Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-01514/USCOURTS-caed-2_09-cv-01514-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

SCOTT BROOKS, No. 2:09-cv-01514-MCE 

Appellant,

v. MEMORANDUM AND ORDER

FOSTER L. BROOKS and 

TERESA R.L. BROOKS,

Appellees.

----oo0oo----

Appellant Scott Brooks (“Scott”) appeals the Bankruptcy

Court’s order in favor of Foster L. Brooks (“Foster”) and Teresa

R.L. Brooks (collectively “Debtors” or “Appellees”). Pursuant to

its oral decision on May 4, 2009 and subsequent written order on

June 2, 2009, the bankruptcy court granted the Debtors’ motion to

confirm their first amended Chapter 13 plan. For the reasons set

forth below, the bankruptcy court’s order will be affirmed.

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2

BACKGROUND

Around 2001, Scott Brooks offered his brother, Foster

Brooks, a job as manager of two car washes he owned, including

Dribbles Carwash, Inc. (“Dribbles Carwash”) in Manteca,

California. Foster accepted the offer and was later granted a

ten percent ownership interest in Dribbles Carwash. Around 2004,

the employment relationship between the brothers ended. 

On October 19, 2005, Foster filed a lawsuit in San Joaquin

County Superior Court alleging wrongful termination and other

claims against Scott, Scott’s wife, Sherry Brooks, and Dribbles

Carwash. Scott subsequently filed a cross-complaint for

defamation and other related causes of action. The state court

action remains ongoing. 

On August 22, 2008, Foster and Teresa Brooks filed a petition

for bankruptcy under Chapter 13. They concurrently filed a

proposed Chapter 13 plan. Among the debts Appellees sought to

discharge through the proceeding was any debt owed to Scott. The

schedules submitted along with the initial reorganization plan did

not list the state court lawsuit as an asset despite the fact that

Appellees believed it had substantial value. 

On October 15, 2008, Scott filed an objection to the

proposed plan and at the November 10, 2008 hearing, the

bankruptcy court denied plan confirmation for failure to include

the lawsuit as an asset. 

On February 24, 2009, Appellees filed an amended plan which

included the lawsuit and in which they promised to pay their

unsecured creditors in full. 

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 The bankruptcy court found that the Debtors failed to 1

properly take such interests into account because they improperly

placed no value on their lawsuit. 

 This designation refers to Appellant Scott Brook’s Excerpt 2

of Record on Appeal, filed concurrently with Appellant’s Opening

Brief on September 22, 2009.

3

As a funding source for those payments, Appellees cited their

potential recovery from the pending state court litigation, and

placed a value on that lawsuit of $750,000.00. Scott filed an

opposition to the amended plan. On May 4, 2009, the court orally

granted Appellees’ motion to confirm their amended plan even

though the unsecured creditors would receive nothing under the

plan unless the Debtors prevailed in their ongoing state court

action against Scott and Sherry Brooks and Dribbles Carwash.

During the course of the May 4th hearing, the bankruptcy

court explained that Appellee’s initial plan confirmation failed

largely because of non-compliance with 11 U.S.C. § 1325(a)(4),

which requires that debtors meet the so-called “best interest of

the creditors” test. The court concluded that defect was cured 1

by the amended plan which listed Appellees’ lawsuit as an asset

of the bankruptcy estate.

The bankruptcy court went on to reject Scott’s other

objections concerning the nature and status of the state court

litigation, specifically stating that it declined to “make any

findings or conclusions” with respect to that litigation. ER at

429. 

2

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The Court noted that if Appellees “do not [prevail], or if they

do but do not obtain enough to pay all the creditors in full

within 60 months, this bankruptcy case will be dismissed and they

will not receive a Chapter 13 discharge unless they obtain the

necessary funds from some other source.” Id. 

The bankruptcy court further described Scott’s strategy as a

“transparent” attempt to “convince the court that the debtors’

litigation has a poor chance of success, get the case converted

to Chapter 7 then convince a Chapter 7 trustee to accept a fairly

nominal settlement like the one recently offered to the debtors.” 

