Court Opinion

ID: 9693137
Source: CourtListenerOpinion
Date Created: 2023-08-25 16:24:57.914536+00
Date Added: 2024-06-11T18:19:19.709854
License: Public Domain

KLEIN, Bankruptcy Judge,
Concurring.
I join the majority opinion and write separately, first, to address another error — oft-repeated but evading review — -in the dismissal order and, second, to emphasize that, if the Ninth Circuit meant everything it said in Slack and Scovis, then our decision regarding chapter 13 eligibility cannot stand, and we will be in a Wonder*878land of counterproductive pleading formalism: “sentence first — verdict afterwards.”
I
This appeal can be comprehended only if one recognizes that there are three separate facets to the order on appeal.
A
First, as this was a plan confirmation that degenerated into dismissal, the order represents a refusal to confirm a chapter 13 plan under § 1325(a) because of ineligibility and lack of good faith. Our conclusion that the debtor was eligible under § 109(e) takes away ineligibility as a basis to refuse to confirm her plan. Although we do not rule on good faith under § 1325(a)(3), we remind the bankruptcy court that Goeb’s “all militating factors” analysis sets the appropriate standard for determining whether to confirm the plan. Goeb, 675 F.2d at 1391.
1
Although we take no formal position on the outcome of the “all militating factors” analysis prescribed by Goeb, it is plain that some of the pertinent factors are adverse to confirmation.
It is significant that the chapter 13 case is probably administratively insolvent. The debtor’s chapter 13 plan calls for her to make plan payments totaling $1,800.00 ($50.00/month x 36 months) that, net of estimated trustee fees, would provide only $1,602.00 to pay all other administrative expenses, with the residue, if any, to creditors. Since administrative expenses include fees for debtor’s counsel, who bills $300.00 per hour and by now must have consumed his $2,500.00 retainer, the chance of any payment to creditors appears to be very low.
Indeed, the administrative insolvency may make the plan not confirmable as a matter of law due to the predictable insufficiency of funds to pay administrative expenses in full (unless debtor’s counsel agrees to a different treatment). 11 U.S.C. §§ 507(a)(1), 1322(a)(2) & 1326(b)(1).
Next, the debtor engaged in bankruptcy planning that could be vulnerable to criticism. She executed a deed of trust (as co-debtor with her sister) dated nine days prebankruptcy and a “mortgage” to her sister dated ten days prebankruptcy on an $85,000 loan secured by her 50 percent interest in the residence and by her otherwise-unencumbered 1998 Mercedes Benz.
Moreover, the debtor’s repayment of a $6,350 debt to her sister six months pre-bankruptcy that might be avoidable.
Nor is the plan providing nominal payment to creditors being justified on a theory of using chapter 13’s muscle to cure a default by forcing a secured lender to accept payments over time or to hold an importuning priority creditor at bay. Here, no defaults are being cured and no secured or priority creditors are being otherwise dealt with under the plan.
2
It would be reasonable to infer, having eliminated the usual reasons for legitimate nominal payment plans, that this plan was designed to preempt litigation before entry of judgment that might make the debtor ineligible under § 109(e).
Any judgment in excess of $93,669.50 would push total unsecured debt over the $269,250 limit. In the action in which the debtor is a party, there is a demand of “in excess of $50,000.00,” and a $1,387,651.39 proof of claim, with allegations that would make the debt nondischargeable in chapters 7 and 11.
Thus, the timing of the filing of this chapter 13 case looks like a simple race to the courthouse so as to collect a “super-*879discharge” in order to discharge debts that might not be discharged in a chapter 7 case.
3
These aspects of Goeb’s “all militating factors” analysis of “good faith” under § 1325(a)(3) do not bode well for plan confirmation. All funds to be paid under the plan would wind up going to the chapter 13 trustee and debtor’s counsel. The main purpose for the nominal payment plan is to eliminate debt that cannot be discharged in chapters 7 or 11 and that, if liquidated, likely would make the debtor ineligible for chapter 13.
While these factors are not necessarily fatal, I doubt that the court would have confirmed the plan if it had performed the Goeb analysis. If plan confirmation had been the sole issue in this appeal, then I might be urging affirmance on the theory that the record supports the result despite the absence of findings.
