Viegelahn v. Essex

• Decision Date: 27 June 2011
• Docket Number: Civil Action No. SA–10–CV–00767–XR.
• Citation: 452 B.R. 195
• Parties: Mary K. VIEGELAHN, Trustee, Appellant,v.Phillip Brian ESSEX; Virginia May Essex, Appellees.
• Court: U.S. District Court — Western District of Texas

452 B.R. 195

Mary K. VIEGELAHN, Trustee, Appellant,

v.Phillip Brian ESSEX; Virginia May Essex, Appellees.

Civil Action No. SA–10–CV–00767–XR.

United States District Court, W.D. Texas, San Antonio Division.

June 27, 2011.

Douglas B. Kiel, San Antonio, TX, Appellant.Heidi McLeod, Rosenbaum Law Services, San Antonio, TX, Appellees.

ORDER

XAVIER RODRIGUEZ, District Judge.

On this date, the Court considered Appellant Mary K. Viegelahn's, Trustee, appeal from an order of the Bankruptcy Court confirming Appellees Phillip Brian Essex and Virginia May Essex's Chapter 13 Plan. Having considered the record, applicable law, and the parties' arguments, the Court REVERSES the Bankruptcy Court's order.

Background

On January 5, 2010, Appellees filed a petition for relief under Chapter 13 in the United States Bankruptcy Court for the Western District of Texas. Appellant filed an Objection to Confirmation of Appellees' Original Chapter 13 Plan claiming in part that the Plan was not filed in good faith according to 11 U.S.C. § 1325(a)(3). Appellant's Br. at 7–8. Appellees then filed an Amended Chapter 13 Plan (“Plan”) that included changes necessary for the Plan to meet feasibility requirements but did not address the good faith concerns that the Appellant raised.

The Plan “calls for payments of $3,717.00 for a period of sixty months and proposes to pay approximately a 1% dividend to non-priority unsecured creditors with the dollar amount to be paid to non-priority unsecured creditors a total of no less than $1,956.41.” Appellant's Br. at 10. The basis of the good faith claim relates to the fact that in the Plan, “the debtors [Appellees] were proposing to retain a homestead with a mortgage of approximately $656,000.00 ...” in which the Appellees have virtually no equity. Id. at 7, 24. To do so, Appellees would pay $6,770.00 towards the mortgage each month. Id. at 19. This amount constitutes 51% of Appellees' monthly income and represents a mortgage payment that “is over four times the amount of the IRS standard for housing and utilities for a family of five in San Antonio, Texas.” Id. (emphasis included in original). In arguing that this proposal was not made in good faith, Appellant draws attention to the steep contrast between the high monthly mortgage payments and the low monthly dividend (1%) that Appellees propose to pay to unsecured creditors. Furthermore, it should be noted that before purchasing the home in 2006, Appellees had not paid income taxes for the years of 2003, 2004, or 2005 and continued this trend for 2006 as well. As a result of this failure to pay taxes, the Appellees owe the IRS $256,498.97, of which $136,681.46 is an unsecured claim. Based on the 1% dividend proposed in Appellees' Plan, the IRS will receive $1,366.82 of the unsecured debt.

Despite Appellant's objection, the Bankruptcy Court confirmed the Plan, citing the eligibility limits of 11 U.S.C. § 109(e) in conjunction with the Chapter 13 purpose of allowing debtors to retain their homes during bankruptcy. As the Court stated,

“We already know that we have a statute that's designed to help people keep their homes, and we already know that Congress also, de facto, put an upper limit on what kind of a home you can keep because they put an upper limit of how much secured debt you can take into Chapter 13. So, that's the de facto number. The de facto number for how much house can you have in Chapter 13 is set by the eligibility limits.”

Ct. Tr. at 34–35. In response to the Court's Order confirming the Plan, Appellant filed an appeal and seeks reversal of the Order and denial of confirmation.

Legal Standard

Standard of Review

When a district court reviews the decisions of a bankruptcy court, “[f]indings of fact are reviewed for clear error, and conclusions of law are reviewed de novo.” Drive Fin. Servs., L.P. v. Jordan, 521 F.3d 343, 346 (5th Cir.2008). As the Fifth Circuit has stated, “[w]hether a petition was filed in good faith is a question of fact that we review for clear error.” Suggs v. Stanley (In re Stanley), 224 Fed.Appx. 343, 345–46 (5th Cir.2007). “ ‘When a finding of fact is premised on an improper legal standard, or a proper one improperly applied,’ however, that finding is reviewed de novo.” Id. at 346 (quoting In re Missionary Baptist Found. of Am., 712 F.2d 206, 209 (5th Cir.1983)).

