Rimgale, In re

• Decision Date: 18 January 1982
• Docket Number: No. 81-1455,81-1455
• Citation: 669 F.2d 426
• Parties: 5 Collier Bankr.Cas.2d 1281, 8 Bankr.Ct.Dec. 874, Bankr. L. Rep. P 68,523 In re Donald S. RIMGALE, Debtor-Appellant. Mary RAVENOT, Incompetent, by Gordon J. Feltes, her father and next friend and conservator of her estate, Creditor-Appellee, v. Donald S. RIMGALE, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 426

669 F.2d 426

5 Collier Bankr.Cas.2d 1281, 8 Bankr.Ct.Dec. 874,

Bankr. L. Rep. P 68,523

In re Donald S. RIMGALE, Debtor-Appellant.

Mary RAVENOT, Incompetent, by Gordon J. Feltes, her father and next friend and conservator of her estate, Creditor-Appellee, v. Donald S. RIMGALE, Debtor-Appellant.

No. 81-1455.

United States Court of Appeals,

Seventh Circuit.

Argued Oct. 1, 1981.

Decided Jan. 18, 1982.

Ray Jeffrey Cohen, Chicago, Ill., for debtor-appellant.

John C. Griffin, Chicago, Ill., for creditor-appellee.

Before CUMMINGS, Chief Judge, FAIRCHILD, Senior Circuit Judge, and BROWN, Senior District Judge. ^*

CUMMINGS, Chief Judge.

This appeal presents for the first time in the Seventh Circuit ¹ the need to construe Section 1325 of the Bankruptcy Reform Act, 11 U.S.C. § 1325 (1978). Donald Rimgale, the Chapter 13 debtor, filed a plan that proposed to pay $120 a month for 42 months to various unsecured creditors. The largest of the claims represented a tort judgment owed to Mary Ravenot. Although the judgment debt would not have been dischargeable in a straight Chapter 7 bankruptcy under 11 U.S.C. § 523(a)(4) or (6), it could be discharged under the more generous provisions that obtain once a Chapter 13 plan is successfully completed. 11 U.S.C. § 1328(a). The bankruptcy judge confirmed Rimgale's proposed plan over the objections of Mary Ravenot's representative. On appeal, the district judge reversed. Because we cannot endorse either the district judge's construction of the statute or the bankruptcy judge's cursory inquiry into the debtor's good faith in proposing the plan, we remand for additional proceedings in the bankruptcy court.

I. The Statutory Background

One of Congress' purposes in enacting the Bankruptcy Reform Act of 1978 was to make the old Chapter XIII provisions more accessible and attractive to individual debtors. Liberalized provisions, Congress reasoned, would benefit both debtors and creditors. Debtors would be given more latitude to work out debt composition plans, thus avoiding the stigma of straight bankruptcy. Creditors would receive total or substantial repayment under a Chapter 13 plan, but little or nothing in a Chapter 7 liquidation. ²

To make Chapter 13 work, Congress altered the old Chapter XIII in three important ways. First, it expanded the class of debtors who could take advantage of Chapter 13. Formerly restricted to wage-earner debtors, Chapter 13 was made available to any individual with regular income, whether from wages or other sources. ³ Second, Congress eliminated the requirement that a plan be approved by a majority of unsecured creditors. ⁴ Concerned that in the past short-sighted and stubborn creditors had blocked feasible plans, Congress provided for creditors to be heard, 11 U.S.C. § 1324, but gave the bankruptcy judge the sole authority to confirm or reject a plan. It also set out the criteria he was to use, 11 U.S.C. § 1325:

(a) The court shall confirm a plan if-

(1) the plan complies with the provisions of this chapter and with other applicable provisions of this title;

(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;

(3) the plan has been proposed in good faith and not by any means forbidden by law;

(4) 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;

(5) with respect to each allowed secured claim provided for by the plan-

(A) the holder of such claim has accepted the plan;

(B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or

(C) the debtor surrenders the property securing such claim to such holder; and

(6) the debtor will be able to make all payments under the plan and to comply with the plan.

Finally, Congress added an incentive for debtors to complete performance under the confirmed plan. 11 U.S.C. § 1328 provides that a debtor who has carried out his plan is entitled to a discharge of virtually all debts provided for in the plan or disallowed. ⁵ Thus a Chapter 13 debtor may be discharged from a variety of debts that a Chapter 7 bankrupt remains obligated to pay at the conclusion of a liquidation.

