In Re Gathright
- Reporters:
- Before:
- Scholl
OPINION
DAVID A. SCHOLL, Bankruptcy Judge.
The instant case presents the recurrent issue of whether a Chapter 13 Plan by which the Debtor seeks principally to discharge obligations otherwise nondischargeable under
The instant bankruptcy petition and Plan were filed by the Debtor on April 29, 1986. His Schedules included no priority or secured claims, and but seven (7) unsecured claims totalling $9,205.00. Except for a $660.00 obligation owed to Sears, Roebuck and Company, it appears that all of the debts listed are educational loans. Most prominent among these is a debt owed to the objecting party, the Pennsylvania Higher Education Assistance Agency (PHEAA), in the amount of $8,200.00. It is therefore safe to say that the Debtor’s filing of his Chapter 13 case was motivated almost exclusively by a desire to discharge student loan obligations which may have been non-dischargeable in a Chapter 7 case.
The Debtor also attached a Statement of current income and expenses to his papers which disclosed take-home pay of $1,111.00 monthly by the Debtor, $606.00 monthly take-home pay by his wife, and $65.00 monthly “disability,” for a total of $1,782.00 monthly.
The Debtor’s expense sheet stated that he is obligated to pay $150.00 monthly support for two (2) children aged sixteen (16) years and thirteen (13) years, presumably *386 not living with him, and that his present dependents included his wife and three (3) children aged twelve (12) years, seven (7) years, and four (4) years. The expenditures listed for shelter, food, and other necessities by this Debtor, faced with substantial dependents to support, appear, if anything, overly modest. PHEAA nevertheless took issue with the following specific monthly expenses: (1) $133.00 for “auto insurance,” on the ground that this is “excessive” and that the Debtor’s Schedules do not indicate that he owns a motor vehicle; 1 (2) $135.00 for “medical expenses;” and (3) $105.00 for “recreation.” 2
The sum of the Debtor’s listed monthly expenditures is $1,676.00. His Plan, leaving a $6.00 monthly “excess,” proposes payment of $100.00 monthly for thirty-six (36) months, which the Court notes constitutes a dividend of approximately forty (40%) percent to unsecured creditors, including PHEAA.
On September 11, 1986, PHEAA filed Objections to the Confirmation of the Debt- or’s Plan pursuant to
PHEAA responded with a timely and lengthy Brief. After citing a goodly number of the Court of Appeals decisions which address the issue of determining what constitutes “good faith,” per
The Debtor, in response, filed a two-and-a-half page “Memorandum Brief” on October 29, 1986, in which he argued simply, based on three (3) bankruptcy court opinions, that the amendments to the Code effected by the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353 (BAFJA), eliminated any notion that the nature of the Debtor’s obligations was relevant to resolution of the issue of “good faith,” per
Considerable independent research, made necessary by the sparseness of the Debt- or’s Brief, reveals that the Debtor’s position is correct. However, in all fairness to PHEAA, it must be observed that Courts of Appeals in several other Circuits, which this Court is unable to join, have held to the contrary, which renders the Debtor’s rather casual treatment of this difficult and important issue somewhat disturbing.
Our starting point in our reasoning process is the language of
*387 Except as provided in subsection (b), 3 the Court shall confirm a plan if— . . .
(3) the plan has been proposed in good faith and not by any means forbidden by law; . . .
After completing its research, the Court must comment at the outset that perhaps rio provision of the Code has been so widely construed as has been this section and, particularly, its predecessor version, which was even more simply stated, as follows:
(a) The court shall confirm a plan if—
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(3) the plan has been proposed in good faith and not by any means forbidden by law.
Unfortunately, this section has been utilized as a handle by courts who have been unwilling to grasp the element of the complete nature of the Chapter 13 “fresh start” as a means of moralizing upon the circumstances which have brought certain debtors to file bankruptcy. We think it appropriate to state at the outset that such moralizing has little place in a bankruptcy court and no place in a determination as to whether a Chapter 13 plan may be confirmed. In this regard, many courts speak, we think out of turn, as if a debtor’s filing of a bankruptcy to prevent his subjection to the consequences of debts was against the principles of bankruptcy. See, e.g., Matter of Wall, 52 B.R. 613, 616 (Bankr.M.D.Fla. 1985) (court faults debtors because “[t]heir Petition appears to be merely a vehicle to defeat the claims of a judgment creditor”); In re Brock, 47 B.R. 167, 169 (Bankr.S.D. Cal.1985) (confirmation denied because “the fact remains that the Plan itself is an effort to discharge a debt [for embezzlement], which was nondischargeable in Chapter 7, by paying only a small part of the obligation”); and In re Johnson, 36 B.R. 67, 69 (Bankr.S.D.Ill.1984) (debtor found not to have treated creditors “fairly” because she sought to discharge “educational loans that would be non-discharge-able in a straight bankruptcy”). To the contrary, this Court observes that avoiding the consequences of debts, which are usually “just” debts and occasionally acquired in circumstances in which the debtor is morally culpable, is normally the reason for a bankruptcy filing. Many non-bankruptcy courts and, surprisingly, the above bankruptcy courts, appear to have minimized this rather basic principle in the heat of outrage against a particular debtor candidly engaged in a Chapter 13 case to effect a complete “fresh start” by means of a Plan to pay in part even a debt which is nondis-chargeable in a Chapter 7 case. We observe further that “nondischargeable” does not equate with “collectible” and that often the creditor is practically better off with a partial payment under a Chapter 13 plan than he would be if the Chapter 13 case had not been filed.
