Amfac Distribution Corp. v. Wolff (In Re Wolff)
22 B.R. 510
9th Cir. BAP
1982
Check Treatment

*2 HUGHES, GEORGE, Before KATZ and Bankruptcy Judges.

PER CURIAM: appeals Amfac from an overruling order objections its to confirmation of the debt- or’s plan in a business It case. plan (1) contends that impermissibly two classifies unsecured creditors and not in the best interest creditors. We appealed treat the order as an order of confirmation and reverse.

I. Claims Classification challenge One 1322(b)(1)by unfairly violates discrimina ting among the unsecured creditors. Sec permits to create of unsecured claims as 1122as as the classification does not unfairly. discriminate Section 1122 allows for classification of claims which are “sub stantially similar” and for classification when reasonable and for adminis trative convenience. We find that debtor failed to show that his did unfairly discriminate in its classification scheme.

The record shows two to be paid in full were the debtor’s current insur- ance company and the materials supplier to whom the debtor owed the least. The debt- or’s rationale the plans’ payment scheme was that he would be unable to do business in the future coopera- without the tion of these creditors. The record de- void evidence allegation. debtor failed establish that his dependent

future viability coop- eration of these creditors. On cross-exami- ment, he had not does the basis for nation, admitted that the debtor supplier in his area any other inquired degree demand that differential relationship possi- a business whether imposed? treatment be admitted that he Similarly, the debtor ble. evidence We believe that the in this case car- any other insurance had not contacted carry indicated that the debtor has failed to availability coverage. riers to discuss ' *3 elements. his burden on all facts, assertion the debtor’s bald On these proof. satisfy his burden of of need fails of II. Best Interests Creditors vigorously that

Appellant argues legal right differentially debtor had no 1325(a) provides for confirmation view claims. The of classify his unsecured require- plans. 13 One of its Iacovoni, (Bkrtcy.D.Utah 2 B.R. 256 In re ments is that of what convenience 1980), administrative plan will receive under the is not creditors justifies subordination differ equitable they less than what would receive in a classification, urged is on the Panel. ential bankruptcy. 11 liquidating U.S.C. spirit of In re Suth Appellee promotes 1325(a)(4). ap- The trial court overruled § erland, (Bkrtcy.W.D.Ark.1980). 3 B.R. 420 pellant’s objection that the “best interests held that in a case where Sutherland to, test”, 1325(a)(4) is referred was not § liquidation yield nothing would met. creditors, plan 13 for unsecured no unfairly discriminate because cannot We hold that this was reversible error expect to receive creditor can improperly because the court allocated the argues for an unfet anything. Appellee proof burden of and failed to find the sub- in classification. right to discriminate tered sidiary sup- and ultimate facts 1322(b)(1) and language Furthermore, § port implied The its order. imprecise, but we do not be- finding that had been satisfied supports the narrow construc- lieve that it clearly erroneous. There, in reliance of the tion of Iacovoni. 1122, comment on 15th Ed. Collier’s A. Burden of Proof all unsecured creditors with court held that The trial court held that the “burden is nature character have claims of the same of the estate. right upon objecting a similar to the assets the creditor to confirmation prove of a debtor’s 13 that the better result We believe interests’ test has not been the best met.” will occasions where unsecured there classified and treated dif- might It is well established that the bur ferently, though even character of proof party den of rests on the who asserts and the treatment is the claims identical the affirmative of an issue. Maxwell Land discriminatory, unfairly so. (1898), 586, Co. v. Dawson 151 Grant U.S. in In re that the test created We believe 604, 458, 463-464, 14 S.Ct. 38 L.Ed. 279. A Kovich, (Bkrtcy.Mich.1980), 4 B.R. 403 and plaintiff making has the burden of out his Dziedzic, in In re 9 B.R. 424 refined case in order to warrant relief. New Orle reasonably more sets (Bkrtcy.Tex.1981), (1918), ans and N.E.R. Co. v. Harris 247 interpretation placed upon to be forth the 367, 535, 38 62 L.Ed. 1167. U.S. S.Ct. (1) the discrim- 1322. The test whether basis; (2) whether ination has a reasonable Similarly, proponent Chap of a carry can out a without the the debtor proof 13 as to its ter the burden discrimination; (3) whether the discrimina- Elkind, 687, confirmation. In re C.B.C.2d faith; good and proposed tion is (Bkrtcy.D.Colo.1981, 11 B.R. 473 Moore B. is di- degree of discrimination whether J.). Crago, (Bkrtcy.S.D. 4 B.R. 483 rectly related to the basis or rationale J.).B. Restating the last ele- Ohio Sidman the discrimination. Sufficiency Findings findings fact must include as “[T]he subsidiary much facts as is necessary Findings of fact are found in to disclose to the reviewing court the steps Objections

