Meyer v. Lepe (In re Lepe)

• Decision Date: 09 May 2012
• Docket Number: Bankruptcy No. 10–60264.,BAP No. EC–11–1349–PaDMk.
• Citation: 470 B.R. 851,12 Cal. Daily Op. Serv. 6933,2012 Daily Journal D.A.R. 6091
• Parties: In re Angel LEPE, Debtor. Michael H. Meyer, Chapter 13 Trustee, Appellant, v. Angel Lepe, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

470 B.R. 851

12 Cal. Daily Op. Serv. 6933

2012 Daily Journal D.A.R. 6091

In re Angel LEPE, Debtor.

Michael H. Meyer, Chapter 13 Trustee, Appellant,

v.Angel Lepe, Appellee.

BAP No. EC–11–1349–PaDMk.

Bankruptcy No. 10–60264.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted March 22, 2012.

Decided May 9, 2012.

Deanna K. Hazelton argued for appellant Michael H. Meyer; Thomas O. Gillis argued for appellee Angel Lepe.

Before: PAPPAS, DUNN and MARKELL, Bankruptcy Judges.

OPINION

PAPPAS, Bankruptcy Judge:

Chapter 13 ¹ trustee Michael H. Meyer (“Trustee”) appeals the order of the bankruptcy court confirming the amended plan of debtor Angel Lepe (“Lepe”). We AFFIRM.

FACTS

The material facts are undisputed.

Lepe filed a petition for relief under chapter 13 on September 2, 2010. In his accompanying schedules, Lepe listed assets valued at $363,900, liabilities of $581,380 (including $549 of unsecured debts), monthly income of $2,631, and expenses of $2,481. In Lepe's original chapter 13 plan, he proposed to pay directly the payments on the first mortgage on his house, to “strip” the second mortgage on his house and to treat that creditor's claim as unsecured, and to pay $150 per month for 36 months to Trustee. The payments to Trustee would provide an estimated 17.25 percent dividend to Lepe's unsecured creditors, including the soon-to-be-unsecured second mortgage creditor's claim.

None of the creditors objected to confirmation of Lepe's plan, including the second mortgage secured creditor whose lien would be stripped. However, on October 20, 2010, Trustee objected to confirmation. Trustee argued that neither Lepe's plan or petition had been filed in good faith, as required by § 1325(a)(3) and (a)(7), respectively. Trustee alleged that, since Lepe's total unsecured debt at the time he filed his petition was only $549, and because he had monthly income sufficient to pay all of his monthly expenses and his debts, the only reason Lepe had filed the bankruptcy case was to use chapter 13 to strip the second mortgage on his house. In Trustee's opinion, Lepe's strategy amounted to an abuse of the bankruptcy laws. Trustee later submitted a brief identifying several errors in Lepe's schedules, and expanding on his argument concerning Lepe's alleged lack of good faith.

Lepe filed a First Amended Plan on February 24, 2011. It increased the monthly plan payments to Trustee from $150.00 to $275.00, which in turn increased the proposed payback on unsecured claims.² Lepe also amended his schedules to include certain assets not disclosed in the original filings.

Trustee submitted a detailed opposition to Lepe's amended plan on March 24, 2011. In addition to repeating earlier arguments on good faith, Trustee discussed the separate chapter 13 case filed by Lepe's girlfriend, Elsa Antonio, and how the cases were related.³ Lepe filed a response to Trustee's submissions on April 29, 2011; Trustee filed a reply brief on May 5, 2011.

At a June 2, 2011 confirmation hearing concerning both Antonio's plan and Lepe's amended plan, the bankruptcy court announced its findings of fact, conclusions of law, and decision regarding confirmation. In material part, the court found and concluded that:

- Any inaccuracies in Lepe's schedules were occasioned by his lawyer's inadvertence, and did not evidence any lack of good faith by Lepe.

- The amount of payments being made under Lepe's amended plan to unsecured creditors was “not insignificant.”

- The bankruptcy court was not persuaded that “the fact that [Lepe and Antonio] don't have very much unsecured debt makes [them] ineligible to be a debtor in chapter 13.”

- “[I]t is a proper reorganization purpose to deal with secured claims as well as to deal with unsecured claims” in chapter 13 cases.

- The second mortgage creditor, whose lien was being stripped in Lepe's plan, had not opposed confirmation.

- While deeming the decision “a very close call,” the bankruptcy court concluded both plans should be confirmed.⁴

The bankruptcy court entered the order confirming Lepe's amended plan on July 1, 2011. Trustee filed this timely appeal.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(L). The Panel has jurisdiction under 28 U.S.C. § 158.

ISSUES

Whether the bankruptcy court erred in finding that Lepe's First Amended Plan was filed in good faith.

Whether the bankruptcy court erred in confirming Lepe's First Amended Plan.

