Court Opinion

ID: 2996255
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:26:49.646679+00
Date Added: 2024-06-11T11:45:29.065195
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 01-3286
IN RE: WAYNE K. CRAWFORD,
                                               Debtor-Appellant.
                        ____________
           Appeal from the United States District Court
               for the Western District of Wisconsin.
          No. 01-C-0147-C—Barbara B. Crabb, Chief Judge.
                        ____________
      ARGUED JANUARY 13, 2003—DECIDED APRIL 1, 2003
                        ____________

  Before POSNER, KANNE, and DIANE P. WOOD, Circuit
Judges.
   POSNER, Circuit Judge. Wayne Crawford appeals from the
district court’s affirmance of the bankruptcy court’s refusal
to confirm his Chapter 13 plan. Chapter 13 is a counterpart
to Chapter 11 (reorganization) but designed for individuals
of modest means. In re Heath, 115 F.3d 521, 522 (7th Cir.
1997). It enables an individual, as an alternative to the
liquidation of his assets, to submit for approval by the
bankruptcy court a plan for paying his creditors as much as
possible over a period of years, upon completion of which
he is given a discharge of his remaining dischargeable debts.
Crawford’s appeal requires us to consider the circumstances
in which and the degree to which a Chapter 13 debtor
may shift the burden of a nondischargeable debt from his
shoulders to those of his unsecured creditors by invocation
of 11 U.S.C. § 1322(b)(1), which provides that a Chapter 13
2                                                No. 01-3286

plan may “designate a class or class of unsecured claims . . .
but may not discriminate unfairly against any class so
designated.” Classification is not unique to Chapter 13; it is
available under other chapters of the Bankruptcy Code as
well. See 11 U.S.C. §§ 901(a), 1122(a), 1222(b)(1).
  Crawford’s nonpriority unsecured debts consist of some
$19,000 owed the IRS; $18,000 owed the county as a result of
Crawford’s having been delinquent for a period in his child
support payments (he is now current) and the county’s
having paid welfare to the mother and taken in exchange
an assignment of her entitlement to child support; and
$500 owed to a pair of trade creditors. The debt that
Crawford owes the county is nondischargeable. 11 U.S.C.
§ 523(a)(5)(A).
  The plan proposed to divide Crawford’s debts into two
classes, one consisting of the debt to the county and the
other of the other debts. The county debt would be paid first
and only after it was paid in full would he begin to pay the
debts of the second class. Originally the plan envisaged that
over the course of its three years the county debt would be
paid in full with enough left over to pay the other unse-
cured creditors between 3 and 6 percent of what they were
owed. But this was contingent on Crawford’s prevailing in
a dispute he had with the IRS. He did not prevail and as a
result the plan had to be amended. Under the amended
plan, the county debt will not be paid in full but two-thirds
of it will be paid, while the other unsecured creditors will
get nothing at all, whereas without the preferred treatment
of the county debt but with the same aggregate level of
periodic payment as under the amended plan each unse-
cured creditor would receive roughly 32 cents on the dollar.
  Section 1322(b) of the Bankruptcy Code, while forbidding
as we have said classifications that discriminate unfairly
No. 01-3286                                                    3

against creditors, does not explain what “unfairly” means in
this context. The courts have striven to formulate a more
precise standard for determining the legitimacy of classifica-
tions proposed by Chapter 13 debtors, but without success.
   A number of cases use a four-factor test: “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.” In re Leser, 939 F.2d 669,
672 (8th Cir. 1991); see, e.g., In re Williams, 253 B.R. 220, 225
(Bankr. W.D. Tenn. 2000); In re Thibodeau, 248 B.R. 699, 704-
05 (Bankr. D. Mass. 2000). With respect, this test is empty
except for point 2, which does identify an important factor
bearing on the reasonableness of a classification, as we shall
illustrate shortly.
  Another test one finds in some cases is whether the debtor
has a “legitimate” basis for the classification. In re Brown,
152 B.R. 232, 237-40 (Bankr. N.D. Ill.), reversed under the
name McCullough v. Brown, 162 B.R. 506 (N.D. Ill 1993); In re
Lawson, 93 B.R. 979, 984 (Bankr. N.D. Ill. 1988). This, if it
means anything, leans too far in favor of the debtor (as
Judge Shadur explained in his opinion reversing the bank-
ruptcy judge’s decision in the Brown case), as it gives no
consideration to the interest of creditors. The first test, the
four-factor one, also fails to mention the creditors’ interests,
at least explicitly.
  A third test insists that the classification presumptively
give the disfavored creditors at least 80 percent of what they
would get without the classification, In re Sullivan, 195 B.R.
649, 656 (Bankr. W.D. Tex. 1996), and a fourth test adds a
similar consideration as a fifth factor to the four-factor Leser
test. E.g., In re Chacon, 223 B.R. 917, 922 (Bankr. W.D. Tex.
1998); In re Strausser, 206 B.R. 58, 60 (Bankr. W.D.N.Y. 1997);
4                                                  No. 01-3286

