In re Warren

• Decision Date: 16 August 1988
• Docket Number: Bankruptcy No. LA 85-07643 SB.,BAP No. CC-87-1410 VMeJ
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit
• Parties: In re Austin WARREN, Debtor. FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellant, v. Austin WARREN, Appellee.

89 B.R. 87 (1988)

In re Austin WARREN, Debtor FIDELITY & CASUALTY COMPANY OF NEW YORK, Appellant, v. Austin WARREN, Appellee.

BAP No. CC-87-1410 VMeJ, Bankruptcy No. LA 85-07643 SB.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted October 28, 1987.

Decided August 16, 1988.

Jaquelynn C. Pope, Law Office of Daniel R. Berke, Law Beach, Cal., for appellant.

Gary Kleinman, Zalutsky, Pinski & Kleinman, Hollywood, Cal., for appellee.

Before VOLINN, MEYERS and JONES, Bankruptcy Judges.

OPINION

VOLINN, Bankruptcy Judge:

The bankruptcy court confirmed the debtor's Chapter 13 plan without conducting an evidentiary hearing concerning debtor's good faith. Appellant, which holds a default judgment for alleged embezzlement by the debtor, contends that the court should have required or permitted further inquiry on the good faith issue.

ISSUES ON APPEAL

The questions presented are whether there is a relationship between the good faith and best effort requirements of 11 U.S.C. § 1325, and the appropriate scope of inquiry attendant to a finding concerning good faith in filing a Chapter 13 plan. Specifically, the issues are:

1. Does fulfillment of the "best effort"¹ requirement of 11 U.S.C. § 1325(b)(1)(B)² satisfy the "good faith" requirement of 11 U.S.C. § 1325(a)(3)³?

2. When a creditor with a debt that is potentially nondischargeable under Chapter 7 objects to confirmation of a minimal repayment plan, thereby seeking to preclude discharge of his debt by virtue of 11 U.S.C. § 1328(a), commonly known as the "super-discharge," must the court conduct or permit a hearing on the issue of good faith?

3. What is the nature and standard of proof required of a debtor at a Chapter 13 confirmation hearing where there is an issue as to good faith?

FACTS⁴

Appellee debtor Austin Warren ("Warren") worked for Bob Warren Pontiac, Inc. The employer collected $40,594.88 during 1981 under an employee fidelity bond issued by appellant Fidelity & Casualty Company of New York ("Fidelity") for losses due to alleged embezzlement by Warren. Fidelity, as subrogee, later sued Warren, obtaining a default judgment in 1984 of $40,970, for the amounts it paid to Warren's former employer, plus interest, and costs of $113.

After Fidelity attempted to collect through garnishment on its judgment, Warren filed a Chapter 7 petition on May 31, 1985. When Fidelity filed an adversary proceeding to determine the dischargeability of the debt, Warren converted his case to Chapter 13.

In his Chapter 13 case, Warren scheduled $3,500 in priority debts and $44,736.37 in other unsecured debts, including $40,970 to appellant Fidelity; there were no secured debts. His property schedules indicated that he neither owned any real property nor any nonexempt personal property. His amended plan provided for full payment of administrative expenses, including $900 in attorneys' fees, and $3,500 in priority tax claims; he proposed to pay over 36 months about two percent or $1,000 on the unsecured, nonpriority claims, including that of Fidelity. Appellant filed an objection to the plan contending inter alia that it was not filed in good faith.

The parties stipulate that the debtor has applied all his disposable income to the plan. We assume, arguendo, that Warren's payment of $1,000 over a period of three years towards satisfaction of some $44,000 in debts fulfills the "best effort" requirement of 11 U.S.C. § 1325(b).

A three year plan was confirmed over Fidelity's objections. The factual and legal issues raised here, including that of good faith, were asserted by Fidelity before the bankruptcy court. No testimony was taken on the issue of good faith, or otherwise. It appears that the debtor did not attend the confirmation hearing. All that occurred at the hearing was a brief colloquy between counsel and the court which was concluded by the court stating it would confirm the plan. The order confirming the plan is a preprinted form which states ultimate conclusory findings and does not specifically address the issues raised by Fidelity.

CONTENTIONS

Appellant contends that more than "best effort" is required when both a nominal repayment plan and a predominant nondischargeable debt are present; that improper motivation and insincerity of the debtor demonstrating lack of good faith should be inferred, thereby preventing confirmation of a plan unless the debtor produces evidence of other mitigating factors.

