Court Opinion

ID: 3151282
Source: CourtListenerOpinion
Date Created: 2015-11-02 17:00:50.427332+00
Date Added: 2024-06-11T11:55:34.099656
License: Public Domain

United States Bankruptcy Appellate Panel
                           For the Eighth Circuit
                       ___________________________

                               No. 15-6009
                       ___________________________

 In re: Kevin D. Jordahl, Jr.; Sarah J. Jordahl, formerly known as Sarah J. Davis

                                    lllllDebtors

                            ------------------------------

                     Kevin D. Jordahl, Jr.; Sarah J. Jordahl

                      lllllllllllllllllllllDebtors - Appellants

                                          v.

                                Gregory A. Burrell

                        lllllllllllllllllllllTrustee - Appellee
                                     ____________

                 Appeal from United States Bankruptcy Court
                  for the District of Minnesota - Minneapolis
                                 ____________

                           Submitted: October 9, 2015
                            Filed: November 2, 2015
                                 ____________

Before SCHERMER, SALADINO and NAIL, Bankruptcy Judges.
                         ____________

SCHERMER, Bankruptcy Judge
      The Debtors, Kevin D. Jordahl, Jr. and Sarah J. Jordahl (Debtors), appeal
from the order of the bankruptcy court1 confirming their amended Chapter 13 plan.
We have jurisdiction over this appeal from the final order 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 a Chapter 13 debtor is permitted to pick and
choose the subsections of 11 U.S.C. § 1322(b) with which he will comply to the
exclusion of other subsections, or whether when the debtor’s treatment under one
subsection of § 1322(b) falls within the ambit of another subsection, the debtor must
meet all standards of that other subsection. We hold that when a Chapter 13 debtor’s
treatment of a creditor under one subsection of § 1322(b) falls within the contours of
another subsection of that statute, all standards of both subsections must be satisfied.
Specifically, we examine whether the maintenance of regular payments for unsecured
non-priority student loan debt by the Debtors in this case, while they paid
substantially less to other unsecured non-priority debt, satisfied the requirements of
Bankruptcy Code §§ 1322(b)(1) and (b)(10). We hold that those requirements were
not met.

                                   BACKGROUND
       On September 30, 2013, the Debtors filed a petition for relief under Chapter
7 of Title 11 of the United States Code (Bankruptcy Code), and the Debtors’ case was
later converted to a case under Chapter 13.

     The two Debtors had a total of three student loans, each of which had a final
payment that would come due after the completion of the Debtors’ Chapter 13 plan.
The Debtors were current on their student loan payments at all relevant times.

      1
              The Honorable Kathleen H. Sanberg, United States Bankruptcy Judge
for the District of Minnesota.

                                          -2-
       Following the conversion of the Debtors’ case to Chapter 13, the Debtors filed
their Chapter 13 plan (Original Plan). The Original Plan bifurcated the Debtors’ non-
priority unsecured debt into student loan debt (which was non-dischargeable) and all
other unsecured non-prority debt (which was dischargeable). Taking into account
the calculations by the Debtor and Chapter 13 trustee, Gregory A. Burrell (Trustee),
the bankruptcy court found that the proposed dividend to unsecured creditors would
be between 6% and 11.5% under the Original Plan. The Original Plan provided that
the Debtors would maintain their full student loan payments under Bankruptcy Code
§1322(b)(5), making those payments directly to the lenders. The bankruptcy court
found that the dividend to the Debtors’ student loan creditors over the life of the plan
was projected to be 52%.

       The Trustee objected to confirmation of the Original Plan because the Debtors’
proposed treatment of the student loans, while meeting the standards of § 1322(b)(5),
failed to meet the requirements of Bankruptcy Code §§ 1322(b)(1) and (b)(10). In its
opinion, the bankruptcy court denied confirmation of the Original Plan because the
Debtors’ separate classification of the student loan debt constituted unfair
discrimination under Bankruptcy Code § 1322(b)(1). The court did not address the
Trustee’s arguments that the Original Plan failed to meet the requirements of
Bankruptcy Code § 1322(b)(10) because the student loan debt payments included
interest, while all other allowed claims were not paid in full.

       Thereafter, the Debtors filed a first modified plan (Modified Plan), under which
the Debtors proposed to maintain and make payment directly to the lender for one
student loan (principal and interest), which the Debtors stated was a loan that was co-
signed by a grandmother of one of the Debtors. The Debtors proposed to pay the
remaining two student loans the same pro rata distribution that would be paid to
other unsecured non-priority creditors. The Trustee objected to confirmation of the
Modified Plan because it proposed payment of post-petition interest on non-
dischargeable student loan debt, while the Debtors were not making full payment of

                                          -3-
all allowed claims. The Debtors objected to confirmation of the Modified Plan
because it did not provide for treatment of the three student loans as the Debtors had
proposed in the Original Plan. The bankruptcy court denied confirmation of the
Modified Plan.

