In re Manzo, 16 C 7218

• Decision Date: 25 August 2017
• Docket Number: 16 C 7218
• Citation: 577 B.R. 759
• Parties: IN RE: Carl MANZO, Debtor/Appellant.
• Court: U.S. District Court — Northern District of Illinois

577 B.R. 759

IN RE: Carl MANZO, Debtor/Appellant.

16 C 7218

United States District Court, N.D. Illinois, Eastern Division.

Signed August 25, 2017

Ainat Natalie Margalit, Chicago, IL, for Debtor/Appellant.

MEMORANDUM OPINION AND ORDER

HON. JORGE ALONSO, United States District Judge

Debtor Carl Manzo appeals to this Court, pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court denying confirmation of his proposed Chapter 13 repayment plan. For the following reasons, the bankruptcy court's decision is reversed.

BACKGROUND ¹

On June 18, 2015, Mr. Manzo filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Illinois. On Schedule C, he claimed as exempt $7,292.94 in a First Financial Federal Credit Union account and $350 in a Chase Bank account under 735 ILCS 5/12–1001(g)(1), which exempts the "debtor's right to receive ... a social security benefit." (See Appellant Designation of R. on Appeal at 22 (hereinafter, "R."), ECF No. 9–2.) These funds represent what remains of a lump sum payment of retroactive social security benefits that Mr. Manzo received in 2013. (Appellant's Br. at 2 (citing R. at 115), see R. at 130.) Mr. Manzo later amended Schedule C to claim that the funds were exempt under 42 U.S.C. § 407. The Chapter 13 trustee ("Trustee"), joined by creditor Seaway Bank and Trust Company ("Seaway"), which held a second mortgage on Mr. Manzo's residence, objected to the exemption. On April 13, 2016, the bankruptcy court overruled the objection, finding the entire amount exempt.

On April 29, 2016, Mr. Manzo filed a modified Chapter 13 repayment plan (hereinafter, "Plan"). Because the value of Mr. Manzo's residence ($42,000) was less than the amount he owed on his primary mortgage ($51,195), the Plan classified Seaway's $9,365.61 claim based on Mr. Manzo's second mortgage as unsecured. See 11 U.S.C. § 506(a). According to Schedule I to Mr. Manzo's petition, Mr. Manzo's only income is $1,579 per month in social security. According to Schedule J, his total monthly household expenses are $1,549, leaving only $30 per month for plan payments. The Plan proposed that Mr. Manzo would pay that $30 per month to the Trustee for the benefit of any unsecured creditors (of which Seaway was the only one to file a claim) for 36 months, for a total of $1,080. After subtracting the Trustee's fees, Seaway would receive only $1,028.52 of its $9,3365.61 claim.²

The bankruptcy court held a confirmation hearing on May 25, 2016. Seaway maintained its objection to confirmation of the Plan, despite the fact that the modified Plan raised the amount Mr. Manzo proposed to pay approximately tenfold, because Mr. Manzo had access to thousands of dollars in funds he had "essentially stockpiled from Social Security benefits." (R. at 154 (May, 25, 2016 Tr. at 2:19–20).) Because Mr. Manzo could afford to pay a still higher percentage of the debt without suffering any hardship, Seaway contended, the modified Plan was not proposed in good faith. The bankruptcy court agreed that Mr. Manzo was not making "enough effort given [the funds he had] in the bank." (R. at 162 (id. at 10:12–14).) The court recognized that "there are an awful lot of cases that say you can't touch Social Security." (R. at 164 (id. at 12:19–20.)) But the court explained that "in the totality of the circumstances" of this particular case, the debtor's proposal of what was essentially a "lien strip," although he had access to sufficient funds in his bank accounts to pay off most, if not all, of the loan secured by the lien, amounted to a "bad faith" proposal. (R. at 164 (id. at 12:7–18).) The court stated that it would deny confirmation of that proposal, but if Mr. Manzo would be willing to propose a plan under which he would pay half of "what is sitting in the bank" to Seaway, the Court would "confirm over objection." (R. at 163 (id. at 11:3–24).)

Mr. Manzo filed a motion for leave to appeal an interlocutory order, which this Court granted. (Nov. 15, 2016 Minute Order, ECF No. 7.) This appeal followed.