court’s Memorandum Re to Con by which the trial court reached its ultimate firmation, judge, and filed prepared conclusion on each factual 9 Wright issue.” Findings and in Fact and Conclusions 710), & Miller (p. citing Kelley Law, prepared by attorney. the debtor’s Everglades District, Drainage 319 U.S. in the two documents references 63 S.Ct. 87 L.Ed. 1485 relevant to the best interests S., Schneiderman v. U. 320 U.S. element of were: (1943). S.Ct. L.Ed. “The na- respect : “With Memorandum valua- evidentiary ture of the findings sufficient tion, set the debtor’s schedules out what appropriate the court’s deci- debtor believes its be worth he assets to sion ... is for trial court to determine examined Ms. Riblett and Mr. Nor- in the first in light instance of the circum- *4 Hanover, counsel, man debtor’s with respect of stances the case. We hold to the valuations. No other evidence was only that findings, there must be stated presented Therefore, the subject. on the opinion either the court’s or separately, only evidence before the court is prima the are which sufficient to the indicate factual debtor, given facie by evidence the which basis for the ultimate Kelley conclusion.” examination, Therefore, after still stands. Everglades Drainage District, supra. objection is overruled.” In order to the finding make of ultimate Findings Fact: The of “2. Debtor required fact 1325(a)(4), the trial filed with this Court schedules of assets to court must also specially find such subsidi- assigned which assets he has values based ary facts as: belief, personal on his which is the evidence before Court.” a. Value property of to be distributed plan, regard under without to when distrib- of “2.

Conclusions Law: The Debtor uted. prima showing has made a facie

value of his assets.” i.e., b. Present property; value such

The “as foregoing findings plan.” of fact are insuf- effective date of the justify ficient to confirmation of the debt- c. Allowable unsecured under the plan. or’s plan finding or that such claims be substantially would same. requires Rule 752 Court sepa- to “find specially the facts state payable d. Amount on unsecured claims rately its conclusions of law thereon...” issue, The element of confirmation at Sec- foregoing None of the relevant facts 1325(aX4),requires finding ulti- specially Accordingly, were found. value, mate fact that “the as of the effec- insufficient, are to findings both as subsidi- plan, tive date be property to facts, ary and ultimate support order under the distributed account overruling objection to confirmation. each allowed unsecured claim is not less paid than the that amount would on such liqui-

