• Confirmation Practice and Procedure
• Good Faith
• Valuation of Collateral
• Payment of Secured Claims
• Present Value: Interest Rates
• Surrender of Sale of Property
• Feasibility
• Best Interest of Creditors Test
• Disposable Income Test
  • What's Included
  • 401k Plans
  • What's Reasonable and Necessary
  • When Applicable
• Miscellaneous Confirmation Issues

Noreen v. Slattengren, 974 F.2d 75 (8^th Cir. 1992)

The bankruptcy court did not clearly err in finding, without an evidentiary hearing, that a chapter 13 debtor's plan was filed in bad faith. The plan was filed only eleven (11) days before the civil suit resulting from the debtor's sexual abuse of the plaintiff was set to go to trial, thereby preventing her from having her case heard. The case was filed in anticipation of the likely damages award in the civil suit, and the initial plan offered only a meager claim payment plan, which was increased only in response to the victim's objection.

Handeen v. LeMaire, 898 F.2d 1346 (8^th Cir. 1990).

A chapter 13 plan that attempts to discharge a debt incurred as a result of an intentional shooting is not filed in good faith.

Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8^th Cir. 1987)

Creditor would not receive more in chapter 7 liquidation that it would under proposed chapter 13 plan; student loan was not long-term debt excepted from discharge; plan included all of debtors projected disposable income for its 3-year period; and plan was proposed in good faith.

United States v. Estus, 695 F.2d 311 (8^th Cir. 1982).

Chapter 13 good faith requirement does not impose rigid and unyielding requirement of substantial payment to unsecured creditors. The case is usually cited for its checklist of eleven factors to consider when making a determination of whether the case or the plan has been filed in good faith.

Bayer v. Hill, No. 97-6017 (B.A.P. 8^th Cir. 1997)

(Judge Schermer) (before Koger, Schermer and Scott)

http://ls.wustl.edu/8th.cir/Opinions/BAP/970812/976017.P8

Case remanded to Bankruptcy Court for further finds on issue of whether debtor proposed his chapter 13 plan in good faith. The determination of good faith in proposing a chapter 13 plan is a factual finding reviewed under the clearly erroneous standard. Absent an adjudication of culpability in state court, bankruptcy court must hold an evidentiary hearing to determine if potential judgment creditor's claims have a basis in fact.

Debtor and his wife filed the chapter 13 petition while state court litigation was pending. Debtor had not responded to the lawsuit nor had the state court entered any findings. The state court plaintiff/creditor/appellee filed a suit alleging assault, sexual battery and intentional and negligent infliction of emotional distress against the defendant/debtor/appellant/university professor. The Bankruptcy Court held a hearing on confirmation and ruled that when a creditor alleges conduct like that alleged by Ms. Hill and the debtor proposes to pay a small percentage of debt arising from that conduct, the plan is proposed in bad faith.

The Appellate Court indicated that they "could not agree with [Judge Scott's] dissenting opinion that thwarting state court litigation is manifestly bad faith constituting unfair manipulation of the Bankruptcy Code. It is common for Debtors to seek refuge in bankruptcy court from a variety of state court proceedings including foreclosure actions, garnishments and tort actions. Nor can we agree that there are no special circumstances that warrant the Debtor's chapter 13 filing. Indeed, the Debtor has spent in excess of $22,000 defending himself against Ms. Hill's claims while his monthly income is $2,702." However, while the majority agreed that the bankruptcy court properly considered Debtor's pre-petition conduct in the good faith analysis, the lower court record was lacking as to evidence of whether plan was filed in good faith. The lower court had considered only the allegations of Ms. Hill's state court lawsuit.

Nielsen v. DLC Inv., Inc. (In Re Nielson), 211 B.R. 19 (B.A.P. 8^th Cir. 1997) (Schermer, J.) (before Koger, Schermer, and Scott) (3:0)

ftp://server.wulaw.wustl.edu/8th.cir/970807/976019.P8

Debtors appeal from the bankruptcy court's order denying confirmation of their chapter 13 plan and converting their chapter 13 case to chapter 7. The appellate court determined that the bankruptcy court erred in assessing good faith at confirmation based on original plan when debtors filed preconfirmation modification before the hearing on confirmation. Accordingly, on remand, the bankruptcy court must consider the good faith issue in light of the increase repayment and duration of the modified plan.

