United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

 

No. 12-6034

 

In re: Shawn C Copeland; *

Lauren MK Copeland, *

*

 Debtors, *

*

Shawn C Copeland; *

Lauren MK Copeland, * Appeal from the

* United States

 Debtors - Appellants, * Bankruptcy Court for the

* Western District of Missouri

v. *

*

Richard V. Fink, *

*

 Trustee - Appellee. *

 

Submitted: October 23, 2012

 Filed: November 20, 2012 

 

Before KRESSEL, Chief Judge, SCHERMER and NAIL, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
The Debtors, Shawn C Copeland and Lauren MK Copeland (the “Debtors”),

appeal from the order of the bankruptcy court confirming their amended Chapter 13 1

plan. We have jurisdiction over this appeal fromthe final judgment of the bankruptcy

court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.

ISSUE

The issue in this appeal is whether the bankruptcy court erred when it

confirmed the Debtors’ amended Chapter 13 bankruptcy plan (over the Debtors’

objection) that did not provide for payment of unsecured non-priority tax claims and

tax preparation fees ahead of other non-priority unsecured creditors. Because a plan

proposed by the Debtors providing for special treatment of the tax claims would

unfairly discriminate against other unsecured non-priority creditors, we hold that the

bankruptcy court’s confirmation of the Debtors’ plan was proper. 

BACKGROUND

On April 22, 2011, the Debtors filed a petition for relief under Chapter 13 of

Title 11 of the United States Code (the “Bankruptcy Code”). Taxing authorities hold

unsecured non-priority claims in the Debtors’ bankruptcy case. Because of the age

2

of the tax debt and the tardy filing of tax returns for pre-petition years, the tax debt

is non-priority debt and a substantial portion of it is non-dischargeable. 

The Honorable JerryW. Venters, United StatesBankruptcyJudge for the 1

Western District of Missouri. The Honorable Arthur B. Federman, Chief United

States Bankruptcy Judge for the Western District of Missouri and and the Honorable

Dennis R. Dow, United StatesBankruptcy Judge for the Western District of Missouri,

held hearings and overruled objections by the Debtors to confirmation of their own

Chapter 13 plan. The rulings ofJudge Federman and Judge Dow both led to the order

of confirmation entered by Judge Venters.

The Debtors state that the taxing authorities also filed secured and

2

priority unsecured proofs of claims in the Debtors’ case. Only the unsecured nonpriority claims are relevant to our discussion.

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The Debtors filed a plan that stated that “[t]he general unsecured claims of the

United Statesfor the InternalRevenue Tax, the Missouri Department ofRevenue, and

the Kansas Department of Revenue for income taxes shall be treated as a Special

Class to be paid 100 percent.” The plan also provided that “Debtors’ attorney is to

be paid for tax return preparation from plan payments.” The tax preparation fees

result from counsel’s post-petition preparation of tax returns. The bankruptcy court

denied confirmation of the plan.3

In February 2012, the Debtors amended their plan to remove the provisionsfor

special classification of unsecured non-priority tax claims and plan payments to the

Debtor’s attorney for tax preparation fees. The Debtors objected to confirmation of

their own plan because it did not provide for the special treatment of unsecured nonpriority tax creditors and tax preparation fees, as provided in the Debtors’ previous

plan. 

At a hearing on the Debtors’ objection to confirmation of their February 2012

plan, the Debtorsstated that they wanted to pay the unsecured non-priority tax claims

in full and their tax preparation fees “from the DIP.” Citing to Groves v. LaBarge (In

re Groves), 39 F.3d 212 (8th Cir. 1994), Richard V. Fink, Chapter 13 trustee (the

“Trustee”), argued that it was unfair discrimination under Bankruptcy Code §1322

for the Debtors to provide special treatment to the tax creditors simply because such

creditors’ claims were non-dischargeable. The Debtors argued that it would not be

unfair to afford special treatment to the tax creditors because the tax creditors are

required to continue performing services for the Debtors. The bankruptcy court

stated that the arguments made by the Debtors “don’t provide a basis for treating the

taxing authorities different from unsecured creditors” and, basing its decision on

The bankruptcy court also denied confirmation of other forms of the

3

Debtors’ plan, but no ground for denial of confirmation, other than those discussed

by us in this decision, is relevant to this appeal.

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Groves, stated that “the plan would provide for unjust discrimination if it allowed the

unsecured non-priority tax claims to be paid ahead of the other unsecured creditors,

that the pot should be available for all the unsecured creditors.” The bankruptcy court

overruled the Debtors’ objection to confirmation. No confirmation order was entered. 

In April 2012, the Debtors amended their plan (the “Final Plan”) to make a

change to it that is not relevant to this appeal, but they retained the equal treatment

of all unsecured creditors from the Debtors’ February 2012 plan including the tax

creditors and tax preparation fees. The Debtors objected to confirmation of the Final

Plan on the same grounds that they had previously objected to confirmation of the

February 2012 plan. At a hearing, the bankruptcy court stated that the issues before

it had already been ruled upon at the previous hearing, and it overruled the Debtors’

objection to confirmation of their Final Plan. On May 10, 2012, the bankruptcy court

entered its order confirming the Final Plan. 

