McCullough v. Brown
| Decision Date | 30 December 1993 |
| Docket Number | No. 93 C 1891.,93 C 1891. |
| Citation | 162 BR 506 |
| Parties | Jack McCULLOUGH, Trustee, Appellant, v. Willie M. BROWN, et al., Appellees. In re Willie M. BROWN (92 B 14365), Marie Butler (92 B 14806), Cleo Pollard (92 B 20029) and Myron Thomas and Eleanor Thomas (92 B 20758), Debtors. |
| Court | U.S. District Court — Northern District of Illinois |
Sheryl A. Fyock, for appellant/Trustee.
Bennett A. Kahn, for appellee Marie Butler.
Standing Trustee Jack McCullough ("Trustee") has appealed Bankruptcy Judge Eugene Wedoff's confirmation (as set out in the "Opinion," 152 B.R. 232 (Bankr.N.D.Ill. 19931)) of the bankruptcy plans of a group of Chapter 13 debtors: Willie Brown, Marie Butler ("Butler"), Cleo Pollard and Myron and Eleanor Thomas. Although Butler alone has responded to Trustee's appeal, both the facts and the legal issues are common to the several cases — so that this opinion will speak of "Debtor" individually and "Debtors" collectively, rather than referring to Butler alone. In any event, for the reasons discussed hereafter, the Bankruptcy Judge's decision confirming the plans — thoughtful though it is — is reversed.
There is no quarrel as to the facts underlying this dispute. Each Debtor sought the shelter of Chapter 13 of the Bankruptcy Code ("Code"2) because a substantial part of his or her indebtedness comprised student loan obligations (which are by law nondischargeable in bankruptcy). Each Debtor then submitted a plan dividing his or her general nonpriority unsecured claims into two classes: student loans and the rest of the unsecured claims.
At the heart of the current dispute lie Debtors' proposals to pay their debts in the student loan class in full, even though such an arrangement leaves only enough money available during the life of each plan to satisfy 10% of the claim of every other unsecured creditor. Each plan results in the Debtor's emergence from Chapter 13 free of unsecured debt, while if only a single class of unsecured creditors had been created:
Trustee readily acknowledges that apart from that preferential treatment there are no other objections to confirmation.3
Treatment of debtors saddled with educational debt obligations has always occupied a special place in the Code. Until 1990 such student loans had been dischargeable under Chapter 13, though nondischargeable in filings under Chapters 7, 11 and 12. Then in that year Congress passed the Student Loan Default Prevention Initiative Act, amending the Code by making the nondischargeability provision of Section 523(a)(8) applicable to Chapter 13 filings as well.4
Instead of accomplishing its intended goal, that change has spawned a somewhat revised (rather than a new) cottage industry. In response to Congress' decision to legislate student loan nondischargeability into Chapter 13, creative debtors have turned to a less direct method by which they still free themselves from such loans and forge a fresh post-bankruptcy start. Such debtors (including Debtors here) simply bifurcate their plans so as to repay their nondischargeable student loan obligations in full at the expense of their obligors who own other nonsecured debts (all of which are dischargeable).
Debtors argue that such a plan is sanctioned by Section 1322(b)(1):
In turn Section 1122(a) states in part that "a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class." Separate classification of student loan debts as such is not at issue in this appeal — as 5 Collier on Bankruptcy ("Collier") § 1322.05, at 1322-12 to 1322-13 (15th ed. 1993) (footnotes omitted) says:
Chapter 13 debtors have proposed, and courts have approved, separate classifications for landlords, attorneys, doctors, trade creditors and even banks extending credit necessary for the continued operation of the debtor\'s business.
Instead it is the right to discriminate as between the classes that is contested here.5
Thus no taint automatically attaches to a Chapter 13 plan merely because it creates a differentiation in treatment among classes of unsecured claims — just because it "discriminates against" one or more classes in the nonpejorative sense of the word "discriminate." Instead the statutory prohibition is limited to plans that "discriminate unfairly" — and of course Congress has chosen to leave the critical word "unfairly" wholly undefined!
Whether Debtors' plans (which are exemplary of a widespread pattern of Chapter 13 plans everywhere) "discriminate unfairly" poses a question on which this Court writes on a virtually clean Article III slate. Although a substantial number of bankruptcy courts have dealt with the precise issue (see Appendix), no Court of Appeals and only a single District Court6 has done so. Hence this Court is bound by no precedent and will proceed to review the question of law from scratch (In re Winer, 158 B.R. 736, 740 (N.D.Ill.1993)).
In the absence of a congressional directive defining (or even fleshing out) the term "unfairly" as employed in Section 1322(b)(1), courts must at least try to formulate some reasoned approach to assessing fairness vel non — lest the process reduce itself to an ad hoc variant on Justice Stewart's famed "I know it when I see it" aphorism to identify "obscenity" (in his concurrence in Jacobellis v. Ohio, 378 U.S. 184, 197 84 S.Ct. 1676, 1683, 12 L.Ed.2d 793 (1964)). By far the majority of bankruptcy courts faced with the current problem have applied the four-part test originally articulated in In re Kovich, 4 B.R. 403 (Bankr.W.D.Mich.1980) and later employed in In re Leser, 939 F.2d 669, 672 (8th Cir.1991) (), the only Court of Appeals decision that to this Court's knowledge has attempted to capture the elusive "discriminate unfairly" phrase:
(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; (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination.
"Reasonable Basis" and "Degree of Discrimination"7
Some bankruptcy courts have been persuaded that the nondischargeable nature of student loan obligations may itself constitute a "reasonable basis" for discriminating among classes of unsecured creditors (see, e.g., In re Benner, 156 B.R. 631, 634 (Bankr. D.Minn.1993) (); In re Keel, 143 B.R. 915, 916 (Bankr.D.Neb.1992)). But many more courts have refused to accept such a rationale, concluding that nondischargeability as such is not a reasonable basis for discriminatory treatment — in addition to Groves, 160 B.R. at 122-23, a sampling of bankruptcy court decisions to that effect is provided by In re Tucker, 150 B.R. 203, 205 (Bankr. N.D.Ohio 1992); In re Eitemiller, 149 B.R. 626, 629 (Bankr.D.Idaho 1993); In re Saulter, 133 B.R. 148, 149 (Bankr.W.D.Mo.1991) and In re Tucker, 130 B.R. 71, 73 (Bankr. S.D.Iowa 1991).
As might be anticipated from its own lack of precision, the "reasonable basis" formulation is no more useful than the undefined statutory concept of "discriminate unfairly." In the end a judge who applies such an amorphous "test" wields a nearly unchecked discretion, implementing his or her personal preferences by the manner in which the judge goes about deciding on reasonableness: whose interests are taken into account and with respect to whom reasonableness is determined. Instead of thus simply shifting the inquiry to a different level of abstraction, this opinion will later seek to explore the various underlying assumptions and their comparative validity and persuasiveness.
This second Kovich factor ordinarily weighs against debtors who try to accomplish the goal sought by Debtors here. As Groves, 160 B.R. at 122-23 put it:
Under most circumstances, a student loan debtor can carry out a Chapter 13 plan without an extreme imbalance between the treatment of student loan claims and other unsecured claims.
If they were so inclined, debtors could almost always design plans that do not discriminate. One way to do so would be simply to treat student loans as long term debt under Section 1322(b)(5) (). But see In re Tucker, 159 B.R. 325, 329 (Bankr.D.Mont.1993) ().
Moreover, as Judge Wedoff has pointed out (Opinion at 236), it is not clear why the test should be phrased in such a way as to make necessity a required element of fairness to begin with. To be sure, necessity...
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