"Good Faith" in Proposing
A Chapter 13 Plan
!juluul t
tad in Fulfillment of Requirements
for Independent Research
Study
To Professor Dallas
w.
Lee
Bud Kirk
Spring, 1962
Toxno Tech University School of Law
Table of Contents
Page
Introduction •• • • • • • • • • • • • • • • • • • • • • • • • • • • •
1
Guidelines for a Definition of "Good faith 11
6
•
•
•
•
•
•
•
•
•
•
•
•
•
•• ••• • • • • • • • • • • •
7
Good faith as a Precondition for § 1328 Discharge • • • • • • • • • • •
9
Good faith and the Case-by-Case Approach
• • • • • • • • • • • • • • • • • • • • • • • •
12
• • • • • • • • • • • • • • • • • • • • • • • • • •
14
fixed Percentage Tests
"No Payment" Rules
"Best Efforts" Rules • • • • • • • • • • • • • • • • • • • • • • • • • •
18
The "Meaningful Payments" Rule • • • • • • • • • • • • • • • • • • • • •
19
factorial Approaches
• • • • • • • • • • • • • • • • • • • • • • • • •
Time Extensions and Good Faith • • • • • • • • • • • • • • • • • • • • •
Attempts at Synthesis: Courts Gathering Cases • • • • • • • • • • • • •
21
24
27
• • • • • • • • • • • • • • • • • • • • • • • • • • • • •
Fraud on the Bankruptcy Court as Bad Faith • • • • • • • • • • ••••••• •
29
Inability to Make Payments • • • • • • • • • • • • • • • • • • • • • • •
35
The Desirable Flexibility of the Good Faith Standard • • • • • • • • • •
36
• • • • • • • • • • • • • • • • • • • • • • • • • •
39
• • • • • • • • • • • • • • • • • • • • • • • •
41
Intent Tests
Legislative Change?
A Judgmental Conclusion
-i-
00218
32
Introduction
Under Chapter 13 of the Bankruptcy Reform Act of 1978 (11·u.s.c. § 1301 et
seq.), an individual with regular income may, as an alternative to petitioning
for liquidation under Chapter 7, petition for an adjustment of his (or her)
debts, as to both their amount and their time for gradual repayment.
13 petition commences the case and constitutes an order for relief.
A Chapter
(Section
301 of Title 11 applies to Chapter 13 proceedings, as do other provisions of
Chapters 1, 3, and 5, unless specifically stated otherwise in the "Code," as the
Bankruptcy Reform Act will hereinafter be called.)
riling of a Chapter 13 petition
also triggers automatic stays under Code sections 362 and 1301.
But the petition doE
not spell out the merits of an individual debtor's request for relief.
merits are to be divulged later, in a document known as a "plan."
The
Section 1321
of the Code succinctly requires the filing of a plan, and practice in the bankruptcy courts demands that the debtor file, with the plan, a budget form.
Only
the debtor--no creditor nor any other person--may file a plan; Chapter 13 is an
entirely voluntary proceeding.
The timely filing of a Chapter 13 plan is governed by the Bankruptcy Rules.
formal contents of a plan must follow § 1322(a} and may follow § 1322(b) of the
Code.
In general, the plan provides that the debtor will turn over {usually
through his employer} part of his income, to be used to retire the debtor's debts
in monthly installments over a three-year period.
Subject to the approval of the
bankruptcy court, the plan may classify debts and propose different percentages,
or "dividends," of repayment to the different classes.
Section 1322(b} affords
ways to tailor a plan so as to accommodate different types of debts, resources
of the debtor other than wages or ••regular income," and needs for extensions of
time (up to five years) to complete the plan.
00219
2
A Chapter 13 debtor is allowed to keep, with limited exceptions, the collateral securing his debts to secured creditors.
When {and if} a debtor completes
his Chapter 13 plan, his reward is a very liberal discharge, under § 1328 of the
Code.
The § 1328 discharge is called a "superdischarge 11 because only a very few
kinds of debt (for alimony, child support, and long-term indebtedness) can survive
after the plan is completed.
Every other type of debt, whether for a civil judg-
ment, embezzlement, fine, criminal penalty, settlement decree, or other liquidated
obligation, if it was listed under the plan, is discharged in full.
The discharge
is full even if the approved plan payment was partial or even negligible.
Dis-
charge under Chapter 13 is thus markedly different from discharge under Chapter 7
or under the Bankruptcy Act of 1898 {hereinafter "old Act").
Most Chapter 7 debts,
to the extent they are not repaid when a case has been completed, will revive in
one year from the termination of a case.
This acute difference between Chapter 7 and Chapter 13 discharges was clearly
intended by Congress, as were many other inducements to debtors to opt for Chapter
13 plans instead of straight liquidations.
The following legislative history for
the Code will illustrate, and it is taken from S.R. 95-595, 95th Cong. 1st Sass.
at
s,
118, and 123 respectively (1978):
Chapter 13 encourages more debtors to repay • • • over an extended
period rather than to opt for straightbankruptcy liquidation • • • •
The purpose a Chapter 13 is to enable an individual, under court
supervision and protection, to develop and perform under a plan
for repayment of his debts over an extended period.
the plan will call for full repayment.
In some cases,
In others, it may offer
creditors a percentage of their claims in full settlement.
In a liquidation case, the debtor must surrender his nonexempt
00220
3
assets for liquidation and sale by the trustee.
Under Chapter 13,
the debtor may retain his property by agreeing to repay his creditors.
• • •
The bill permits great flexibility in the formulation of the
plan.
The only requirements are that the debtor pay all priority
claims (mainly administration expenses and certain taxes) in full,
and submit such portion of his future earnings to the supervision
of the court as is necessary for the execution of the plan.
The
plan may provide for full or partial payments of creditors, over
any period up to 3 years, and with the court's approval, up to
five years.
The Reform Act was the fruit of extensive study commissioned by the Congress.
One of the more important reports furnished to Congress from these studies was
H.R. Doc. No. 137, Part I, ·93rd Cong. 1st Sess. 157 (1973):
The Commission was frequently informed by witnesses at its hearings
and in correspondence that the preponderant majority of debtors
desire some means of repaying their debts in preference to incurring the stigma and other consequences of bankruptcy.
Yet the old Bankruptcy Act had allowed "wage earner" plans, extension plans,
and composition plans.
Why was any change necessary?
its commissioned studies during the early
earners, had been little used.
1
Congress learned through
70 1 s that old Chapter XIII, for wage
Chapter XIII posed to the debtor a discomfiting
choice: if he proposed partial payment, his creditors could veto the plan.
If he
proposed full payment, which they could not veto, he became a wage slave to a court
for a number of years, without respite.
The prospect of a "fresh start" under
Chapter XIII was distant and unappealing.
Consequently, debtors preferred liqui-
dation under the old Act.
Liquidation under the old Act was, as far as creditors of average wage earners
were concerned, a different nightmare.
Most of the "assets" possessed by ordinary
00221
4
wage earners were either exempt from the bankrupt estate, under state property
laws, or else rendered practically unsalable from everyday use.
Most wage earner
liquidations thus turned out to be "no asset" cases, and for creditors, "no-recovery"
cases.
Chapter 13 was conceived as a
~ia
media that would give debtors and creditors
alike an incentive to prefer bankruptcy "plans."
creditors their veto right.
The new Chapter took away from
If a plan is confirmed, a secured
creditor must
endure what is called "cram down," a forced subjection to the plan, in which recovery is limited to what the plan allows.
~
§ 132S(a)(S).
The debtor, in formu-
lating a plan, has the option of returning the collateral to a secured creditor, or
of seeking the cram down.
~
In re Mysqrove, 2 C.B.C.2d 238 (Bkptcy Ct. M.D. Fla.
1980).
The creditor's only real opportunity to be heard in opposition to the proposed plan is at the conformation hearing.
Here creditors may complain that the
plan offers them insufficient recovery, too great a risk to their collateral,
contrivance to shirk legitimate payment, or an interruption of their rightful
unilateral remedies, and so on.
Objection to the plan is not cognizable by the
court, however, unless it fairly sounds under one of six statutory criteria which
must be met for plan confirmation.
These six criteria are set out in Code section
1325, which reads in its entirety,
§ 1325.
(a)
Confirmation of plap.
The court shall confirm a plan if-(1)
the plan complies with the provisions of this chapter
and with other applicable provisions of this title;
(2)
any fee, charge, or amount required under chapter 123
of title 28, or by the plan, to be paid before confirmation,
has been paid;
(3)
the plan has been proposed in good faith and not by
any means forbidden by law;
00222
5
(4)
the value, as of the effective date of the plan, of prop-
erty to be distributed under the plan on account of each allowed
unsecured claim is not less than the amount that would be paid on
such claim if the estate of the debtor were liquidated under Chapter
7 of this title on such date;
(5)
with respect to each allowed secured claim provided for
by the plan-(A)
the holder of such claim has accepted the plan;
(B)
(i) the plan provides that the holder of such claim
retain the lien securing such claim;
and
(ii) the value, as of the effective date of the plan,
of property to be distributed under the plan on account of
such claim is not less than the allowed amount of such claim;
or
(C)
the debtor surrenders the property securing such claim
to such holder;
(6)
and
the debtor will be able to make all payments under the plan
~
and to comply with the plan.
Of these six requirements for plan confirmation, two, the "good faith" standard of subsection (a)(3), and the "best interests" of unsecured creditors, at
subsection (a)(4), have spawned the most litigation.
If Congress meant to save
the courts an administrative burden in designing § 1325, the attempt has badly
miscarried, as § 1325(a)(3) alone has generated more reported bankruptcy decisions
than any other single clause in the Code.
If, on the other hand, Congress knew
that the courts would need a·free hand in regulating the initial caseload strain
of Chapter 13, purposefully designed to be the most attractive relief to the most
numerous type of debtor (the individual
consumer-~age
§ 1325{a){3) cases should not be surprising.
earner), the glut or
The attractive provisions of
r.haoter 13 invite debtur abuse, and the "good faith" requirement has given courts
00223
6
(or allowed them to seize) discretionary po~ers to evaluate and check those
abuses.
