In re Williams, 99-35958-L
| Citation | 253 BR 220 |
| Decision Date | 27 July 2000 |
| Docket Number | No. 99-35958-L,00-20972-L.,00-20777-L,00-21785-L,00-21741-L,99-35958-L |
| Parties | In re Torian Marcel WILLIAMS, Annette Haywood Burton, Katressa L. Haten, Jeffrey L. King, Lora J. King, Percy Hunter, Barbara M. Hunter, Debtors. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee |
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Brad George, Memphis, TN, for Torian Marcel Williams.
Joseph D. Fox, Memphis, TN, for Katressa L. Haten, Jeffrey L. King, and Lora J. King.
Allen C. Jones, Memphis, TN, for Percy Hunter and Barbara M. Hunter.
Ben G. Sissman, Memphis, TN, for Annette Haywood Burton.
George W. Stevenson, Memphis, TN, Chapter 13 Trustee.
The court scheduled status conferences in each of the referenced Chapter 13 cases which propose to separately classify and preferentially treat student loan claims. No objections to the proposed classifications were raised by any creditor or the standing Chapter 13 trustee. Nevertheless, the bankruptcy judge has an independent obligation to determine whether a plan fulfills the requirements for confirmation under Chapter 13. See, e.g., McCullough v. Brown (In re Brown), 162 B.R. 506, 508 n. 3 (N.D.Ill.1993) (citing In re Christophe, 151 B.R. 475, 476 (Bankr.N.D.Ill.1993)).
The issue before the court is whether a plan that proposes to separately classify and fully repay nondischargeable student loan debt unfairly discriminates against other unsecured creditors who will receive only partial repayment of their dischargeable claims. For the reasons set forth below, the court determines that the proposed plans are not capable of confirmation because they discriminate unfairly against general unsecured creditors. These are core proceedings. 28 U.S.C. § 157(b)(2)(L).
In each of these cases, the debtor proposes to pay 100% of his or her student loan claim over the life of the plan. Each of the plans is expected to terminate after 60 months. Two of the plans specify no distribution to the other unsecured creditors, but leave that percentage to be determined by the Chapter 13 trustee after the bar date for filing proofs of claim has passed. The other three plans propose paying a specified percentage to the general unsecured creditors: the Kings propose to pay 15%, Mr. Williams to pay 20%, and the Hunters to pay 25%.
At the hearing, counsel for Mr. Williams informed the court that while the debtor listed Tennessee Student Assistance Corporation ("TSAC") in its schedules, TSAC was not included in the matrix and, therefore, did not receive notice of the bankruptcy filing. The debtor filed an amended plan which listed TSAC as a general unsecured creditor to receive a pro rata distribution of 20% along with the other general unsecured creditors. As a result, Mr. Williams' plan is not ready for confirmation and will not be considered by the court at this time.
As to the remaining four cases, the student loan lenders have filed proofs of claim in all but Ms. Burton's case. United Student Aid Funds, Inc. ("USAF") filed a proof of claim in the amount of $2,151.67 in the Kings' case. This claim consists of unpaid principal in the amount of $1,075.56, unpaid accrued interest in the amount of $64.12, and collection costs in the amount of $1,012.23. TSAC filed a proof of claim in the amount of $1,586.10 in Ms. Haten's case. This claim apparently includes two loans which consist of unpaid principal in the amount of $1,338.49 and $179.57 ($1,518.06) and unpaid accrued interest in the amount of $59.94 and $8.10 ($68.04). The United States Department of Education filed a proof of claim in the Hunters' case in the amount of $9,595.58. The only document supporting this proof of claim is the original contract signed by Mrs. Hunter for a loan in the amount of $7,472.00.
