Source: https://law.justia.com/cases/federal/appellate-courts/F3/286/461/608692/
Timestamp: 2019-09-15 16:26:22
Document Index: 616403977

Matched Legal Cases: ['§ 523', '§ 1307', '§ 1307', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 1325', '§ 122']

In Re Edwin R. Smith, Debtor-appellee.appeal of Jerry Watson, 286 F.3d 461 (7th Cir. 2002) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Seventh Circuit › 2002 › In Re Edwin R. Smith, Debtor-appellee.appeal of Jerry Watson
In Re Edwin R. Smith, Debtor-appellee.appeal of Jerry Watson, 286 F.3d 461 (7th Cir. 2002)
US Court of Appeals for the Seventh Circuit - 286 F.3d 461 (7th Cir. 2002)
In March 1999, Mr. Smith filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Southern District of Indiana. Ms. Watson filed an adversary proceeding challenging the dischargeability of Mr. Smith's debt to her. On July 22, 1999, the bankruptcy court granted Ms. Watson's motion for summary judgment and declared that Mr. Smith's debt was nondischargeable because of Mr. Smith's fraudulent representations and his fraud while serving as Ms. Watson's fiduciary. See 11 U.S.C. § 523(a) (2) & (4).
After hearing the evidence, the court, ruling from the bench, adjusted, and then confirmed, Mr. Smith's Chapter 13 plan. The court stated, "I just have to make sure that this debtor puts all [his] disposable income into the plan." Bankr. Tr. at 76. The original Plan called for payments of $200 per month; the court accepted this number for the first five months of the Plan. After that period, however, Mr. Smith would pay $250 per month for the next seven months, then $300 per month for a year, and then $350 per month for the final three years of the Plan. As adjusted, the Plan would increase Mr. Smith's payments to account for any pay raises he receives. After describing these adjustments, the court concluded that " [b]ased upon payment of that [adjusted] level, the Court would find that the plan as submitted is proposed in good faith." Bankr.Tr. at 79. The bankruptcy court issued a written order, using a pre-printed form, which confirmed the details of the Plan as amended at the hearing.1
We note at the outset that the obligation of good faith is imposed on the debtor at two stages of a Chapter 13 proceeding. First, the debtor must file his petition for Chapter 13 bankruptcy in good faith. See In re Love, 957 F.2d at 1354-55. Second, the debtor must file his Chapter 13 plan in good faith. See id.; In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990); see also 8 Lawrence P. King et al., Collier on Bankruptcy, at 1325-13 (15th ed.2001). At different times, and at different places in her brief to this court, Ms. Watson has objected to a finding of good faith both in filing the petition and the Plan.
In our earlier cases, we have read 11 U.S.C. § 1307(c), which provides for dismissal of a Chapter 13 provision "for cause," to include a dismissal premised on a debtor's bad faith in filing the petition. See In re Love, 957 F.2d at 1354; In re Smith, 848 F.2d 813, 816 n. 3 (7th Cir. 1988). Although Ms. Watson has not cited § 1307(c), her brief to this court asks us to reverse the bankruptcy court and conclude that neither the petition nor the Plan was filed in good faith. Most of her brief focuses on whether Mr. Smith's Plan was proposed in good faith, as did almost all of the bankruptcy hearing.
Before a bankruptcy court confirms a debtor's plan under Chapter 13, it must find that the plan was filed in good faith. See 11 U.S.C. § 1325(a) (3). "The provisions of 11 U.S.C. § 1325 ensure that a Chapter 13 plan ... will be properly scrutinized by the bankruptcy court before the plan is confirmed, mitigating the danger of abuse." In re Young, 237 F.3d 1168, 1174 (10th Cir. 2001). In considering whether a plan is filed in good faith, the court asks of the debtor: "Is he really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?" In re Schaitz, 913 F.2d at 453. "At base, this inquiry often comes down to a question of whether the filing is fundamentally unfair." In re Love, 957 F.2d at 1357. Whether a plan or petition is filed in good faith is a question of fact based on the totality of the circumstances surrounding the proposed plan. See In re Smith, 848 F.2d at 817-18.
We have articulated several factors that courts should consider in analyzing the totality of the circumstances. See In re Rimgale, 669 F.2d 426, 432 (7th Cir. 1982).3 Several of those factors are relevant to our inquiry in this case. We consider whether the plan accurately reflects the debtor's financial condition and affords substantial protection to unsecured creditors. If there are inaccuracies, we consider whether these flaws are "an attempt to mislead the bankruptcy court," id.; we also consider whether the plan, taken as a whole, indicates "a fundamental fairness in dealing with one's creditors," In re Bassak, 705 F.2d 234, 237 (7th Cir. 1983) (quoting Rimgale, 669 F.2d at 432-33). In applying this last factor, we suggested in Rimgale that "the bankruptcy court may wish to examine the timing of the bankruptcy filings, the proportion of the total unsecured debt that is represented by the [tort] judgment, and the equities of classifying together ordinary consumer debt and a judgment debt arising out of intentionally tortious conduct." In re Rimgale, 669 F.2d at 433 n. 22. Other courts of appeals have adopted a similar approach, providing courts within their jurisdictions a non-exhaustive list of factors to guide the good faith inquiry. See, e.g., In re Young, 237 F.3d at 1174 (quoting Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir. 1983)); In re Estus, 695 F.2d 311, 317 (8th Cir. 1982). In this case we are concerned with three factors bearing on Mr. Smith's good faith, as raised by Ms. Watson: Mr. Smith's pre-petition conduct, including the nature of the underlying debt, see In re Smith, 848 F.2d at 818-19, the sufficiency of the pay out, see Flygare, 709 F.2d at 1348, and the accuracy of Mr. Smith's financial disclosures in his Plan, see In re Rimgale, 669 F.2d at 432.