The "good faith" requirement, in any event, occupies a strategic place in
Chapter 13 as the crucial point at which some conflicting interests of debtors
and creditors become balanced.
for when unsecured creditors complain of inade-
quate recovery, for instance, they gain little help from subsection (a)(4),
which merely provides a Chapter 13 plan should net them no less than a liquidation
would.
No less than a no-asset liquidation, is nothing.
might satisfy subsection (a)(4).
Even a zero-payment plan
The only other subsection which might be used
by unsecured creditors, to ask for greater repayment under a plan, is (a)(3).
Some bankruptcy courts have, indeed, perceived in the "good faith" standard
§ 1325 a substitute for creditors' lost voting powers.
~
or
Musgrove, 2 C.B.C.2d
at 238.
~yidelines
for a Definition of Good faith
"Good faith" is nowhere defined or explained in the Code.
Nor does the
legislative history of the Reform Act offer a definition or explanation.
5 Collier on Bankruptcy, 15th ed.
~
1325.01 (1978).
~
Under the Act of 1898, in
which (as revised over the years) the phrase "good faith" appeared in several
places (Chapter X, § 141;
Chapter XIII,
§§
Chapter XI,
§§
361 and 366;
Chapter XII, § 472; and
651 and 656), "good faith" came to enjoy a negative definition
in the federal court system.
That is, "bad" faith comprised, according to 10
Collier on Bankruptcy, 14th ed. ~29.06[6] (1978),
• • • fraud, improper scheduling, payment of promises to pay
money to procure acceptances • • •
[These] are ins~nces of
lack of good faith as well as acts barred by the statute.
Good
faith itself io not defined but generally the inquiry is directed
to whether or not there has been an abuse of the provisions,
00224
7
purpose, or spirit of Chapter XIII in the proposal or plan.
Most bankruptcy courts applying the new Code have hesitated to import the old
Act's accepted glosses, however.
The old Act, for one point of difference, al-
lowed creditors to file plans, and allowed creditors rights to negate proposed
plans.
~'
on this reluctance to apply the old standard,
In re Terry,
1 C.B.C.2d 525, 528 (Bkptcy Ct. Ark. 1980), rev 1 d on other grounds,
Tenney v. Terry, 630 F.2d 634 (8th Cir. 1980).
sometimes adopted
~lmm·
Other bankruptcy courts have
as a gloss on "good faith" the language of the old Act at
Chapter XIII, § 656(a)(4): a plan should not be "procured by means, promises,
or acts forbidden by this Act."
N.D. Ohio 1980).
In re Keckler, 1 C.B.C.2d 574, 578 (Bkptcy Ct.
Another gloss from the old Act's Chapter X, on corporate reor-
ganizations (seemingly applicable to current Code § 1129(a)(3) which reads
identically to § 1325(a)(3), is that good faith is lacking where a plan is filed
"for the purpose of delay and harassment of creditors."
~·
Sims, 318
u.s.
fidelity Assurance Ass'n.
608 (1943).
But usually the courts applying the new Code have considered themselves to
be writing about "good faith 11 on a blank slate, "the proverbial tabula rasa."
re Montano, 2 C.B.C.2d 431, 432 (Bkptcy Ct. D.C. 1980),
J.o
The concept's Judicial
development has, according to these courts, been left to a case-by-case approach
by design, more than by default.
"Good faith" and the Case-by-Case Approach
The very adoption by the Congress of the phrase "good faith" as a criterion
for Judicial evaluation of Chapter 13 plans has suggested to many bankruptcy
courts that Congress recognized the utility of an established but flexible legal
concept that would promote fairness over a range of varying and unforeseen circumstances, ~ In re Seely and Cox, 2 C.B.C.2d 1128 (Bkptcy Ct.
E.D.
Va. 1980)
("good faith" germane to case-by-case approach); accord, In re pglak, 9 B.R. 502
00225
a
(Bkpcty Ct. E.D. Mich 1981).
In the words of the bankruptcy judge for the
Eastern District of New York, in In re yee, 3 C.B.C.2d 388, 399-99 (1980),
Good faith is not defined in the Code and its meaning is not
clarified by the legislative history • • • •
It is a phrase
well known to the law, and characteristically derives its meaning
from the context in which it is found • • • •
[The conceptj
must rely on the common sense and the perception of justice and
equity in the federal courts to assure the fair administration
of the new cnapter 13, • • • particularly where otherwise nondischargeable debts are present.
Had Congress left out the "good faith" test, reasoned another court, that would
have been a signal that judicial discretion in plan confirmations was foreclosed,
since other subsections of § 1325{a) readily lend themselves to mechanical analysis.
But with "good faith" in place at subsection (a)(3), 200 bankruptcy judges
were left to evolve an idea of good faith.
Ct. N.D. Ill. 1980).
In re Marlow, 1 c.s.C.2d 705 (Bkptcy
Bankruptcy Judge Bonney of the Eastern District of Virgin-
ia, a wag whose flair for blunt but snappy phraseology gives literary if not
jurisprudential value to the reports from the lowest federal courts, has posited
as "the last word on good faith" the holding of the fourth Circuit in In re Northeastern Corporation, 519 f.2d 1360, 1363 (1975):
The court's finding as to good faith or the lack thereof is
a factual determination that cannot be set aside unless it is
clearly erroneous.
Quoted in Seely, 2 c.B.C2d at 1132.
The authority of federal Rule of Civil Pro-
cedure 52{a), according appellate deference to federal district courts as factfinders, is thus added to what Judge Bonney regarded as another judicial prerogative: "the inherent right of a court to require good faith or clean hands." .19·
"Good faith'' is also a circumstance recognized in equity, sometimes even
without statutory suggestion.
''Good faith" may be understood almost instinctively
00226
9
by courts, such as the bankruptcy courts, who see repeated practices or creditor
harrassment and other oppressions of the weak at the hands of the strong; and who
see repeated instances of fraud, evasiveness, and irresponsible conduct on the part
of those who undeservedly seek the law's protection.
In any event, "good faith"
will support judicial solicitude for debtor and creditor interests alike.
~'
for instance, In re powell, 1 C.B.C.2d 371, 372 (Bkptcy Ct. E.D. Va. 1980}:
Are the creditors entitled to every nickel of the excess or
income over expenditures?
I think not.
11
Good faith" does not
mean that every shekel must go that way.
The debtor in Powell proposed a plan paying his unsecured creditors a SO% dividend.
Powell had never been in bankruptcy before, had only reasonable expenses within
his plan budget, and was struggling to keep his family together.
His plan was
already performed sucessfully for some months, when his creditors learned that his
house payment dropped $84 a month.
They wanted the $84, but the court was quick
to point out that Powell's working hours had dropped, costing him $100 each week.
ruled the plan was still in "good faith":
Judge Bonney
"And we come to the
greatest mystery in Chapter 13 legislation: what is good faith?
The term is sim-
ply nowhere defined; therefore, great discretion is reposed in the court.
This
is good."
Good Faith as a Precondition for § 1328 Oischar~
It is usually a creditor who lodges the objection that a proposed plan lacks
good faith.
(But a trustee may raise the question, especially one who does not
receive payment under a proposed plan. ~ In re E~wio, 4 C.B.C.2d 174 (Bkptcy
Ct. Colo. 1981}.
And the court may raise the
matter~~ponte.
liams, 1 C.B.C.2d 879 (Bkptcy Ct. N.D. Ill. 1980}.
~In
re Wil-
One of the most commonly
raised creditor arguments is that the debtor is proposing such minimal recovery
00227
10
for unsecured creditors that the plan is a no-asset liquidatiDn in disguise.
The creditor argument continues: if the case were properly converted to a Chapter
7, under Code § 1307, creditors could hope eventually to recover partly on their
claims, which would not be discharged under Chapter 7, and
~hich
would in fact
become collectible again one year after termination of the bankruptcy.
Sections 727 and 523 greatly restrict the discharge from debt that is
available to a Chapter 7 debtor.
Section 727 bars from discharge claims tinged
with fraud, misrepresentation, concealment, and other debtor dishonesty.
Section
727(a}(9) in particular denies discharge to the recidivist debtor ~ho, under an
earlier bankruptcy prior to October of 1979 (when the Code took effect), had not
paid 100% of his unsecured debts, or else 70% of such debts in "good faith" and
with the debtor's "best effort."
Section 523 exempts from discharge any claims
for taxes, fines, fraudulent transactions, breach of trust, student loans, willful
or malicious torts, alimony and child support, and debts not
l~ted
with the court.
What is to prevent the debtor affected with one or more of the foregoing
claims ·from dodging his creditors by filing under Chapter 13?
Is the superdis-
charge of § 1328, which would wipe out all of the foregoing claims except that for
alimony, child support, or debts extending beyond the life of the plan, a free
-lunch?
The argument from the creditor, at this point, is that the debtor should not
be entitled to a superdischarge unless he undertakes to make plan payments qteater
than what a liquidation would bring.
by subsection (a){4) of § 1325.
This added debtor burden is not called for
Creditors have had to argue it is instead called
for by subsection (a)(3) and the "good faith" standard.
C.B.C.2d 574 (Bkptcy ct. N.D. Ohio 1980);
Ct. M.D. Ala. 1980);
Ct. Kan, 1980);
Jn
~
re McBride,
In re Hoeckler, 1
2 c.s.C.2d 302 (8kptcy
Overland park Dodge. Inc. v. Gtaff, 3 C.B.C.2d 421 (Bkptcy
In re Thorson, 3 C.B.C.2d 66 (Bkptcy Ct. S. Oak. 1980).
The courts have listened to the creditors' arguments sympathetically but not
00228
11
without vexation.
Section 1328 is not drafted so as to permit the creditors'
viewpoint, for it is very specific about what must be exempted from Chapter 13
discharge.
Debts paid only partially, nominally, or not at all, are not excepted
from the discharge.