B
The second facet of the order represents a determination of “cause” under § 1307(c) premised on ineligibility and bad faith. The gravamen of our conclusion that the debtor is eligible for chapter 13 relief is that any finding of § 1307(c) “cause” would require a totality of the circumstances analysis followed by, if “cause” is found, consideration of whether conversion or dismissal is in the best interests of creditors and the estate.
While the circumstances are the same, the question of dismissal or conversion has more at stake than mere denial of plan confirmation. This extra dimension warrants careful analysis by the bankruptcy court.
C
The third facet of the order declares the debtor ineligible to file another bankruptcy case for 180 days and does so in the form of an injunction. Here, our decision is silent. Unlike the majority I would decide its merits, as the court’s “180-day bar to refiling in any chapter” is at odds with the Bankruptcy Code and usually evades review.
1
The bankruptcy judge reasoned that a mere finding of “bad faith” warranted application of § 109(g), which provides that a individual debtor is ineligible to be a debt- or for 180 days after dismissal of a bankruptcy case:
if (1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the ease; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362[.]
11 U.S.C. § 109(g).
Not only does § 109(g) say nothing about bad faith, the court should have made findings about willfulness of a violation of an order of the court or of a failure to appear before the court in proper prosecution of the case in order to justify invoking § 109(g). What those findings would be are not apparent as there is no obvious violation of § 109(g).
2
Although the court cited the Ninth Circuit’s Eisen decision as authority to apply § 109(g) to a dismissal for “bad faith,” the remark to that effect in Eisen is pure dictum.
The question of the debtor’s eligibility to file bankruptcy was not an issue in Eisen. The 180-day bar had long since been mooted by the passage of time. The per curiam opinion does not discuss § 109(g) *880and would, if it really was intended to be a holding, have explained how bad faith can be shoehorned into the language of § 109(g). Finally, the only thing in Eisen arguably probative of § 109(g) issues is a reference to the debtor’s failure to disclose a prior bankruptcy and submission of “contradictory and misleading” descriptions of his interest in property, both of which could reasonably be viewed as willful violations of orders of the court. Eisen, 14 F.3d at 471.
I doubt that, if the Eisen panel had considered the issue, it would have said that a “bad faith” choice of chapter 13 in one case should slam the door to legitimate chapter 7 relief or preclude other creditors from filing an involuntary case, both of which are consequences of debtor ineligibility.
This appeal illustrates the problem. It cannot be said that the debtor had no legitimate bankruptcy purpose in filing her case. In addition to the debt that may be nondischargeable, she has $171,042.98 in unsecured debt that appears eligible for discharge in chapters 7 or 11. This was not a serial filing. At worst, her “bad faith” transgression was selecting the chapter 13 remedy over the chapter 7 remedy in circumstances in which she was either ineligible for chapter 13 or doomed to fail.
The debtor has the non-waivable right to convert a chapter 13 case to chapter 7 “at any time.” 11 U.S.C. § 1307(a)(“Any waiver of the right to convert under this subsection is unenforceable.”).12 Thus, the failure of a chapter 13 case, by way of unsuccessful plan confirmation or otherwise, ordinarily leaves the debtor with the option of converting to chapter 7, rather than being expelled from bankruptcy for 180 days.
3
Moreover, the bankruptcy court imposed its 180-day bar with what looks like an injunction. It is not settled that this is the correct manner of proceeding. If another case were to be filed within 180 days and assigned to another judge, the usual procedure is to move for dismissal in the later-filed case rather than to ask the earlier judge to enforce the injunction.
The better way to make the § 109(g) record in the first case is for the court, having made findings, formally to declare that the “debtor has willfully failed to abide by orders of the court” and/or “willfully failed to appear before the court in proper prosecution of the case” and then let nature take its course.
II
If the Ninth Circuit really meant everything it said in Slack and Scovis, then our decision on chapter 13 eligibility cannot stand and counterproductive pleading formalism will reign.
A
Read together, Slack and Scovis paint chapter 13 eligibility matters into a neat corner entirely in the debtor’s control by virtue of a nearly immutable focus on the initial schedules.
On one hand, a debt is liquidated for purposes of § 109(e) if the amount is “readily ascertained,” regardless of doubts about liability. On the other hand, § 109(e) eligibility is governed by the debtor’s originally filed schedules, checking only to see if they were prepared in good faith.
