IN RE: STEPHEN C. BLOUNT CASE NO. 89-00816
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
STEPHEN C. BLOUNT CASE NO. 89-00816
JANET C. BLOUNT
This chapter 13 case is pending on the objection of Jeffrey P. Kearney, by counsel, to confirmation of the joint chapter 13 plan of the debtors. The objecting creditor holds an unsecured claim against the debtor Stephen C. Blount that might be excepted from discharge under 11 U.S.C. section 523(a)(6) in a case under chapter 7 of the Bankruptcy Code as a debt for willful and malicious injury by Blount to Kearney. By its terms section 523(a) of the Bankruptcy Code does not apply to a discharge granted under 11 U.S.C. section 1328(a), which in turn excepts from discharge only debts of a kind specified in section 523(a)(5) of the Bankruptcy Code. Consequently, the debt of the objecting creditor is dischargeable upon successful completion of a confirmed chapter 13 plan.
With increasing frequency creditors holding unsecured claims that are excepted from discharge under one of the paragraphs of section 523(a), particularly paragraphs (2), (4), (6), (7), (8) and (9), now attempt to circumvent the statutory scheme, which precludes entertainment in a chapter 13 case of complaints to except such debts from discharge, by raising the issue of nondischargeability of the debt in the context of an objection to confirmation of the chapter 13 plan on the grounds the plan has not been proposed in good faith as required by 11 U.S.C. section 1325(a)(3). If such objection is sustained the case may ultimately be dismissed pursuant to 11 U.S.C. section 1307(c)(5) because modification of the plan is not feasible. Dismissal may be detrimental to creditors holding unsecured claims except an objecting creditor holding a claim that is nondischargeable in a chapter 7 case.
Under 11 U.S.C. section 1325(b) if a creditor holding an unsecured claim objects to confirmation of the plan on any grounds the court may not approve the plan unless the plan provides that all the debtor's projected disposable income to be received in a three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan. This codification of the so-called best effort test was imposed by the 1984 amendments to the Bankruptcy Code. The issue then becomes whether a plan that meets the best effort test may nevertheless be disapproved as not having been proposed in good faith because the plan deals with and proposes payment to the same extent as other unsecured debts of a debt or debts that would be nondischargeable in a chapter 7 case.
When the 1984 amendments were under consideration by Congress there was a proposal to include in the amendment to 11 U.S.C. section 1322(b) language that would authorize different classification and more favorable treatment of claims excepted from discharge under paragraphs (2), (4), and (6) of section 523(a), as well as consumer debts on which an individual co-obligor was liable. This proposal to authorize more favorable treatment of debts excepted from discharge by 11 U.S.C. section 523(a)(2), (4), and (6) was not accepted by Congress. If Congress had wanted to preclude the dischargeability in a chapter 13 case of a debt made nondischargeable in a chapter 7 proceeding by 11 U.S.C. section 523(a) (2), (4) or (6), Congress could have done so by declaring the debt nondischargeable in 11 U.S.C. section 1328 as it did with regard to a debt for alimony, support or maintenance under 11 U.S.C. section 523(a)(5).
It is clear that a fully informed Congress has provided for composition and discharge in a chapter 13 case of debts that would otherwise be nondischargeable in a chapter 7 case. Congress has made a moral judgment on this issue in the interest of rehabilitation of debtors and in the interest of creditors generally who may receive dividends on their claims in a chapter 13 case that would not accrue to them in a chapter 7 case. Consequently, courts should exercise restraint in second guessing this moral judgment of Congress under the guise of finding a chapter 13 plan has not been proposed in good faith, particularly a plan that meets the best effort test required by 11 U.S.C. section 1325(b).
Against this statutory framework we review the facts of this case.
Findings of Fact:
On April 12, 1985 the debtor, Stephen C. Blount, and the objecting creditor, Jeffrey P. Kearney, due to the fervor of their competing romantic interest in Janet, who is now Janet C. Blount, the codebtor in this case, became engaged in an argument and resulting fist fight at a local mall. Thereafter on December 3, 1985, Kearney brought an action against Mr. Blount in the Fayette Circuit Court seeking damages for assault and battery. Mr. Blount, although served with summons on January 3, 1986, failed to file an answer in the action. A default judgment was entered against Mr. Blount on February 10, 1986, and on May 22, 1986 the court entered a judgment against Mr. Blount for damages in the amount of $10,323.00, plus costs of $133.00.
Later Stephen C. Blount married Janet, and they now have three children ages 4, 3 and 8 months. They own a home which they purchased August 24, 1988 for $32,000.00, subject to an FHA mortgage on which there is a balance due of $31,824.49. On April 16, 1988 Mr. Blount purchased a 1988 Nissan automobile on which he owes GMAC an amount in excess of the value of the vehicle. The debtors owe unsecured debts in the approximate amount of $19,758.00, including a student loan in the amount of $2,729.37 owed by the wife, and a student loan in the amount of $1,033.00 owed by the husband. The creditors holding these student loan debts have not objected to confirmation of the plan. The unsecured indebtedness also includes the $10,323.00 debt represented by the judgment owed by the husband to Kearney. The judgment has been filed of record and now is secured by a lien against the rather minimal interest of the husband in the residence of the debtors.