Section 727(a}'s exemptions do not apply to Chapter 13, be-
cause Chapter 7 does not apply to Chapter 13.
unanimously
Congress, the courts have almost
concluded, knowingly left the door open to Chapter 13 discharge for
a host of unsavory debtors and otherwise nondischargeable debts.
The view that Congress knew what it was doing and should not be gainsaid by
judges who might have different ideas is well expressed in the Hoeckler case, 1
C.B.C.2d 574.
The Bankruptcy Commission spent five years gathering information
and advice from the financial. commercial, manufacturing, and mercantile sectors,
as well as from behavioral scientists, who all pressed home the need for a more
attractive Chapter 13.
Following Hoeckler's general result (plan proposing mini-
mal payment to unsecured creditors confirmed) are McBride (Congress, not the court,
should change the statute), Overland Park Dodge (debtor qualified for superdischarge even though converting van by selling it and consuming proceeds), and
Seely (Bonney, J.: liberal discharge is a "pot sweetener" meant by Congress; debtor was not in "bad faith" who converted his liquidation to a Chapter 13 under
§ 706 of the Code, and "[ijn this neck of the woods the court seeks solely to
interpret the law and not to legislate.");
and cases discussed hereinafter.
The easy availability of Chapter 13 discharge is summarized in Lee, "Chapter 13
nee Chapter XIII," 53 Am. Bankruptcy L.J. 303, 307 (1979), as follows:
A nondischargeable debt • • • for embezzlement, for money obtained
by fraud, for willful and malicious injury to the person or property of another, far a fine or for an educational loan, can be
compromised in the same manner as other unsecured debts.
On pay-
ment of the amount provided in a composition plan dealing with
any such claim, the debtor is entitled to a discharge releasing
him from the balance of the claim.
0022
12
But other courts have chosen to place an obstacle
of the easy path to Chapter 13 discharge: ''good faith."
squarely in the middle
The Eighth Circuit held
in Ienny v. Terry, supra, that a plan proposing zero payments to unsecured creditors was an abuse of the superdischarge and therefore in bad faith; the consequence
of zero payments, reasoned the appellate court, should be a Chapter 7 and its
limited discharge.
Supportive of the Eighth Circuit's ruling, though not cited
therein, is S.R. 95-989, 95th Cong. 2d Sass. 13 ·(1978), which speaks of encouraging and discouraging filings under Chapters 13 and 7, respectively, by adjusting
the Chapters' discharge provisions.
A different route to raising a good faith obstacle to Chapter 13 discharge
was taken in In re Yee,
~P.ra.
There the bankruptcy judge for the Eastern Dis-
trict of New York, piqued by a steady traffic of unrepaid student loan cases
through his court as Chapter 13 1 s, concluded that Congress had bungled in passing
the superdischarge portion of the Reform Act: the text of the bill had misnumbered
some s-ections, with the result that counterparts to § 727(a), restricting discharge, never appeared in Chapter 13.
"Good faith" at § 1325(a)(3) consequently
had to be used as a backup provision to prevent the obtaining of discharges
without affirmative payments.
A variety of approaches for translating "good faith" into a standard of positive repayment to unsecured creditors is discernible in the reported bankruptcy
'
cases.
A classification is possible.
1) fixed percentage tests,
The cases interpret "good faith" through
2) "no payment" rules,
4) "meaningful payment" rules, and
3) "best efforts" rules,
5) factorial approaches.
Each of these will
now be discussed in turn.
fixed Percentage Iests
Section 1322(a) of the Code speaks of full payment, which must go to all
priority (§ 507) claims.
In practice, time payment is often used to pay court
costs, debtor attorney fees, and the trustee's share (10~~ of each payment).
00230
full
payment is not spoken of again within Chapter 13.
Partial payment, to secured
as well as unsecured creditors, is clearly permitted by § 1325(a)(4) and (5).
Section 1322(b) permits the debtor to propose to "modify the rights of holders
of secured claims," or to offer less than full and later than timely payment.
Section 1322(b), respecting unsecured creditors, merely requires that all be
treated alike.
The stage is thus set for an opportunistic debtor to propose a plan in
which his attorney, the court, and
t~
trustee will be paid in full, secured
creditors will receive a percentage sufficient to allow cram down and enable the
debtor to keep the collateral, and in which unsecured creditors will receive a
common pittance, equal to or only slightly above what a liquidation would bring.
The debtor in In re Burrell, 1 C.B.C.2d 474 (Bkptcy Ct. N.D. Cal. 1980) proposed a plan in which full payment was offered to secured creditors, but only 15%
to unsecured creditors.
The judge, unused to the new Code and displeased that
it held out superdischarge to a debtor proposing such low payment to his unsecured
creditors, refused to confirm the plan.
The judge borrowed a standard for "good
faith" from § 727{a)(9) of the Code and concluded plans would have to make "substantial" payments, of at least 70%, to meet the good faith standard:
Unaccountedly [sicj, Congress did not include a substantial payment or best effort requirement under Chapter 13 confirmation
standards.
One must assume it was an oversight, and that had
such a standard been considered it would conform to that which
Congress did consider and establish in Section 727(a)(9).
1 C.B.C.2d at 478.
Burrell would later be reversed by the District Court for
Northern California, on appeal.
In re Byrrell, 2 C.B.C.2d 1019 (1980).
But for
more than a year--the time it took for other courts to realize it had been reversed--Burrell stood as a high-water mark for what constituted "good faith"
in a Chapter 13 plan.
(Seventy percent to unsecured creditors was proposed,
and approved as being in
~ood
faith, in as lata an opinion as In
0023:
r~
Syrys,
14
4 C.B.C.2d 1172 (Bkptcy. Ct. Kan. 1981)}
Byrrell had conflicted sharply with
the earliest case on what amount should be paid in "good faith" under § 1325,
In re Cyrtis, 5 B.c.o. 1214 (Bkptcy ct.
w.o.
Mo. 1979) (10% of debtor's income
held good faith). And a rebuttable presumptjon that a 10% dividend to unsecured
11
I# J' 1~ !'"~ ~ i I'A
creditorsAhad been adopted in In re Johnson, 1 C.B.C.2d 994 (Bkptcy Ct. S.D. Ohio
1980).
Cases decided on fixed percentage tests, however, more often refuse
plan proposals.
One percent to unsecured creditors was rejected in In re
Campbo~l,
1 C.B.C.2d 653 (Bkptcy Ct. S.D. Cal. 1980), which glanced at Burrell and its
70% test but noted § 727(a)(9) had no application to Chapter 13.
The Campbell
court settled for a notion of "substantial" payments, "depending upon the facts
of each case," 1 C.B.C.2d at 656, and added that the only element of § 1325(a)
which could be used by a court to replace creditors' lost objection rights under
the new Code was the good faith requirement.
The same court later held, in In re
Lucas, 1 C.B.C.2d 833 (1980), that plans offering unsecured creditors
were to be regarded as proposed in bad faith as a matter of law.
1~
dividends
The court cited
Campbell (its own opinion) as precedent for the holding.
"No payment" Ryles
fixed percentage rules have not won the day as the be-all and end-all of
"good faith."
Though fixed percentage rules may seem desirable to courts which
are fond of certainty, fixed percentages have suggested, to other courts, a level
of minimum compliance no self-interested debtor would ever exceed, or else a
Procruste9n bed which could not accommodate, without ruin, the needs of individual,
well-meaning debtors afflicted with harsh circumstances.
Yet courts have continued searching for other, less deterministic rules
which might serve to check the abuses of Chapter 13 through nominal payment plans,
which appeared under the new Code with disturbing frequency.
See In re Ciotta,
6 B.C.D. 346, 347 (Bkptcy Ct. E.D. N.Y. 1980): "Plans which would provide for
0023~
'.
15
the repayment of more than SO% of unsecured debt are few and far between."
Neither few nor far between in the bankruptcy reporters are cases in
which debtors have proposed unsecured creditors take !W payment.
The bankruptcy
court for the District of Nebraska held, in In re Koerpoerich, 2 c.a.C.2d 1282
(1980), that so long as a plan satisfied the "best interests'' test of § 132S(a)(4)
and netted no less than a liquidation would for unsecured creditors, subsection
(a)(3) required no higher payment.
On appeal, in Koerpoerich y. Benkelman Co-
operative Equity Exchange, et al.,
3 C.B.C.2d 923 (D. Neb. 1981), it was ruled
that the bankruptcy court should have inquired into the debtor's circumstances,
which showed an ability to pay a 10% dividend and still have $55 per month for
unforeseen expenses.
But some other courts have approved no-payment plans without being reversed.
See In re Roy, 2 C.B.C.2d 985 (Bkptcy Ct. M.D. Ala. 1980) (plan which represents
debtor's "best efforts" may propose in good faith 100% on a tax claim, value of
collateral to secured creditors, and nothing to unsecured creditors).
Compliance
with § 1325(a)(4) was held to be the Code's only payment level requirement, in
jn re Berry, 2 C.B.C.2d 663 (Bkptcy Ct. S.D. Ohio 1980), since, if faced with
any court demands for higher payment, the debtor would have a right to convert
h5s Chapter 13 into a Chapter 7 liquidation under § 1307, thereby assuring a
"no payment" result.
The Berry court viewed court-made requirements for affir-
mative payments to unsecured creditors as "gastronomic reaction" rather than a
calm reading of the "good faith" standard;
had Congress envisioned involuntary
Chapter 13 cases, perhaps then debtors could be required to pay more than liquidation would yield,
(Yet the Berry court stressed it would retain a special
supervisory jurisdiction over the plan's performance, to make sure "good faith"
would not erode.)2 C.B.C.2d at 666.)
In accord with the Berry result was In re
Cloutier, 1 C.B.C,2d 909 (Bkptcy Ct. Colo. 1980), observing that court-made
affirmative payment rules were attempts to
00233
~ullify
Congressional solicitude for
16
debtors.
The Cloutier court posited that a debtor might legitimately prefer
Chapter 13 filing for many reasons other than superdischarge, including the
financing of attorney's fees under § 1322{a){2), curing of a mortgage default
under § 1322(b)(3), or the cramming down of a secured creditor under § 1325(a)
(5)(b)(3).
