In Re Burrell
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- Before:
- Ingram
MEMORANDUM OF DECISION
INGRAM, District Judge.
This appeal from a decision of the bankruptcy court addresses the standards for confirmation of a plan for the adjustment of a wage earner’s debts under Chapter 13 of the Bankruptcy Act of 1978,
The debtor has proposed a Chapter 13 plan that would allow his discharge if, within three years, he pays each of his unsecured creditors fifteen cents on each dollar of allowed debt. That amount exceeds what would have been realized under a Chapter 7 liquidation in bankruptcy,
The standards governing Chapter 13 plans are set forth in
(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;
*362 (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.
The bankruptcy court found that the debtor’s plan met “all of the express statutory requirements of confirmation.”
Supra,
at 651. Specifically, the court found that the debtor would be able to make all payments under the plan and that he would be able to comply with it, that the unsecured creditors would receive more under the plan than would be available in a Chapter 7 liquidation, and that the plan represented “the debtor’s best effort, i. e., that the amount and term of payments are the greatest the debtor can reasonably pay.”
Id.
at 651. The court did not
specifically
find that the plan had been proposed in “good faith” within the meaning of
The court rejected the debtor’s plan because it interpreted
There is no express, statutory requirement that plans propose substantial payments on unsecured claims, nor any provision of Chapter 13 that defines substantial as being at least 70% of such claims. I have concluded that it is necessary to read such a requirement into [§ 1325(a) ] on the basis that failure to do so will frustrate the objectives of Congress and lead to absurd results considering Chapter 13 within the Bankruptcy Code as a whole.
Supra, at 651.
The court reasoned that absurd results would follow if a Chapter 13 plan does not provide for substantial payment to unsecured creditors. Each of the stated reasons involves a comparison of Chapter 13 with Chapter 7. In making these comparisons, the court concluded that Congress in expanding the scope of Chapter 13 in 1978 gave the Chapter 13 debtor many advantages denied to the Chapter 7 bankrupt. The Chapter 13 debtor may obtain a discharge even though he has committed acts that would bar discharge under Chapter 7; similarly, he can complete the plan and obtain discharge of particular debts, such as fraud judgments, that are excepted from Chapter 7 discharge. Under the pre-1978 Chapter XIII, the debtor’s creditors had the power to reject a plan. After the 1978 revision, however, their assent is no longer required; the court may confirm a plan over their objection. The bankruptcy court concluded that Congress must have intended to restrict the benefits of Chapter 13 to *363 those cases where the debtor proposes to make substantial payments to his unsecured creditors. Both literally and figuratively, the debtor has to pay a price for the benefits of Chapter 13.
[[T]he] departures from former Chapter XIII are so striking that one assumes they would only apply in cases in which the plan proposes to pay creditors in full or at least in substantial part and even then only if the plan as proposed is a good faith effort to pay creditors the greatest amount that can reasonably be expected.
Supra, at 652. Implicit in the court’s reasoning is the fear that a liberal reading of the provisions of Chapter 13 will allow an undeserving debtor unable to make substantial payments to his creditors to circumvent the express limitations of Chapter 7 by allowing that debtor to obtain the broader benefits of Chapter 13 with what should be a Chapter 7 case. In order to harmonize the chapters, the bankruptcy court concluded that a debtor who wishes to avail himself of Chapter 13 will have to make provision for substantial payments to his unsecured creditors, even though those creditors would have received less from the debtor in a straight bankruptcy.
The court found further support for its interpretation in the hardship discharge provision of § 1328(b). Under this section, a debtor may be relieved from his Chapter 13 plan if his failure to complete the payments is “due to circumstances for which the debtor should not justly be held responsible.” As the court noted, however, such a debtor obtains only the narrower discharge provided by Chapter 7. Implicitly, the court reasoned that Congress contemplated that the debtor who obtains the broader discharge afforded by § 1328(a) must do something more than the hardship debtor: he must make substantial payments to his unsecured creditors. If a no-payment plan were sanctioned, for example, there would be no need for the hardship discharge provision; such a plan would be completed the moment it is confirmed. “Such a disparity of treatment makes sense only if the section 1328(a) discharge is limited to plans that are both substantial and represent the debt- or’s [best] effort.” Supra, at 652.
The debtor argues that
What the debtor’s argument overlooks, however, is the requirement of
The bankruptcy court examined the legislative history of the 1978 Act and concluded:
Congress intended to encourage full payment Chapter 13 plans and substantial partial payment plans. Nothing in the reports suggests any intention on the part of Congress to encourage nominal partial payment plans.
Supra, at 652. (emphasis in original). While the Chapter 13 legislative history may be limited, it clearly shows that Congress viewed Chapter 13 as an alternative to straight bankruptcy only when the debt- or could reasonably have been expected to be able to pay his debts in full or in substantial part. The Senate report stated:
In theory, the basic purpose of Chapter XIII has been to permit an individual to pay his debts and avoid bankruptcy by making periodic payments to a trustee *364 under bankruptcy court protection, with the trustee fairly distributing the funds deposited to creditors until all debts have been paid . . . The new chapter 13 will permit almost any individual with regular income to propose and have approved a reasonable plan for debt repayment based on that individual’s exact circumstances. As in current law, 100 percent payment plans will be encouraged . It is also necessary to prevent chapter 13 plans from turning into mere offers of composition plans under which payments would equal only the non-exempt assets of the debtor.