claim if the estate of the debtor were possible support Were find for the dated this title under on such record, ruling court’s from the the absence date.” might of special findings be excused. Our record, however, The Court not an examination of the leaves failed make express finding any implied us the firm 1325(a)(4) that section with conviction that special finding 1324(a)(4) that section been sat- satisfied failed make find- had ings clearly of fact are isfied would be erroneous. Bank- finding of ultimate fact. Rule company insurance plan, Under the an to section relevant Evidence paid would be 100%on their supplier and a (a) the schedules debtor’s consisted issues unsecured creditors would claims. All other (c) liabilities, (b) plan, and of assets justification for paid 50%. The debtor’s testimony the debtor’s class is treatment of 100% different of one asset. services to remain in that he needs their schedules, judicial notice subject The that the classifica- The court held business. F.R.C.P., these non- disclosed under Rule 43 “does tion was rational and exempt assets: unfairly against creditors not discriminate $12,113 Inventory designated classes.” 6,710 lien claims Mechanics 6,722 receivable Accounts controlling stat- majority The reads 20,000 42,000 note Secured among permitting utes as $45,545 $67,545 class so as it is of the same face was listed at its secured note The the debtor has but concludes that not unfair $42,000 and at its approximately amount of burden. I would satisfy failed to even this $20,000. Thus, the “discounted” value impermissible the classification is hold that value of- facie evidence on prima debtor’s 1322(b)(1) and violates 11 under 11 U.S.C. satisfy unsecured claims available to assets in that the does not U.S.C. § $67,545 $45,545. was either claims of same treatment to all provide the not reach note, legal nature. would fully se- the same although promissory question. the unfair discrimination payable was not property, cured real *5 wife remarried or debtor’s former until the A. value of the present Thus the until 1985. of unsecured creditors Classification face something less than the note predecessor under permitted specially find court did not amount. The Chapter 13. Section 646 of the note. present Chapter plans under former governed Act pay- total plan proposes The debtor’s provide could While the XIII. $37,080 rate at the to the trustee of ments required “severally,” it creditors secured months. The per month for 36 of $1030 provided for creditors be that unsecured $37,- pay by the debtor would plan proposed See, 646(1), (2) the Bank- “generally.” § claims, liquida- while on 080 on unsecured This was read to Act as amended. $45,545 would be or Chapter 7 there tion in were enti- mean that all unsecured even without claims. Thus more for such on Bank- treatment. Collier equal tled Chapter pay- 13 stream of discounting the 10, ¶ 28.02. 14th Ed. Vol. ruptcy, accepting value and ments to obtain departs 13 from that standard. by more than of his note debtor’s discount provisions The relevant are: 50%, finding that unsecured any implied this as much under would receive claims 1322(b)(1): Section liquidation 7 plan as in “[Subject (a) (c) to subsection clearly erroneous. would be section, plan may] designate a class or Ill claims, provided classes of unsecured as in title, may section 1122 of this not dis- pro- and remand for further We reverse against unfairly criminate class so des- opinion. with this ceedings not inconsistent ignated,”; Judge, concur- HUGHES, Bankruptcy 1122(a): Section ring: (b) in “Except as subsection in part II and I concur fully section,

I concur in an plan may place a a claim or this separately because only result. I write class if such particular Part I’s interest in a of 11 U.S.C. substantially construction similar to panel’s believe the claims interest 1322(b)(1) is erroneous. or interests of such class.” 1322(a)(3) and the other claims § §

515 1122(b): Section assets of the debtor.” In Angeles re Los plan may “A Investments, designate Ltd., a separate of Land and 447 class 1366 F.2d 1971); claims (9th Newton, consistent Cir. Scherk every 152 unsecured F.2d (10th claim that 1945); less In than or Cir. reduced to an Palisades-On- amount The-Despiaines, (7th court approves 1937). as 89 F.2d 214 reasona- Cir. ble and necessary for administrative conve- example permissible An classification nience.” of unsecured claims under the Act involved 1322(a)(3):