A very casuistical approach to no-payment plans was taken at the district
level in In re Terry, sypra.
There the court reasoned that zero payments, pro-
posed under a plan, would still be "payments."
The debtor paying nothing would
still be making the proposed payment and meeting his plan.
The Terry court dodged
§ 109(e} of the Code, which states that "only and individual with regular income
• • • may be a debtor under Chapter 13," by referring to the definition of "income" in Code § 101(24), as meaning that zero income in a zero-payment plan could
still be "income sufficiently stable to enable • • • payments under a plan under
Chapter 13 of this title."
The Ierry court defended this reasoning as being com-
patible with the new Code's empahsis upon the debtor's ''fresh start."
And as
though its own logic was perfectly commonsensical, the Ierry court launched an
attack on other courts which had used the "good faith" standard as
• • • a peg from
~hich
they spin a web of nebulous judicial re-
quirements for confirmation which have not been made by Congress.
In an area as fraught with misunderstanding as is created by the
discharge of debts in bankruptcy, this Court is reticent to tack
onto the work of Congress its own notions of what debtors ought
to do in order to be afforded a discharge from their debts.
1 C.B.C.2d at 529-30.
Terry was soon reversed, under the style Terry v. Ienney,
630 F.2d 634 (8th Cir. 1980), on grounds that the "good faith" requirement was
a tradeoff, a mandate that the debtor do some extra thing for his creditors, in
order to merit Chapter 13 discharge.
Prior to its reversal, Terry attracted no judicial following.
00234
To other
17
courts it was plain that the Code presupposed some affirmative payments would
be made in a Chapter 13 case.
Section 109{e) required a regular and stable
income, obviously to the end that payments might be made ~ith it.
Section
101(24) was distorted entirely if read to mean inability to pay anything was
tantamount to an "income."
§ 1325(a)(6)
The bankruptcy court was bound to ascertain, under
~ In re
i f not (a)(4), that a debtor had some ability to pay.
Hobday, 2 c.s.C.2d 506, 508 (Bkptcy Ct. N.D. Ohio 1980), relying on H.R. 95-595,
95th Cong. 1st Sess. 117 (1977) for the notion that partial payments under new
Chapter 13 would be a happy compromise between the old Act's undesirable alternatives of full payment or straight bankruptcy.
The policies, purposes, and
spirit of the new Code, reasoned the Hobday court, all pointed to an affirmative
payment obligation.
Accord, 2 Collier on Bankruptcy, 15th ed.
~
109.05 (1978);
5 Collier on Bankruptcy, 15th ad. ~~~ 1300.40[1j, 1325.01(c), and 1325.(2)(f).
Mandates in the new Code for affirmative payment to unsecured creditors,
as a requirement for "good faith," were also found in In re Hyrd, 3 C.B.C.2d 303
(Bkptcy Ct. N.D. Ind. 1980), and in In re Melroy, 3 C.B.C.2d 864 (E.D. Cal. 1980).
Hutd followed the reasoning of ijobday and cited as further support S.R. 989, 95th
Cong. 2d Sass. 141 (1978): "Subsection (b) [of Code § 1322] permits a chapter 13
plan to • • • propose payments on unsecured claims concurrently with payments on
any secured claim • • • [and toj propose the payment of part or all or any claim
• • • •"
Had Congress meant to permit no-payment plans, the Hurd court continued,
no debtor would ever elect liquidation with its lesser discharge and other disadvantages.
The Melroy opinion treated "good faith'' as a bar to "disguised
liquidation enabling debtors to keep their nonexempt property as well as rewarding them with a more liberal discharge."
3 C.B.C.2d at 867.
Congress, moreover,
would never have bothered to.draft {a}{3) if it were a mere echo of the "best
interests 11 test a (a)(4).
-I d.
.
00235
'
18
"Best Efforts" Rules
In Chapter 7 (at§ 727(a)(9)), ''good faith" is mentioned in conjunction with
"the debtor 1 s best effort."
would make
Following the rule of statutory construction which
synonyms out of conjunctively stated words (the exact opposite of
the principle followed in Melroy,
~P.ra,
where a second term would not ever have
been inserted if it meant the same thing), some courts have chosen to equate
"best efforts" with good faith, not merely in Chapter 7 but in the Code generally.
"Best efforts" was first applied to Chapter 13 in Surrell,
~P.ra,
en route to
that case's holding that a 70% dividend was required for "good faith,"
11
And
best efforts" in Burrell was not disturbed on appeal when the district court
for Northern California reversed the 70% rule.
1019, relying on the holding of Perry
v•
~In
re Burrell, 2 C.B.C.2d at
Commerce Loan Co., 383
u.s.
392, 396
(1966), that Congress offered wage earner plans so as to net more payment to
creditors, to free debtors from the stigma of bankruptcy and from "garnishments,
attachments, and other harassments by creditors," and to decrease the number of
liquidations,
A debtor was found not to have made "best efforts," and his plan was rejected, in In re Bloom, 1 C,8,C.2d 1098 (Bkptcy Ct. S.D. Cal, 1980); also in In re
~~
3 C.B.C.2d 388 (Bkptcy ct. E.D. N.Y. 1980), and in In re Williams, 1 C.B.C.
,2d, 879 (Bkptcy Ct. N.D. Ill. 1980),
Bloom's plan was termed "illusory" because
its dividend amounted to little more than what liquidation would have produced,
Yea, who worked as a financial analyst)
lived by
himsel~
$17,500 a year, proposed 2% to his unsecured creditors,
and was salaried at
Williams proposed to
pay his unsecured creditors 100~~ over 40 months, but the court was not satisfied
this schedule represented his optimum performance,
Yet courts have also applied a "best efforts" standard in defending low
payment plans,
In In re Seman, 2 C,8,C,2d 394 (Bkptcy Ct. S.D. N,Y, 1980), the
00236
19
debtor worked as a waitress at $574 per month and was not receiving ordered alimony payments.
Her plan providing a zero dividend to unsecured creditors was
upheld, since she could do no better, and since "best efforts" was not meant
"to be a rack for the poor."
And in GF"C Corp. of Missouri v, Bixby, 4 c.B.C.2d
485 (D. Kan. 1981), "best efforts" language was thought less proper, as the
measure of good faith, than "a sincere, honest effort to pay."
In Bixby the
debtor was unemployed, and his wife's income of $390 per month was used for the
plan.
four children were at home, all under eleven years old.
20% to unsecured creditors, and the plan was confirmed.
similar to that
in~,
The plan proposed
Bixby's holding was
where the court stated that "good faith" did not neces-
sarily presuppose ''best effort," but certainly demanded "bona fide effort."
(Vee
had, in the words of the bankruptcy court, offered "to pay his creditors no more
each month than he spends for cigarets."
3 C.B.C.2d at 401.)
Proposed legislative changes in § 1325, discussed at the conclusion of this
paper, have approached closely to· the "bona fide effort" standard of the 1.§J! and
Bixby cases.
Meanwhile, judicial ardor for equating good faith with best efforts
has apparently subsided.
The dubious merits of borrowing "best efforts" from
Chapter 7 and thrusting it into Chapter 13 have been examined in In re McMinn,
_ .1 C.B.C.2d 1007 (Bkptcy Ct. Kan, 1980).
The McMinn court noted that Congress
had expressly deleted "best efforts" from the "good faith" clause in § 1325,
and McMinn frowned on judicial attempts to get "best efforts" into Chapter 13
"through the back door disguised as good faith."
The "Meaningful payments" Rule
A number of reported opinions adopt a "meaningful payments" rule, using it
as a reason to find bad faith in "no payment" or "nominal payment" plans.
The
rule arose in In re Beaver, 1 C.B.C.2d 609 (Bkptcy Ct. La. 1980), and continues
to be a vehicle to express judicial indignation over low-payment proposals.
0023~
An
20
attempt to square the "meaningful payments" rule with legislative history was made
in In re Montano, 2 C.B.C.2d 431 (Bkptcy Ct. D.C. 1980), citing H.R. 95-595, 95th
Cong. 2d Sess. (1977} at 118 and 125:
Congress called for affirmative payments
so that creditors' "losses will be significantly less than if • • • debtors opt for
straight bankruptcy";
Congress is also portrayed as intending that non-payment
should render a debtor ineligible for Chapter 13 relief.
The "meaningful payments" rule is treated by its adopting courts as a
P,ro quo for debtors' superdischarge.
E.D. Pa. 1980};
~
CUL!9
In re Scott, 3 C.B.C.2d 417 (Bkptcy Ct.
accord, In re Marlow, 1 C.B.C.2d 705 (Bkptcy Ct. N.D. Ill. 1980)
(1% dividend to unsecured creditors over 36 months held not meaningful enough to
deserve Chapter 13 discharge).
A 1% dividend was similarly ruled "not meaningful"
in In re Desimone, 2 C.B.C.2d 1060 (S.D. N.Y. 1980}, citing H.R. 95-595, 95th
Cong. 2d Sess. 141 (1977}: "Chapter 13 is designed to serve as a flexible vehicle
for the repayment of part or all of the allowed claims of the debtor."
who proposed 1% to his unsecured creditors
including
Desimone,
student loan creditors
from the graduate schools he had attended at Harvard, Columbia, and Albert Einstein
Medical College, was working as a medical researcher at $250 a month.
The court
made no explicit connection between his educational history and his ungrateful
and undermotivated proposals to his creditor-benefactors, but the court's denial
of his plan clearly signalled that "good faith" required more of him.
Some other courts have expressed the practical equivalent of a "meaningful
payment" rule by condemning nominal plans.
~
In re Webb, 5 C.B.C.2d 1379
(Bkptcy Ct. N.D. Cal. 1981) (''1% plans are both insulting and de minimus" (sic]).
The court in In re Erwin, 4 C.B.C.2d 174 {Bkptcy Ct. Colo. 1981) spoke of a plan
proposing
~1.00
to each unsecured creditor as "equal to a liquidation, hence it
is no more than a wolf in sheep's clothing, because it embodies none of the purpose and spirit of Chapter 13."
