In re Wolff, BAP No. CC-81-1010-HKG

Decision Date29 June 1982
Docket NumberBankruptcy No. SB-80-01593-WH.,BAP No. CC-81-1010-HKG
Citation22 BR 510
CourtU.S. Bankruptcy Appellate Panel, Ninth Circuit
PartiesIn re William Kyle WOLFF, individually and dba Town & Country Electric, Debtor. AMFAC DISTRIBUTION CORPORATION, Appellant, v. William Kyle WOLFF, individually and dba Town & Country Electric, Appellee.

Robin L. Riblet, Stutman, Treister & Glatt, P.C., Los Angeles, Cal., for appellant.

Norman L. Hanover, a Law Corp., San Bernardino, Cal., for appellee.

OPINION

Before HUGHES, KATZ and GEORGE, Bankruptcy Judges.

PER CURIAM:

Amfac appeals from an order overruling its objections to confirmation of the debtor's plan in a business Chapter 13 case. It contends that the plan (1) impermissibly classifies two unsecured creditors and (2) is not in the best interest of creditors.

We treat the order appealed as an order of confirmation and reverse.

I. Claims Classification

One challenge to the plan is that it violates § 1322(b)(1) by unfairly discriminating among the unsecured creditors. Section 1322(b)(1) permits the plan to create classes of unsecured claims as provided in § 1122 as long as the classification does not discriminate unfairly. Section 1122 allows for classification of claims which are "substantially similar" and for classification when reasonable and necessary for administrative convenience. We find that the debtor failed to show that his plan did not unfairly discriminate in its classification scheme.

The record shows that two creditors to be paid in full were the debtor's current insurance company and the materials supplier to whom the debtor owed the least. The debtor's rationale for the plans' payment scheme was that he would be unable to do business in the future without the cooperation of these creditors. The record is devoid of any evidence in support of this allegation.

The debtor failed to establish that his future viability was dependent on the cooperation of these creditors. On cross-examination, the debtor admitted that he had not inquired of any other supplier in his area whether a business relationship was possible. Similarly, the debtor admitted that he had not contacted any other insurance carriers to discuss the availability of coverage. On these facts, the debtor's bald assertion of need fails to satisfy his burden of proof.

Appellant argues vigorously that the debtor had no legal right to differentially classify his unsecured claims. The view of In re Iacovoni, 2 B.R. 256 (Bkrtcy.D.Utah 1980), that only administrative convenience or equitable subordination justifies differential classification, is urged on the Panel. Appellee promotes the spirit of In re Sutherland, 3 B.R. 420 (Bkrtcy.W.D.Ark.1980). Sutherland held that in a case where a Chapter 7 liquidation would yield nothing for unsecured creditors, a Chapter 13 plan cannot unfairly discriminate because no unsecured creditor can expect to receive anything. Appellee argues for an unfettered right to discriminate in classification.

The language of § 1322(b)(1) and § 1122(a) is imprecise, but we do not believe that it supports the narrow construction of Iacovoni. There, in reliance of the 15th Ed. Collier's comment on § 1122, the court held that all unsecured creditors with claims of the same nature or character have a similar right to the assets of the estate.

We believe that the better result is that there will be occasions where unsecured claims might be classified and treated differently, even though the legal character of the claims is identical and the treatment is discriminatory, but not unfairly so.

We believe that the test created in In re Kovich, 4 B.R. 403 (Bkrtcy.Mich.1980), and refined in In re Dziedzic, 9 B.R. 424 (Bkrtcy.Tex.1981), more reasonably sets forth the interpretation to be placed upon § 1322. The test is (1) whether the discrimination has a reasonable basis; (2) whether the debtor can carry out a plan without the discrimination; (3) whether the discrimination is proposed in good faith; and (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination. Restating the last element, does the basis for the discrimination demand that this degree of differential treatment be imposed?

We believe that the evidence in this case indicated that the debtor has failed to carry his burden on all elements.

II. Best Interests of Creditors

Section 1325(a) provides for confirmation of Chapter 13 plans. One of its requirements is that the present value of what creditors will receive under the plan is not less than what they would receive in a liquidating bankruptcy. 11 U.S.C. § 1325(a)(4). The trial court overruled appellant's objection that the "best interests test", as § 1325(a)(4) is referred to, was not met.