Id. The court declined to proceed in that fashion, stating that

an “accurate evaluation of the litigation in this court is not

possible...the best method of liquidating the claim is to allow

it to go forward in state court.” Id.

The court further clarified in its June 2, 2009 Memorandum

that Class 7 unsecured creditors will receive a payment only if

the debtors recover on their claim against Scott. Such creditors

stand to obtain nothing, however, in the absence of such

recovery. 

Scott now appeals the bankruptcy court’s decision. 

STANDARD

An appellant may petition the district court for review of a

bankruptcy court’s decision. Fed. R. Bankr. P. 8013. The

applicable standard of review is identical to that employed by

circuit courts of appeal in reviewing district court decisions. 

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See Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441

(9th Cir. 1997). Legal conclusions are reviewed on a de novo

basis, and factual determinations are assessed pursuant to a

“clearly erroneous” standard. Murray v. Bammer (In re Bammer),

131 F.3d 788, 792 (9th Cir. 1997) (en banc).

Findings of fact are “clearly erroneous” only if the

reviewing court is “left with the definite and firm conviction

that a mistake has been committed.” In re Marquam Inv. Corp.,

942 F.2d 1462, 1466 (9th Cir. 1991) (quoting United States v.

United States Gypsum Co., 333 U.S. 364, 395 (1948)). “A finding

is ‘clearly erroneous’ when although there is evidence to support

it, the reviewing court on the entire evidence is left with a

definite and firm conviction that a mistake has been committed.” 

Anderson v. Bessemer City, 470 U.S. 564, 573 (1985) (quoting

United States Gypsum Co., 333 U.S. at 395). “If the bankruptcy

court’s account of the evidence is plausible in light of the

entire record viewed, it must be upheld even though we might have

weighed the evidence differently had we been sitting as the trier

of fact.” In re Forbes, 215 B.R. 183, 187 (8th Cir. BAP 1997)

(citing Anderson, 470 U.S. at 573-74). 

“Whether property is included in the bankruptcy estate is a

question of law.” Ramsay v. Dowden (In re Central Arkansas

Broad. Co.), 68 F.3d 213, 214 (8th Cir. 1885). “Chapter 13 plan

confirmation issues requiring statutory interpretation are

subject to de novo review.” Hagel v. Drummond (In re Hagel), 184

B.R. 793, 795 (9th Cir. BAP 1995).

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 In its June 2, 2009 Memorandum, the bankruptcy court 3

clarified that the amended plan be further changed to reflect

that the unsecured creditors would not receive “100 percent” but

would receive a dividend of whatever amount the Debtors receive

from the state court lawsuit. 

6

The appellant has the burden of proof in convincing the

reviewing court that such error has been committed, and the

reviewing court should not reverse simply because another

decision could have been reached. In re Windsor Indus., Inc.,

459 F. Supp. 270, 275 (N.D. Tex. 1978).

ANALYSIS

Scott argues there are three reasons why the bankruptcy

court erred in its confirmation of the amended plan. According

to Scott, the Debtors’ amended plan fails the best interest of

the creditors test, the feasibility requirement, and the good

faith requirement. These tests are codified in 11 U.S.C.

§ 1325(a)(4), 11 U.S.C. § 1325(a)(6), and 11 U.S.C. § 1325(a)(3),

respectively. 

A. The Debtors’ Amended Plan Satisfies the “Best Interest

of the Creditors” Test. 

Scott contends that “Debtors’ promise to pay their unsecured

creditors 100 percent is based solely on their hope and

speculation that they will recover sufficient funds from the

state court lawsuit to do so.” Opp. Br. 13:6-9 (internal 3

quotations omitted). 