Judge Moore in Erwin was unwilling to gloss the
"good faith" requirement as prohibiting
.21J:
00238
nominal payment plans, but he was
21
convinced it should check "sinister and unworthy schemes'' such as the one before
him.
Judge Moore found that affirmative payments to unsecured creditors were
implicit in Code sections 1322(a), (b), and (c), 1325(a) and (b), 1326(a) and
(b), 1328{a), and 1329.
And he found the intent of Congress aptly expressed
in S.R. 989, 95th Cong. 2d Sess. 13 (1978):
The new Chapter 13 will permit almost any individual with regular
income to propose and have approved a .reasonable plan for debt
repayment based on that individual's exact circumstances.
factorial Approaches
To approach legal questions through factorial analyses is a popular, modern
judicial technique, commendable for the illumination it throws upon the decisionmaking process.
Articulated factors, at least, allow more accurate prognoses
for the legal significance of given factual circumstances, than do non-articulated
factors.
factorial decisionmaking also permits flexibility, balancing, and equit-
able considerations.
ysis.
Equity, perhaps, is a legal birthplace of factorial anal-
To come before the chancellor, in ancient times, was as much as to say that
fixed rules of law had not anticipated the grievant's particular circumstances.
-~
w.
Geldart, Elements of English Law 23 (8th ed. 1975).
United States bankruptcy courts, as courts of equity, gave factorial construction to the statutory language, ''good faith," long before the adoption of the new
Code. ~ 10 Collier on Bankruptcy, 14th ed. ~i 29.06( 6] {1978).
A l\.lell-tried
list of "good faith'' factors emerged from the cumulative experience of the early
"pilot" district for wage earner plans, in Atlanta, Georgia, which worked out much
of what eventually became, in 1938, Chapter XIII.
The Atlanta court's evolving
understanding of ''good faith" over the years enabled a sister court, in In re
Kull, 5 C.B.C.2d 600 (Bkptcy Ct. S.D. Ga. 1981) (consolidating five cases), to
set forth twelve factors for determining "good faith" in a Chapter 13 plan:
00239
22
(1)
amount of the debtor's income, from all sources;
(2)
debtor's regular and recurring living expenses;
(3)
amount of the debtor's attorney fees;
(4)
probable or expected duration of the plan;
(5)
debtor's motivations and sincerity;
(6)
debtor's earning capacity, likelihood it may increase
or decrease;
(7)
whether the debtor has anticipated needs for emergencies, especially medical emergencies;
(8)
the frequency with which the debtor has claimed bank1
ruptcy;
(9)
the nature of the transactions giving rise to debts;
(10)
whether plan payments are so.low as to be a mockery of
other debtors' hard work to repay creditors;
(11)
burden the plan places upon the trustee;
(12)
the Bankruptcy Reform Act's salutary provisions liberally
favoring debtor rehabilitation.
5 C.B.C.2d at 604.
The overall result of this analysis, the court concluded,
should leave the court convinced the debtor is committed to the purposes and
spirit of both repayment and rehabilitation.
~
Widely cited and followed among the bankruptcy courts applying the new
Code, however, is a much briefer factorial test, developed in In re Iacovoni,
1 C.B.C.2d 331 (Bkptcy Ct. Utah 1980).
As a starting point, the lacovoni court
took notice of a Bankruptcy Commission Report which emphasized that "good faith''
was to be given substance ''so as to protect the rights of unsecured creditors,"
"particularly in light of the broader Chapter 13 discharge."
1
Id. at 345.
The
Prior bankruptcies, considered by themselves, are irrelevant to a determination of "good faith." In re Chafin, 2 C.B.C.2d 229 (Bk~tcy Ct. Kan. 1980).
00240
23
court then set out four factors to be used in determining a Chapter 13 plan's
good faith:
(1)
the debtor's budget and capacity to pay;
(2)
the debtor's future income and repayment prospects;
(3)
dollar amounts of outstanding debt, and the proposed
percentage of repayment;
(4)
the nature of the debt sought to be discharged;
specifically, to what extent the debtor is taking advantage of the broader Chapter 13 discharge, which may
carry with it concomitant obligations of repayment
effort.
19·
at 344.
The fourth factor, permitting the court to weigh (but not necessarily
hold dispositive) the debtor's opting for Chapter 13 because of an otherwise nondischargeable debt, has been raised to factorial status by another court, in In re
Sanders, 4 C.B.C.2d 1397 (Bkptcy Ct. Kan. 1981).
Two contrasting applications of Iacovoni will show its vitality and adaptability.
In In re Bellgraph, 2 C.B.C.2d 1057 (Bkptcy Ct. W.O. N.Y. 1980), a
56-year-old mother of seven wanted to save her home from foreclosure.
She was
divorced, disabled, and subsisting on $390 per month in welfare payments.
Her plan
proposed payments on her house {for a short-term mortgage and taxes), but no payments to other creditors.
Relying on Iacovoni, the court confirmed her plan and
added that Mrs. Bellgraph was making a "sincere, meaningful, honest effort to
repay her creditors."
Much different was the result of applying Iacovoni in
re Schonqalla, 2 c.B.C.2d 286 (Bkptcy Ct. Md. 1980).
ln
Schongalla, a law student,
had had a prior bankruptcy, maintained an expensive standard of living, and proposed a 10% dividend to his unsecured creditors when, the court deemed, his budget
had room for 20%.
The court denied the plan, pointing out that the drafters of
the new Code had meant to reward with superdischarge only those debtors who
dealt fairly with their creditors.
for a similar result on similar facts,
0024:
~
24
In
~e
Madden, 1 C.B.C.2d 1093 (Bkptcy Ct. S.D. Ohio 1980).
Iacovoni's factors
also worked to deny a proposed plan in In re Manoipg, 2 C.B.C.2d 873 (Bkptcy Ct.
W.O. N.Y. 1980), where the debtors ~hose to occupy both spacious apartments of
their duplex, rather than rent out one half to earn more plan money.
{The court
did not find fault otherwise with the Mannings for their budget, which included
expensive foods and vehicles claimed to be essential in looking after illnesses.)
Another recent factorial test of "good raith" in Chapter 13 plans emerged in
In re Thorson, 3 C.B.C.2d 66 {Bkptcy Ct.
s.
Oak. 1980).
The test, admittedly
loosely conceived and "not meant to be all-inclusive," was
si~point:
{1)
whether the debtor retains secured collateral;
(2)
whether the debtor makes all priority payments;
(3)
length of the plan;
(4)
total amount the plan pays
(5)
the dividend to unsecured claimants;
(6)
whether debtors are making their "best effort."
ou~;
A plan's length--a factor under both Thorson and Kull--has been a separate
ground for challenges to the good faith of debtors, as the next section of this
paper explains.
Time Extensions and Good Faith
Section 1322(c) of the Code reads, "The plan may not provide for payments
over a period that is longer than three years, unless the court, for cause, approves a longer period;
than five years."
but the court may not approve a period that is longer
Applications of § 1322{c) by the courts have become entangled
with applications of the "good faith" standard of § 132S(a)(3).
The entanglement
has most often occurred when debtors have presented plans which are shottet than
36
months, or which do not propose some extra recovery for creditors as a sort
or contractual consideration for a shorter (or longer) period than 36 months.
0024~
25
~In reCook, 1 C.B.C.2d 780 (Bkptcy Ct.
s.o. w.
Va. 1980), in which a plan was
refused because, inter alia, it asked for less than 36 months but proposed a mere
10% dividend to unsecured creditors.
The court held such a plan was "underfinanced"
and that the debtor should go to Chapter 7 for relief.
(Cook was, however, ineli-
gible for Chapter 7 relief; he had taken a liquidation within the preceeding six
years.)
In In re Hall, 2 C.B.C.2d 310 (Bkptcy Ct. E.D. Va. 1980), debtors were
given twenty days to refile plans which had called for a 6% dividend to unsecured
creditors paid over fifteen months, unless special circumstances of hardship could
be shown, necessitating curtailed repayment.
A fifteen-month plan at 1%, where
the debtor's monthly "cushion•• of income over expenses was a hefty $1,016, was
held to be proposed in bad faith in In re Anderson, 2 C.B.C.2d 594 (Bkptcy Ct. S.
D. Cal. 1980).
Anderson argued, unsuccessfully, that he was not bound under § 1325
(a)(4) of the Code to pay his unsecured creditors any more than they would receive
in a liquidation.
In some other reported opinions, plan lengths have afforded the bankruptcy
courts a sort of sliding scale on which to adjust debtor-creditor interests.
judicial license for this adjusting has been § 132S(a)(3).
c.a.C.2d 359 (Bkptcy Ct. Mass. 1981).
See In re Levine, 4
Levine had successiveJproposed plans of
4% and 6% without winning the court over.
permissible period of 60 months.
The
He now proposed 10% over the maximum
The court responded to this proposal by com-
puting the present value (over 60 months) of a 10% plan, and found it to be a
mere S%, or nothing
m~e
than a "nominal increase."
The court concluded, "it is
clear there is no blackletter meaning to 'good faith,''' but added, "[o]bviously,
the benefits of Chapter 13 require more from the debtor than nominal payments."
~
at 36D-62.
A similar question of good faith could have been reached in In re
Coleman, 1 C.B.C.2d 530 (Bkptcy Ct. W.O. Ky. 1980), where debtor proposed to
repay under a three-year plan a four-year old delinquency on his residence.
The court did not rule on the objecting mortgagee's claim that this proposal
was made in bad faith;
§ 1322(b),
the court instead preferred to reject the plan under
which excepts from modification claims secured only by an interest
0024~
26
in the debtor's principal residence.
An 18-month plan was approved in In re Curtis, 1 C.B.C.2d 314 (Bkptcy Ct.
W.O. Mo. 1979), where debtor was able for that extent of time to pay 10% to his
unsecured creditors.