The statutory modification of Chapter 13 has had both intended and unintended effects. The number of Chapter 13 cases has increased sharply. ⁶ Many of them correspond closely to the idealized case Congress had in mind when it wrote the legislation: the debtor, given time and relief from harassment, is able to pay all or most of his debts. Increasingly, however, bankruptcy courts are seeing cases like the one before us, in which debtors propose less substantial, or even nominal, payments under a Chapter 13 plan, in order eventually to take advantage of Chapter 13's generous discharge provisions. Our task is to determine whether such a plan is permissible under the legislation Congress has drafted. In so doing, we are not free to rewrite the legislation as we think best, but neither are we able to ignore the broad equitable principles that have characteristically animated American bankruptcy law.

II. Rimgale's Chapter 13 Plans

Donald Rimgale filed an original and two amended Chapter 13 plans in the bankruptcy court. Each involved about $6200 of unsecured consumer debt owed to half a dozen creditors, none with enough at stake apparently to file objections to the plan. Each also involved, and offered differing treatments of, a much larger debt owed to Mary Ravenot, the only creditor on whose behalf objections were made.

On May 24, 1979, the Circuit Court of Cook County, Chancery Division, entered a tort judgment against Rimgale and his wife Alice. Alice Rimgale had been employed as a psychiatric nurse at St. Joseph's Hospital in Joliet, Illinois, and had cared for Mary Ravenot, a twenty-six-year-old widow then undergoing psychiatric treatment and since adjudged incompetent. The Rimgales first won Mrs. Ravenot's confidence, then induced her to turn over to them all the proceeds of her husband's life insurance. The judgment against the Rimgales had the following components: (1) compensatory damages of $29,743 and $3,988.39 in prejudgment interest, for which the Rimgales were jointly and severally liable; (2) punitive damages of $5,000 against Donald Rimgale alone; and (3) attorney's fees and costs amounting to $8,857.75, again assessed against Donald Rimgale alone, based on his false pleading and bad faith in the tort litigation. ⁷ The judge also imposed a constructive trust in Mary Ravenot's favor on real and personal property acquired with the insurance money, including the Rimgales' house in Coal City, Illinois. What part of the judgment debt is secured by the constructive trust is a matter of dispute. ⁸ Until the filing of the bankruptcy, Mrs. Ravenot had garnished Rimgale's wages in the amount of $264 per month.

Rimgale's first plan, offered on December 18, 1979, listed Mary Ravenot's debt as entirely unsecured, treated both the compensatory damages and the attorney's fees as joint obligations of Donald and Alice Rimgale, and omitted the $5,000 in punitive damages altogether. The plan characterized that portion of the tort debt it listed as "disputed," although the judgment had become final. ⁹ The plan proposed to make no payments whatsoever to Mary Ravenot. Payments of $110 a month over thirty-six months would, according to the petition, pay 45% of the other unsecured claims.

The first amended plan, filed on April 3, 1980, has been lost and can be only partially reconstructed. ¹⁰ It represented that $55 semi-monthly payments over thirty-six months would pay one-third of the unsecured claims, but did not change the amount or proposed nonpayment of Mary Ravenot's claim. ¹¹

The second amended plan, filed on July 10, 1980, attempted to meet the objections of Mrs. Ravenot. It treated her debt as partly secured and partly unsecured. It estimated that she would receive $25,000 from the sale of the Rimgale house, ¹² making the unsecured part of her claim $24,799.54. It increased payments under the plan to $120 a month and extended the term of the plan from thirty-six to forty-two months. An estimated 11% of unsecured claims would be paid. Mrs. Ravenot would receive about $2,700. This version of the plan was confirmed by bankruptcy judge Robert Eisen over the objections of Mrs. Ravenot's representative. Judge Eisen also lifted the automatic stay to permit Mrs. Ravenot's lawyers to set in motion the sale of the Coal City house.

III. The Appeal to Judge Decker

Mrs. Ravenot thereupon appealed the confirmation order to the district court. There were three bases for the appeal. First, Mrs. Ravenot argued that she was not receiving at least as much as she would receive in a Chapter 7 liquidation, because her debt could not be discharged under Chapter 7 but would be discharged at the completion of a Chapter 13 plan. The plan therefore did not meet the "best interests" test of Section 1325(a)(4), infra. Second, Mrs. Ravenot contended that the plan had not been proposed in good faith and therefore violated Section 1325(a)(3). Third, Mrs. Ravenot argued that the bankruptcy judge had unduly restricted her arguments against the plan, contrary to the spirit of Section 1324. Judge Decker based his decision for Mrs. Ravenot on the first ground. In re Rimgale, No. 80 C 4862 (N.D.Ill., February 21, 1981). He found that the value of a nondischargeable claim for the whole of the unsecured debt could not easily be quantified. Nonetheless, he assumed that Mrs. Ravenot's objections were a sufficient indication that the claim...