The Debtors’ Chapter 13 Plan is a Disposable Income Pot - 60 month plan. The

Trustee estimated that, based on claims that had been filed, the Final Plan would

provide for a distribution of approximately 78% to all unsecured non-priority

creditors. The Trustee further submitted that, if the Debtors were permitted to pay 4

the tax claims ahead of other unsecured non-priority creditors, the tax creditors would

After the deadline for filing proofs of claims in the Debtors’ case, the

4

Debtorssettled an adversary proceeding “striping off” a lender’s juniormortgage lien. 

The Agreed Judgment in the adversary proceeding stated that the lender “shall be

entitled to” an allowed unsecured non-priority claim. The Agreed Judgment was

signed and entered on the docket in December 2011, but the lender had not filed a

proof of claim as of the date this case was submitted to us.

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receive a distribution of approximately 97%. The remaining unsecured non-priority

5

creditors would receive nothing. 

6

STANDARD OF REVIEW

We review findings of fact for clear error and conclusions of law de novo. 

Lange v. Mutual of Omaha (In re Negus-Sons, Inc.), 460 B.R. 754, 755 (B.A.P. 8th

Cir. 2011) (citation omitted). The standard of review on the issue of whether the

Debtors’ proposed classification discriminated unfairly is not clear. See Groves, 39

F.3d at 214 (“[Mickelson v. Leser (In re Leser), 939 F.2d 669,671 (8th Cir. 1991)]

treated the issue as ‘solely one of legal interpretation,’ . . . [b]ut in Hanson v. First

Bank of South Dakota, N.A., 828 F.2d 1310, 1313 (8th Cir. 1987), we noted ‘the

broad discretion of bankruptcy courts in matters of classification,’ and reviewed a

classification issue under the clearly erroneous standard . . . .”). In some instances,

the inquiry is “primarily one ofstatutory construction, to be reviewed de novo [, b]ut

application of the ‘discriminate unfairly’ standard in other cases may involve little

more that exercise of the bankruptcy court’s broad discretion.” Groves, 39 F.3d at

214. Regardless of whether we review the bankruptcy court’s decision de novo or for

an abuse of discretion, our conclusion is the same.

The Trustee stated that this percentage does not account for payment of 5

tax preparation fees.

It is ambiguous as to whether the Debtors’ request for payment of their 6

tax preparation fees is a priority or a non-priority claim. The Debtors’ previous plan

simply statesthat the tax preparation fees “will be paid from plan payments out of the

DIP [disposable income pot] pool.” We do not need to resolve this ambiguity

because the bankruptcy court correctly noted the unfair discrimination in the

unsecured claim classification. 

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DISCUSSION

The Debtors had standing to bring this appeal from an order confirming their

Chapter 13 Final Plan. See Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1141 (8th Cir.

2008)(debtor had standing to appeal from an order confirming her own plan). 

A. 11 U.S.C. §1322(b)(1)

Section 1322(b)(1) of Title 11 of the United States Code (the “Bankruptcy

Code”) permits a Chapter 13 plan to “designate a class or classes of unsecured claims,

as provided in section 1122 of [the Bankruptcy Code], but [it] may not discriminate

unfairly against any class so designated. . . .” “A Chapter 13 . . . plan of

reorganization may place unsecured claims in separate classes ‘as long as the

classification 1) complies with section 1122 ofthe [Bankruptcy] Code and 2) does not

result in unfair discrimination between the claims grouped separately.’ ” Groves, 39

F.3d at 214 (quoting Leser, 939 F.2d at 671)).

The Trustee contends, and we agree, that the Debtors’ proposed classification

of the tax claims would unfairly discriminate against the other unsecured creditors in

violation of §1322(b)(1). The Debtors bear the burden of proving that their Final

Plan does not unfairly discriminate against unsecured creditors. Groves, 39 F.3d at

214. 

B. Unfair discrimination

We apply a four-part test adopted in this Circuit for determining whether the

Debtors’ separate classification of the tax debt resulted in unfair discrimination,

examining:

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(1) whether the discrimination has a reasonable basis; (2) whether the

debtor can carry out a plan without the discrimination; (3) whether the

discrimination is proposed in good faith; and (4) whether the degree of

discrimination is directly related to the basis or rationale for the

discrimination.

Lesser, 939 F.2d at 672 (citations omitted). 

Although the two cases concern different types of non-dischargeable debt, this

case is similar in many respects to the Eighth Circuit’s Groves case. 39 F.3d 212. In

Groves, the court disallowed the debtor’s request to provide discriminatory treatment

to non-dischargeable student loan debt. The Groves court agreed with the

determination by the lower courts “that the nondischargeability of student loan

claims, by itself, does not justify substantial discrimination against other,

dischargeable unsecured claims in a Chapter 13 plan.” Unsatisfactory to the Groves

court were arguments by the debtor that public policy concerns made it appropriate

to separately classify and pay student loan debt in full through a Chapter 13 plan. 