His
~ife
was pregnant, his expenses were sure to increase,
and his employer would not agree to co-operate with the trustee (by forwarding
Curtis' paycheck} for any period longer than 18 months.
A doctrine of "excep-
tiona! circumstances" permitted the court to find the plan was in good faith,
and that it represented "the best effort which the debtor can apply against the
scheduled indebtedness."
Yet a few courts have refused to use time-scaling in determining the good
faith issue.
In both reported instances, aggressive and disputatious creditors
demanded that the court
~rest
100% payment from the debtor.
In In re Armstrong,
1 C.B.C.2d 1060 (Bkptcy Ct. Ore. 1980), a creditor getting 70% recovery over 36
months asked for 100% over 60 months.
The court declined this demand, saying
it would not resurrect the attitude, "pay your debts in full if you want to live
in this community," which had prevailed in many districts under the old Act.
Congress clearly had meant to encourage partial compositions under the new Code.
~-
at 1062.
.
:
And in In re Eury, 4 C.B.C.2d 568 (Bkptcy Ct. N.D. Ga. 1981), the
National City Sank
o~
Rome, Georgia filed a lengthy brief with the court, claiming
that a plan proposing 100% repayment over 60 months was in bad faith because of
its extended time, failure to comply with minute formal requirements, failure to
notify the Bank adequately, and failure to apprise the Bank fully of what the
debtor proposed to do.
The court wrote a lengthy opinion replying to each of the
Bank's objections, discussing the general informality and dispatch of bankruptcy
procedure under Chapter 13, and explaining the inappropriateness of hypertechnical and dilatory pleading in the Chapter 13 setting.
The court then commended
the plan's ambitiousness, found all was proper with its form, and refused to impose the hardship of a shorter schedule.
00244
27
Attempts at Synthesis; Courts Gathering Cases
Bankruptcy courts have been able to read each other's decisions, since the
adoption of the new Code, through the various commercial reporting services and
indexing aids which are vying for the professional market.
With the aid of this
literature, at least three courts have availed themselves of the opportunity
to take in, with a grand sweep (and perhaps diligent clerks' energies), the accumulated body of judicial thought about § 1325(a)(3).
The earliest such gathering of cases was done by the bankruptcy court for
the Central District of California, in In re Bloom, et al., 1 C.B.C.2d 1098
(1980), which attempted to put the new Code's emerging case law alongside the
established decisional currents of the old Act.
The Bloom court stated that
judges had been concerned essentially with three kinds of bad faith:
ful conduct;
debt.
(2) repeated discharges;
(1) wrong-
and {3) attempts to evade nondischargeable
These concerns had emerged in the first, experimental district for wage
earner plans, Atlanta, Georgia, and had become incorporated into the Chandler
Act in 1938, as sections 651, 656, and 660 of Chapter XIII.
Bankruptcy Rules
13-404 and 13-407 ha~ aimed at the same three species of bad faith.
The new Code,
however, rendered two of the three kinds of bad faith--repeated discharges and
attempts to evade nondiscgargeable debt--much less significant insofar as Chapter
13 was concerned.
That left, reasoned the Bloom court, wrongful conduct as the
surviving focus for the "good faith'' standard.
Congressional intent, the court
continued, was to lessen the stigma of bankruptcy and aid creditors, while the
means Congress had afforded to the courts to achieve these ends was the "good
faith"
standard,~~
I
substitute
!£I~~
Act's creditor voting.
The Bloom
court concluded, too, that any plan which was ''illusory" would somehow stigmatize
a debtor as badly as a liquidation would.
The soundest judicial view of "good
faith" was that found in the Iacovooi, Howatd, and Campbell opinions: a debtor
00215
28
wanting superdischarge should come up with "reasonable and substantial payment."
Almost a year after Bloom, the bankruptcy court for the Western District of
Kentucky, having the benefit (or curse) of about thirty more newly-reported
judicial constructions of ''good faith" to analyze, sought to collate them all and
make a definitive ruling on minimum-payment plans.
In re Heard, 3 c.a.C.2d 170
(1980) displays a commitment to thoroughness and to quantitative analysis.
By
a margin of more than two to one, the courts surveyed in Heatd have found that
a good faith plan requires "meaningful" or "substantial'' payment, rather than
nominal, minimal, or no payment.
Heard favors the majority approach, along with
a "best efforts" standard for good faith.
The Heard court also announced that in
the future it would rely heavily upon the standing trustee's advice as to whether
or not a plan represented the debtor's "best efforts."
Adding his own small rule
to the holdings he had surveyed, however, Judge Dietz in Heard also held that a
Chapter 13 plan must propose more than
a~
minimis difference from the result
of a Chapter 7 bankruptcy, for unsecured creditors.
The most recent attempt to gather and evaluate cases on "good faith" in
Chapter 13 plans has been In re Scher, 4 C.B.C.2d 784 (Bkptcy Ct. S.D. N.Y. 1981),
which describes a judiciary "legitimately frustrated, indeed outraged, by what
Congress achieved [with] • • • the reach of the Chapter 13 discharge." lS• at
804, and citing In re Turpin, ___ F.2d ___ (5th Cir. 1981) (Unit A, No. 8D-1535,
May 4, 1981) as an example of a "bonanza" discharge in which the debtor's only
surviving obligation, following a Chapter 13 plan, was alimony.
The Scher court
then surveyed "routes traveled [by judges] to seize on somathing to relieve our
own feelings," and examined the cases described in earlier parts of this paper.
The Scher court concluded there was no statutory enablement, anywhere in the Code,
for hanging such meanings as."best efforts," "meaningful payment," "70%," or any
other standards on the phrase "goad faith."
Debtors were, by Congressional in-
vitation, welcome to the congenial climes of Chapter 13, until Congress should
rethink the matter.
The Scher court announced, at 4 C.B.C.2d 807, that it was
00246
29
bound by the rule of U.S, v. Butler, 297
stautes;
u.s.
1 (1936):
"Courts construe
they do not construct them."
Suffice it to say, then, that three courts did not arrive at a shared result
after searching diligently for an accumulating judicial consensus as to what
"good faith" in filing a Chapter 13 plan is.
Intent Iests
One judicial gloss which has sbown a tendency to carry over from "good faith"
in Chapter XIII to "good faith" in the new Code, is stated in 10 Collier on Bankruptcy, 14th ed. ~ 29.06[6j: good faith is lacking where the debtor intends to
abuse "the provisions, purposes, or spirit of Chapter XIII in the proposal or
plan.''
This principle, applied to the new Code, comports well with§ 132S(a)(1)
(plan must comply with P.rovisions of Chapter 13 and applicable parts of Title 11),
as well as with the second clause in § 1325(a)(3) (plan must not be proposed by
any means forbidden by law).
The new Code, as to this much, appears to restate
Collier on abuse of the law's "provisions."
Section 132S(a)(3) 1 s first clause,
then, must accordingly address the "purpose" and "spirit" of the new Code.
To
ascertain purpose and spirit, however, one must venture into a disappointingly
general if not barren legislative history which speaks blithely about the twin
satisfaction of the broad objectives of greater creditor recovery and easier debtor
rehabilitation.
When we wish to resolve a struggle over how much a proposed plan
must recover, such conflicting platitudes are of little help.
Several courts have followed through, to this same meager result, the testing
of good faith under the old Act's "abuse of provisions, purpose, or spirit" standard.
~ In re McMinn, 1 C,B.C.2d 1007 (Skptcy Ct. Kan, 1980);
1 C,B.C,2d 994 {Bkptcy Ct.
Ct. S, Oak. 1980);
s.o.
Ohio 1980);
In re Johnson,
In re Thorson, 3 C.B.C.2d 66 (Bkptcy
In re Montano, 2 C.B.C.2d 431 (Bkptcy Ct. D.C. 1980),
These
cases• conflicting results (pro-debtor and pro-creditor) have turned on which
00247
30
of the two legislative spirits or purposes--that favoring the debtor or that
favoring the creditor--the courts found more pithy.
Somewhat more conducive to a predicatable judicial outcome has been a
different intent test, measuring the debtor's own subjective good faith.
The
test has proved easy to apply: the court can examine the debtor-witness during
the confirmation hearing and ask him why he filed a Chapter 13 petition, what
obligations he seeks to avoid, or what debts he wishes to repay.
In re Cook, 1 C.B.C.2d 780 (Bkptcy ct. S.D.
w.
The court in
va. 1980), after asking such ques-
tions, decided the debtor was more interested in finding out how little, rather
than how much he could repay, and refused to confirm the plan.
Accord, In re Leal, 3 C.B.C.2d 299 (Bkptcy Ct. Colo. 1980).
I~.
at 786.
The debtor in Cook,
who was proposing zero payments to unsecured creditors, admitted he had come to
Chapter 13 because he had undergone a straight bankruptcy within the previous
six years and was ineligible to repeat under Chapter 7.
In In re Co.e, 1 C.8.C.2d
795 (1980), the same court which decides Cook denied a plan which had been designed
to nullify the debtor's only sizeable debt, a S6,000 tort judgment for battery.
The debtor's petition coincided with the running out of his unemployment benefits,
and he proposed that by working at odd jobs he would have an income stable enough
to pay 100% to the secured creditor on his 1979 four-wheel-drive truck, zero to
his landlord, and zero to his tort victim.
A subjective-intent test for a plan's good faith worked out favorably for the
debtor in In re Ryals, 1 C.B.C.2d 836 (Bkptcy Ct. E.D. Tenn. 1980).
General ~otors
Acceptance Corporation claimed Ryals had given them a fraudulent credit application for a new car, one month before filing his Chapter 13 petition (proposing
to pay 27% of the lo3n value).
The court examined Ryals and found that at the
time he fillied out the credit application, he had no expectation he would lose
the job he then held.
In dictum, however, the ]Y.als court listed some acts which,
in future cases, would raise a strong inference of bad faith:
00248
repeated filings,
31
misrepresentations on credit applications, liquidations disguised as Chapter 13
plans, and malicious resort to the Code to injure a creditor.