*881Slack says, “[w]e hold that a debt is liquidated if the amount is readily ascertainable, notwithstanding the fact that the question of liability has not been finally decided.” Slack, 187 F.3d at 1075.
Scovis says, “[w]e now simply and explicitly state the rule for determining Chapter 13 eligibility under § 109(e) to be that eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith.” Scovis, 249 F.3d at 982.
These two precedents, treacherously simple in their statement, mask complexity that invites abuse and confusion.
B
I do not claim to have a comprehensive solution to this multi-dimensional puzzle and cannot pretend that our solution today is faithful to the letter of Slack and Scovis. We indulge in the liberty of construing the problematic portions of those decisions as dicta. The court of appeals may see it differently.
We should be striving toward a rule of chapter 13 eligibility analysis that is comprehensible by lawyers and judges, promotes full, candid, and complete disclosure in schedules, distinguishes between the objective and subjective dimensions of eligibility, settles the objective issues, and leaves to the bankruptcy judges the subjective issues so that we may fulfill the intent of Congress, as reflected in the fact that it prescribed specific debt limits in § 109(e).
Those who are entitled to the special protections of chapter 13 relief should have it, while the undeserving are excluded.
1
In a well-managed chapter 13 regime, one would expect that there would be two occasions for inquiring into whether the debtor had, on the date of filing, noncon-tingent, liquidated unsecured and secured debts within the § 109(e) limits, so as to be eligible for chapter 13 relief. One would also think that in the nitty-gritty daily judicial management of chapter 13 cases, the court would need some discretionary latitude in determining the pertinent amounts of debt.
First, early in the case the limits could be tested by way of a motion to dismiss or convert. The stakes of immediate importance to creditors early in the case are whether the debtor should be allowed to remain in control of property of the estate and whether the unique chapter 13 co-debtor stay should continue to apply. 11 U.S.C. §§ 1301 & 1306(b).
Second, at the time of confirmation, the debtor’s § 109(e) eligibility for chapter 13 relief is logically subsumed within the essential elements for confirmation that the Bankruptcy Code be complied with and that the plan be proposed in good faith and not by any means forbidden by law. 11 U.S.C. §§ 1325(a)(1) & (a)(3). The important stakes to creditors at the time of confirmation are whether they will be held at bay for the life of the plan and then have otherwise nondischargeable debts discharged by way of the “superdisc-harge.” 11 U.S.C. § 1328(a).
In this respect, it is worth remembering that chapter 13 is fundamentally in the nature of a remedy — a remedy more potent than other remedies in the Bankruptcy Code. Any individual can file a chapter 7 or 11 bankruptcy case, but only an individual whose debts are below the statutory limits can maintain a chapter 13 case in which more debts can be discharged, with creditors being held at bay by the automatic stay for the life of the plan. The trade-off for creditors is that the debtor must adhere to a regime of supervised payments that will pay creditors more than what they would receive under other Bankruptcy Code chapters.
*8822
While it is tempting to analogize § 109(e) to the $75,000 amount-in-controversy requirement for exercise of diversity jurisdiction, 28 U.S.C. § 1332, the analogy does not hold up because the § 109(e) determination has no impact on federal bankruptcy jurisdiction under 28 U.S.C. § 1334.
The amount-in-controversy requirement for diversity jurisdiction is part of the determination of the existence of the court’s jurisdiction, which needs to be resolved early in a civil action. It would be dysfunctional judicial administration to permit the initial determination that there is jurisdiction to be routinely revisited and second-guessed later in the litigation.
In contrast, federal jurisdiction is not at stake in an eligibility determination under § 109(e). There is federal bankruptcy jurisdiction over an individual’s bankruptcy case under § 1334, regardless of whether the individual’s debt structure qualifies for chapter 13. If the debtor is not eligible under § 109(e) for the remedies of chapter 13, the debtor is nevertheless eligible under chapters 7 and 11 because all individuals are eligible for some form of bankruptcy relief. To that end, § 1307(a) gives the debtor a non-waivable right to convert to chapter 7 “at any time.”
