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

Heading: Application of Good Faith Standards Here

Text: Here, the bankruptcy court found that Brown did not file his petition or propose his plan in good faith. See 11 U.S.C. § 1325(a)(3), (a)(7). After close review of the record and the totality of the circumstances, we cannot say that the bankruptcy court’s findings were clearly erroneous. 18 Case: 13-10260 Date Filed: 02/14/2014 Page: 19 of 23 First, the bankruptcy court did not clearly err in its determinations as to the debtor’s motivations and sincerity in seeking Chapter 13 relief, which is a Kitchens factor. The record supported the bankruptcy court’s findings that Brown sought Chapter 13 relief not to adjust debts and preserve assets but to pay his attorney’s fees, and that Brown was far better off in a Chapter 7, over a Chapter 13, bankruptcy. Brown had no non-exempt assets for the trustee to liquidate, and Brown to lose, in a straight Chapter 7 liquidation. Brown did not have a home or a vehicle he was trying to protect or preserve in a Chapter 13 case. Brown’s monthly income was low and barely exceeded his monthly expenses. In addition to being a “no asset” case, Brown’s income was fixed, not fluctuating, and Brown did not have an ability to earn more money over the next three to five years. Brown’s Social Security income would not have been subject to garnishment in a Chapter 7 liquidation. These undisputed financial facts heavily favored a Chapter 7, over a Chapter 13, bankruptcy. The record also supported the bankruptcy court’s finding that the only reason Brown filed a Chapter 13 petition and plan was so that Brown’s attorney’s fees could be paid in installments through a Chapter 13 plan. Brown’s Chapter 13 plan was all about attorney’s fees, and not Brown’s best interest or the creditors. While the choice of chapter is one made by the debtor, we cannot say the 19 Case: 13-10260 Date Filed: 02/14/2014 Page: 20 of 23 bankruptcy court clearly erred in finding this Chapter 13 plan was for the benefit of the lawyer and not in the best interest of the debtor Brown. Indeed, there was no evidence in this particular record revealing unique circumstances that would lead to the conclusion that it was in Brown’s best interest to file under Chapter 13. See In re Crager, 691 F.3d at 675–77 (affirming bankruptcy court’s confirmation of attorney-fee-centric plan when debtor “had a legitimate fear that a future medical problem might leave her in a situation in which she had to take on more debt and might need to file another Chapter 13 petition”). As to the administrative burden Brown’s plan would place on the trustee, another Kitchens factor, the trustee would have worked primarily for the attorney to collect $150 for 17 months. Because the attorney was paid in full before the creditors received a dime, the bankruptcy court suggested that “the primary job of the trustee . . . [would] be to collect and distribute plan payments to pay attorney fees.” Only three of the ten scheduled creditors bothered to file claims, totaling $1,355.08, but no part of that sum would be paid for 17 months until the attorney received his full $2,000. As to the Kitchens factor regarding substantiality of repayment to those creditors, there was a reasonable likelihood that Brown would not complete his Chapter 13 plan and would never pay those creditors anything. Brown’s monthly 20 Case: 13-10260 Date Filed: 02/14/2014 Page: 21 of 23 income was $1,364 and his monthly expenses were $1,214, leaving $150 in discretionary income. The plan proposed Brown would pay that entire $150 every month to the trustee for three years. This left no margin of error or room for unforeseen expenses. If Brown could not save $150 for five months to pay his attorney up front for a Chapter 7 petition, a Chapter 13 plan requiring him to pay $150 monthly for three years seemed doomed to failure. The bankruptcy court emphasized the “abysmal failure rate of chapter 13 cases,” pointing out that in the Eastern Division of the Northern District of Alabama “approximately 65% of all chapter 13 cases fail before debtors complete their plans and become eligible for a discharge.” During oral argument, the parties agreed that, in their experiences, approximately two-thirds of Chapter 13 plans fail. Furthermore, if the bankruptcy court confirmed Brown’s Chapter 13 plan, Brown could have simply made the payments to his attorney and then converted his case to a Chapter 7 and received a discharge. As the bankruptcy court succinctly stated, “there is no good faith to be found in a temporary chapter 13 case filed to accommodate payment of attorney fees as a prelude to a conversion to chapter 7.” Allowing Brown to do so would circumvent the Supreme Court’s holding in Lamie that attorney’s fees cannot be paid out of the funds of a Chapter 7 estate, absent the approval of the trustee and the court. See 540 U.S. at 538–39, 124 S. Ct. at 1032. 21 Case: 13-10260 Date Filed: 02/14/2014 Page: 22 of 23 Notably too, the bankruptcy court did not apply a categorical rule prohibiting attorney-fee-centric or attorney-fee-only Chapter 13 plans. 7 During oral argument, the Chapter 13 trustee agreed that debtors, such as Brown, need an attorney to successfully navigate both Chapter 7 and Chapter 13 proceedings. And no one disputed that reasonable compensation to a debtor’s attorney may be paid in installments from the debtor’s estate in Chapter 13 cases. Here, the bankruptcy court found Brown’s Chapter 13 plan was not proposed in good faith because: the totality of the factual circumstances showed Brown was best served by a Chapter 7 bankruptcy; only Brown’s attorney benefitted from proceeding under Chapter 13; and Brown was likely to default in his Chapter 13 case and end up without a discharge. Our precedent demands a multi-factor analysis of the particular facts of a case to determine whether good faith existed, see In re Kitchens, 702 F.2d at 888–89, which is what the bankruptcy court did here. For all of these reasons above, we cannot say that the bankruptcy court’s findings that Brown’s petition and plan did not meet the Chapter 13 good faith 7 A few months after denying Brown’s Chapter 13 plan, this same bankruptcy judge confirmed an attorney-fee-centric Chapter 13 plan, which involved a 60-month repayment period, a total payment of $5,400, and an attorney’s fee of $1,800. See In re Armstrong, No. 1240530-JJR13 (Bankr. N.D. Ala. Jun. 7, 2012). Although the debtor in that case subsequently failed to make the scheduled payments, the bankruptcy court’s confirmation of that Chapter 13 plan further indicates that the court does not apply a categorical rule. 22 Case: 13-10260 Date Filed: 02/14/2014 Page: 23 of 23 requirements were clearly erroneous. 8 We offer no opinion as to other attorneyfee-centric Chapter 13 plans. There is no hard and fast rule to be applied. Each case has its own special circumstances, and Chapter 13 requires a case-by-case analysis by the fact-finder.