Court Opinion

ID: 3024574
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:31:49.446209+00
Date Added: 2024-06-11T11:47:41.920626
License: Public Domain

United States Bankruptcy Appellate Panel
                                  FOR THE EIGHTH CIRCUIT

                                     ____________________

                                         No. 99-6079EA
                                         No. 00-6001EA
                                     ____________________

In re: Ronald W. Banks,                           *
       Debtor.                                    *
_____________________________                     *
                                                  *
Ronald W. Banks,                                  *           Appeals from the United States
       Debtor-appellant.                          *           Bankruptcy Court for the
                                                  *           Eastern District of Arkansas
               v.                                 *
                                                  *
Sandra Vandiver,                                  *
       Creditor-appellee.                         *

                                     ____________________

                                      Submitted: May 4, 1999
                                       Filed: May 31, 2000
                                     ____________________

Before KOGER, Chief Judge, KRESSEL, and WILLIAM A. HILL, Bankruptcy Judges.
                                ____________________

WILLIAM A. HILL, Bankruptcy Judge.

       Debtor Ronald W. Banks appeals from the bankruptcy court’s1 order determining that he filed his
chapter 13 plan in bad faith and from the bankruptcy court’s subsequent order of dismissal. We have
jurisdiction over these appeals from the final orders of the bankruptcy court. See 28 U.S.C. § 158(b).
For the reasons set forth below, we affirm.

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          The Honorable Mary D. Scott, United States Bankruptcy Judge for the Eastern and Western
Districts of Arkansas.
                                             BACKGROUND
         The Debtor, Ronald Banks, was an Air Force pilot and officer for many years. During 20 of those
years, he was married to Sandra Vandiver. On May 27, 1982, they dissolved their marriage in the state
of California. However, their divorce decree left open the issue of whether Vandiver would later be entitled
to a portion of the Debtor’s military pension. The Debtor began drawing his military pension in November
1988.

         In 1990, Vandiver filed a state court action in Arkansas to determine her entitlement to a portion
of the Debtor’s military pension. Rather than setting aside the contested portion of the pension money he
received, the Debtor spent all the funds “as he saw fit,” including paying attorney fees incurred contesting
Vandiver’s claim. Applying Arkansas law, the state court dismissed Vandiver’s suit. However, the
Arkansas Court of Appeals reversed the trial court, holding that the law of California–not
Arkansas–governed the case. On remand, the state court dismissed the case again, finding that the original
California divorce court had made a final adjudication with respect to Vandiver’s claim and that Vandiver’s
suit was barred by res judicata, collateral estoppel, and an applicable California statute of limitations. On
appeal a second time, the appellate court again reversed the trial court, holding that no adjudication of
Vandiver’s claim had occurred in the California divorce proceeding and that Vandiver’s lawsuit was not
barred by res judicata, collateral estoppel, or the California limitations statute cited by the trial court. After
the second appellate ruling in her favor, Vandiver voluntarily nonsuited her case and timely refiled it,
claiming her community property interest in the Debtor’s military pension benefits as a tenant in common
and bringing an action for partition. The case then went to trial. Afterward, the trial court dismissed
Vandiver’s lawsuit a third time, and Vandiver appealed yet again. On appeal, the Arkansas Supreme
Court held that the prior rulings by the Arkansas Court of Appeals were the law of the case and that the
trial court erred in dismissing Vandiver’s lawsuit and in failing to award Vandiver 37.28 percent of the
Debtor’s military pension benefits.

       Shortly after the Arkansas Supreme Court’s decision, the Debtor filed a chapter 13 petition in
bankruptcy. At the time of filing, the Debtor was in good financial shape, earning an annual income of
approximately $62,000. He had no unsecured debt other than the judgment owed to Vandiver. Indeed,
the Debtor had paid off approximately $10,000 in unsecured debt within a few months prior to filing
bankruptcy. The only other significant debt the Debtor had was a home mortgage loan guaranteed by the
Veteran’s Administration. Shortly after the petition was filed, the automatic stay was lifted so that any
remaining issues regarding the liquidation of Vandiver’s claim could be resolved in state court. The state

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court then determined that Vandiver’s share of the military pension benefits that had been received by the
Debtor was $177,372.83. Vandiver filed a proof of claim that included an unsecured claim for $24,996.85
in attorney fees and costs in addition to a secured claim for $177,372.83–her liquidated portion of the
Debtor’s military pension–based on an equitable lien or constructive trust.