DISCUSSION

I. LEGAL STANDARDS

A. Review of Bankruptcy Court Decision

An order denying confirmation of a proposed Chapter 13 repayment plan is generally not a final, appealable order, see Bullard v. Blue Hills Bank , ––– U.S. ––––, 135 S.Ct. 1686, 1692, 191 L.Ed.2d 621 (2015), but "[i]nterlocutory orders from the Bankruptcy Court may be reviewed with leave of the district court sitting in its appellate jurisdiction." In re MCK Millennium Ctr. Parking, LLC , No. 12 B 24676, 2015 WL 2004887, at *2, 2015 U.S. Dist. LEXIS 56570, at *7–8 (N.D. Ill. Apr. 29, 2015) (citing 28 U.S.C. § 158(a)(3) ). "The district court has broad discretion in determining whether to exercise jurisdiction over interlocutory appeals from the bankruptcy court." Tr. of Jartran, Inc. v. Winston & Strawn , 208 B.R. 898, 900 (N.D. Ill. 1997). "Whether an interlocutory appeal of a non-final bankruptcy order is appropriate is analyzed pursuant to 28 U.S.C. § 1292(b)." Rosen v. Aes/chase Bank , No. 15–CV–7462, 2015 WL 6756290, at *2 (N.D. Ill. Nov. 3, 2015). "Under the three part test [of § 1292(b) ], an interlocutory appeal is appropriate when it: (1) involves a controlling question of law; (2) over which there is substantial ground for difference of opinion; and (3) an immediate appeal from the order may materially advance the ultimate termination of the litigation." Tr. ofJartran , 208 B.R. at 900. In this case, the Court has granted Mr. Manzo's motion for leave to appeal an interlocutory order because all three requirements are met. First, whether bankruptcy courts may consider the debtor's failure to commit social security benefits to a Chapter 13 plan in determining whether the debtor has proposed the plan in good faith is a controlling question of law. See id. at 900–01 ("[A] question of law is controlling if its resolution is quite likely to affect the outcome or the further course of litigation, even if it is not certain to do so"). Second, there is ground for difference of opinion over this question; decisions have differed, and the Seventh Circuit has not weighed in. Third, the Court has no doubt that an immediate appeal may "materially advance the ultimate termination of the litigation"; otherwise, the parties must go back to the drawing board and devise a new repayment plan.³ For all these reasons, the Court has concluded that it is proper to hear Mr. Manzo's interlocutory appeal.

"A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo." In re Midway Airlines, Inc. 383 F.3d 663, 668 (7th Cir. 2004) (citing In re Smith , 286 F.3d 461, 464–65 (7th Cir. 2002) ); see also In re Adinolfi , 543 B.R. 612, 614 (9th Cir. BAP 2016) ("We apply the de novo standard when reviewing chapter 13 plan confirmation issues requiring the interpretation of a statute."); In re Edwin R. Smith , 286 F.3d 461, 465 (7th Cir. 2002) ("A bankruptcy court's determination that a plan was filed in good faith is a factual finding; therefore, we shall reverse only if the court's finding was clearly erroneous.")

B. Chapter 13, Plan Confirmation, and Good Faith Requirement

"Chapter 13 provides, for individuals [below a certain debt threshold, see 11 U.S.C. § 109(e) ], a counterpart to Chapter 11 of the Bankruptcy Code, which authorizes the reorganization of bankrupt enterprises in lieu of their liquidation. Instead of the trustee's seizing and selling the bankrupt's nonexempt assets, as in a Chapter 7 proceeding, under Chapter 13 (as under Chapter 11) the bankrupt proposes a plan for the repayment of his debts out of future income." In re Schaitz , 913 F.2d 452, 453 (7th Cir. 1990). Although creditors have the right to object to a debtor's proposed plan, see 11 U.S.C. § 1324, Congress "gave the bankruptcy judge the sole authority to confirm or reject a plan." Ravenot v. Rimgale (In re Rimgale) , 669 F.2d 426, 428 (7th Cir. 1982). However, she "can [confirm the plan] only if the plan is in ‘good faith,’ [ 11 U.S.C.] § 1325(a)(3), a term neither defined in the statute nor discussed in the legislative history." Schaitz , 913 F.2d at 453. "In considering whether a plan is filed in good faith, the court asks of the debtor: ‘Is he really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?’ " Edwin R. Smith , 286 F.3d at 466 (quoting Schaitz, 913 F.2d at 453 ).

"[G]ood faith must be defined on a case-by-case basis because ‘[a] comprehensive definition of good faith is not practical.’ " In re Kenneth W. Smith , 848 F.2d 813, 817 (7th Cir. 1988) (quoting Rimgale , 669 F.2d at 431 ). Factors useful for defining good faith in a particular case include the following:

(1) Does the proposed plan state [debtor's] secured and unsecured debts accurately?

(2) Does it state [debtor's] expenses accurately?

(3) Is the percentage of repayment of unsecured claims correct?

(4) If there are or have been deficiencies in the plan, do the inaccuracies amount to an attempt to mislead the bankruptcy court?

(5) Do the proposed payments indicate "a fundamental fairness in dealing with one's creditors," [I ]n re Beaver , 2 B.R. 337, 340 (Bkrtcy. S.D. Cal. 1980) ?

Kenneth W. Smith , 848 F.2d at 817 (citing Rimgale , 669 F.2d at 432–33 ). Additionally, courts may consider factors such as "why the debtor filed under Chapter 13, how the debts arose, and whether those debts would be nondischargeable in Chapter 7" in determining whether the plan is proposed in good faith. Kenneth W. Smith , 848 F.2d at 818 ; see also In re Love , 957 F.2d 1350, 1357 (7th Cir. 1992) (good faith factors include "the nature of the debt, including the question of whether the debt would be nondischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the...