In Re Goodman, (Bankr. D. Neb. June 17, 1999)

http://www.nebar.com/bankruptcy/Goodman.htm

Previous employer's motion to dismiss and objection to confirmation on the basis of bad faith were overruled. Debtor had embezzled at least $100,000 from her previous employer who had taken a default judgment against her. Prior to bankruptcy she had been paying restitution on that judgment but filed chapter 13 when the IRS had begun to garnish her wages. Focusing on the Estus and Zellner criteria, the Court reviewed the facts of the case but would not confirm this particular plan until debtor extended it for sixty (60) months and discontinued a $15 per month 401K deduction.

In Re Tobiason, 185 B.R. 59 (Bankr. D. Neb. 1995). Debtor had converted from chapter 7 to chapter 13 while a complaint to determine the dischargeability of debts for securities fraud was pending. Debtor omitted from his schedules an "option agreement" to buy stock from his brother in a closely held chemical company….The failure to disclose the stock option is evidence of bad faith. The faith that the debtor may have believed that the stock option was worthless is immaterial. Creditors are entitled to full disclosure and to form their own opinion, after investigation, as to value of property of the estate. The Court concluded that the debtor's failures to disclose his interest in the stock option within his bankruptcy schedules justified a finding of bad faith. The Court stated that "the failure to disclose assets is an extremely serious violation of the Bankruptcy Code."

In Re Swan, 98 B.R. 502 (Bankr. D. Neb. 1989) Court used Estus factors and denied confirmation of a three-year plan that paid attorney's fees in full and $90 toward unsecured debt of approximately $14,000. The major unsecured claim in this case arose out of assault and battery. The Court also ruled that fees for debtor's counsel are administrative expenses allowed under 11 U.S.C. § 503, entitled to priority under 11 U.S.C. § 507, and entitled to full payment under 11 U.S.C. § 1322.

In Re Akin, 54 B.R. 700 (Bankr. D. Neb. 1985), Neb. Bkr. 85:69. (Judge Mahoney) Court applied Estus analysis and would not confirm plan which failed to commit future increases in income to funding the plan.

http://supct.law.cornell.edu/supct/html/96-454.ZS.html.

certiorari to the U.S. Court of Appeals for the 5^th Circuit

On June 16, 1997, the United States Supreme Court reversed and remanded the Fifth Circuit's en banc decision involving the proper standard of valuation of collateral under 11 U.S.C. § 506(a). In this case the debtor brought a Kenworth truck for $113,700.00, and paid it down to $41,171. Debtor filed bankruptcy and proposed a plan in which he would retain his truck and cram down pursuant to 11 U.S.C. § 1325(a)(5)(ii) the secured claim to the value of the truck as of the effective date of the plan. Associates Commercial Corporation argued that the value of the truck was $41,000 (the "retail" value). Debtor argued that the value was $31,875 (the "wholesale" value).

The Fifth Circuit en banc reversed an earlier panel decision and found that the appropriate means of valuing the secured claim was the "wholesale value." The Fifth Circuit reasoned that the secured creditor should only be favored over the unsecured creditors by the actual value of the collateral, which is the value the secured creditor would receive at foreclosure. The remainder of the secured creditor's claim, the Court reasoned, should be treated as unsecured and share in the percentage distribution provided for in the plan.

The Supreme Court disagreed with the Fifth Circuit based upon its reading of 11 U.S.C. § 506(a). The Supreme Court held that the first sentence of 11 U.S.C. § 506(a)("a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property") merely divides the claim into secured and unsecured, citing U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), and determine what you evaluate, rather than how you evaluate. The second sentence of 11 U.S.C. § 506(a)("such value shall be determined in light of the purpose of the valuation and the proposed disposition or use of such property") describes how to value the collateral. Conversely, the Fifth Circuit test renders the second sentence of § 506(a) inconsequential. Surrender and retention are not equivalent acts.

The Supreme Court found that the appropriate value was replacement value, which it defined as what "a willing buyer in debtor's trade, business or situation would pay a willing seller to obtain property of like age and condition." Rash, supra. In footnote 6, however, the Supreme Court stated that:

Replacement value, in this context, should not include certain items. For example, where the proper measure of the replacement value of a vehicle is its retail value, an adjustment to that value may be necessary: A creditor should not receive portions of the retail price, if any, that reflect the value of items the debtor does not receive when he retains his vehicle, items such as warranties, inventory storage, and reconditioning.

