I. INTRODUCTION AND PROCEDURAL POSTURE
This matter is before the court on the Motion to Confirm Second Amended Chapter 13 Plan (the "Plan") of ( "Debtor"). The Motion is objected to by a creditor, (" Allensworth"), whose primary objection is that the Plan has not been proposed in good faith as required by 11 U.S.C. § 1325(a)(3).1 The bankruptcy court has jurisdiction of this
1Section 1325(a) of the Bankruptcy Code sets out six requirements
for Chapter 13 plan confirmation:
(a) Except as provided in subsection (b), the court shall confirm a plan if-
( 1) the plan complies with the provisions of this chapter and with the 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;
(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,
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.
%e feasibility requirement for Chapter 13 plan confirmation appears in subsection (6) of Section 1325(a) cited in footnote 1.
3Section 1325(b)(I) mandates that, in the face of an objection, the court can confirm a non-full payment plan only if "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."
"Disposable income" is defined in section 1325(b)(2) as:
...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. ..; and (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
4Debtor's student loan receives more favorable treatment (repayment outside the Plan) than his other two unsecured creditors. Unlike Allensworth ' s claim, this student loan would not be covered by a Chapter 13 discharge. 11 U.S.C. § 1328(a)(2). This court has not had occasion to determine whether Allensworth' s claim would or would not be dischargeable in Chapter 7. It is very likely, in any event, that real concerns in that regard were part of this debtor's choice of Chapter 13. Debtor readily admits that the sole purpose for filing this case was to avoid litigating Allensworth's fraud claim. See 11 U.S.C. §§ 523(a)(2), (4) and (6).
5Plan payments in months one through four are augmented to a monthly total of$875.00. The source of the additional funds is apparently proceeds of sale of a second sports utility vehicle that was owned by Debtor when the case was filed.
Unlike the quitclaim deed from Allensworth to Debtor's father and that
from Debtor's father to Debtor, the deed from Debtor back to his aunt was
never recorded. This deed was apparently misplaced by Allensworth following
delivery to her, but it has now been produced in its original, unrecorded
state. When confronted with this deed, Debtor admitted having signed it.
In July, 1996, without consulting and unbeknownst to his father and Allensworth, Debtor sold the Downey Property for $210,000, paid off encumbrances against the property, claimed the net proceeds as his own, and never paid Allensworth for her half interest. As a result, Allensworth sued Debtor and his father for fraud in California Superior Court in January, 1999. Father and son have not spoken in years.
Just days prior to trial in the California litigation, Debtor filed this Chapter 13 bankruptcy case. He readily admits the reason this case was filed was to avoid the cost of defending himself in the trial of the California fraud suit. In response to questions on cross-examination by Allensworth, when asked ifhe had interposed any defense in the California litigation, he responded that his only defense was his aunt's delay in suing him. Allensworth filed a claim in this case for a total of$209,617.90, and Debtor has not objected to it.
C. The Standard for Good Faith in Chapter 13 The Tenth Circuit has adopted what it has termed a "middle road" approach to adjudicating objections to the good faith in which a Chapter 13 plan is proposed. In re Flygare, 709 F .2d 1344, 1347 (lOth Cir. 1983). This standard rejects the conclusion at one pole that a plan that fails to make "substantial or meaningful repayment" to general creditors is, necessarily, not proposed in good faith. It also rejects the conclusion at the other pole that if a plan meets the best interest of creditors test of paying as much as general creditors would receive in Chapter 7, it necessarily satisfies the
Chapter 13 good faith requirement. Flygare instructs that the proper analysis requires a case-by- case, facts and circumstances inquiry into whether a plan "abuses the provisions, purpose or spirit ofChapter 13." Id. (quoting In re Estus, 695 F .2d 311 at 315 (81h Cir. 1982). In Flygare, the Tenth Circuit adopts a non-exhaustive list of factors to guide bankruptcy courts in their determination of section 1325(a)(3) good faith on a case-by-case basis.6 Although Flygare predates the amendments to the Code which define disposable inc~me, the Flygare factors remain as guideposts for the courts in deciding whether a plan has. been proposed in good fath ''as well as any other relevant circumstances." Robinson v. Tenantry (In re Robinson), 987 F.2d 665,668 (101h Cir. 1993) (citing In re Rasmussen, 888 F .2d at 704). As the court of appeals observed in a footnote in Robinson:
In re Rasmussen, we recognized that "relevant factors
to the analysis of
good faith after the 1984 amendments include 'whether the debtor has stated his
debts and expenses accurately; whether he has made any fraudulent . misrepresentations to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code."' 888 F.2d at 704 n.3 (quoting Education Assistance Corp. v. Zellner, 827 F.2d 1222,1227 (81h Cir. 1987)).
In re Robinson, 987 F .2d at 668 n. 7.
D. Evidence Relating to Good Faith
In applying this circuit's "totality of the circumstances" test to make a determination of good faith in Chapter 13, the finder of fact must weigh the credibility , motivation, and sincerity of the plan proponent. In re Young, 237 B.R. 791,798 (101h Cir. BAP 1999), affd 237 F.3d 1168 (loth Cir.
6These factors include (1) payment amount; (2) earning
capacity; (3) plan duration; (4) candor and accuracy in disclosing information
to creditors and the court; (5) extent of
preferential treatment between classes; (6) extent of modification of secured claims; (7) extent to which the discharge sought is greater than that available in Chapter 7; (8) special harct..l1ip, such as medical expense; (9) prior utilization of Title 11; (10) motivation and sincerity in seeking Chapter 13 relief; and ( 11) burden on the standing trustee of plan administration.