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7

Scott argues that because the Debtors failed to show they have

any ability to actually pay their creditors 100 percent, or in

fact, anything, the plan fails the best interest of the creditors

test. In addition, Scott alleges that the Debtors have failed to

act in the best interest of the creditors because Scott offered

$35,000 to settle. Scott states that this offer would have

produced a dividend to the unsecured creditors and that

consequently those creditors would have received something. On

the other hand, according to Scott, they stand to receive nothing

under the Debtors’ amended plan unless a recovery is made. Opp.

Br. 13:17-23. 

The bankruptcy court must assess whether a Chapter 13

proposed plan provides general unsecured creditors with at least

as much as they would receive under a hypothetical Chapter 7

liquidation case. 11 U.S.C. § 1325(a)(4). The statute

specifically provides that a court shall confirm a plan if: 

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.

 

11 U.S.C. § 1325(a)(4). To make such a determination, the court

must consider the liquidation value of the estate’s assets. In

re Beck, 309 B.R. 340, 353 (Bankr. N.D. Cal. 2004); In re Klein,

57 B.R. 818 (9th Cir. BAP 1985). 

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8

Therefore, in performing the best interest of the creditors test,

a “comparison is made between 1) the value of the property which

unsecured creditors are to receive under the debtor’s proposed

plan or postconfirmation plan modification, and 2) the net value

of unencumbered nonexempt property which would be distributed to

those creditors under a hypothetical Chapter 7 liquidation of the

debtor’s estate.” In re Forbes, 215 B.R. at 189. “The focus of

the ‘best interests of the creditors’ analysis rests upon a

hypothetical distribution to unsecured creditors under Chapter

7.” Id. at 190. 

Code Section 541 instructs the liquidation inquiry, guiding 

what should be included in the estate. Id. Section 541(a)(1)

specifically includes as property of the estate, “all legal and

equitable interests of the debtor in property.” 11 U.S.C.A.

§ 541(a)(1). This phrase has been interpreted as sufficiently

broad to include causes of action which are in existence as of

the petition date. In re Forbes, 215 B.R. at 190; In re Central

Arkansas Broad. Co., 68 F.3d at 214. Moreover, the “conditional,

future, speculative, or equitable nature of an interest does not

prevent it from being property of the bankruptcy estate.” 

Affiliated Computer Sys., Inc. v. Sherman (In re Kemp), 52 F.3d

546, 550 (5th Cir. 1995). See also, e.g., In re Pendleton, 225

B.R. 425 (Bankr. E.D. Ark. 1998) (exempt proceeds from the

debtors’ personal injury settlement must be characterized as

disposable income under § 1325(B)(2) and therefore must be

included in the plan). 

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9

The amended plan satisfies the best interest of the

creditors test because, as the bankruptcy court noted, the

amended plan provides that should the Debtors recover any money

from the state court litigation, that recovery will become part

of the estate, with any monies received being distributed to

unsecured creditors. ER at 441. 

In his Memorandum of Points and Authorities in Support of

Objections to the [Original] Chapter 13 Plan, Scott initially

argued that the “State Court Litigation is an asset of the

estate, and the Debtors are required to use good faith efforts to

assign a value to it.” ER at 97. Appellees thereafter complied

with the November 10, 2008 bankruptcy order and responded to

Scott’s contention that the litigation be included. When

Appellees assigned such a figure and included it in the schedule,

finding that the unsecured debtors be paid 100 percent, Scott

argued that the percentage was incorrect, although he went on to

indicate that he had no conceptual problem with respect to the

recommended plan. ER at 442. 

This Court agrees with the bankruptcy court’s conclusion

that Scott’s actions appear to evince an attempt to get

Appellee’s Chapter 13 plan rejected, thereby causing the Chapter

13 proceeding to be converted into a Chapter 7 proceeding and

compelling the Chapter 7 trustee to accept a settlement offer in

the state court proceeding against Scott. ER at 429. The

Appellees have, however, complied with the requirements of both

the statute and the bankruptcy court’s orders. 