Appellee debtor takes the position that the debtor's intentions are matters of fact reviewable only under the clearly erroneous standard and, therefore, the "basis of the court's ruling that the facts justified confirmation is not appealable." Appellee's Brief at 4. He argues further that the cases cited by appellant do not support any theory that bad faith is conclusively shown when a nominal repayment plan and a nondischargeable debt are present. Finally, he urges that sufficient evidence of good faith is shown in the record.

While conceding that best effort alone does not satisfy the good faith requirement, appellee states:

Not only has this debtor devoted substantially all of his income to the plan, it was extended past three years in order to pay more to the unsecured creditors and his income and exepnses sic do not show that he can live more modestly than he is doing at present. These are all indications of good faith.

Appellee's Brief at 7. The foregoing statement, focused on best effort, exemplifies what was presented to the trial court.

STANDARD OF REVIEW

The standard of review here is dual in nature; we are concerned with (1) a basically factual issue relating to the sufficiency of the evidence in support of the finding of good faith and (2) a legal issue as to whether more than best effort is required. When findings of fact are involved, the clearly erroneous standard is applicable. B.R. 8013. Statutory construction involves an issue of law as to which the de novo standard applies. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir.1986); Phoenix Inst. of Technology v. Klein (In re Klein), 57 B.R. 818, 819 (9th Cir. BAP 1985). An exercise of discretion based on an incorrect conclusion of law is also reviewable de novo by an appellate tribunal. La Grand Steel Products Co. v. Goldberg (In re Poole, McGonigle & Dick, Inc.), 796 F.2d 318, 321, amended on reh'g on other grounds, 804 F.2d 576 (9th Cir.1986).

DISCUSSION

I. Good Faith Defined

"Good faith" under 11 U.S.C. § 1325(a)(3) is neither defined by statute, nor explained in legislative history. Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1389-90 (9th Cir. 1982).

Nevertheless, the former Bankruptcy Act employed the term and concept of good faith as a confirmation standard not only in Chapter XIII (former 11 U.S.C. § 1051 and Rule 13-213(a)), but also in Chapters X, XI and XII. Cases thereunder were numerous and varied considerably depending on the circumstances before the court. Variable treatment of the term "good faith" has been continued under the present chapters of the Bankruptcy Code, including Chapter 13, as will be demonstrated by the cases discussed below. See, e.g., 5 Collier on Bankruptcy ¶¶ 1129.023 (Chapter 11), 1325.04 (Chapter 13) (L.P. King 15th ed. 1988).

The court pursuant to 11 U.S.C. § 1325(a)(3) has an independent duty to make a considered assessment of the debtor's good faith. In re Hale, 65 B.R. 893, 897 (Bankr.S.D.Ga.1986); In re Meltzer, 11 B.R. 624, 626 (Bankr.E.D.N.Y.1981). The latter court explained:

The determination with which the bankruptcy court is entrusted under § 1325(a)(3) is not a ministerial one. Like any judicial determination which a bankruptcy court is called on to make during the course of a proceeding, it calls for the exercise of the Court\'s informed and independent judgment.

Meltzer, 11 B.R. at 626. The court's duty has been characterized as follows:

It should be noted here that Chapter 13 provides that the bankruptcy judge shall preside over confirmation proceedings. If confirmation depended entirely upon arithmetical computations or the absence of illegal activity in the case, there would be no need for a judge. Confirmation of a Chapter 13 plan requires the exercise of judicial discretion and assessment of evidence by a bankruptcy judge. The good faith requirement is one of the central, perhaps the most important confirmation finding to be made by the court in any Chapter 13 case. Each case must be judged on its own facts.

Georgia R.R. Bank & Trust Co. v. Kull (In re Kull), 12 B.R. 654, 658 (S.D.Ga. 1981), aff'd sub nom. Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir.1983); accord In re Chaffin, 836 F.2d 215, 216 (5th Cir.1988) ("the court has the authority and duty to examine a plan even when no creditor has objected. . . . ").

Even though good faith in Chapter 13 has not been precisely defined, guidelines have been developed for bankruptcy courts to follow:

Given the nature of bankruptcy courts and the absence of congressional intent to specially define "good faith," we believe that the proper inquiry is whether the Goebs acted equitably in proposing their Chapter 13 plan. A bankruptcy court must inquire whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner. Though it may consider the substantiality of the proposed repayment, the court must make its good-faith determination in the light of all militating factors.

Goeb, 675 F.2d at 1390 (emphasis added).

II. Procedure

The procedural framework for a confirmation hearing on a plan is found in Bankruptcy Rule 3020, which is applicable to Chapters 9, 11, and 13. B.R. 3020 advisory committee's note. Rules 3020(b)(1), (2) deal respectively with objections to confirmation and the hearing. Objections to confirmation are required to be filed and served on the trustee and the debtor. This...