2001). Only in this way can the bankruptcy court undertake the imposing
task of sorting the honest but unfortunate debtors, for whom Title 11 affords
a fresh start, from those who, in the absence of good faith, manipulate
the system such that denial of relief is appropriate.
Debtor argues that several factors weigh in the balance of finding that his plan is, in fact, proposed in good faith. He has never before availed himself of Title 11 relief. This plan commits payment for the maximum 60 months, not a mere 36. Debtor works an extra part-time job and operates a home business to generate funds for this plan. While the proposed payment to general creditors is approximately a modest 5 percent, it is considerably more than the nominal payment of many Chapter 13 plans that literally give general creditors a few dollars more than nothing, but are confirmed because they pay more than the alternative of a no-asset Chapter 7.
Allensworth counters that these factors, in the totality of the circumstances of this case, are not evidence of good faith, but of astute manipulation of the legal process. Two days before the confirmation hearing, Debtor filed an amendment to his plan, an amended statement of affairs, and amended schedules.7 The amended Plan nearly doubled the distribution to general creditors and extended the Plan from 48 to 60 months. Serious deficiencies in Debtor's schedules and statement of affairs were corrected. However, Debtor came forth with these amendments only after his candor came under serious assault by Allenswoi-th in a June 5, 2001, deposition taken in preparation for the confirmation hearing.
Debtor's deposition of June 5, 2001, revealed the following omissions from his original filings with this Court: a $14,000 payment to his ex- wife during the month before the case was filed;
7Notwithstanding those amendments, Allensworth objected
to the Plan on the same grounds. The court afforded Allensworth the opportunity
to continue the hearing to avoid surprise, but she indicated her desire
to proceed with the hearing as scheduled.
historically generates an average of $1,500 in revenue per month is
belied by his own tax returns and bank statements with which he was confronted
Debtor's cavalier approach to providing the necessary disclosures and his lack of candor with the court and creditors weigh heavily in this court's decision. Perhaps most damaging to Debtor on the issue of good faith, however, is his testimony concerning his aunt's claim and his failure to pay her a portion of the proceeds from the sale of the Downey Property .In the face of overwhelming evidence to the contrary , he insist,ed to the end that he never understood his father's transfer of the Downey Property to him to be anything other than an outright gift of the entire property .He refused to transfer a half interest to his aunt because "that wasn't part of his deal" with his father. He testified that he knew of his aunt's claim to the property at the time he sold it, and he kept the proceeds despite that and despite his father's demand that he pay her for her half interest.8 Throughout his testimony it was apparent that Debtor is without remorse for the pecuniary and emotional damage he has caused members of his family.
Although there has been no determination by a court that the debt owed by Debtor to Allensworth is for fraud or conversion and nondischargeable in a Chapter 7 case, the evidence is clear that Debtor executed a quitclaim deed in favor of his aunt prior to his sale of thepioperty and that he knew ofher claim to the property when he sold it and kept the proceeds. He acted from total self-interest and without regard for others, and continues to do so when he decides what to buy and which creditors to pay.
8 Allensworth testified that when she asked her nephew
why he was withholding from her her interest in the Downey Property , Debtor
replied that he was doing so to get back at his father, and that Allensworth
should look to her brother to make her whole.
The good-faith provision of Bankruptcy Code Section 1325(a)(3) does
not require that a debtor who has made financial and other mistakes must
be condemned to a life of poverty. Nevertheless, the relief of Chapter
13 is not available to those whose use of it would be an abuse of its provisions,
purpose, or spirit. In re Young, 237 F .3d 1168,1177- 78 (lOth Cir. 2001).
The burden ofproofin establishing good faith in proposing a Chapter 13
plan is the debtor's. In re Young, 237 B.R. 791, 799 (loth Cir. BAP 1999);
tiff'd 237 F .3d 1168 (lOth Cir. 2001). On this record, and considering
the fact finder's perGeption of this debtor's credibility, motivation,
and sincerity, it is the court's finding that this plan proponent fails
to carry that burden. The court concludes, therefore, that this Chaper13
plan has not been proposed in good faith and cannot be confirmed under
Bankruptcy Code Section 1325(a)(3).
E. Ability to Make Plan Payments Debtor's proposed plan calls for payments of $235.00 in each of the fifth through sixtieth months. This is to be funded by the difference between proposed monthly revenues of $3,644.00 and monthly expenses of$3,409.00. These projected revenues include $1,500.00 per month from Debtor's home business. Debtor's own records show that projection of revenues from his home business is speculative at best. In 1998, this business made $4,032.00 on gross revenues of$471.00 per month. In 1999, it lost $2,01.1.00 on gross revenues of $778.00 per month. In 2000, it lost $4,664.00 on gross revenues of $881.00 per month. (See Allensworth Exhibit D -Partnership Return, Form 1065; Exhibit E -Schedule C (Form 1040); Exhibit F -Schedule C (Form 1040)). The court finds that Debtor has failed to demonstrate an ability to make future payments under his proposed plan. Accordingly, the Plan cannot be confirmed under Bankruptcy Code Section 1325(a)(6).
For the reasons set forth above, Debtor's Motion to Confirm Second Amended Chapter 13 Plan is DENIED.
Dated: July 27, 2001
BY THE COURT:
A. Bruce Campbell
United States Bankruptcy Judge
9 Debtor has no dependents.