Opinion ID: 2653399
Heading Depth: 2
Heading Rank: 4

Heading: Bankruptcy Court’s Confirmation Hearing

Text: On February 9, 2012, the bankruptcy court held a confirmation hearing on Brown’s Chapter 13 plan. Brown appeared, represented by counsel. The bankruptcy court noted that it had continued an earlier confirmation hearing to allow Brown time to convert his Chapter 13 petition into a Chapter 7 liquidation petition because “Mr. Brown unquestionably would be better off in Chapter 7.” Brown, however, had not done so. Thus the bankruptcy court considered whether Brown’s proposed plan met the requirements for confirmation under Chapter 13, concluding that Brown’s plan did not. The bankruptcy court suggested that the only reason Brown had filed under Chapter 13 instead of Chapter 7 was because Brown did not have the money up front to pay his attorney’s fee. The bankruptcy court stated: “All he has got to do is not make any payments, is to hold those [$150] payments that he would make to the trustee for a few months and then he can pay his lawyer and then he can file Chapter 7 and he will then permanently have those debts erased . . . . But, here, all 3 The bankruptcy court stated “[a]ttorneys in this Division often charge $1,000 or less to file a simple Chapter 7 case.” 6 Case: 13-10260 Date Filed: 02/14/2014 Page: 7 of 23 we are really doing is we are financing the lawyer’s fee . . . , and that is not a purpose of Chapter 13.” The bankruptcy court then pressed Brown’s attorney: “Other than you can’t come up with attorney’s fees, you tell me why he wants to file Chapter 13.” Brown’s attorney responded: “Well, the reason he wants to is because he wants some relief and he can’t get it with a Chapter 7 because he has no money.” The bankruptcy court countered: “And he has no money to, you have to finish the sentence, pay his lawyer.” Brown’s attorney implied that this was correct, stating: “Well, or pay the [court] filing fee.” The bankruptcy court pointed out that a debtor “can pay the filing fee in installments in Chapter 7 to the same extent that he can in Chapter 13.” Brown was present during this exchange and apparently acquiesced to his attorney’s statements. In light of the fact that the only reason Brown filed a Chapter 13 petition, instead of a Chapter 7 petition, was so Brown could pay the $2,000 attorney’s fee through installments under a Chapter 13 plan, the bankruptcy court found that the petition and plan were not filed or proposed in good faith. Explaining this conclusion, the bankruptcy court stated: “I am not going to allow these folks to come in here to pay lawyers . . . . I think there is a real ethical issue of doing this . . . . [I]f they can’t come up with the attorney fee, I don’t see how in the world you expect that they are going to be able to pay a five or three-year plan and not default 7 Case: 13-10260 Date Filed: 02/14/2014 Page: 8 of 23 and then, once they do, they are back in the soup again and they have made no headway.” 4 The bankruptcy court was particularly concerned that Brown would be obligated to pay $150 for three years, would pay his attorney $150 each month for 16 months, and then would default on his plan and be right back in the same predicament without having received a discharge. Thus, the bankruptcy court orally denied confirmation of the proposed Chapter 13 plan. Advising Brown to “save some money . . . to pay the lawyer to put [him] in Chapter 7,” the bankruptcy court explained the benefits of a Chapter 7 liquidation. It told Brown: “When you file Chapter 7, then you are discharged and that’s it. You don’t have to pay any more. You don’t have to pay a three-year plan, two-year plan, six-month plan, one-week plan. You pay the lawyer and the filing fee.” The bankruptcy court further explained that Brown would only have to pay an attorney approximately $750, in a lump sum payment, for a Chapter 7 petition, instead of the $2,000 the proposed Chapter 13 plan called for him to pay his attorney. In fact, the bankruptcy court suggested to Brown that if he could make $150 in Chapter 13 payments, he could wait a few months and “save some money . . . until you come up with enough to pay the lawyer to put you in Chapter 7.” E. The Bankruptcy Court’s Order Denying Confirmation 4 Although it was Brown’s first bankruptcy case, the bankruptcy court noted that other Chapter 13 debtors in the district had “filed twelve, thirteen, fourteen,” or “eighteen” cases. 8 Case: 13-10260 Date Filed: 02/14/2014 Page: 9 of 23 After the hearing, the bankruptcy court explained in a thorough order its reasons for denying confirmation of the Chapter 13 plan. See In re Jackson, Nos. 11-42528-JJR-13, 11-42825-JJR-13, 2012 WL 909782 (Bankr. N.D. Ala. Mar. 16, 2012), aff’d sub nom, Brown v. Gore (In re Brown), No. 1:12-CV-02202-RDP, 2012 WL 6609005 (N.D. Ala. Dec. 13, 2012).5 The bankruptcy court assessed Brown’s proposed plan against the factors this Court set forth in In re Kitchens for determining good faith (the “Kitchens factors”). Id. at –8 (quoting In re Kitchens, 702 F.2d at 888–89). One Kitchens factor is “the motivations of the debtor and his sincerity in seeking relief under the provisions of Chapter 13.” Id. at  (internal quotation marks omitted). Evaluating that factor, the bankruptcy court found that Brown’s motivations and sincerity “were tainted because [he] sought relief under chapter 13, not to adjust debts and preserve assets, but to accommodate payment of attorney fees.” Id. at . The bankruptcy court explained the reasons for that finding “at length.” Id. The bankruptcy court found that Brown was a “quintessential candidate[] for chapter 7 relief,” and then asked why did Brown “seek relief under chapter 13 that postpones discharge pending completion of at least a 3-year plan, when [he] easily 5 In this same order, the bankruptcy court explained why it was denying the Chapter 13 plan of another debtor, Steven Jackson. Jackson, 2012 WL 909782, at . Like Brown, Jackson’s plan primarily involved only paying an attorney’s fee in installments. Id. The same law firm represented both debtors. Id. at  n.8. The initial attorney’s fee in Jackson’s case was $2,500, which the attorney later reduced to $1,500. Id. at  n.4. Jackson is not a party to this appeal. 