         The Debtor responded by filing an objection to Vandiver’s proof of claim, contending that her
entire claim was unsecured. In addition, the Debtor proposed an initial chapter 13 plan, and later, a
modified plan which treated Vandiver as an unsecured creditor and purported to pay her less than 15
percent of the total amount asserted in Vandiver’s proof of claim. The judgment debt owed to Vandiver
was the only significant debt to be dealt with under the Debtor’s modified three-year plan. Vandiver
objected to confirmation of the Debtor’s plan, contending, inter alia, that it was not filed in good faith.

        On June 29, 1999, the bankruptcy court conducted a hearing on Vandiver’s objection to
confirmation as well as the Debtor’s objection to Vandiver’s proof of claim. On September 17, 1999, the
bankruptcy court issued an order that sustained the Debtor’s objection to Vandiver’s proof of claim without
prejudice to her filing an adversary proceeding and motion for reconsideration, reasoning that the
procedural safeguards attendant a full adversary proceeding would be necessary for the bankruptcy court
to impose an equitable lien or constructive trust on the Debtor’s property. However, the bankruptcy court
also sustained Vandiver’s objection to confirmation on the grounds that the plan was proposed in bad faith.
The bankruptcy court specifically stated:

                  The chapter 13 plan proposes to pay [the Debtor’s] unsecured creditors
        approximately fifteen percent of the debt owed, over a three year period. However, the
        only unsecured creditor the debtor has is his former spouse. The only debt to be paid
        pursuant to this plan is a portion of a pension he is required to pay to his former spouse.
        The debtor admits that he filed this chapter 13 case because he was about to be compelled
        to pay the long-unpaid benefits. Having been finally ordered by the state Chancery Court
        to pay the past due amounts to his former spouse, he sought to circumvent the state court’s
        authority and to thwart his former spouse by filing a bankruptcy case and substantially
        devaluing her claim.
                                  *           *         *        *          *
                  This debtor is not in need of bankruptcy relief and filed his chapter 13 plan solely
        to ensure that his former spouse does not obtain most of the pension money to which she
        is entitled, but which he chose to spend. The plan proposes to pay his former spouse a
        meager portion of the amount to which she is not only entitled, but needs. The plan, as
        such, is not filed in good faith and cannot be confirmed. At minimum, since this debtor filed

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        a case without either the need for relief from debt or the desire for reorganization, but
        merely sought to avoid payment of a single debt, any modification which would meet the
        good faith standard must provide for payment for the entire debt, either in full within the
        time limits of chapter 13, or provide that repayment of the debt will be a continuing one.

The bankruptcy court’s order also provided for automatic dismissal of the bankruptcy case in the event that
the Debtor failed to file a plan conforming to the bankruptcy court’s decision.

        The Debtor filed a motion to amend the bankruptcy court’s order of September 17, 1999. By the
order dated October 20, 1999, the bankruptcy court granted the Debtor’s motion only insofar as removing
certain footnotes which were not essential to the court’s decision. On December 13, 1999, the Debtor’s
bankruptcy case was dismissed for failure to file a modified plan conforming to the bankruptcy court’s
previous decision.

        The Debtor appeals from the bankruptcy court’s orders of September 17, 1999, October 20,
1999, and December 13, 1999. The Debtor argues that the bankruptcy court clearly erred in making
certain findings of fact, including the finding that he proposed his chapter 13 plan in bad faith.

                                       STANDARD OF REVIEW
         On appeal, we review the bankruptcy court’s findings of fact for clear error and its conclusions of
law de novo. Fed. R. Bankr. P. 8013; Hatcher v. U. S. Trustee (In re Hatcher), 218 B.R. 441, 445
(B.A.P. 8th Cir. 1998) (citations omitted); Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir.
1997); O’Neal v. Southwest Mo. Bank (In re Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir.
1997). A fact finding is clearly erroneous when the reviewing court, based on the entire evidence, is left
with a definite and firm conviction that a mistake has been committed. Hatcher, 218 B.R. at 445-46
(citations omitted).