Metrobank v. Trimble, 50 F.3d 530 (8^th Cir. 1995)

Where a debtor intends to retain and use the collateral, the purpose of the valuation is to determine the amount an undersecured creditor will be paid for the debtor's continued possession and use of the collateral. Therefore, the creditor's interest is properly based on the retail value of the collateral without deduction for costs of sale. Note that this case was decide before Associates Comm'l Corp. v. Rash, 117 S. Ct. 1879, 138 L.Ed.2d 148 (1997).

United States Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 108 S.Ct. 626 (1988). (Justice Scalia) (9:0)

certiorari to the U.S. Court of Appeals for the 5^th Circuit

http://laws.findlaw.com/US/484/365.html

Undersecured creditors are not entitled to compensation under 11 U.S.C. § 362(d)(1) for the delay caused by the automatic stay in foreclosing on their collateral.

 

In Re Saunders-Mann, Bk. No. 98-83161 (Bankr. D. Neb. July 16, 1999)

http://www.nebar.com/bankruptcy/saunders.htm

Must a secured car creditor, Norwest Bank, release its lien on the car upon full payment of the secured portion of its claim? The Court concluded that the answer was "no." The debtor must complete all of her Chapter 13 plan payments before Norwest Bank must release its lien on the debtor's 1995 Dodge Intrepid.

(Justice Blackmun) (6:3)

certiorari to the U.S. Court of Appeals for the 6^th Circuit

http://laws.findlaw.com/US/489/235.html

The Supreme Court held that 11 U.S.C. § 506(b) entitles a creditor to receive postpetition interest on a nonconsensual oversecured claim allowed in a bankruptcy proceeding.

United States v. Roso, 76 F.3d 179 (8^th Cir. 1996).

http://www.wulaw.wustl.edu/8th.cir/Opinions/960130/952435.P8

The court determined in this chapter 13 case that for confirmation purposes, 11 U.S.C. § 1325(a)(5)(B)(ii) requires the claim to receive a market rate of interest. The subsidized FmHA is below the market rate and cannot be used.

Forbes v. Forbes (In Re Forbes), 215 B.R. 183 (B.A.P. 8^th Cir. 1997) (Hill, J.) (before Kressel, Hill, and Dreher) (3:0)

The appellant is the former spouse and, by virtue of a divorce decree award, a creditor of the chapter 13 debtor, the appellee herein. In these consolidated appeals the former spouse appeals from the bankruptcy court's approval of post-confirmation modification of the appellee's confirmed chapter 13 plan over her objection and from an order denying her motion for reconsideration of its order approving the sale of real property in which she claimed a lien.

The appellate court opined that a postconfirmation plan modification must also satisfy the "best interest of creditors test" pursuant to 11 U.S.C. § 1329(b)(1) which provides that "Sections 1322(a), 1322(b), and 1323(c) and the requirements of section 1325(a) apply to any modification under subsection (a) of this section. Here the Court held that the proceeds of the settlement of a cause of action that accrued post-petition was not property of the estate and thus the failure of the Chapter 13 debtor to submit the proceeds of the settlement at the time he sought to amend his chapter 13 plan did not violate the "best interest of the creditors test." The majority of courts within the 8^th Circuit which have addressed the application of this language have determined that it refers to the effective date of the plan as originally confirmed." (at 189).

Further, when the debtor sought to modify the plan to payoff the 60 month plan before the anticipated five years utilizing the proceeds of the settlement, there was no obligation to dedicate "all disposable income." That requirement applies only at an initial plan confirmation and, since reference to 1325(b) is missing from 11 U.S.C. § 1329, does not apply at a plan modification. The Court concluded that the disposable income test is not applicable at modification after confirmation, except in the sense that the plan as modified must satisfy the three year calculation from the date the first payment was due under the originally confirmed plan.

The Court also held that entry of discharge at completion of payments did not moot appeal of approval of modified plan because discharge order was also appealed.

DISPOSABLE INCOME TEST

WHAT'S INCLUDED

Stuart v. Koch (In Re Koch), 109 F.3d 1285 (8^th Cir. 1997).

http://www.wulaw.wustl.edu/8th.cir/Opinions/970328/961541.P8

The debtors filed a chapter 7 case, and the United States Trustee, Region 12, moved to dismiss the case pursuant to 11 U.S.C. § 707(b) for substantial abuse. The Eighth Circuit held that orders denying § 707(b) motions are appealed under 18 U.S.C. § 158(d). The court also held that for 11 U.S.C. § 707(b) purposes, a debtor's exempt worker's compensation benefits are projected disposable income notwithstanding 11 U.S.C. § 522(c).