9 Case: 13-10260 Date Filed: 02/14/2014 Page: 10 of 23 qualified for chapter 7 relief that will provide [him] with [a] prompt discharge[] and no long-term commitments?” Id. at . The answer, the bankruptcy court found, was because of Brown’s “inability or unwillingness” to prepay his attorney’s fees in one lump sum before his petition for relief was filed. Id. The bankruptcy court recounted that, at the confirmation hearing, “Brown’s counsel candidly admitted the only reason Brown filed for relief under chapter 13 was to finance his attorney fees because he could not come up with the funds needed to prepay fees for a chapter 7 case.” Id. at . The bankruptcy court then reviewed the purpose of Chapter 13 as compared with Chapter 7. Quoting this Court’s Kitchens precedent, the bankruptcy court noted that Chapter 13 was “‘designed to facilitate adjustments of debts of individuals with regular income through extension and composition plans funded out of future income, under the protection of the court.’” Id. at  (quoting In re Kitchens, 702 F.2d at 887 (additional internal quotation marks omitted)). Therefore, “the precept for chapter 13 relief is adjustment of an individual’s debts by way of developing a plan for their repayment.” Id. A Chapter 13 debtor is able to “preserv[e] assets that otherwise might be liquidated under chapter 7.” Id. However, Chapter 13 “was not intended as a payment collection and enhancement device for attorneys.” Id. at . 10 Case: 13-10260 Date Filed: 02/14/2014 Page: 11 of 23 The bankruptcy court stressed that, in Brown’s case, there was no meaningful adjustment of his debts and none of his assets were being protected— they were all exempt. Id. at . Brown was not saving his home by paying mortgage arrears or protecting non-exempt equity or assets; neither was he avoiding repossession of vehicles, nor holding at bay tax or domestic support creditors. Id. at . Indeed, Brown’s plan was an “attorney-fee-centric” plan because it “provided some small distribution to unsecured creditors,” but Brown’s “main purpose for choosing chapter 13 as opposed to chapter 7 was to finance attorney fees.” Id. at  (internal quotation marks omitted). The bankruptcy court pointed out that “[w]hat is telling are provisions in such [attorney-fee-centric] plans that delay the commencement of payments to unsecured creditors until after attorney fees are fully paid. Such a provision has always been present in the Brown case.” Id. at  n.13. The bankruptcy court acknowledged that “[i]n most chapter 13 cases, paying attorney fees through a plan is not only permitted, it is the norm.” Id. at . Nevertheless, Brown’s attorney-fee-centric plan “abuse[d] the provisions, purpose and spirit of chapter 13” because payment of attorney’s fees was “the overriding purpose for filing a chapter 13 case.” Id. This was particularly true in Brown’s 11 Case: 13-10260 Date Filed: 02/14/2014 Page: 12 of 23 case, where “relief under chapter 7 would be the logical choice if it were not for the attorney-fee hurdle.” Id. The bankruptcy court also discussed another factor mentioned in Kitchens: “the substantiality of repayment to the unsecured creditors.” Id. at . Regarding this factor, the bankruptcy court noted that, at first glance, it may appear Brown should be permitted to proceed under Chapter 13 because his plan at least proposed “to pay small, albeit tenuous distributions to unsecured creditors—something being better than nothing.” Id. The bankruptcy court, however, explained that even if Brown made some payments to his creditors, those payments would “be of little consequence.” Id. The creditors’ expenses would, “in most instances, exceed the recovery.” Id. Furthermore, the bankruptcy court stressed the “abysmal failure rate of chapter 13 cases” generally, and noted that Brown had “little incentive to stay the course for three years.” Id. The “burden which the plan’s administration would place on the trustee” is another Kitchens factor the bankruptcy court emphasized. Id. at  (internal quotation marks omitted). The bankruptcy court pointed out that the primary job of the trustee in Brown’s case would be to collect and distribute plan payments in order to pay his attorney’s fees. Id. at . And the bankruptcy court noted that Brown proposed paying the trustee only a “fraction of her expenses and overhead 12 Case: 13-10260 Date Filed: 02/14/2014 Page: 13 of 23 related to servicing” his plan. Id. Brown’s plan would thus force the trustee to subsidize the work she did on his case. See id. Thus, the bankruptcy court found that Brown did not file his petition or propose his plan in good faith, as there was “no meaningful or legitimate debt adjustment purpose” to be found in Brown’s case or plan. Id. at . The bankruptcy court considered “most glaring” the fact that even if Brown’s proposed Chapter 13 plan was ultimately paid, everything that might be accomplished over the next three years could be achieved more quickly and cheaply, and with greater certainty—especially a discharge—under Chapter 7. Id. The bankruptcy court gave Brown “14 days to convert his case to a case under chapter 7.” Id. Brown did not do so and instead appealed to the district court, which affirmed. Brown timely appealed to this Court.