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10

Moreover, at its May 4, 2009 hearing and in its subsequent order,

the bankruptcy court clarified that unsecured creditors would

receive a dividend only if the Debtors recover from their ongoing

state litigation. ER at 467. As stated above, the court went on

to make it clear that Appellees’ debt would not be discharged

even if the amounts paid to the unsecured creditors could not be

financed through proceeds obtained from Appellees’ lawsuit. 

Therefore, following a de novo review of this matter, the

Court concludes that Debtors’ Chapter 13 plan met the best

interests of creditors requirement for confirmation, even though

the payments included a potential award from a pending lawsuit.

B. The Debtors’ Amended Plan is Feasible. 

Scott further argues that the bankruptcy court erred because

the Debtors’ amended plan is not feasible. Scott again

reiterates that their amended plan is based on a “large

litigation recovery” which is “pure speculation.” Opp. Br.

16:23-24. 

Pursuant to 11 U.S.C. § 1325(a)(6), a court should not

confirm a plan unless the court finds that the debtor will be

able to make all payments under the plan and to comply with the

plan. 11 U.S.C. § 1325(a)(6). This requirement goes to the

feasibility of the plan. In re Gavia, 24 B.R. 573, 574 (9th Cir.

BAP 1982). “[T]he feasibility test as applied under the

Bankruptcy Act...requires a court to be satisfied that the debtor

has, not only the present ability, but the future ability to

comply with the proposed plan.” 

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In re Hockaday, 3 B.R. 254, 255 (Bankr. S.D. Cal. 1980). To

satisfy this requirement, the court must make a “thorough review

of the debtor’s financial picture.” Id. 

As stated previously, the amended plan provides for payment

to the unsecured creditors should the debtors recover from the

litigation. However, the bankruptcy court specifically held that

“the plan’s feasibility does not hinge on the likelihood of

success in the litigation.” ER at 429. In fact, it stated that

“[i]f unsuccessful, [the Debtors] will not receive a discharge

because they are nonetheless obligated to pay creditors in full.” 

Id. 

Therefore, the bankruptcy court found that “the plan’s

feasibility hinges on the debtors’ financial ability to move

forward with that litigation” and that Debtors made an adequate

showing that the state court action will continue to be funded. 

Id. Mary Rose Garbiso, the mother of Debtor Terry Brooks, stated

in her declaration that she plans to continue to provide

assistance to the Appellees so that the litigation can move

forward. Scott objects to the court’s reliance on Debtor’s

mother to finance the lawsuit. However, “[w]hen there are two

permissible views of the evidence, we may not hold that the

choice made by the trier of fact was clearly erroneous.” In re

LeMaire, 898 F.2d 1346, 1349 (8th Cir. 1990). “Even greater

deference is required where factual findings call for an

assessment of witness credibility, and no documents or objective

evidence contradict the testimony.” In re Central Arkansas

Broad. Co., 68 F.3d at 215. 

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12

Here, the bankruptcy court reached its determination on

feasibility after reviewing the declaration of the Debtor’s

mother and further documentation of her commitment to fund the

lawsuit as proof that the litigation will continue. 

Further, at the hearing on April 6, 2009, the bankruptcy

court specifically rebutted Scott’s claim that the tentative

ruling approving the plan bypassed the issue of feasability,

explaining that no one can guarantee the outcome of litigation. 

ER at 408. Scott argued at the hearing and continues to contend

that including the lawsuit is like having a debtor’s plan hinge

on the proposed sale of property or be dependent upon gambling

winnings. Opn. Br. 16:6-11 and 17:6-14 (citing In re Hogue, 78

B.R. 867 (Bankr. S.D. Ohio 1987) and In re Cushman, 263 B.R. 293

(Bankr. W.D. Mo. 2001)). The Debtors here, however, have not

only included the lawsuit in their plan, they have also placed an

estimated value on their potential recovery. As indicated above,

this is not only permissible, but required in instances of

Chapter 13 plan confirmation. Including the lawsuit is

distinguishable from speculative winnings from gambling or gains

to be acquired from a proposed sale of property. As the

bankruptcy court clarified: “any time a debtor has an

unliquidated claim, they’re entitled to pursue it and the fact

that they can’t make assurance that they’re going to win doesn’t

mean you can’t confirm the plan.” ER at 409. Additionally, as

the bankruptcy court noted, Appellees’ reliance on their

litigation against Scott does not extend to all claims, but

rather only to those involving unsecured creditors. 