Section subordinated contract to others. Markson, (2nd Bartle v. 314 F.2d 303 Cir. plan shall], if classifies “[The 1963). claims, provide the same treatment for each C. particular claim a within class.” An exception limiting to the rule classifi authority sole for classification cation to claims of the same nature is 1122(b). con- found in unsecured creditors in This permits following portion place in debtor all tained creditors whose 1322(b)(1): specified claims do not a plan may] designate ap exceed court “[The proved purposes amount one class for class unsecured creditors ” (Emphasis sup- administrative convenience. Case un provided in 1122... law permitted prohibition der Act plied). type Neither of unfair of classifi cation of smaller nor the limi- claims for convenience of parties both the 1322(a)(3) permit tation contained in court. See Brock clas- Co., ett v. Terra Cotta provi- sification of claims. Those Winkle F.2d (C.A.8, 1936), re Realty impose Associates sions additional limitations on unse- Security Corp., (E.D. F.Supp. cured claims classification. N.Y., 1943). limitation, 1122(a), The basic found placed may is that claims D. they substantially class if are similar not a model of statuto- other claims of such class. Several itself, ry clarity. the subsection seems provision courts have examined this *6 permit unlimited classification of unsecured under the have Code construed substantial claims so as all claims in each class are similarity legal to mean the nature the “substantially similar other claims ... McKenzie, respective claims. In re 4 B.R. (b), Read with such class.” subsection how- 1980, Creahan, (Bkrtcy.W.D.N.Y., J.); B. ever, (a) prohibition subsection is seen as a Iacovoni, In (Bkrtcy.D.Utah, re B.R. establishing separate of claims J.); Montano, Mabey, B. re In 4 B.R. legal whose nature character are not Whelan, (Bkrtcy.D.D.C.1980, J.); In substantially (b) ex- similar. Subsection Barnes, (D.D.C.1981). re 7 B.C.D. 961 pressly excluded from the limitations of light the is understandable This (a) [“except subsection as sub- notes, state that legislative which (b) section ... it permits designa- Since ”]. the surrounding law “codifies current ease separate tion of a based on the class size requires of claims... It clas- classification claim, (a) the follows subsection of the on the nature claims sification based authority for such classification even H.R.No.95-595, 95th ... classified...” though small claims would to qualify seem 406; S.R.No.95-989, Cong. 1st Sess. “substantially as one similar” to another. Cong. 95th 2nd Sess U.S.Code give (a) meaning In order subsection Cong. pp. & Admin.News relationship (b), to subsection and consistent existing law above,

The case at the time of legislation with the notes cited I Chapters stemmed from X and (a) permits enactment would hold that subsection des- Act; XI of the in general, ignation former these separate class unsecured legal to “the the separate cases looked character or claims when com- class is as quality posed substantially of the claim it relates to the of claims that are dis- G. or character to the legal nature similar claims. In re debtor’s other similar Applying legal the standard of Iacovoni, McKenzie, supra; supra; In re In case, nature facts conclude Montano, Barnes, supra. In re supra; impermissible. classification legal quality character or claims legal short, the same nature claims of entitled to cannot payment full said class. v. in the same Scherk placed must be to that of substantially dissimilar Newton, In re Palisades-On-The- supra; Accordingly, other unsecured claims. Desplaines, supra. 1322(b)(1) 1322(a)(3), violates E. 1122(a) objection confirmation support for construction Further ground upheld. been on this should have section incorporated as into section 1322(a)(3), 1322(b)(1) in section is found same treatment requires

which “the particular class.”

each claim within a superficially

Read placed claims with- require

seems to that all receive the designated

in a class read, however, re-

same treatment. So d/b/a Installa Michael PAYEUR significance because quirement is without Unlimited, Debtor. tions claims treatment of defi- unequal nition classification. Jr., MALONE, Trustee, Thomas F. significance, how- Plaintiff-Appellee, ever, if is read describe the claim “class” Thus, rather than the treatment. Marjorie PAYEUR, al., et A. different treatment for dif- designates Defendants-Appellees, acceptable under ferent only if all 1322(a)(3) standard claims of pro- nature or character are legal the same America, United States vided same treatment. Defendant-Appellant. F. No. 82-9015. permitting construing claims of unsecured when classification Bankruptcy Appellate United States Panel are of all claims within a class First Circuit. for the nature, I am not unmindful same Aug. that support decisions numerous *7 majority by analyzing classification See, alone.

basis of unfair discrimination

e.g. Gay, (Bkrtcy.D.Colo., 3 B.R. 336 Fizer,

1980, Keller, J.); In re 1 B.R. 400 B. Sidman, J.);B.

(Bkrtcy.S.D.Ohio,

Utter, (Bkrtcy.W.D.N.Y., 3 B.R. 369

Hayes, J.) well as cases cited

majority.

However, focusing on the element of discrimination, give these no

unfair cases my

weight opinion, permit does not consideration require- until the

of unfair discrimination

ments of 1122 have been satisfied.