We hold that this was reversible error because the court improperly allocated the burden of proof and failed to find the subsidiary and ultimate facts necessary to support its order. Furthermore, any implied finding that § 1325(a)(4) had been satisfied was clearly erroneous.

A. Burden of Proof

The trial court held that the "burden is upon the creditor objecting to confirmation of a debtor's Chapter 13 plan to prove that the best interests' test has not been met."

It is well established that the burden of proof rests on the party who asserts the affirmative of an issue. Maxwell Land Grant Co. v. Dawson (1898), 151 U.S. 586, 604, 14 S.Ct. 458, 463-464, 38 L.Ed. 279. A plaintiff has the burden of making out his case in order to warrant relief. New Orleans and N.E.R. Co. v. Harris (1918), 247 U.S. 367, 38 S.Ct. 535, 62 L.Ed. 1167.

Similarly, the proponent of a Chapter 13 plan has the burden of proof as to its confirmation. In re Elkind, 4 C.B.C.2d 687, 11 B.R. 473 (Bkrtcy.D.Colo.1981, Moore B.J.). In re Crago, 4 B.R. 483 (Bkrtcy.S.D. Ohio 1980, Sidman B.J.).

B. Sufficiency of Findings

Findings of fact are found in the court's Memorandum Re Objections to Confirmation, prepared and filed by the judge, and in Findings of Fact and Conclusions of Law, prepared by the debtor's attorney. The only references in the two documents relevant to the best interests of creditors element of § 1325(a)(4) were:

Memorandum: "With respect to valuation, the debtor's schedules set out what the debtor believes its assets to be worth and he was examined by Ms. Riblett and Mr. Norman Hanover, debtor's counsel, with respect to the valuations. No other evidence was presented on the subject. Therefore, the only evidence before the court is the prima facie evidence given by the debtor, which after examination, still stands. Therefore, this objection is overruled."

Findings of Fact: "2. The Debtor has filed with this Court schedules of assets to which assets he has assigned values based on his personal belief, which is the only evidence before the Court."

Conclusions of Law: "2. The Debtor has made a prima facie showing of the value of his assets."

The foregoing findings of fact are insufficient to justify confirmation of the debtor's plan.

(1)

Bankruptcy Rule 752 requires the Court to "find the facts specially and state separately its conclusions of law thereon..." The element of confirmation at issue, Section 1325(a)(4), requires a finding of ultimate fact that "the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title on such date."

The Court not only failed to make an express finding that section 1325(a)(4) was satisfied but failed to make the special findings of fact that are necessary to support that finding of ultimate fact.

"The findings of fact must include as much of the subsidiary facts as is necessary to disclose to the reviewing court the steps by which the trial court reached its ultimate conclusion on each factual issue." 9 Wright & Miller § 2579 (p. 710), citing Kelley v. Everglades Drainage District, 319 U.S. 415, 63 S.Ct. 1141, 87 L.Ed. 1485 (1943) and Schneiderman v. U.S., 320 U.S. 118, 63 S.Ct. 1333, 87 L.Ed. 1796 (1943). "The nature of the evidentiary findings sufficient and appropriate to support the court's decision ... is for the trial court to determine in the first instance in light of the circumstances of the particular case. We hold only that there must be findings, stated either in the court's opinion or separately, which are sufficient to indicate the factual basis for the ultimate conclusion." Kelley v. Everglades Drainage District, supra.

In order to make the finding of ultimate fact required by section 1325(a)(4), the trial court must also find specially such subsidiary facts as:

a. Value of property to be distributed under plan, without regard to when distributed.

b. Present value of such property; i.e., "as of the effective date of the plan."

c. Allowable unsecured claims under the plan and in Chapter 7, or a finding that such claims would be substantially the same.

d. Amount payable on unsecured claims in Chapter 7.

None of the foregoing relevant facts were specially found. Accordingly, the findings are insufficient, both as to subsidiary and ultimate facts, to support the order overruling objection to confirmation.

(2)

Were it possible to find support for the court's ruling from the record, the absence of special findings might be excused. Our examination of the record, however, leaves us with the firm conviction that any implied finding that section 1324(a)(4) had been satisfied would be clearly erroneous. Bankruptcy Rule 810.

Evidence relevant to section 1325(a)(4) issues consisted of (a) the debtor's schedules of assets and liabilities, (b) the plan, and (c) the debtor's testimony on the present value of one asset.

The schedules, subject to judicial notice under Rule 43 F.R.C.P., disclosed these nonexempt assets:

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