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Under those circumstances, the Court finds it was reasonable for

the plan to include a repayment plan should the Debtors’ lawsuit

produce a recovery.

Thus, in light of the foregoing discussion, it was not error

for the bankruptcy court to find the amended plan met the

feasibility requirement pursuant to Section 1325(a)(6).

C. The Debtors’ Amended Plan was Proposed in Good Faith.

Scott contends that the Debtors proposed their amended plan

in bad faith for two reasons. First, the Debtors “failed to

provide any evidence that their lawsuit has a value of $750,000.” 

Opp. Br. 23:2-3. Second, “the complete turnaround between

Debtors’ original plan offering nothing to unsecured creditors -

and their amended plan - promising at least 100 percent to their

unsecured creditors - is in bad faith...” because there was no

change in the Debtors’ financial abilities. Opp. Br. 23:6-8. 

Pursuant to 11 U.S.C. § 1325(a)(3), a Chapter 13 plan that

is confirmed must be submitted by the Debtors in good faith. The

term “good faith” is not defined. Nor does the legislative

history provide any guidance as to the term’s meaning. In re

Warren, 89 B.R. 87, 90 (9th Cir. BAP 1988). In reviewing a

bankruptcy court decision on good faith, this Court has an

independent duty to make a reasoned assessment of the debtor’s

good faith. Id. (citing In re Hale, 65 B.R. 893, 897 (Bankr.

S.D.Ga. 1986)). Although no definition per se has been provided,

the Ninth Circuit has articulated guidelines on what should be

considered. 

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It has noted that bankruptcy courts should determine good faith

on a case-by-case basis. In re Goeb, 675 F.2d 1386, 1390 (9th

Cir. 1982). The Court has also noted the proper inquiry as

including “whether the debtor has misrepresented facts in his

plan, unfairly manipulated the Bankruptcy Code, or otherwise

proposed his Chapter 13 plan in an inequitable manner.” Id. 

Here, the plan was proposed in good faith. On November 10,

2008, the bankruptcy court found Debtors’ original plan was not

proposed in good faith. The court cited the fact that the

Debtors failed to disclose the pending civil action and that when

the Debtors did include the lawsuit, they applied a “no cash

value.” The court believed that the pending action had value and

thus the original plan which provided zero percent distribution

was in bad faith. Debtors amended their original plan to include

the pending civil action. Thus, the remedy to the bankruptcy

court’s initial objection to the plan was to include the pending

action as an asset of the bankruptcy estate. The Debtors

subsequently included the lawsuit and assigned it a $750,000.00

value. They also amended their plan and provided that unsecured

creditors would be paid out if any proceeds derived from the

lawsuit. Consequently, the bankruptcy court, in reviewing the

amended plan, found that “to the extent the Court was concerned

that the debtors were not proposing a plan in good faith, the

court’s concerns have been addressed.” ER at 429. 

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 Because oral argument was not of material assistance, this 4

matter was deemed suitable for decision without oral argument. 

Local Rule 230(g).

15

There is no evidence before this Court that the Debtors

personally misrepresented any facts in their proposed

reorganization plan. Nor is there evidence that they unfairly

manipulated the Bankruptcy Code. The Debtors complied with court

orders and submitted a feasible and equitable amended plan which

the bankruptcy court properly confirmed. 

Therefore, this plan was not submitted in bad faith. 

CONCLUSION

Based on all the foregoing, the decision of the bankruptcy

court is hereby AFFIRMED.4

IT IS SO ORDERED.

Dated: April 2, 2010

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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