"Under a `totality of the circumstances' test, a debt's nondischargeability under Chapter 7 arising from a debtor's prefiling conduct is relevant to the debtor's good faith." In re Smith, 848 F.2d at 818. There is no question that Mr. Smith's treatment of Ms. Watson was deplorable and it appears from this record that Mr. Smith abused the trust Ms. Watson placed in him for his own pecuniary benefit. It is also clear, if the Plan is confirmed, that Mr. Smith will not only pay far less than the $267,000 he currently owes to Ms. Watson, but will pay her less than her actual losses, unadjusted for inflation. This consideration alone, however, is not sufficient to defeat Mr. Smith's plan. Congress has made it clear that some debts, although nondischargeable in Chapter 7, may be discharged under the more liberal rules of Chapter 13. See Johnson v. Home State Bank, 501 U.S. 78, 87, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991). We are not free to second-guess Congress' policy choice in this regard. What is required is "that the plan must be `proposed in good faith,' not that the debt was incurred in good faith." In re Smith, 848 F.2d at 819 (emphasis in original). " [A] Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan nevertheless represents a good faith effort by the debtor to satisfy his creditor's claims." Neufeld v. Freeman, 794 F.2d 149, 153 (4th Cir. 1986).
Ms. Watson next points to the low percentage repayment of her debt as evidence of Mr. Smith's bad faith. Unless he receives significant pay raises over the repayment period, Mr. Smith will end up repaying less than 10% of what he currently owes Ms. Watson. Congress has not adopted a minimum payment for confirmation of a Chapter 13 plan, and we cannot read one into the Code through its good faith requirement. See In re Rimgale, 669 F.2d at 431-32. Further, it is difficult to see how the low percentage of the payout adds anything to the other good faith factors and the other statutory requirements. The percentage repayment is a function of the size of the debt relative to the debtor's anticipated earnings; this factor is not relevant to determining whether the debtor has acted in good faith. The Code requires a debtor to commit all of his disposable income to repayment of his creditors over the term of his Chapter 13 plan. If this process, honestly and fairly undertaken, produces a payment that is a small percentage of the debt, the Code permits such a payment so long as it is "not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7." 11 U.S.C. § 1325(a) (4).
Ms. Watson's final contention is that Mr. Smith's Plan is in bad faith because it does not accurately describe his financial position. Chapter 13 requires that a debtor commit all of his disposable income to repayment of his debts. Disposable income is defined as "income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." 11 U.S.C. § 1325(b) (2) (A). Although this mandate is independent of the good faith requirement, courts also have considered the accuracy of a debtor's financial disclosures in determining whether a debtor has dealt fairly with his creditors. Ms. Watson contends that Mr. Smith's Plan was not filed in good faith because he failed to accurately state his income, and because his expenses were padded to include items "not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." 11 U.S.C. § 1325(b) (2) (A). "Complete and truthful disclosure is particularly important in a Chapter 13 case because, since creditors do not vote on the plan, there is no disclosure statement as such, and parties in interest and the court must evaluate the debtor's proposal in a short period of time based on facts mostly revealed by the debtor." 5 William L. Norton, Jr., Norton Bankruptcy Law & Practice, § 122 at 18-19 (2d ed.1997); see also In re Leavitt, 171 F.3d 1219, 1224-25 (9th Cir. 1999); In re Robinson, 987 F.2d 665, 668 n. 6 (10th Cir. 1993) (quoting Flygare, 709 F.2d at 1348); In re Caldwell, 895 F.2d at 1126-27; In re Langguth, 52 B.R. 572, 577 (Bankr.N.D. Ill. 1985). In the seminal Seventh Circuit case dealing with the question of good faith in Chapter 13, four of the five factors5 we enumerated as relevant to the good faith inquiry addressed the accuracy of a debtor's financial disclosures in his plan. See In re Rimgale, 669 F.2d at 432.
Ms. Watson suggests that this case ought to be remanded for further fact-finding by the bankruptcy court. Although appellate review is facilitated by detailed findings, particularly on a fact-specific issue like good faith under the Bankruptcy Code,see In re Schaitz, 913 F.2d 452, 455-56 (7th Cir. 1990), failure to include a written opinion does not warrant an automatic remand. Ms. Watson had the opportunity to bring forward evidence of Mr. Smith's bad faith at the evidentiary hearing. There is no need for further fact-finding because there is no indication in the record that the bankruptcy court's decision was clearly erroneous.
Some cases have held that close temporal proximity between a debt coming due and a bankruptcy filing indicates an effort by the debtor to avoid payment of the judgment or to forgo appeal in favor of bankruptcy See In re Leavitt, 171 F.3d 1219, 1221, 1224-25 (9th Cir. 1999); In re Smith, 848 F.2d 813, 821 (7th Cir. 1988); In re Sanabria, 52 B.R. 75, 76-77 (N.D. Ill. 1985). Also, serial bankruptcy filings may indicate bad faith. See In re Jackson, 91 B.R. 473, 473-75 (Bankr.N.D. Ill. 1988). Ms. Watson has made no such allegations here.
In In re Rimgale, 669 F.2d 426, 432 (7th Cir. 1982), we listed the following factors as a guide to bankruptcy courts evaluating whether a plan had been filed in good faith: (1) whether the plan states the secured and unsecured debts of the debtor accurately; (2) whether the plan states the expenses of the debtor accurately; (3) whether the percentage of repayment of unsecured debts is correct; (4) whether inaccuracies in the plan amount to an attempt to mislead the bankruptcy court; and (5) whether the proposed payments indicate a fundamental fairness in dealing with creditors. See In re Rimgale, 669 F.2d at 432-33. We stressed that this list is not exhaustive.