United States Trustee v. Harris, 960 F.2d 74 (8^th Cir. 1992)

The district court correctly ordered dismissal of the debtors' chapter 7 petition for substantial abuse. The debtors' income in excess of expenses would enable them to pay 156% of their unsecured debt with 3 years.

In Re Walton, 866 F.2d 981 (8^th Cir. 1989). 

Chapter 7 debtor had sufficient income to pay a substantial portion of the unsecured debt. The case was properly dismissed on substantial abuse grounds.

In Re Talley, Neb. Bkr. 99:315 (Bankr. D. Neb. 1999) (Judge Mahoney) (Chapter 13)

http://www.nebar.com/bankruptcy/talley.htm

Otherwise exempt income from a deferred compensation plan is nonetheless disposable income and must be included in the calculation for a chapter 13 plan.

In Re Cavanaugh, Neb. Bkr. 93:449, 450 (Bankr. D. Neb. 1993) (Judge Mahoney)

The Bankruptcy Court held that "contributions to a retirement account while in bankruptcy is impermissible because the money that the debtor proposes to use to pay into a retirement plan is disposable income that should be paid to creditors." Debtors had $30,000 in retirement and they were 28 years old.

In Re Cedar, Neb. Bkr. 94:279 (Bankr. D. Neb. 1994) (Judge Mahoney)

May a chapter 13 debtor continue to repay a loan against their 401K plan while paying her other unsecured creditors less? No, the Court concluded. "The debtor must discontinue making contributions to her retirement plan. The debtor may continue to authorize payroll deductions to pay her plan loan if she pays the unsecured creditors 100% of their claims minus the pro rata difference the tax claim would have on the estate. Since the loans are not debts under the bankruptcy code, it is not necessary for the debtor to pay them through the trustee if the debtor maintains payroll deductions. If the debtor cannot propose a 100% payment to unsecured creditors minus the additional potential tax claims, the debtor is prohibited from paying the plan loan during the case and will have to deal with the IRS obligations resulting from the loan balance being deemed taxable income. The plan is denied confirmation. Debtor granted thirty days to amend."

In Re Anderson, 143 B.R. 719 (Bankr. D. Neb. 1992), Neb. Bkr. 92:204 (Judge John C. Minahan, Jr.)

Court concluded that debtors were not devoting all disposable income to the plan and outlined factors to consider in making such determination.

Forbes v. Forbes (In Re Forbes), 215 B.R. 183 (B.A.P. 8^th Cir. 1997) (Hill, J.) (before Kressel, Hill, and Dreher) (3:0)

The appellant is the former spouse and, by virtue of a divorce decree award, a creditor of the chapter 13 debtor, the appellee herein. In these consolidated appeals the former spouse appeals from the bankruptcy court's approval of post-confirmation modification of the appellee's confirmed chapter 13 plan over her objection and from an order denying her motion for reconsideration of its order approving the sale of real property in which she claimed a lien.

The appellate court opined that a postconfirmation plan modification must also satisfy the "best interest of creditors test" pursuant to 11 U.S.C. § 1329(b)(1) which provides that "Sections 1322(a), 1322(b), and 1323(c) and the requirements of section 1325(a) apply to any modification under subsection (a) of this section. Here the Court held that the proceeds of the settlement of a cause of action that accrued post-petition was not property of the estate and thus the failure of the Chapter 13 debtor to submit the proceeds of the settlement at the time he sought to amend his chapter 13 plan did not violate the "best interest of the creditors test." The majority of courts within the 8^th Circuit which have addressed the application of this language have determined that it refers to the effective date of the plan as originally confirmed." (at 189).

Further, when the debtor sought to modify the plan to payoff the 60 month plan before the anticipated five years utilizing the proceeds of the settlement, there was no obligation to dedicate "all disposable income." That requirement applies only at an initial plan confirmation and, since reference to 1325(b) is missing from 11 U.S.C. § 1329, does not apply at a plan modification. The Court concluded that the disposable income test is not applicable at modification after confirmation, except in the sense that the plan as modified must satisfy the three year calculation from the date the first payment was due under the originally confirmed plan.

The Court also held that entry of discharge at completion of payments did not moot appeal of approval of modified plan because discharge order was also appealed.

MISCELLANEOUS CONFIRMATION ISSUES

In Re Strauss, 184 B.R. 349 (Bankr. D. Neb. 1995). The Court applied In Re Baker, 736 F.2d 481 (8^th Cir. 1984) and denied confirmation of a zero percent plan on good faith ground because the proposed plan was deemed to be a "disguised chapter 7 liquidation."