In short, while failure to have $75,000 in controversy precludes federal diversity jurisdiction, deviation from the debt limits of § 109(e) does not defeat federal jurisdiction under § 1334. Rather, exceeding the debt limit merely affects which chapters, and which remedies, are available to the debtor.
Thus, no dysfunction results from permitting § 109(e) eligibility to be thoroughly litigated at the time of plan confirmation. A bankruptcy court’s denial of an early motion to dismiss for ineligibility is merely a determination that the court will allow the debtor to propose and attempt to confirm a chapter 13 plan, at which time the debtor will be required to prove eligibility for the chapter 13 remedy.
3
Since a finding of § 109(e) eligibility amounts to a choice of a more potent remedy regarding property rights than other chapters of the Bankruptcy Code, there is more need to continue to police the boundary after an initial determination is made.
If it is determined later in the chapter 13 case that the debtor was ineligible for chapter 13 at the time of filing, then the case is easily converted to a chapter for which the debtor is eligible, without defeating federal jurisdiction. The debtor can convert as of right under § 1307(a) and can dismiss as of right under § 1307(b), unless the case was earlier converted to chapter 13. Otherwise, conversion or dismissal, whichever is in the best interests of creditors and the estate, requires “cause” under § 1307(c).
Just as the stakes differ at the two pertinent stages of § 109(e) analysis, the nature of the litigation and burdens of proof differ. A creditor’s failure to persuade the court to grant a motion to dismiss for § 109(e) ineligibility ought not to be conclusive with respect to the debtor’s burden to demonstrate § 109(e) eligibility for purposes of plan confirmation.
As motion practice early in the case, sound judicial management discourages diversionary sideshows. In the absence of an apparent risk of dissipation of property of the estate, little harm, relative to being in chapter 7, results from permitting the chapter 13 case to proceed toward plan confirmation.
Thus, there is considerable logic in deferring to a debtor’s schedules in early motion proceedings designed to short-circuit the chapter 13 process and in placing the burden on a moving creditor to present *883a persuasive case promptly to demonstrate that the debtor is so clearly ineligible per § 109(e) that there is no point in giving the debtor a chance to prove eligibility in connection with plan confirmation.
The equation shifts, however, at the plan confirmation stage. The debtor has the burden of proof on all essential elements for confirmation, including that “the plan complies with the provisions of this chapter [13] and with the other applicable provisions of this title [11]” and whether “the plan has been proposed in good faith and not by any means forbidden by law.” 11 U.S.C. §§ 1325(a)(1) & (a)(3).
In view of the fact that the negotiation dynamic of chapter 11 is not present in chapter 13 cases because creditors are not allowed to vote to accept or reject the plan, plan confirmation is the primary occasion for chapter 13 creditors to have their Due Process opportunity to contest the plan.
Thus, in principle, one would expect a plan confirmation hearing could include a more careful evidentiary inquiry into the “ready determinability” of the nature and amount of the putative liquidated debt as it appeared as of the date of the filing of the petition, which is then an issue at the heart of two essential elements of plan confirmation, and no longer a diversionary sideshow.
That balance between interests of debt- or and creditor was at the foundation of our position in the Nicholes decision, which was an appeal from denial of chapter 13 plan confirmation:
It is important to emphasize today that the bottom line is that § 109(e) calculations depend on “ready determination,” not upon the existence or absence of disputes. If a debt is not readily determinable, whether as a result of a dispute or otherwise, then the claim is unliquidated. This approach encourages administrative efficiency, recognizes that Congress deliberately limited the availability of Chapter 13, and helps prevent potential abuse of the “superdischarge” provisions of Chapter 13.
Nicholes, 184 B.R. at 91 (emphasis supplied).
After Slack and Scovis, I am no longer confident that the law of the circuit is consistent with this construct.
In sum, the chapter 13 system in this circuit is in disequilibrium if our decision today is not correct.
If that turns out to be the case, then the problem will have to be sorted out in some other way. One, or a combination, of two things will happen. Either, the genius of counsel, which knows no bounds, will devise new theories — perhaps challenging chapter 13 schedules as not prepared in good faith — to resolve festering chapter 13 eligibility issues. Or, the court of appeals will more cogently restate the law of the circuit.

. Subsequent conversion from chapter 7 to chapter 11, requires the court's approval. 11 U.S.C. § 706(a)-(b).