Still more sym-
pathetic to a debtor's plight was the subjective intent test applied in In re
aarnes,
4 C.B.C.2d 1510 (1981), an appeal to the District Court for the District
of Columbia.
The District Court remanded for confirmation a plan which merely
displayed honesty of intent.
ful payment, was the
Code~s
The court held that such honesty, and not meaningquid pro quo for liberal discharge.
Solicitude for
debtors reached an even higher level in In re Prina. 4 C.B.C.2d 51 (Bkptcy Ct.
Idaho 1981).
Mrs. Prine
plead guilty to an embezzlement charge and was ordered
to make restitution in state court.
She admitted to the bankruptcy court that
she had filed her Chapter 13 case in order to reduce her restitution obligation
of $45,000 to a schedule of $100 per month for 36 months.
The court held it was
not bad faith for a debtor to avail herself of a legal remedy, any mer€ than it
could be said to be in bad faith for a Chapter 13 petitioner to wish to extend
a tax liability or cram down a secured creditor.
erine may not be good law today.
Precedents cited for its holding are
Terry and Koerpoerich (the bankruptcy court opinions), both of which had been
overruled by higher courts, even as the Prine court wrote.
But suggesting that
the Prine result may be correct is In re Keckler, 1 C.B.C.2d 574 (Bkptcy Ct. N.D.
Ohio 1980).
Miss Keckler was on parole for check forgery when she filed her peti-
tion.
The bank which had taken the loss on her forged check was still demanding
~9,000
from her, and her conviction made finding work difficult.
She sought to
begin a new life by attending college and working part-time, and her plan proposed
to repay S% on the debt owed to the bank.
The court confirmed her plan, recogniz-
ing her good faith because it represented her best efforts and was not forbidden
by law.
Distinguishable from the subjective good faith of the Kec!<ler case, in the
0024~
32
opinion of the bankruptcy court for Colorado in In re Tanke, 2 C.B.C.2d 240
(1980), was a situation in which a debtor invoked Chapter 13 while still perpetrating a fraud on his creditor.
Tanke had gotten a loan from the Pueblo
Credit Union to buy a four-horse trailer.
He was to bring title documents to
the Credit Union after purchasing the vehicle, so that a security interest could
be perfected through filing and retained possession of the title.
bought the trailer.
Tanke never
He spent or concealed the money ($4200) and sent a fictitious
letter to the Credit Union purporting to be a message from a trailer dealer in a
distant city, explaining that the trailer sale had been held up but would soon
be effected.
Tanke's petition was filed shortly after this letter was traced to
a non-existent address.
unsecured creditor.
His plan proposed paying $1.00 to the Credit Union as an
The court held, "[t]o confirm this plan would, in effect,
make the Bankruptcy Court the Debtor's instrument for perpetrating a fraud." ]g.
at 21.
The court reset the case for a hearing on whether to dismiss or convert
the case under Code § 1307.
[raud on the Bankruptcy Court as Bad faith
There is probably no variety of bad faith in plan proposals which the bankruptcy courts are readier to find, than misrepresentation or concealment in a
plan or budget which is intended to mislead the court.
Such misrepresentation
could easily be dealt with under § 1325(a)(1) 1 which insists on compliance with
Chapter 13 and Title 11;
or it could be dealt with through§ 1325(a)(3)'s second
clause, forbidding plans proposed under illegal means.
But misleading the bank-
ruptcy courts has usually been dealt with as a lack of "good faith.''
Undervaluation of liquidatable property is one such type of misrepresentation to the courts.
The object of an undervaluation is to create the impression
that a liquidation will not net creditors as much as a Chapter 13 plan would,
under the "best interests" standard of § 1325(a)(4).
00250
Bankruptcy courts have been
33
quick to refuse plans based on undervaluations.
In In re Ballard, 2 c.a.C.2d
340 {Bkptcy Ct. E.D. Va. 1980), confirmation was denied when dEbtors misrepresented
not only the value of their large house in Norfolk and their sailboat, but also
the amount of their outstanding indebtedness.
(Their unsecured debts of more
than $350,000 also made them ineligible for Chapter 13 relief.
See § 109{e).)
Somewhat more complex was the situation in In re Carter, 2 C.B.C.2d 667 {Bkptcy
Ct. Colo. 1980).
Debtor had, prior to filing her Chpater 13 petition, quit-claim
deeded a 75% interest in her house to her parents.
A creditors' suit to set this
transfer aside as fraudulent {the daughter remained in possession) had been
stayed by filing.
Material to a determination of whether liquidation would bring
more than a Chapter 13 plan, under § 1325(a){4), was the question of whether ~s.
Carter had made a legitimate transfer, and whether her representation to the court
that her interest in the $84,000
ho~se
was a mere $21,000, was bona fide.
The
court held that creditors had made a strong prima facie showing that they could
set aside the house transfer, that the house would then belong to the bankrupt
estate, and that liquidation would bring more than a plan.
The plan was refused.
Creditor objections that a debtor has falsified a credit application ~
Ryals,
~P.ra)
are sometimes presented as attempted fraud on the courts also.
In In re·Marlow, 1 C.B.C.2d 705 (Bkptcy Ct. N.D. Ill. 1980), the court was unwilling to see itself as a victim of such fraud unless the creditors first proved
up, as to their own injury, all the elements of credit application misrepresentation required at § 523(a)(2) of the Code.
Bankruptcy courts have considered themselves fraudulently importuned by
requests to bring alimony payments into a plan for reduction.
2 C• 8 • C• 2d 1110 (Bk p t cy Ct •
~
~.
~
In re Garrison,
0 • M.
n1C h • 1980), holding that nothing could be in
good faith toward a dependent child as creditor which lowered his support payments.
A court considered itself an object of fraud where a plan failed to dis-
close that a mortgagee was owet<ot just arrearange but the full note amount, under
an acceleration clause. ~ In re Coleman, 2 c.a.C.2d 736 (Bkptcy Ct. W.O. Ky. 1980).
0025:
34
A plan was ruled fraudulent and in bad faith which failed to disclose that the
debtor, a Jamaican alien seeking to discharge student loans, was sending
month home to her parents.
In re
Coy~·,
~30
per
3 C.B.C,2d 388 (Bkptcy Ct. E.D. N.Y. 1980),
And another court treated as bad faith a debtor's sudden discovery, in modifying
his plan, that he could afford an extra 13,5% for unsecured creditors.
Ponanski, 4 C.B,C.2d 895 (Bkptcy Ct. R.I. 1981),
~
In re
Ponanski, a budget analyst for
the state of Rhode Island, then tried to explain he had reserved the 13,5% from his
first plan, in case he decided to get married,
Bankruptcy courts may intensify their scrutiny of plans when there is reason
to believe a particular debtor is likely to mislead the court,
This issue cams
up as dictum in In re Brown, 2 C.B.C.2d 869 (Bkptcy Ct. S.D. N.Y. 1980),
Debtors
faced a contingent tort liability for an automobile collision death, involving
millions of dollars.
Their plan offered 1% dividends to unsecured creditors and
allowed a ''cushion" of S140 per month.
The court noted that debtors probably
filed their Chapter 13 to claim the benefit of the automatic stay against the tort
claim while the plan continued,
Whether debtors were likely to file a new Chapter
13 after the plan was completed, and whether the tort judgment would exceed the
eligibility ceiling for a new Chapter 13, were also questions much on the court's
mind,
The case, in any event, was reset for a new proposal with a lesser monthly
"cushion."
The debtors in aavenot v, Rimgale, ___ F,2d ___ , 5 C.B.C,2d 1281 (7th Cir.
1982), had an inveterate history of defrauding not only courts but truly helpless
people,
Mrs, Rimgale was a psychiatric worker who gained the confidence of a
patient and induced her to turn over, to Mr. and Mrs. Rimgale, proceeds of her
late husband's life insurance,
The Rimgales built a house with the money.
sued for conversion and fraud, Mr. Rirngale perjured himself.
The Rimgales then
sought to mitigate the harsh consequences of the tort judgment against them
0025~
When
35
(which included exemplary damages and an already-consummated sale of the Rimgale
house to raise compensatory damages for Mrs. Ravenot) by petitioning for Chapter
13 relief.
The Seventh Circuit upheld the power of the bankruptcy court to scru-
tinize the Rimgales' plan, under the "good faith" standard, to make sure it contained
1) an accurate statement of debts, secured and unsecured;
statement of expenses;
2) an accurate
3) an accurate statement of the creditors' dividends;
4) no other inaccuracies which might mislead the court,
and (5) such terms as to
assure "fundamanental fairness in dealing with creditors," citing In re Beaver,
sypra.
One can surmise from a reading of In re Belka, 4 c.B.C.2d 1348 (Bkptcy Ct.
W.O.
~ich.
1981), that a court grows readier to find bad faith on a debtor's part
when the debtor or his attorney do not treat the court with respect.
The Balkas
did not appear for their confimration hearing, nor did their counsel.
Their plan
was contrived so as to let them keep possession of, inter alia, a 1979 Chevy van,
a station wagon, several tractors, two ski boats, and some snowmobiles.
The 8el-
kas1 attorney had appealed the judge's rulings on six former occasions and persisted
in a practice of challenging the court's rulings at the time they were made.
The
bankruptcy judge, in denying the Belkas' resubmitted plan, mentioned aside his
great difficulties with the case, the clients, and the counsel.
The stated grounds
for denying the plan was that the Belkas had failed to disclose an expected tax
refund and calculations of interest for their creditors.
lnability to Make
paym~gts
A separate subsection of§ 1325, {a)(6), empowers a court to withhold plan
confirmation if the debtor cannot make the proposed payments.
This subsection has
become intermeshed with subsection (a)(3) in some of the reported bankruptcy decisions, for two reasons.
The first is that subsections (a)(3) and (a)(6) make up
00253
36
twin hazards, like Scylla and Charybdis, for plan proposals.
not pay enough may be held to lack good faith.
A plan which does
A plan which pays so much as to
leave the debtor without reserves for emergencies, may fail under the ability to
make payments requirement.
~
Belka, 4 C.B.C.2d 1348 (dicta).
