Opinion
Case No.: 1-06-bk-01457MDF.
November 27, 2007
OPINION
Before me is a motion filed by Amanda and William Price ("Debtors") to dismiss the objection to their chapter 13 plan filed by CitiFinancial Auto Corp. ("CitiFinancial"). In its objection CitiFinancial alleges that the plan was filed in bad faith.
I issued an order and opinion in this case on March 5, 2007 ("the March Opinion"). In the order I granted summary judgment in favor of Debtors on CitiFinancial's objection to their plan, which provided for the surrender of Debtors' demolished vehicle in satisfaction of CitiFinancial's claim. I found that because 11 U.S.C. § 506(a) is inapplicable to situations in which a debt is secured by a purchase money security interest in a motor vehicle acquired within 910 days prior to the filing of the petition, CitiFinancial had a fully secured claim. Therefore, as a general principle, when bifurcation of a claim is not permitted, the Bankruptcy Code authorizes the surrender of the secured creditor's collateral in full satisfaction of the debt. However, I granted CitiFinancial leave to address the issue of whether Debtors were proposing their plan in good faith as required by 11 U.S.C. § 1325(a)(3). CitiFinancial filed an amended objection to confirmation that Debtors now seek to dismiss.
The procedural and factual history of the case as recited in the March Opinion is incorporated in this opinion.
In their motion, Debtors assert three grounds for dismissal of CitiFinancial's objection. First, they challenge CitiFinancial's standing to file an objection because no plan can be confirmed that will provide additional payments in satisfaction of its claim. The second basis for dismissing the objection is similar to the first. Debtors assert that CitiFinancial has failed to state a claim upon which relief can be granted because its claim cannot be bifurcated and because any allegation that the debt to CitiFinancial is non-dischargeable is untimely. Finally, Debtors assert that under the totality of the circumstances test, the plan was filed in good faith.
I have jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A).
Discussion
When considering a motion to dismiss under Rule 12(b)(6), the Court must construe the objection in favor of the objecting party, accepting as true all material allegations of the objection. See Trump Hotels Casino Resorts, Inc. v. Mirage Resorts, Inc., 140 F.3d 478, 483 (3d Cir. 1998). A court may dismiss an objection only if the objectant cannot demonstrate any set of facts that would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The moving party has the burden of persuasion on a motion to dismiss. See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir. 1991). The Court is not required to determine if the non-moving party ultimately will prevail, but only whether the party is entitled to relief under any set of facts that could be proved consistent with the allegations of the objection. Hishon v. King Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232 (1984). In the context of an objection to a chapter 13 plan, a court must be particularly reticent to dismiss an objection when the debtor bears the burden of proving that the plan meets all of the requirements of 11 U.S.C. § 1325(a). See Ed Schory Sons, Inc. v. Francis (In re Francis), 273 B.R. 87, 91 (B.A.P. 6th Cir. 2002).
a. CitiFinancial's standing to object
The first ground Debtors assert for dismissing CitiFinancial's objection may be addressed summarily. Any "party in interest" may object to the confirmation of a debtor's chapter 13 plan. 11 U.S.C. § 1324. See In re Jensen, 369 B.R. 210 (Bankr. E.D. Pa. 2007) (creditor has pecuniary interest in ensuring that claims are not discharged through plan filed in bad faith). CitiFinancial is a creditor and has standing to object to confirmation of the plan even if sustaining their objection will not require more favorable treatment in a future plan. Whether or not CitiFinancial can bifurcate its claim is not relevant to whether the plan was filed in good faith.
b. Whether a claim has been stated upon which relief can be granted
Debtors allege that CitiFinancial has failed to state a claim upon which relief can granted. Subsumed within this argument is the repeated allegation that CitiFinancial's claim may not be bifurcated, which, as the Court stated above, is not germane to the issue of whether the plan was filed in good faith. Debtors also allege that CitiFinancial may not raise as a plan objection the issue of whether its debt would be dischargeable in a chapter 7 proceeding. CitiFinancial asserts that its claim "would be" nondischargeable in a chapter 7 case, presumably because CitiFinancial believes that it could prove that the debt would be excepted from discharge under § 523(a)(6).
Debtors misunderstand CitiFinancial's allegations regarding the dischargeability of its debt. CitiFinancial is not seeking to have the debt determined to be non-dischargeable in this proceeding. It simply is alleging that whether a debt would be non-dischargeable in a chapter 7 proceeding is a factor to be considered in the analysis of a debtor's good faith in proposing a chapter 13 plan.