                                             DISCUSSION
        In order to be confirmed, a chapter 13 plan must be proposed “in good faith and not by any means
forbidden by law.” 11 U.S.C. § 1325(a)(3). A determination as to whether a chapter 13 plan was
proposed in good faith is a finding of fact reviewable under the clearly erroneous standard. Nielsen v. DLC
Investment, Inc. (In re Nielsen), 211 B.R. 19, 21 (B.A.P. 8th Cir. 1997);Noreen v. Slattengren, 974 F.2d
75, 77 (8th Cir. 1992); Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346, 1349-52 (8th Cir. 1990).

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The relevant inquiry regarding good faith is “whether the debtor has stated his debts and expenses
accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or
whether he has unfairly manipulated the Bankruptcy Code.” Education Assistance Corp. v. Zellner, 827
F.2d 1222, 1227 (8th Cir. 1987). However, the foregoing inquiry is governed by a “totality of the
circumstances” test. Noreen, 974 F.2d at 76; LeMaire, 898 F.2d at 1349; In re Estus, 695 F.2d 311, 316
(8th Cir. 1982). Factors which are particularly relevant to determining good faith under the totality of the
circumstances include: (1) the nature of the debt sought to be discharged; (2) whether the debt would be
dischargeable in a chapter 7 bankruptcy case; and (3) the debtor’s motivation and sincerity in seeking
chapter 13 relief. LeMaire, 898 F.2d at 1349 (citing Estus, 695 F.2d at 317). See also In re Kurtz, 238
B.R. 826, 830 (Bankr. D.N.D. 1999) (“Further consideration must be given to the sincerity of the Debtor
in putting forth his Chapter 13 plan of repayment and whether that plan demonstrates real sincerity on the
part of [the Debtor] to repay his creditors as best he can in exchange for the liberal Chapter 13
discharge.”). Another relevant factor in determining good faith is the Debtor’s pre-filing conduct. LeMaire,
898 F.2d at 1352 (citations omitted). However, even in light of egregious pre-filing conduct by the Debtor,
a chapter 13 plan may be confirmed if other factors “suggest that the plan nevertheless represents a good
faith effort by the debtor to satisfy his creditors’ claims.” Id. (citation omitted).

        The bankruptcy court’s finding of bad faith is subject to review under the clearly erroneous
standard. Although the Debtor contests various subsidiary fact findings, he ultimately fails to show that the
bankruptcy court’s finding of bad faith was clearly erroneous. For example, the Debtor argues that the
bankruptcy court should not have found that he accumulated $107,000 in a savings account, that his
demeanor revealed rancor, or that he failed to assist his children in pursuing a college education. Indeed,
some of the factual issues raised in the Debtor’s argument appear to have only scant relevance to the
ultimate finding of bad faith. Nevertheless, the bankruptcy court heard testimony from both sides regarding
these factual issues, made its credibility determinations, and based its findings thereon. Determinations as
to the credibility of witnesses are uniquely within the province of the trier of fact. Estate of Davis by
Ostenfeld v. Delo, 115 F.3d 1388, 1394 (8th Cir. 1997) (citing Anderson v. City of Bessemer, 470 U.S.
564, 105 S. Ct. 1504, 84 L. Ed. 2d 518 (1985)). Moreover, a court’s choice between two permissible
views of the evidence cannot be clearly erroneous. Delo, 115 F.3d at 1393-94 (citing Moody v. Proctor,
986 F.2d 239, 241 (8th Cir. 1993)). Accordingly, the Debtor’s argument must fail.