The Groves student loan creditors were to receive 100% payment under the debtor’s

proposed plan, while other unsecured creditors would receive, at most, 40% of their

claims. Here, the Debtors’ plan would pay the tax claims 97% and other unsecured

claims 0%.

 

According to the Debtors, their reason for the proposed discrimination is to

prevent punishment of the tax creditors. The Debtorsstate that “[w]hile [Debtors] are

at fault for not timely filing their tax returns, the taxing authorities are not.” 

Focusing on the obligation of taxing authorities to continue performing their services

(in contrast to other creditors who can discontinue providing goods or services to a

debtor), the Debtors argue for “the public policy of maximum tax collection as the

basis for favorable treatment of general unsecured tax claims.” 

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The public policy argument of the Debtorsseems to be a request (like a request

by the debtor in Groves) that we extend to the Debtors’ plan the Eighth Circuit’s

rationale in Leser. 939 F.2d 669. Citing to the lower court’s public policy concerns

for full payment of support of children, the Leser court affirmed the confirmation of

a Chapter 13 plan that gave special treatment to claims for unsecured non-priority

non-dischargeable child support. Id. The interest in collecting taxes as advanced by

the Debtors is simply not comparable to the public policy in favor of ensuring that

child support is paid. See Groves, 29 F.3d at 215 (disallowing the debtor’s request

to liken public policy in favor of paying child support in full through plan as allowed

in Leser with payment of student loan debt). The Debtors provided nothing to

convince the bankruptcy court or us that the tax creditors deserve special treatment. 

Regardless of the Debtors’ stated purpose for the discrimination and in light

of the fact that we do not accept the Debtors’ public policy rationale, it is evident (as

the bankruptcy court implicitly determined) that the reason for the Debtors’ proposed

special treatment of the tax claims is because of the non-dischargeable nature of most

of such debt. Standing alone, the non-dischargeability of a debt is not a proper basis

for discrimination against other unsecured non-priority claims. Groves, 39 F.3d at

216 (non-dischargeability of student loan debt alone is not enough to justify

discrimination against other unsecured creditors). 

We also note that none of the tax creditors objected to confirmation of the

Debtors’ Final Plan, a plan that the Debtors claim unfairly punishes those same

creditors. The Trustee estimated that the tax creditors (together with other unsecured

non-priority creditors) will receive payment of 78% of their unsecured non-priority

claims under the Final Plan. And the tax creditors’ rights are protected without

special treatment because these creditors can pursue payment of the nondischargeable debt after the completion of the Debtor’s bankruptcy case. We reject

an argument by the Debtorsthat the delay in collecting the non-dischargeable tax debt

should change the outcome. See Groves, 39 F.3d 212 (delay in collection of non-

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dischargeable debt was not a consideration of court when disallowing special

treatment for non-dischargeable student loan debt).

 

The Debtors do not deny that they are able to carry out a plan without the

discrimination. And there is no suggestion otherwise. The Debtors’ Final Plan was

confirmed by the bankruptcy court and the Debtors have not contested the Trustee’s

assertion that the Debtors have been making payments under their Final Plan. There

is no requirement, based on public policy or otherwise, to pay the unsecured nonpriority non-dischargeable tax claims in full through the plan. See Groves, 39 F.3d

215 (public policy did not require payment ofstudent loan debt in full under plan and

therewas nothing elsemandating such payment). The Debtors express dissatisfaction

with the four-part test adopted in Leser, arguing that application of it (particularly

the inquiry regarding whether a debtor can carry out a plan without the

discrimination), should be reconsidered. We are bound to follow the test adopted in

Leser. 

Like in Groves, the plan the Debtors seek improperly puts the Debtors’ desire

for a fresh startsignificantly ahead of the interests of the other creditors. See Groves,

39 F.3d 215 (significantly better treatment of non-dischargeable debt “more than

overbalance[d] the debtors’ desire for a clean sale as against fairness to their general

unsecured creditors.”) (quoting district court’s analysis in same case) (quotation

marks omitted). 

By asking for special treatment of their tax claims, the Debtors ask their other

unsecured non-priority creditors to pay for the Debtors’ failure to file timely tax

returns. See Groves v. LaBarge (In re LaBarge), 160 B.R. 121, 123 (E.D. Mo. 1993)

(quoting In re Saulter, 133 B.R. 148, 149 (Bankr. W.D. Mo. 1991)) (“to allow

discrimination solely on the basis of non-dischargeability enables the debtor . . . .

‘[i]n essence . . . [to] shift [ ] the student loan non-dischargeabilty burden fromherself

onto her general unsecured creditors.’ ”), aff’d 39 F.3d 212. The bankruptcy court

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properly held that such treatment unfairly discriminates against the other unsecured

non-priority creditors.

CONCLUSION

 The decision of the bankruptcy court is AFFIRMED.

 

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