452 B.R. 195
W.D. Tex.2011Background
- trustee appeals Bankruptcy Court confirmation of debtors' Chapter 13 Plan.
- Debtors propose $3,717 monthly payments for 60 months with a 1% dividend to unsecured creditors and retain a $656,000 mortgage on their homestead.
- Debtors' mortgage payments amount to about $6,770 monthly (51% of income), well above IRS housing standards for a family of five.
- Debtors owe IRS $256,498.97, of which $136,681.46 is unsecured; under the plan IRS would receive about $1,366.82.
- Bankruptcy Court confirmed the plan citing 109(e) eligibility and Chapter 13’s home-retention purpose; trustee appeals.
- The court reverses, noting aggravating circumstances negate the presumption of good faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard of review for good faith | Viegelahn argues de novo review; no factual findings were made. | Essex argues clear error review for a bankruptcy-fact finding. | De novo review applied; no preserved facts, legal conclusion reviewed afresh. |
| Whether plan is proposed in good faith under 1325(a)(3) given means test | Plan violates good faith by preserving a costly home with minimal unsecured payout. | Housing expenses complying with 1325(b)(3) support good faith under 1325(a)(3). | Bad faith found due to aggravating circumstances despite 1325(b)(3) compliance. |
| Relation between 1325(b)(3) and 1325(a)(3) | Compliance with 1325(b)(3) does not ensure good faith under 1325(a)(3). | If housing costs are allowed under 1325(b)(3), they are presumptively in good faith under 1325(a)(3). | Presumption of good faith rebutted by aggravating circumstances; not automatic. |
| Aggravating circumstances and asset retention | Debtors’ plan should honor their means and avoid luxury retention; taxes unpaid is aggravating. | No exaggeration in housing; means test compliance is sufficient absent aggravation. | Aggravating circumstances rebut presumption; plan confirmed unlawful. |
Key Cases Cited
- In re Stanley, 224 F. App’x 343 (5th Cir. 2007) (good faith determined by totality of circumstances; standard of review discussed)
- In re Owsley, 384 B.R. 739 (Bankr. N.D. Tex. 2008) (expenses deemed reasonably necessary under 1325(b)(3) presumed in good faith under 1325(a)(3))
- In re Namie, 395 B.R. 594 (Bankr. D. S.C. 2008) (retention of high-value home with excessive mortgage raises bad faith concerns)
- In re Stitt, 403 B.R. 694 (Bankr. D. Idaho 2008) (demonstrates belt-tightening expectation; high housing costs can indicate bad faith)
- In re Farrar-Johnson, 353 B.R. 224 (Bankr. N.D. Ill. 2006) (means test does not automatically satisfy 1325(a)(3) good faith)