        Furthermore, there is ample evidence in the record to support the bankruptcy court’s finding that
the Debtor proposed his chapter 13 plan in bad faith. First, the nature of the debt at issue is closely tied

                                                     5
to the Debtor’s pre-filing conduct, and these factors bode against a finding of good faith. The debt in
controversy arose out of eight years of bitter litigation in the state courts. Although ownership of a portion
of his military pension was in dispute, the Debtor nevertheless spent the entire pension monies he received
in complete disregard of the potential consequences for doing so. A possible inference to be drawn from
such conduct is that the Debtor never intended to pay Vandiver her share of the pension, even if she
prevailed in the state court litigation. Indeed, it seems apparent from the record that the Debtor funded his
legal battle against Vandiver, at least in part, with pension monies that were ultimately adjudicated to be
Vandiver’s marital community property. Second, the potential dischargeability of the debt under chapter
7 bodes against a finding of good faith. If the Debtor had filed for protection under chapter 7 of the
Bankruptcy Code, it is likely that Vandiver would have had at least a colorable claim for
nondischargeability of the debt at issue. See 11 U.S.C. § 523(a)(5), (15). Third, the Debtor’s motivation
and sincerity in seeking chapter 13 relief bode against a finding of good faith. In this case, the Debtor
admitted that his sole motivation for filing bankruptcy was to avoid paying Vandiver on the debt at issue.2
This admission, combined with the fact that the Debtor proposed only a three-year plan that paid less than
15 percent of Vandiver’s claim, supports the bankruptcy court’s finding that the Debtor’s modified plan
was proposed in bad faith as yet one more attempt to deny Vandiver her marital community property
interest in the Debtor’s pension. See In re Zaleski, 216 B.R. 425, 431 (Bankr. D.N.D. 1997) (“Although
. . . the duration of a plan is not by itself indicative of bad faith, it is a factor in gauging the debtor’s sincerity
where, as here, a three-year plan operates to reduce the return to pre-petition creditors.”). Indeed, the
Debtor’s admitted motivation for seeking chapter 13 relief suggests that his modified plan was proposed

         2
          Seeking chapter 13 relief to avoid or lessen the effects of state court litigation is not “bad faith
constituting unfair manipulation of the Bankruptcy Code” per se. Bayer v. Hill (In re Bayer), 210 B.R.
794, 796 (B.A.P. 8th Cir. 1997). Nevertheless, the Debtor’s motivation in seeking chapter 13 relief is a
factor that must be considered when determining good faith, and where a debtor’s behavior exhibits a
pattern of manipulation, such conduct should not be rewarded in bankruptcy. See Zaleski, 216 B.R. at 429
(“The [good faith] requirement has at its heart the fundamental notion that bankruptcy is intended to afford
the honest but unfortunate debtor the opportunity to gain for himself a fresh start; bankruptcy is not meant
to reward the dishonest debtor.”). During eight years of state court litigation, the Debtor consciously chose
to spend the contested portion of the pension monies he received, thereby manufacturing the debt to
Vandiver he now seeks to discharge in bankruptcy. The record indicates that the Debtor was gainfully
employed at all times during that period and that it was not necessary for the Debtor to invade the contested
portion of his military pension to provide for himself and his two dependents. Thus, the Debtor is not of
the “honest but unfortunate” variety that the Bankruptcy Code was intended to protect, and his conduct
in this case allows an inference of dishonest manipulation to be drawn.

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not with the intention of satisfying Vandiver’s claim to the greatest extent possible, but with the intention of
avoiding payment of that claim to the greatest extent possible, and the meager repayment percentage
proposed by the Debtor’s plan supports this conclusion. Such a purpose is the antithesis of good faith in
the context of chapter 13. Since there is no strong evidence of good faith on the part of the Debtor, we
are not left with a definite and firm conviction that a mistake has been committed. Therefore, the
bankruptcy court’s finding that the Debtor proposed his modified chapter 13 plan in bad faith is affirmed.

        Finally, the bankruptcy court dismissed the case based on the Debtor’s failure to file a new
modified plan satisfying the good faith requirement of 11 U.S.C. § 1325(a)(3). The bankruptcy court’s
dismissal of the case was correct and is hereby affirmed as well.

                                           CONCLUSION
        For the foregoing reasons, we affirm the bankruptcy court in all respects.

        A true copy.

                 Attest:

                           CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
                           EIGHTH CIRCUIT

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