and not by any means forbidden by law." As noted later in this opinion, the good faith requirement of Section 1325(a)(3) has itself generated a complex body of law, and there is no apparent reason to consider good faith separately in determining whether a classification of unsecured debt is unfairly discriminatory. Furlow, 70 B.R. at 977 (); Green, 70 B.R. at 166 ().
Next, the second factor of the test, requiring that a proposed classification of unsecured debt be necessary for completion of a plan, is overly restrictive. Green suggests that almost any plan proposing a discriminatory classification could also be carried out with equal treatment, 70 B.R. at 166, and even cases employing the four factor test have approved discriminatory classifications without finding that the plans were likely to fail if the discrimination were not allowed. See, e.g., In re Todd, 65 B.R. 249, 253 (Bankr.N.D.Ill.1986) (); In re Ratledge, 31 B.R. 897, 900 (Bankr.E.D.Tenn.1983) (). Thus, Furlow probably reflects the reality of the decisions in suggesting that "it should not be necessary for the debtor to show that every form of different treatment of claims is a matter of life or death for the Plan." 70 B.R. at 977.
Finally, the fourth factor of the test focuses on the treatment accorded to the class discriminated against. However, as Green points out, this is necessarily "a part of the consideration of whether the discrimination has a reasonable basis." 70 B.R. at 166. In the end, then, the test for unfair discrimination should be limited to the reasonableness of the proposed discrimination between classes of unsecured creditors, as both Green, 70 B.R. at 166, and Furlow, 70 B.R. at 978, suggest.
However, even this focus leaves application of the test uncertain, since one can only determine whether a discrimination is reasonable in relation to the interests it is supposed to advance. Thus, in formulating a test for reasonableness of legislation challenged under the Equal Protection Clause, the Supreme Court has examined the legislation "to determine whether...
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