        The Debtors filed a second modified plan, which the Debtors did not pursue
after the Trustee objected to it. The Debtors then filed their third modified plan (Final
Plan). The Final Plan separately treats one student loan for which the payment of the
principal amount (but not interest) of the loan is maintained. With respect to this loan,
the Final Plan states “Codebtor is liable on claim. All amounts paid to this creditor
during the plan term shall be applied only to principal and not to interest.” Under the
Final Plan, the remaining student loans are to be paid pro rata with other unsecured
non-priority claims. Against the Debtors’ objection, the Final Plan was confirmed.
The Debtors timely appealed.

                            STANDARD OF REVIEW
        We review findings of fact for clear error and conclusions of law de novo.
Venture Bank v. Lapides, 800 F.3d 442, 443 (8th Cir. 2015). Statutory interpretation
is a legal question that we review de novo. Hardy v. Fink, 787 F.3d 1189, 1192 (8th
Cir. 2015). The standard of review for whether a debtor’s classification discriminates
unfairly is unclear. In Groves v. LaBarge (In re Groves), 39 F.3d 212 (8th Cir. 1994),
the Eighth Circuit “treated the issue of classification as ‘primarily one of statutory
construction.” Copeland v. Fink (In re Copeland), 742 F.3d 811, 813 (8th Cir. 2014)
(quoting Groves, 39 F.3d at 214). However, the Groves court stated that “application
of the ‘discriminate unfairly’ standard in other cases may involve little more than
exercise of the bankruptcy court's broad discretion.” Id. (quoting Groves, 39 F.3d at
214). Our conclusion is the same regardless of which standard is used.

                                          -4-
                                   DISCUSSION
       The Debtors’ appeal of the order confirming their Final Plan was proper. See
Bullard v. Blue Hills Bank, 135 S.Ct. 1686 (2015) (order denying confirmation of
Chapter 13 plan was not final for appeal when the debtor could propose an alternate
plan); Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1141 (8th Cir. 2008) (Debtor had
standing to appeal confirmation of her own plan). The Debtors seek reversal of
confirmation of their Final Plan and approval of their Original Plan.2

A.   11 U.S.C. § 1322(b)
     Bankruptcy Code § 1322(b) sets forth eleven subsections pertaining to a
Chapter 13 plan. It provides, in pertinent part, that:

            (b) . . . the plan may –

              (1) designate a class or classes of unsecured claims, as provided
      in section 1122 of this title, but may not discriminate unfairly against
      any class so designated; however, such plan may treat claims for a
      consumer debt of the debtor if an individual is liable on such consumer
      debt with the debtor differently than other unsecured claims;
              ...
              (5) notwithstanding paragraph (2) of this subsection, provide for
      the curing of any default within a reasonable time and maintenance of
      payments while the case is pending on any unsecured claim or secured
      claim on which the last payment is due after the date on which the final
      payment under the plan is due;
              ...
               (10) provide for the payment of interest accruing after the date
      of the filing of the petition on unsecured claims that are
      nondischargeable under section 1328(a), except that such interest may

      2
            In their brief, the Debtors request that we “reverse the bankruptcy court’s
confirmation of the debtors [sic] third modified plan and remand the case so that the
debtors may propose a plan substantially similar to their original plan for
confirmation.”

                                         -5-
      be paid only to the extent that the debtor has disposable income
      available to pay such interest after making provision for full payment of
      all allowed claims;

11 U.S.C. §§ 1322(b)(1), (b)(5) and (b)(10). Section1122(a) states that “a plan may
place a claim or an interest in a particular class only if such claim or interest is
substantially similar to the other claims or interests of such class.” 11 U.S.C.
§1122(a).

       The Debtors argue that the word “may” in § 1322(b) signifies that they are
permitted to choose one subsection of the statute (§ 1322(b)(5)) for treatment of their
student loan debt, to the exclusion of all other subsections. The Trustee submits that
the subsections of § 1322(b) are not eleven independent choices; instead, they set
forth eleven standards that must be met in a Chapter 13 plan.

       We agree with neither the Debtors nor the Trustee. Instead, we hold that when
a Chapter 13 Debtor’s treatment of a creditor under one subsection of § 1322(b) falls
within the contours of another subsection of that statute, all standards of both
subsections must be satisfied. This is clear from the face of § 1322(b) and a common
sense reading of the statute. To allow a debtor to comply with the requirements of
only one of the eleven subsections of § 1322(b) when the facts of his case fall within
another subsection of the statute would be nonsensical. Congress chose to set forth
all eleven subsections. A debtor cannot ignore those that he does not like.

       The Debtors cite to dicta in the Eighth Circuit’s Groves decision, which they
believe supports their argument that they need only comply with § 1322(b)(5), to the
exclusion of the other subsections of § 1322(b). 39 F.3d at 215. However, the
sentence to which the Debtors cite, “[a]lternatively, the debtor may treat the student
loan obligation as a long term indebtedness under § 1322(b)(5), curing arrearages
within a reasonable time and thereafter maintaining regular payments,” is just that,
dicta. Id. The interplay between § 1322(b)(5) and the other subsections of § 1322(b)

                                         -6-
was not at issue in Groves, and the language cited by the Debtors does not impact our
ruling.