S.Rep. No. 989, 95th Cong., 2d Sess. 12, 13 (1978), reprinted in [1978-5] U.S.Code Cong. & Admin. News, pp. 5787, 5798.
The Senate report shows that even as Congress sought to make the liberal provisions of Chapter 13 more widely available, it did not intend to change the basic nature of a Chapter 13 proceeding. Nowhere in the legislative history that accompanied the amendments did Congress purport to change the settled rule that a Chapter XIII plan should result in a substantial payment of debts. Congress must be presumed to have known that the Supreme Court had interpreted Chapter XIII in just such a manner when it held:
In designing a remedy for the dilemma facing a debtor seeking to repay, rather than avoid, his obligations, the Congress settled upon the wage-earner extension-of-term procedures of Chapter XIII. The chapter gave-and was intended to give-to the wage earner a reasonable opportunity to arrange installment payments to be made out of his future earnings. Congress clearly intended to encourage wage earners to pay their debts in full, rather than to go into straight bankruptcy or composition, by offering two inducements: (1) avoidance of an adjudication of bankruptcy with its attendant stigma; and, at the same time, (2) temporary freedom during the extension from garnishments, attachments and other harassment by creditors.
Perry v. Commerce Loan Co., 383 U.S. 392, 395, 86 S.Ct. 852, 854, 15 L.Ed.2d 827 (1966). See also Matter of White Birch Park, Inc., 471 F.Supp. 159, 165 (E.D.Mich.1979) (“The purpose of Chapter XIII is to provide a vehicle for relief and for rehabilitation to persons dependent upon their earnings from personal services to effectuate a composition with creditors, or to procure extensions of time to pay debts, or both.”)
Previously, Congress had conditioned the right of a debtor to proceed under Chapter XIII on obtaining the approval of the creditors. This was often recognized by the courts.
The objective of Chapter 13 . . .is to furnish a method by which persons dependent upon their earnings from personal services can effectuate a program whereby they will be given an extension of time to pay their debts, on the condition that the program is acceptable to a majority of the creditors.
In re Teegarden, 330 F.Supp. 1113, 1114 (E.D.Ky.1971). See also In re Hendren, 240 F.Supp. 807, 808 (S.D.Ohio 1965).
Having eliminated the creditors’ veto right in the 1978 revision, Congress cannot lightly be held to have removed the major remaining protection accorded to those creditors, that is, the requirement of full or substantial payment. If Congress had intended to abolish the substantiality requirement, it could have done so unambiguously. Because it did not, this Court must conclude that no change was intended.
The majority of bankruptcy judges who have interpreted the “good faith” language of
reveals that the proponents of the Chapter 13 provisions intended and projected that a substantial amount would be paid out under all proposed plans. In citing the reasons for the changes to be made in *365 the Chapter 13 provisions, the House Report criticized the former Chapter XIII as being “overly stringent and formalized” which “discouraged overextended debtors from attempting to arrange a repayment plan under which all creditors are repaid most, if not all, of their claims over an extended period.” H.R.Rep. No. 95-595, at 117, U.S.Code Cong. & Admin. News [1978], p. 6077. Thus, in reworking the Chapter 13 provisions, proponents were attempting to produce a medium for repayment of “most, if not all” of the claims against the debtor.
Id. at 266, 5 BCD at 1276. Similarly, the court in In re Beaver, 2 B.R. 337, 339, 5 BCD 1285, 1286 (Bkrtcy S.D.Cal.1980), reasoned that “[l]osses to creditors otherwise accruing in a liquidation were seen [by Congress] as being significantly reduced in a Chapter 13 setting.” Concluding that a plan under Chapter 13 must be a “meaningful attempt to come to terms with creditors,” the Beaver court interpreted good faith to mean not just simple honesty, but as “a fundamental fairness in dealing with one’s creditors.” Id. at 340, 5 BCD at 1287. See also In re Powell, 2 B.R. 314, 5 BCD 1233 (Bkrtcy E.D.Va.1980); In re Campbell, 3 B.R. 57, 5 BCD 1365 (Bkrtcy S.D.Cal.1980); In re Howard, 3 B.R. 75, 5 BCD 1375 (Bkrtcy S.D.Cal.1980).
Given the legislative history accompanying the 1978 amendments, the prior caselaw, and the recent cases interpreting the good faith requirement of
The Court, however, does not endorse the bankruptcy court’s holding that good faith can be found only if the debtor proposes to pay 70% of the allowed unsecured claims and if the plan represents his best effort. The legislative history provides no support for the argument that Congress intended to incorporate into the confirmation standards of
Because the language of
This Court holds that the bankruptcy court correctly concluded that a Chapter 13 plan requires that substantial payments be made to unsecured creditors and that such payments form a component of the good faith element of
Because the bankruptcy court failed to exercise proper discretion in this case, the case must be remanded for that court to determine in the first instance whether the debtor has offered his plan in good faith. This Court is unwilling to say as a matter of law that the 15% payments proposed here are insubstantial, although the bankruptcy court may well reach such a conclusion. This Court holds only that the bankruptcy court cannot sua sponte impose its own inflexible standards.
The case is reversed and remanded for proceedings not inconsistent with this decision.