Clearly, however, Congress meant
something
by the “good faith” requirement of
To obtain a generalized definition of “good faith,” we first turn to BLACK’S LAW DICTIONARY, which states that, while the concept is “intangible and abstract,” it relates principally to
an honest belief, the absence of malice and the absence of design or fraud or to seek an unconscionable advantage, and an individual’s persona; good faith is [sic] concept of his own mind and inner spirit. . . . Id. at 63 (5th ed. 1979).
Our local Court of Appeals, construing the term “good faith” in the context of the Bankruptcy Act, stated that
Good faith imports an honest intention on the part of the petitioner, . . . whether it was reasonable to expect that a plan could be effected; that there was opportunity and need for reorganization; and that the petition was filed with the honest intention of effecting it.... In re Business Finance Corp., 451 F.2d 829, 834 (3d Cir.1971) (quoting In re Julius Roehrs Co., 115 F.2d 723, 724 (3d Cir.1940)).
See also, e.g., Snyder v. Fenner, 101 F.2d 736, 738 (3d Cir.1939).
A historical analysis causes Judge Norton, in one of the earliest Code cases construing
Two elements seem inherent in “good faith” with respect to the debtor’s responsibilities in proposing a plan, to wit: (1) honesty in purpose, and (2) full disclosure of relevant facts....
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Thus, good faith as used inSection 1325(a)(3) means full and complete disclosure and honesty of purpose by the debt- or to consummate the payments proposed in the plan.
Similarly, the District of Columbia Court of Appeals concludes, in Barnes v. Whelan, 689 F.2d 193, 198 (D.C.Cir.1982), that “good faith” under the Code, as under the Act, refers to “debtor misconduct in the implementation or approval of the plan, and did not relate to the contents of the plan.” See also, In re Street, 55 B.R. 763, 765 (9th Cir.Bankr.App.1985); In re Slade, 15 B.R. 910, 912 (9th Cir.Bankr.App.1981); and In re Prine, 10 B.R. 87, 89-90 (Bankr.D.Idaho 1981). We particularly agree with the following observations of the Court in Prine:
If it is bad faith to utilize the discharge right, is it bad faith for a debtor to file a Chapter 13 plan for the sole purpose of extending his tax liability, or to file for the sole purpose of using the cram down provision on a secured creditor. All of these, seem to me, to be legal remedies granted by Congress which the Courts should not deny by judicial fiat.
Despite the clarity of these sentiments, many courts initially interpreted
In this Circuit, the only Code decision in the “good faith” arena is
In re Hines,
723 F.2d 333 (3d Cir.1983), where the Court thankfully resisted the “laundry-list” approach and simply stated that “Chapter 13 plans providing for nominal repayments to unsecured creditors do not, for that reason, violate the good faith standard of
At the opposite end of the spectrum of pre-BAFJA decisions is
In re Estus,
695 F.2d 311, 317 (8th Cir.1982), in which the court produced the following eleven-item laundry-list of factors which should be considered in a
(1) the amount of the proposed payments, and the amount of the debtor’s surplus;
(2) the debtor’s employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan’s statements of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debt- or has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and
(11) the burden which the plan’s administration would place upon the trustee.
Unfortunately, several other Courts of Appeals adopted the Estus laundry-list in toto. See Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir.1983); and In re Kitchens, 702 F.2d 885, 888-89 (11th Cir.1983). Other courts developed their own shortened-version laundry-lists. See Deans v. O’Donnell, 692 F.2d 968, 972 (4th Cir.1982); and In re Rimgale, 669 F.2d 426, 432-33 (7th Cir.1982).
One reason that we believe that this approach was unfortunate was that it caused the courts to address elements which are properly dealt with under separate provisions of the Code and should not be brought into the consideration of whether the
Thus, it is submitted that factors (1), (2), (3), (5), (6), (7), (8), (9), (11) and probably (10) of the
Estus
laundry list should have no place whatsoever in a
Similar comments can be made about the
Deans
laundry list.
6
The first, second, third and fourth factors are presently covered by
We also disagree totally with the statements in Memphis Bank and Trust Co. v. Whitman, 692 F.2d 427, 432 (6th Cir.1982), that the debtor’s dishonesty in acquiring his debts, as opposed to his dishonesty in proposing his plan to liquidate those debts, is a proper consideration in determining the Chapter 13 debtor’s “good faith.”