The other con-
nection with ''good faith" is that a proposed plan may involve purely wishful
thinking on a debtor's part, as seen in In re Howard, 1 C.B.C.2d 633 (Bkptcy Ct.
S.D. Cal. 1980) (holding that debtors have not dealt fairly or in good faith by
proposing
pay~ents
they cannot realistically expect to meet);
or as seen inJD
re Gale, 3 C.B.C.2d 765 (Bkptcy Ct. E. D. Md. 1981) (debtor proposed to let creditors have no payment until he could sell his house within 36 months at a
non-distressed price; held, good faith question not reached because court cannot
ascertain sale would bring more than a liquidation, under test of § 1325(a)(4)).
In In re Wilhelm, 3 C.B.C2d 147 (Bkptcy Ct. E.D. N.Y. 1980), the court treated
ability to make plan payments as neither a § 1325(a){3) or (6) problem, but as
a matter of threshold eligibility for Chapter 13, under § 109(e), and its "regular income" rule.
In In re Nance, 2 C.B.C.2d 963 (Bkptcy Ct. W.O. Mo. 1980),
however, the court used the "good faith'' provision to advise the debtors, more
as if they lacked good sense and not good faith, that their reserves on hand, of
S6500, would soon play out under their plan to satisfy $66,000 in debts at $500
per month for five years, all somehow to equal a 100% dividend.
The Desirable flexibility of the "Good Faith" Standard
The foregoing discussion anatomizes the more typical problems and solution3 courts have addressed in "good faith" cases.
However valuable those ap-
plications of judicial technique are, they do not show the inventiveness with
which the "good faith" test can be applied in highly unusual situations. Here,
37
even if nowhere else, Congress should be commended for having left some peg on
which courts can hang discretionary powers in evaluating plans.
In Ig re Lockwood, 2 C.B.C.2d 781 (Bkptcy Ct. S.D. fla. 1980), for instance,
the debtors defaulted on their house payment and fell into the hands of an unscrupulous attorney in seeking to extricate themselves from their problem.
The
attorney said that, as his fee for filing their Chapter 13 case, he would assume
their debt and take over title and remaining payments on the house.
By the time
the case came on for confirmation hearing, the attorney had already rented the
house out and begun collecting rent!
The court denied the plan, holding it to
be in bad faith because it did not rehabilitate the debtors, who were "no better
off than they were before the jurisdiction of this court was invoked."
An adversary proceeding threatened plan confirmation in Illinois Department
of Public Aid v. Osborne, 3 C.B.C.2d 586 (N.D. Ill. 1981).
paid $1,000 in welfare.
action.
Debtor had been over-
The State of Illinois wished to proceed with a criminal
Debtor proposed through Chapter 13 to repay 100% of the overpayment.
The bankruptcy court and the district court both held such a plan was proposed
in good faith and should be confirmed, staying for the duration of the plan the
State's other recovery remedies.
The district court pointed out that the Depart-
ment of Public Aid, as a general creditor, would fare much better under the plan
than if the debtor were incarcerated.
The flexible ''good faith" standard may permit confirmation of plans which,
but for special circumstances, would seem contrary to other provisions in Chapter
13.
It is, for instance, forbidden for the debtor during his plan to deal with
others except on a
cash-only basis; dealings on credit are to be suspended.
In
In re perskio, 4 C.B.C.2d 294 (Bkptcy Ct. N.D. Tex. 1981, John C. ford, J.), the
debtor was a travelling salesman whose credit card slips entitled him to reimbursement from his employer.
The debtor's plan called for continued possession of the
necessary credit cards.
The plan was confirmed as baing in good faith.
00255
38
The flexible good faith standard also helped debtor and creditors in In re
Claybo~n, 4 C.B.C.2d 882 (Bkptcy Ct. E.D. Tenn. 1981).
One creditor wished to
enforce an installment contract clause providing that the consumer (debtor)
would pay all legal fees incidental to collection of the debt.
The creditor now
wished to be reimbursed for sending its counsel to the bankruptcy court.
ruled good faith did not require.a fee-paying.
The court
The filing of claims in the Chapter
13 bankruptcy court is a simple, perfunctory matter which should not be the basis
for an aggregation of fee demands from all creditors that would quickly consume
the debtor's repayment efforts.
A debtor proposed to surrender, in full satisfaction of a secured loan,
a wrecked automobile, in In re Mills, 5 C.B.C.2d 23 (Bkptcy ct.
The
l~an
balance was $2,900, while the car's value was $400.
w.o.
Mo. 1981).
Pressed for some
reason as to why this plan should be denied, the court resorted to the "good
faith" standard and required the debtor to resubmit a plan calling for some means
of dealing with the $2500 in unsecured debt that would be owed the creditor.
Another resourceful debtor, in Ford Motor Credit Co. v. Jenkins, 5 C.B.C.2d 696
(E.D. Cal. 1981), faced insolvency and owned two vehicles, neither worth the amount
of debt owed on it.
Debtor agreed with his credit union to return a 1977 Mercury
in full satisfaction of a $3900 laon balance.
He then presented to a bankruptcy
court in Arkansas a plan calling for retention of the other vehicle, a 1979 Ford
pickup, on which he would pay a 20% dividend.
ford Credit followed the debtor and
his pickup to California and appealed the confirmation of the plan, contending
that debtor's dealings with his credit union rendered his subsequent plan fraudulent.
The California court agreed, under the ''good faith'' test, and remanded
the case for an assessing of meaningful payments under the Eight Circuit's holding in Terry, supra, and for a setting aside of the transfer to the credit union.
The good faith standard does not apply to filing§
00256
of Chapter 13 cases, and
39
the bankruptcy courts must look to other grants of power when creditors charge
that the debtor has sought § 1301 and its automatic stay in bad raith. ~ In ~e
flick, 5 C.B.C.2d 494 (Bkptcy Ct. E.D. Pa. 1981) (debtor faced money judgment ror
deceptive trade practices; his stay of collection proceedings granted under the
old Act ran out, and he promptly appealed his case through the state courts; only
hours after his case was affirmed on appeal, he filed a Chapter 13 petition).
The
debtor's good or bad faith must be found in the plan, and at the confirmation hearing.
flexibility, then, and a judicial warrant for adjusting unforeseeable debtorcreditor conflicts, is a salutary aspect of the good faith standard.
Legislative Change?
Congress has not gone unapprised of the difficulty experienced by the
bankruptcy courts in applying the "good faith" requirement of§ 1325(a)(3).
In
1980 the Congress conducted a survey of how well Chapter 13 was working, and sampled, among persons involved in the general field of bankruptcy work, bankruptcy
judges' opinions of how the new Chapter was performing.
Over fifty bankruptcy
judges responded with the information that there was a recurring difficulty with
nominal payment plans, superdischarge, and the "good faith" standard.
The judges
expressed reactions varying from frustration over the new law's oversights, to
dismay at some of their colleagues' devisings as glosses on "good faith."
~
Committee (House Judiciary) Print No. 16 (January 1981), 96th Cong. 2d Session.
Throughout the legislative year 1980, Congress worked with bills which
would have altered present § 1325.
Senate Bill 863 as originally proposed would
have added a "best efforts'' requirement to subsection (a)(3).
The House took a
different approach and initially pondered that subsection (a)(3) read to include
"good faith effort consistent with the debtor's present and future ability.''
H.R. 96-1195, 96th Cong. 2d Sass. 24-26 (1980).
00257
-See
The same report contained a dis-
40
discussion of "good faith" as encompassing the debtor's subjective intention and
what the legal effect of confirmation would be, as compared to the purposes and
spirit of Chapter 13.
~.
As the House
~orked
with the bill further, however,
it occurred to the Senate to insert a similar "bona fide effort" standard, but to
insert the language "bona fide effort 11 at subsection (a)(4), immediately before
the existing semicolon.
See
S.R. 97-150 (Juduciary Committee}, Commerce Clearing
House Reprint, at§ 1325 (April, 1981).
The House passed, in December 1980, the
following addition to subsection (a)(4): "and such plan represents the debtor's
bona fide effort."
Had the Senate only acted in time, the judicial doctrine
first announced in In re Yee by the bankruptcy court for the Eastern District of
New York, would have become the law.
But subsections (a)(3) and (a)(4) remain unchanged.
And even if the abortive
changes of the 1980 legislative year are revived and passed by both houses, there
will still be, at subsection (a)(3), the enduring phrase, "good faith."
If left
standing it will simultaneously be the spoor of, and judicial warrant for curing,
the problems of legislative draftsmanship addressed by Justice frankfurter in
"Some Reflections on the Reading of Statutes," 47 Col. L. Rev. 4:529 (1947):
The intrinsic difficulties of language and the emergence after
enactment of situations not anticipated by the most gifted legislative imagination, reveal doubts and ambiguities in statutes that
compel judicial construction.
·'
00253
!
41
A Jydgmantal Conclysion
The most appropriate standard of "good faith" for the bankruptcy courts
to apply is a factorial analysis which is fair to the interests of both debtor
and creditor.
Such factorial analyses have been developed in the Kull (a long
version} and Iacovoni (a short version} cases •. factorial analyses lend well to
the equitable considerations that are germane to bankruptcy, render judicial
decisionmaking more predictable, and prepare both debtor and creditor for what
may be established or challenged in the confirmation hearing.
The bankruptcy court is able at the confirmation hearing to interview the
debtor under oath.
The court can then inquire of the debtor personally, as to
all questions raised by a penetrating factorial analysis of what shoUld constitute good faith.
In practice to date, courts may already be doing this; the
confirmation hearing is to a large extent a procedure bent on discovery concerning the debtor and his resources, needs, and special circumstances.
To formalize
such discovery under the general headings of a factorial test for good faith,
should be consonant with the broader purposes and spirit of not only the Code
but the federal court system in general.
The various single-dimension stanpards of good faith which courts have
developed, moreover, can be combined into factorial analysis of good faith.
No
particular factor need be dispositive, and common-sense balancing, flexibility,
and fairness from case to case are facilitated by the factorial model.