STANDARDS OF REVIEW

The bankruptcy court's determination regarding a debtor's good faith in proposing a chapter 13 plan for confirmation is a factual finding reviewed under the clearly erroneous standard. Figter Ltd. v. Teachers Ins. & Annuity Ass'n (In re Figter Ltd.), 118 F.3d 635, 638 (9th Cir.1997); Ho v. Dowell (In re Ho), 274 B.R. 867, 870 (9th Cir. BAP 2002).

Whether a chapter 13 plan should be confirmed involves mixed questions of fact and law, where factual determinations are reviewed under the clearly erroneous standard, and determinations of law are reviewed de novo. Andrews v. Loheit (In re Andrews), 155 B.R. 769, 770 (9th Cir. BAP 1993).

DISCUSSION

I.

In order to confirm a plan, the debtor must show, and the bankruptcy court must find, that the debtor's “plan has been proposed in good faith and not by any means forbidden by law.” § 1325(a)(3). In his brief, Trustee concedes that the “debtor was not ‘bad’ in any way.” Even so, Trustee argues that, given these facts, the bankruptcy court's order confirming Lepe's amended plan must be reversed because Lepe “fails to pass the ‘good faith standard [not] because the debtor is ‘bad,’ but because what the debtor is proposing, stripping a second mortgage while being otherwise solvent, is not within the spirit or purpose of Chapter 13.” It is the Trustee's view that, as a matter of law, any debtor who is “otherwise able to pay [his or her] debts,” and whose “sole purpose” for filing for relief under chapter 13 is to strip a totally unsecured lien on the debtor's home, while paying unsecured creditors (including the mortgage creditor holding the stripped lien) only a percentage of that debt over the term of the plan, lacks good faith.⁵

Based upon the long-standing precedents of this circuit, we reject Trustee's construction of the Code. We also disagree with Trustee's characterization of the facts in this case.

The decisional law in the Ninth Circuit guiding a bankruptcy court's examination of a chapter 13 debtor's good faith under the Code is well-known. Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir.1982), was one of the first decisions to construe the § 1325(a)(3) good faith requirement, and its holding has continuing vitality.

Goeb noted that neither the former Bankruptcy Act, nor the then-new Bankruptcy Code, defined good faith, and that there was no controlling case law assigning meaning to the term. In light of the equitable nature of bankruptcy court proceedings, when weighing a debtor's good faith in a chapter 13 case, Goeb held that a bankruptcy court should ask whether the debtor had acted equitably in proposing the plan. Id. at 1390. More precisely, according to the court, a bankruptcy court should 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.” Id. To make its decision about a debtor's good faith (or lack of it), Goeb emphasized that a bankruptcy court must engage in a “case-by-case” analysis of the “particular features of each Chapter 13 Plan,” and should consider “ all militating factors.” Id. To do justice to the purposes of the Code, the court stated:

We emphasize that the scope of the good-faith inquiry should be quite broad. The statement most quoted on the meaning of “good faith” is: [“]Good faith itself is not defined but generally the inquiry is directed to whether or not there has been an abuse of the provisions, purpose, or spirit of Chapter XIII in the proposal or plan.[”] 10 W. Collier, Bankruptcy ¶ 29.06[6] (14th ed. 1980). However, even this generalization does not adequately reflect the range of relevant considerations.... Too much weight should not be given to Collier's observation.... [B]ankruptcy courts cannot substitute a glance at [one factor such as the amount to be paid under the plan] for a review of the totality of the circumstances.

In re Goeb, 675 F.2d at 1390 n. 9;see also Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1444 (9th Cir.1986) (stating that the good faith inquiry “should examine the intentions of the debtor and the legal effect of the confirmation of a Chapter 13 plan in light of the spirit and purposes of Chapter 13”).

Goeb is particularly instructive in resolving the issue in this appeal because, in that case, the court reversed the decision of a bankruptcy court refusing to confirm the debtors' plan solely because it would pay primarily secured and priority debt, and not “substantially repay their unsecured creditors.” 675 F.2d at 1391 (“Although these two considerations are relevant, they are not determinative. Unless the [bankruptcy] court can muster other evidence of bad faith on remand, it must confirm the Goebs' plan.”). After ruling that a plan provision providing a nominal repayment to unsecured creditors was “one piece of evidence that the debtor is unfairly manipulating Chapter 13 and therefore acting in bad faith,” the Ninth Circuit then cautioned:

However, bankruptcy courts cannot substitute a glance at the amount to be paid for a review of the totality of the circumstances. Because the court below did not inquire adequately into whether the Goebs acted in good faith, we must reverse and remand.

In re Goeb, 675 F.2d at 1391.

In short, Goeb established that, in this circuit, a good faith determination in connection with chapter 13 plan confirmation cannot be based on any single factor or feature of a proposed plan, to the exclusion of review of all other...