Good Faith

According to Section 1325(a)(3) of the Bankruptcy Code, “the court shall confirm a plan if ... the plan has been proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1325(a)(3). Importantly, “[i]n proceedings to confirm a plan, the debtor has the burden of proving good faith....” In re Stanley, 224 Fed.Appx. at 346. To determine whether the debtor has sufficiently satisfied this burden, bankruptcy courts employ a “totality of the circumstances” test. Id. The Fifth Circuit test considers these factors: “(1) ‘the reasonableness of the proposed repayment plan,’ (2) ‘whether the plan shows an attempt to abuse the spirit of the bankruptcy code,’ (3) whether the debtor genuinely intends to effectuate the plan, (4) whether there is any evidence of misrepresentation, unfair manipulation, or other inequities, (5) whether the filing of the case was part of an underlying scheme of fraud with an intent not to pay, (6) whether the plan reflects the debtor's ability to pay, and (7) whether a creditor has objected to the plan.” Id. (citing In re Chaffin, 816 F.2d 1070, 1070, 1073–74 (5th Cir.1987), modified, In re Chaffin, 836 F.2d 215, 216–17 (5th Cir.1988)).

In applying the totality of the circumstances test, a court need not make an explicit “ ‘formulary statement’ that it considered the relevant facts ‘individually and cumulatively.’ ” Id. at 347 (quoting Early v. Packer, 537 U.S. 3, 9, 123 S.Ct. 362, 154 L.Ed.2d 263 (2002)). Instead, “ ‘it suffices that that was the fair import of the [lower court's opinion].’ ” Id. (alteration in original) (quoting Early, 537 U.S. at 9, 123 S.Ct. 362).

Analysis

Standard of Review

The parties disagree as to what standard of review the Court should apply in this case. Appellees claim that by confirming the Plan and overruling Appellant's good faith objection, the Bankruptcy Court made a finding of fact and therefore, this Court should review the decision for clear error. Appellee's Br. at 9–11. To support this claim, Appellees point to the case of Suggs v. Stanley in which the Fifth Circuit considered the appropriate standard of review for a good faith determination made by a bankruptcy court. In re Stanley, 224 Fed.Appx. 343. The district court in Suggs decided that de novo review was necessary because the bankruptcy court had improperly performed the “totality of the circumstances” test in finding that the plan had been proposed in good faith. Id. at 347. The Fifth Circuit disagreed, however, and held that the bankruptcy court had satisfactorily applied the test and as a result, its factual finding of good faith was entitled to a clear error review. Id. Appellees urge this Court to adopt the same reasoning as Suggs and to find that the Bankruptcy Court's holding is a factual finding that should be given a clear error standard of review.

Conversely, Appellant asserts that although the good faith objection was overruled, the Court reached its conclusion without making any findings of fact. Recognizing that once a Section 1325(a)(3) objection is raised, it is the debtor's burden to show that the plan was proposed in good faith, Appellant argues that Appellees presented no evidence to refute the good faith objection. Therefore, Appellant claims, the Appellees provided the Bankruptcy Court with no basis for making a finding of fact related to good faith. As Appellant states, “No witnesses were ever sworn in to give testimony and no evidence was presented or admitted.” Appellant's Br. at 3. Rather, the Court overruled the good faith objection using 11 U.S.C. § 109(e). Therefore, Appellant argues that by deciding the issue on this basis, the Bankruptcy Court avoided making any findings of fact concerning the Appellees' good faith and therefore, the decision should be reviewed de novo.

To support this argument, Appellant urges this Court to consider a recent holding of the Bankruptcy Court for the Northern District of Texas in the case of In re Owsley, 384 B.R. 739 (Bankr.N.D.Tex.2008). Referring to the debtor's burden of showing good faith, the Court in that case stated that “[i]t is difficult, if not impossible, for a debtor to meet this burden without putting on evidence. Usually, that evidence comes in the form of the debtor's testimony. No such evidence was given here. Consequently, the debtors did not satisfy their burden on the good faith issue.” Id. at 751. Appellant asserts that the same reasoning is applicable in this case. Because the debtor did not provide the Bankruptcy Court with evidence in response to the good faith objection, Appellant claims that it was impossible for the Court to make a factual finding of good faith. Instead, Appellant argues, the Bankruptcy Court's order overruling Appellant's objection was based on a legal conclusion arising from an unprecedented interpretation of Section 109(e) and thus, should be given a de novo, rather than a clear error, review.

This Court agrees with the Appellant. Although the Bankruptcy Court considered the facts as presented by the parties' attorneys during the hearing, it ultimately confirmed the proposed Plan based on its interpretation of Section 109(e) eligibility limits in conjunction with the underlying purpose of Chapter 13 to allow debtors to keep their homes. In doing so, the Bankruptcy Court overruled the good faith objection based on a legal conclusion rather than on facts gleaned from evidence presented by the Appellees. Thus, the Suggs holding is not determinative in this case and the order of confirmation is subject to a de novo standard of review.

Good Faith

Many courts disagree on what constitutes a violation of ...