Section 1322(b)(1) provides in pertinent part that a debtor's plan may "designate a class or classes of unsecured claims, as provided in section 1122 of title 11, but may not discriminate unfairly against any class so designated." Section 1122 requires that a claim or interest be placed in a particular class only if the claim or interest is substantially similar to other claims or interests of that class, but permits dissimilar claims to be classified together for administrative convenience. See 11 U.S.C. § 1122(a) and (b). Implicit in section 1122 is the requirement that claims be sufficiently dissimilar to warrant separate classification. See Teamsters Nat'l Freight Industry Negotiating Committee v. U.S. Truck (In re U.S. Truck), 800 F.2d 581, 586 (6th Cir.1986) (). In Chapter 11 cases where confirmation of the plan requires the acceptance of the plan by at least one class of impaired claims, a reasonable limitation upon a debtor's ability to separately classify claims prevents inappropriate "gerrymandering" to obtain an accepting class. Chapter 13 does not provide for acceptance of the plan by the vote of creditors, thus the only purpose served by a separate designation of unsecured claims in Chapter 13 is discrimination in treatment. Discrimination between classes of unsecured claims generally takes the form of a difference in the percentage of payment or the order of distribution. Discrimination is said to be unfair when there is no valid reason to prefer one group of unsecured claims over another. See, e.g., Groves v. LaBarge (In re Groves), 39 F.3d 212, 215 (8th Cir.1994); McDonald v. Sperna (In re Sperna), 173 B.R. 654, 658 (9th Cir. BAP 1994); In re Coonce, 213 B.R. 344, 346 (Bankr.S.D.Ill. 1997). If there is no valid reason for discrimination, there is also no valid reason for separate classification in Chapter 13. See 8 COLLIER ON BANKRUPTCY ¶ 1322.05, pp. 1322-13 through -15 (15th rev.ed.2000).
George Stevenson, the standing Chapter 13 trustee, filed a memorandum in favor of confirmation of the debtors' plans in these cases. Mr. Stevenson argues that section 1322(b)(1) requires that a specially designated class of unsecured creditors not be treated worse than general unsecured creditors, but does not prohibit better treatment of the designated class. Mr. Stevenson is correct in one sense — section 1322(b)(1) does not prohibit better treatment of a designated class. Mr. Stevenson is incorrect in another sense because designation of one class necessarily involves designation of a second class. As was shown, in Chapter 13 the only purpose for such designation is discrimination in treatment. After secured claims and administrative expenses are provided for, the balance of payments under a Chapter 13 plan are divided among the unsecured claims. To discriminate in favor of one class of unsecured claims necessarily results in discrimination against another class of unsecured claims. What is required is that the discrimination not be unfair.
In these cases, the debtors propose to separately classify their student loan claims from other unsecured claims, and to pay their student loan claims "100%." Ms. Haten, Mr. and Mrs. King, and Mr. and Mrs. Hunter propose to pay interest on the student loan claims as well. The debtors, as proponents of the plans, bear the burden of proving that the proposed classification does not discriminate unfairly. In re Brigance, 219 B.R. 486, 494 (Bankr.W.D.Tenn.1998)(citing Groves v. LaBarge (In re Groves), 39 F.3d 212, 214 (8th Cir.1994); In re Kolbe, 199 B.R. 569, 570-71 (Bankr.D.Md.1996)). This court has previously quoted with approval the comments of Bankruptcy Judge Barbara Sellers concerning separate classification of claims in Chapter 13 cases:
Any classification of unsecured claims must pass a test of fairness unless that classification involves consumer debts for which co-signers were obtained. See Nelson v. Easley (In re Easley), 72 B.R. 948, 956 (Bankr.M.D.Tenn.1987). Unlike Chapter 11, unsecured creditors in Chapter 13 are not afforded an opportunity to vote. Further, unless their claims are unusually large, such creditors generally lack economic incentive to object to confirmation of a low dividend plan. Therefore, the primary burden for scrutinizing the differing treatment of separately classified unsecured claims in Chapter 13 falls, first on the Chapter 13 trustee, and then on the court.
In re Riggel, 142 B.R. 199, 202 (Bankr. S.D.Ohio 1992) (quoted in In re Brigance, 219 B.R. at 494).
Four factors must be considered in determining whether a proposed classification scheme is proper:
In re Brigance, 219 B.R. at 494 ().
The debtors have put forth a number of justifications for the separate classification of their student loan debts. The primary reason offered for the separate classification is that the student loan claims, unlike the general unsecured claims, are not dischargeable in bankruptcy. See 11 U.S.C. § 523(a)(8).2 Related to this is the argument that the debtors will not receive the benefit of a fresh start if they are not allowed to fully repay their student loans during the pendency of their plans. The debtors argue that the remedies available to student loan creditors, such as wage garnishment and set off of income tax refunds distinguishes these claims from other general unsecured claims. The trustee argues that the fact that Congress has rendered student loans nondischargeable except in cases of undue hardship demonstrates a strong public policy in favor of full repayment of student loans. Another distinction between student loans and other unsecured loans...
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...is said to be unfair when there is no valid reason to prefer one group of unsecured claims over another." In re Williams, 253 B.R. 220, 224 (Bankr. W.D. Tenn. 2000) (citing Groves v. LaBarge (In re Groves), 39 F.3d 212, 215 (8th Cir.1994); McDonald v. Sperna (In re Sperna), 173 B.R. 654, 65......
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