In re Kolbe, 199 B.R. 569, 572-75 (Bankr. D. Md. 1996). The
third test is arbitrary, and the fourth test makes the first
collapse of its own weight.
  We haven’t been able to think of a good test ourselves. We
conclude, at least provisionally, that this is one of those
areas of the law in which it is not possible to do better than
to instruct the first-line decision maker, the bankruptcy
judge, to seek a result that is reasonable in light of the
purposes of the relevant law, which in this case is Chapter
13 of the Bankruptcy Code; and to uphold his determination
unless it is unreasonable (an abuse of discretion). This
approach has support in In re Bentley, 266 B.R. 229, 239-
40 (B.A.P. 1st Cir. 2001), and 8 Collier on Bankruptcy
¶ 1322.05[2] (15th ed. 2002), as well as in the statutory
language of “unfair” discrimination against creditors. It is
true that the use of “fair” in a statute or a legal doctrine
need not preclude judicial development of a particularized
standard; the “fair use” doctrine of copyright law and the
“duty of fair representation” in labor law have considerable
structure, and other examples could be given. But success
has not attended efforts to give comparable structure to the
classification provision of Chapter 13.
   Mention of the statute’s language should at least serve to
remind bankruptcy judges that Chapter 13 is designed for
the protection of creditors as well as debtors. In re Andrews,
49 F.3d 1404, 1407 (9th Cir. 1995); First Nat’l Fidelity Corp. v.
Perry, 945 F.2d 61, 64 (3d Cir. 1991); McCullough v. Brown,
supra. It is true that only the debtor can invoke Chapter 13.
But he may not use it to deny consideration of the legitimate
interest of creditors in repayment. In re Divine, 127 B.R. 625,
629 (Bankr. D. Minn. 1991); see also In re Scotten, 281 B.R.
147, 150 (Bankr. D. Mass. 2002); In re Virden, 279 B.R. 401,
409 (Bankr. D. Mass. 2002). This point implies, however, that
if without classification the debtor is unlikely to be able to
No. 01-3286                                                    5

fulfill a Chapter 13 plan and the result will be to make his
creditors as a whole worse off than they would be with
classification, then classification will be a win-win outcome.
Suppose the debtor is a truck driver and one of his creditors
is the state driver’s license bureau which unless paid in full
will yank his license, with the consequence that he won’t
have earnings out of which to make the payments called for
in his plan. Or suppose the creditor is a supplier of the tools
of the debtor’s trade, and unless paid in full will cut him off
and thereby prevent him from plying his trade, again with
the result of depriving him of the earnings he needs to fund
his plan. The creditor might be the supplier of the bottled
gas that the debtor uses to heat his home, and if not paid in
full will refuse to sell him more gas. (We use this example
rather than that of natural gas or electricity because a public
utility is not permitted to refuse to restore service because
of nonpayment of fees incurred before the filing of a
bankruptcy petition, 11 U.S.C. § 366 (a) (2003); In re Spencer,
218 B.R. 290, 293-94 (Bankr. W.D. N.Y. 1998); In re Whittaker,
84 B.R. 934, 942 (Bankr. E.D. Pa. 1988), but a supplier of
bottled gas is not a public utility.) All these are substantial
cases for a classification that will permit one creditor or class
of creditors to be paid disproportionately to the rest because
the creditors as a whole will be better off and so will the
debtor. In re Gallipo, 282 B.R. 917, 923 (Bankr. E.D. Wash.
2002); In re Davis, 209 B.R. 893, 896 (Bankr. N.D. Ill. 1997); In
re Ross, 161 B.R. 36, 38 (Bankr. C.D. Ill. 1993).
  At the other extreme is a nondischargeable debt consisting
of a fine imposed, or restitution ordered, in respect of a
criminal fraud that the Chapter 13 debtor committed,
together with other unsecured debts, and he proposes a
classification under which the nondischargeable debt will be
paid in full and the other creditors will receive nothing at
all. Approval of such a plan would be unreasonable. In re
Bennett, 237 B.R. 918, 924 (Bankr. N.D. Tex. 1999); In re
6                                               No. 01-3286

Williams, 231 B.R. 280, 283 (Bankr. S.D. Ohio 1999); In re
Limbaugh, 194 B.R. 488, 493-94 (Bankr. D. Ore. 1996). The
effect of the plan if approved in such a case would be to
make the debtor’s other unsecured creditors pay his fine or
restitution!
   Crawford’s rejected plan lies in between our examples,
but it is closer to the second and close enough to require us
to affirm its rejection. The nonpayment of child support is
a serious matter and in fact a nationwide problem, which
is why Congress has determined that child-support debts,
of which the debt owed the county is a version, are non-
dischargeable. The retributive and deterrent interests are
weaker than in the case of a deliberate criminal act, since
nonpayment can be involuntary as well as voluntary; but no
reason has been shown for allowing Crawford to shift two-
thirds of this debt to his other unsecured creditors. Had he
proposed to carve down his nondischargeable debt to the
principal owed on it (roughly $12,000), and had he shown
that without such a carve down he would be staggering
under such a crushing load of undischarged debt as to
make it inevitable or nearly so that he would soon be back
in bankruptcy court, this time under Chapter 7, the bank-
ruptcy court might deem such a plan reasonable and we
presumably would affirm—especially if the unsecured
creditors would do worse in Chapter 7 than they would do
under Crawford’s revised Chapter 13 plan. It is true that he
has a previous Chapter 7 discharge and so must wait six
years from the filing of his previous Chapter 7 petition
before seeking another such discharge. 11 U.S.C. § 727(a).
But although we don’t know the exact date of his previous
filing, we do know that he received his discharge in Sep-
tember 1997 and this means that he’ll be eligible to file
another Chapter 7 petition no later than September of this
year—for all we know, he can do so right now.
No. 01-3286                                                 7

  We do not hold that child-support debts, or, as in this
case, a debt arising from the assignment of the right to child
support, cannot be classified. Nor do we hold that Crawford
cannot formulate an acceptable plan that would involve an
element of classification. We hold only that the bankruptcy
court did not abuse its discretion in rejecting, as an unfair
discrimination against his other creditors, the plan he pro-
posed, which would if approved have shifted two-thirds of
his nondischargeable debt to his other creditors, leaving
them with nothing.
                                                  AFFIRMED.
A true Copy:
        Teste:

                           _____________________________
                           Clerk of the United States Court of
                             Appeals for the Seventh Circuit

                    USCA-02-C-0072—4-1-03