Mr. Blount is now employed as a production worker at Lexington Glass Company. The wife is not employed. The budget filed by the debtors indicates the husband's income is $1,354.00 per month and family expenses are $1,254.00 per month. Under their plan the debtors propose to pay $100.00 per month to the trustee for a period of three years. They propose to make their house payments directly to FHA and their car payment directly to GMAC to the extent of $6,525.00, the allowed amount of the secured claim of that creditor. There appears to be no cushion and no allowance for exigencies in the budget. The plan meets the best effort requirements of 11 U.S.C. section 1325(b). The amount of the payments under the plan, a total of $3,600.00, less administrative expenses will be paid on the claims of creditors holding unsecured claims. The report filed by the chapter 13 trustees indicates that if all creditors holding unsecured claims file claims they will be paid approximately 27 cents on the dollar. Those who file claims may be paid more if all creditors holding unsecured claims do not file claims.
Conclusions of Law:
Recently the Sixth Circuit Court of Appeals had the opportunity to consider the issue of whether a chapter 13 plan has been proposed in good faith in In re Caldwell, 895 F.2d 1123 (6th Cir. 1990); see also In re Caldwell,851 F.2d 852 (6th Cir. 1988). In Caldwell, the debtor, an assistant chief of the Knoxville, Tennessee police department, owed a debt of approximately $50,000 to certain creditors as a result of a judgment awarded in a Tennessee state court to the creditors against the debtor for false arrest, false imprisonment and malicious prosecution. Less than two months after the debtor exhausted all avenues for appellate relief in the state court system and prior to making any payments in satisfaction of the judgment the debtor filed a petition for relief under chapter 7 of title 11 United States Code. During the pendency of Caldwell's chapter 7 case Caldwell failed to disclose assets and may have misrepresented his liabilities. The judgment creditors, the only unsecured creditors of the debtor, obtained a judgment in the bankruptcy case declaring the debt nondischargeable as a willful and malicious injury pursuant to 11 U.S.C. section 523(a)(6).
Two months later the debtor, with the approval of the bankruptcy court, converted his bankruptcy case to a chapter 13
case. The bankruptcy court approved the debtor's proposed plan by which he agreed to pay $19,800 of the $50,000 indebtedness at $550 per month for thirty-six months. The court found the plan was proposed in good faith. The district court reversed the decision of the bankruptcy court; the Sixth Circuit affirmed the decision of the district court.
The Sixth Circuit noted a debt arising from a willful and malicious injury can be excepted from discharge in a chapter 7 case but is dischargeable in a chapter 13 case. A chapter 13 plan must meet the criteria of 11 U.S.C. section 1325(a), one of which is the requirement that a plan be proposed in good faith.
The Sixth Circuit reiterated its support of the use of a "twelve-part test" to determine whether the chapter 13 plan was proposed in good faith. 895 F.2d at 1126-27. The court stated:
It is not conclusively bad faith for a debtor to seek to discharge a debt incurred through his own criminal or tortious conduct, but that factor may be considered. Although we consider as a factor what Caldwell did to incur the judgment, it is what he has done since the judgment to avoid paying it that is most important. Our decision rests on much more than the fact that this debt is not dischargeable under Chapter 7; it rests on Caldwell's unrelenting efforts to reduce the assets available to his creditors, to make only minimal payments and over the shortest possible time, and to make even those only when threatened with garnishment. The plan before us was not tendered in good faith, but was one more effort to avoid paying the judgment creditors.
As the district court observed, Caldwell is not the type of debtor whom the bankruptcy laws were meant to protect. See also Public Finance Corp. v. Freeman, 712 F.2d 219, 221 (5th Cir. 1983) (court should determine whether debtor is attempting "to abuse the spirit of the Bankruptcy Code").
Caldwell, 895 F.2d at 1127-28 (citations omitted).
The circumstances in Caldwell are far removed from the facts presented in the case at hand. The court is not persuaded that resort to chapter 13 by the debtors on the facts of this case constitutes an abuse of the provisions, purpose or spirit of chapter 13 on the part of Mr. Blount.
There are those who suggest the good faith provisions in title 11 U.S.C. section 1325(a)(3) should be repealed as redundant in view of the 1984 amendment to section 1325(b) codifying the best effort test, especially in view of the propensity of some courts to stretch the good faith test beyond its appropriate bounds. Others contend the good faith test should be retained as a means for courts to monitor several kinds of behavior that would not be satisfied by the notion that the debtor had committed all his or her disposable income to a plan. To deny confirmation of the plan in this case would open the floodgate to objections to confirmation of plans routinely by every creditor holding a debt that may be nondischargeable in a chapter 7 case and encourage a questionable practice that is obviously contrary to the plain intent of Congress. In any event the facts of this case do not warrant a finding that the plan is proposed in bad faith.
The court is of the opinion that Kearney's objection to confirmation of the debtors' chapter 13 plan should be overruled.
By the court -
Michael W. Troutman
Ronald E. Butler
Sidney N. White
U. S. Trustee