       The Trustee does not dispute the application of § 1322(b)(5) to the student loan
debt, provided that the Debtors also comply with the requirements of §§ 1322(b)(1)
and (b)(10). The Trustee argues that the Debtors failed to comply with the
requirements of §§1322(b)(1) and (b)(10). We address each subsection in turn.

      (1) 11 U.S.C. § 1322(b)(1)
      Under §1322(b)(1), “[a] Chapter 13 debtor's plan of reorganization may place
unsecured claims in separate classes ‘as long as the classification 1) complies with
section 1122 of the Code and 2) does not result in unfair discrimination between the
claims grouped separately.” Groves, 39 F.3d at 214 (quoting Mickelson v. Leser (In
re Leser), 939 F.2d 669, 671 (8th Cir. 1991)); 11 U.S.C. § 1322(b)(1).

      The Debtors believe that under their Original Plan, § 1322(b)(1) does not
apply, because the Debtors did not create a separate class for the student loan debt
under §1122. The Debtors argue that they instead elected to treat their student loan
debt separately under § 1322(b)(5). However, § 1122(a) simply states that a claim
must be substantially similar to the other claims in the same class. By paying the
student loan debt directly, and not through the plan, the effect of what the Debtors did
was to separately classify and treat the student loan debt. Therefore, § 1322(b)(1)3

      3
              Section 1322(b)(1) also states that the plan “may treat claims for a
consumer debt of the debtor if an individual is liable on such consumer debt with the
debtor differently than other unsecured claims.” 11 U.S.C. §1322(b)(1). The
confirmed Final Plan separately classified and provided for the maintenance of
payment of the principal (but not interest) of one student loan that was co-signed by
a third party. The Trustee did not contested the payment of principal on the co-signed
loan and no issue regarding such payment was raised in this appeal.

                                          -7-
does apply and the Debtors must comply with the bar on unfair discrimination in that
statute.

      The Eighth Circuit has “adopted a four-part test for unfair discrimination”
under § 1322(b)(1). Copeland, 742 F.3d at 813. Under the test, we examine:

           (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.

     Leser, 939 F.2d at 672 (citations omitted). The Debtors bear the burden of
proving that the classification of the student loan debt does not discriminate unfairly.
Groves, 39 F.3d 212, 214 (8th Cir. 1994).

        The Debtors argue that we should not look to the Eighth Circuit’s four-part
analysis for unfair discrimination because § 1322(b)(1)’s fairness requirement is
satisfied as a matter of law by the statutory authority granted under § 1322(b)(5). See
In re Jordahl, 516 B.R. 573, 576 (Bankr. D. Minn. 2014) (bankruptcy court noting
a split of authority regarding “whether the classification of an unsecured debt under
§1322(b)(5) is subject to the unfair discrimination test found in § 1322(b)(1),” and
the majority view that treatment under § 1332(b)(5) must satisfy the unfair
discrimination analysis.) We disagree with the Debtors. This argument by the
Debtors is an end run around § 1322(b)(1) and is, in substance, the same as the
argument that we already rejected; that each subsection of § 1322(b) operates
independently. As we stated above, the requirements of all applicable subsections of
§ 1322(b) must be satisfied.

       We agree with the bankruptcy court’s holding that the Debtors’ plan was
unfairly discriminatory under the four-part test. The bankruptcy court stated that the

                                          -8-
Debtors failed to establish that the discrimination was reasonable, the Debtors and the
Trustee had agreed before that court that the Debtors could not satisfy the second part
of the test, the Debtors satisfied the good faith requirement, and the last part of the
test was inapplicable.

        The only reason for the discrimination that the Debtors set forth in this appeal
is the one that we just rejected; that Congress’s authorization for debtors to make the
student loan payment under § 1322(b)(5) renders such treatment fair under
§1322(b)(1). In addition, special classification is not justified by the non-
dischargeability of the debt standing alone, which appears to be the real reason for the
Debtors’ separate treatment of the student loan debt. See Copeland, 742 F.3d at 814
(citing Groves, 39 F.3d at 216). The Debtors make no argument in this appeal to
support the last three parts of the four-part test. Moreover, without a basis for the
discrimination, we do not examine the last part of the test; the relationship between
the degree of discrimination and the rationale for such treatment. Copeland, 742 F.3d
at 815 (“Having rejected the [Debtors'] proffered rationale for the discrimination, we
see no need to consider whether the degree of discrimination is reasonably related to
the rationale.”).

        (2) 11 U.S.C. § 1322(b)(10)
        The facts of the Debtors’ case also show that § 1322(b)(10) applies to and bars
the Debtors’ proposed treatment of their student loan debt. Section 1322(b)(10)
provides that the payment of post-petition interest on a non-dischargeable unsecured
claim is permitted only if the debtor’s plan provides for full payment of all allowed
claims. See 11 U.S.C. § 1322(b)(10). The Debtors admit that each maintenance
payment that they seek make to their student loan lenders would include a component
of post-petition interest. However, the Debtors did not provide for full payment of
all allowed claims.

                                          -9-
                           CONCLUSION
For the reasons stated, we affirm the decision of the bankruptcy court.

                                 -10-