Court Opinion

ID: 812219
Source: CourtListenerOpinion
Date Created: 2012-11-20 16:18:25+00
Date Added: 2024-06-11T15:20:28.472739
License: Public Domain

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 court1 confirming their amended Chapter 13
plan. We have jurisdiction over this appeal from the 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.2 Because of the age
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.

      1
             The Honorable Jerry W. Venters, United States Bankruptcy Judge for the
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 States Bankruptcy 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 of Judge Federman and Judge Dow both led to the order
of confirmation entered by Judge Venters.
      2
              The Debtors state that the taxing authorities also filed secured and
priority unsecured proofs of claims in the Debtors’ case. Only the unsecured non-
priority claims are relevant to our discussion.
                                          -2-
       The Debtors filed a plan that stated that “[t]he general unsecured claims of the
United States for the Internal Revenue Tax, the Missouri Department of Revenue, 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 provisions for
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 non-
priority 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 Debtors stated 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

      3
              The bankruptcy court also denied confirmation of other forms of the
Debtors’ plan, but no ground for denial of confirmation, other than those discussed
by us in this decision, is relevant to this appeal.
                                          -3-
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.4 The Trustee further submitted that, if the Debtors were permitted to pay
the tax claims ahead of other unsecured non-priority creditors, the tax creditors would

      4
              After the deadline for filing proofs of claims in the Debtors’ case, the
Debtors settled an adversary proceeding “striping off” a lender’s junior mortgage 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.
                                          -4-
receive a distribution of approximately 97%.5 The remaining unsecured non-priority
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 of statutory 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.

      5
             The Trustee stated that this percentage does not account for payment of
tax preparation fees.
      6
             It is ambiguous as to whether the Debtors’ request for payment of their
tax preparation fees is a priority or a non-priority claim. The Debtors’ previous plan
simply states that 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.
                                           -5-
                                 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 of the [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:

                                         -6-
      (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 Debtors state 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.”

                                         -7-
       The public policy argument of the Debtors seems 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 non-
dischargeable debt after the completion of the Debtor’s bankruptcy case. We reject
an argument by the Debtors that the delay in collecting the non-dischargeable tax debt
should change the outcome. See Groves, 39 F.3d 212 (delay in collection of non-

                                           -8-
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 non-
priority non-dischargeable tax claims in full through the plan. See Groves, 39 F.3d
215 (public policy did not require payment of student loan debt in full under plan and
there was nothing else mandating 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 start significantly 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 from herself
onto her general unsecured creditors.’ ”), aff’d 39 F.3d 212. The bankruptcy court

                                            -9-
properly held that such treatment unfairly discriminates against the other unsecured
non-priority creditors.

                                CONCLUSION
      The decision of the bankruptcy court is AFFIRMED.

                                        -10-