One district court in the Third Circuit has held that a bankruptcy court may not consider whether a debt may be discharged in chapter 7 in the context of analyzing the good faith of a chapter 13 plan. New Jersey Lawyers' Fund for Client Protection v. Goddard (In re Goddard), 212 B.R. 233, 240 n. 9 (D. N.J. 1997) citing In re Lilley, 91 F.3d 491, 496 n. 2 (3d Cir. 1996). Lilley, the authority upon which Goddard relied, was decided in the context of a motion to dismiss a petition alleged to have been filed in bad faith. In Lilley, the Third Circuit concluded that a debtor's choice to pursue the expanded discharge available in chapter 13 is not an appropriate factor to consider when determining whether a petition was filed in bad faith. The Goddard court assumed that this same reasoning applied in the context of plan confirmation. I find, however, that there is an important distinction between the analysis of good faith in the filing of a petition and in the filing of a plan. A debtor may choose to file chapter 13, but once he has decided to pursue relief under that chapter, how he proposes to treat debts that would be nondischargeable in chapter 7 becomes a relevant part of the totality of the circumstances analysis. c. Sufficiency of CitiFinancial's objection to confirmation
See Robert J. Bein, Subjectivity, Good Faith and the Expanded Chapter 13 Discharge, 70 Mo. L.Rev. 655, 681 (2005) (consideration of the dischargeability of a debt when examining the good faith of a plan is the quid pro quo of the expanded chapter 13 discharge). At this point in the proceeding, CitiFinancial has not established that its debt would be non-dischargeable in a chapter 7 case.
At this juncture, the Court is not weighing the merits of the positions of the two parties. It is considering whether CitiFinancial would be entitled to prevail under any set of facts that could be proved consistent with the allegations of the objection. Section 1325(a)(3) states that "the court shall confirm a plan if . . . the plan has been proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1325(a)(3). To determine whether a chapter 13 plan has been filed in good faith a bankruptcy court must look at the totality of the circumstances including "factors such as whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentations to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code." Educational Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987) (cited in In re Norwood, 178 B.R. 683, 688 (Bankr. E.D. Pa. 1995)); In re Goddard, 212 B.R. at 240. Lack of good faith in proposing a chapter 13 plan focuses on whether the plan demonstrates an abuse of the "provisions, purpose, or spirit" of chapter 13. Matter of Smith, 848 F.2d 813, 818 (7th Cir. 1988) (quoting In re Rimgale, 669 F.2d 426, 431 (7th Cir. 1982)).
The Third Circuit has not addressed good faith in the context of plan confirmation, but the Circuit has determined that there is an implicit requirement that a chapter 13 case be filed in good faith. Further, the Court has adopted certain factors to be considered when determining whether a petition has been filed in good faith. In re Lilley, 91 at 496. These factors have been applied not only when assessing whether a petition has been filed in good faith, but also when considering whether a plan is being proposed in good faith under § 1325(a)(3). See In re Jensen, 369 B.R. 210, 233 (Bankr. E.D. Pa. 2007); In re Devine, 1998 WL 386380, at *12 (Bankr. E.D. Pa. July 7, 1998). Factors included in the totality of the circumstances analysis include:
The distinctiveness of the two tests has been blurred further by the 2005 amendments to the Bankruptcy Code. The Bankruptcy Abuse Prevention and Consumer Protection Act, of 2005, Pub.L. No. 109-8, § 102(g), 119 Stat. 23 (2005) added § 1325(a)(7), which requires consideration of whether the petition was filed in good faith as a prerequisite to plan confirmation.
Debtors state that a court must consider the following factors when examining a debtor's good faith under the totality of the circumstances test: "1) whether Debtor stated her debts and expenses accurately; (2) whether Debtor made any fraudulent misrepresentations to mislead court; (3) whether Debtor has unfairly manipulated Bankruptcy Code; (4) nature of debt sought to be discharged; (5) whether debt would be dischargeable in Chapter 7 case; (6) Debtor's prefiling conduct; and (7) Debtor's motivation and sincerity in seeking Chapter 13 relief." Debtors' Motion to Dismiss CitiFinancial Auto's Objection, ¶ 3. Although Debtors cite to § 1325(a)(3), these factors are not explicitly listed in the statute and appear to be a paraphrasing of the test applied in In re Ussery, 261 B.R. 227, 228-29 (Bankr. E.D. Ark. 2001). Although these factors are relevant to the inquiry in the within case, this Court is not required to use this particular formulation when analyzing the totality of the circumstances.
the nature of the debt . . .; the timing of the petition; how the debt arose; the debtor's motive in filing the petition; how the debtor's actions affected creditors; the debtor's treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.
In re Lilley, 91 F.3d at 496. These factors do not differ significantly from the criteria used in the Zellner case cited above when analyzing good faith in the filing of a petition. However, the Lilley factors explicitly include an examination of a debtor's pre-petition conduct. Pre-petition conduct does not dictate a finding of good or bad faith, but it is a relevant factor in the totality of the circumstances analysis. In re Goddard, 212 B.R. at 241. Therefore, if the allegations in CitiFinancial's objection are accepted as true, they substantiate its claim that the plan was filed in bad faith.
Debtors have noted correctly that CitiFinancial has based its claim of bad faith almost entirely on Debtors' pre-petition conduct and the treatment of its claim. This observation, however, goes to the weight of the evidence and does not support the motion to dismiss. CitiFinancial has placed Debtors' good faith at issue. It remains incumbent upon Debtors to demonstrate that they have stated their debts and expenses accurately, that they have been forthright with the Court, and they have not unfairly manipulated the Bankruptcy Code. For these reasons, the motion to dismiss will be denied. An appropriate order follows.