We share the belief, with the courts in In re Greer, 60 B.R. 547, 554 (Bankr.C.D.Cal.1986); In re Red, 60 B.R. 113, 115-16 (Bankr.E.D.Tenn.1986); and with 5 COLLIER, supra, ¶ 1325.04[3], at 1325-17, that the BAFJA amendments restrict the element of “good faith” to the traditional concept of “serious debtor misconduct or abuse.” An unfortunate by-product of the laundry-list approach is that it permits courts to reach results consistent with Whitman, as in Neufeld v. Freeman, 794 F.2d 149, 150, 153 (4th Cir.1986) (following Deans, supra, court persists in considering prior filings and honesty of debtor in acquiring debts in 1325(a)(3) analysis despite enactment of BAFJA); and In re Todd, 65 B.R. 249, 252-56 (Bankr.N.D.Ill.1986) (following Rimgale, supra, and Estus, supra, the Court considers “duration of the plan,” holding more than three (3) year plan may be necessary; and that the extent of preferential treatment among classes of creditors and whether the debt would be dis-chargeable in a Chapter 7 case are relevant considerations).
PHEAA, in its Brief, contends that the Court has adopted the “substantial repayment approach” in such student loan cases
*391
as
In re Miller,
24 B.R. 786 (Bankr.E.D.Pa.1982) (per GOLDHABER, CH. J.);
In re Goth,
24 B.R. 122 (Bankr.E.D.Pa.1982) (per KING, J.);
In re Adger,
23 B.R. 741 (Bankr.E.D.Pa.1982) (per KING, J.); and
In re Mitruka,
19 B.R. 516 (Bankr.E.D.Pa.1982) (per GOLDHABER, CH. J.). To the extent that this observation is accurate, it should be noted that these decisions were all rendered in 1982 and that this approach was specifically rejected by the subsequent Court of Appeals decision in
Hines,
which we obviously are bound to follow. Further, these decisions pre-dated the BAFJA amendments, and the elements which this Court deemed relevant would, at present, be mooted by (in the factual pattern of
Mitruka),
or be within the scope of,
We would also make two (2) other points which militate strongly against PHEAA’s argument that the fact that the Debtor is seeking to discharge student loans in his bankruptcy should result in finding that his Plan lacked the requisite “good faith” under
Therefore, we conclude that the fact that the Debtor here seeks to discharge almost exclusively student loan obligations by means of his Chapter 13 bankruptcy does not render the Plan, for that reason, subject to attack under
PHEAA has, however, also challenged the Debtor’s Plan on the ground that it fails to meet the
However, we do believe that, considering this Plan as we would any other where
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Nevertheless, we recognize that, here, the possibility does exist that, enlightened by. this Opinion, Counsel for PHEAA, whose cooperation with opposing counsel has always been exceptional, will not wish to pursue
Notes
. The Court notes that, far from being excessive, a $2,000.00 annual auto insurance premium is quite reasonable for an individual residing at the inner-city Philadelphia address of the Debt- or, which is approximately seven (7) blocks from the present residence of the Court, whose own annual insurance premium exceeds this amount. PHEAA’s Counsel, being from Harrisburg, can be excused for this misunderstanding on his part. We can certainly conceive of a reason why no motor vehicle is listed; probably the family car is exclusively in the name of the Debtor’s wife. However, our speculation does not resolve this issue, and hence the Court believes that a hearing is necessary.
. Actually, in the Objections per se, as opposed to its Brief, PHEAA excepted only to the “recreation” expenditure. We shall, however, consider all of the issues raised by PHEAA in its Brief as Amendments to its Objections.
.
(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor‘s projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
(2) For purposes of this subsection, “disposable income” means income which is received by the debtor and which is not reasonably necessary to be expended—
(A) for the maintenance or support of the debtor or a dependent of the debtor; or
(B) if the debtor is engaged in business, for the continuation, preservation, and operation of such business.
. This section is quoted in full at page 387 n. 3 supra.
. See In re Gronski, 65 B.R. 932 (Bankr.E.D.Pa.1986), where we held that HEAL loans were an exception from a general Chapter 13 discharge. Thus, dischargeability of this type of educational loan is extremely limited, even for debtors filing under Chapter 13.
. The Deans court cites the following factors, 692 F.2d at 672, which include the numbers adopted by this Court in the following discussion:
[1] Failure to provide substantial repayment. . . .
[2] the debtor‘s financial situation,
[3] the period of time payment will be made,
[4] the debtor’s employment history and prospects,
[5] the nature and amount of unsecured claims,
[6] the debtor’s past bankruptcy filings,
[7] the debtor’s honesty in representing facts,
[8] any unusual exceptional problems facing the particular debtor.
.Beaver appears to have been effectively overruled in any event by the Ninth Circuit‘s decision in Goeb, supra, and is inconsistent with the Circuit’s Bankruptcy Appeal Panel decisions in Street, supra, and Slade, supra.
. We do not address the subject of who has the “burden of proof’ at a confirmation hearing. Bankruptcy Rule 3020(b)(2), the only known source addressing the point, seems to say only
*392
that the