Opinion
NOT FOR PUBLICATION
Argued and Submitted at San Diego, California: February 24, 2006
Appeal from the United States Bankruptcy Court for the Southern District of California. The Honorable James W. Meyers, Bankruptcy Judge, Presiding. Bk. No. 03-11143.
Before: PAPPAS, MARLAR and SMITH, Bankruptcy Judges.
MEMORANDUM
Creditor James M. Kinder (" Kinder") appeals from an order of the bankruptcy court approving a modification of the confirmed chapter 13 plan of debtor Georgia Ray Kingry (" Kingry"). Because the bankruptcy court did not make adequate findings of fact concerning whether Kingry's plan modification was proposed in good faith, we VACATE the bankruptcy court's order and REMAND for further proceedings.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (" BAPCA"), Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005).
FACTS
Kingry, age 60, filed a chapter 13 petition on December 15, 2003, together with a proposed plan (the " Original Plan"). The Original Plan provided that Kingry would make payments of $575 per month to Thomas H. Billingsley, Jr., the chapter 13 trustee (" Trustee"), for a period of not less than three years. This payment stream would provide full payment of all secured and administrative claims, and provide a 70 percent distribution to Kingry's unsecured creditors, including Kinder. The Original Plan was confirmed by the bankruptcy court on January 27, 2004.
On April 20, 2004, Kinder commenced an adversary proceeding against Kingry, No. 04-90127, in which he alleged that Kingry was indebted to Kinder under a state court judgment for $20,000, including $18,000 in punitive damages, based upon Kingry's fraudulent tender to him of a non-sufficient funds check, and for wrongful conversion of a motor vehicle. In the adversary proceeding, Kinder alleged that his judgment debt was excepted from discharge in Kingry's bankruptcy case under § 523(a)(2). Of course, under § 1328(a), debts based upon fraud could be discharged if Kingry successfully completes her chapter 13 plan payments. Recognizing that it lacked merit, Kinder abandoned the adversary proceeding, which was dismissed by the bankruptcy court on December 22, 2004, for lack of prosecution.
On May 21, 2004, Kingry moved to modify the Original Plan to reduce the payments from $575 to $420 per month. This proposal had the effect of reducing the distribution to unsecured creditors to zero. The motion was opposed by the Trustee on the grounds that Kingry was unemployed and could not make the payments as listed in the modified plan. Kinder also objected to the proposed modification on three grounds: (1) Kingry listed Kinder's debt at $1,000 rather than the $20,000 claimed by Kinder; (2) Kingry made one payment on her debt the day after filing the chapter 13 petition and thus waived her rights to file for chapter 13 relief; and (3) Kingry's plan is not in good faith because Kingry was employable and received a substantial annuity. On July 13, 2004, the bankruptcy court denied the May 21, 2004, motion.
The minute order does not explain the bankruptcy court's reasons for denying the motion. There is no transcript of the May 21, 2004, hearing included in the excerpts of the record.
On September 16, 2004, Kingry again moved to modify the Original Plan on the same terms as in the May 21, 2004, motion. Kingry submitted a Declaration in Support of Motion to Modify Chapter 13 Plan (the " Kingry Declaration") together with copies of amended Schedules I and J showing her current income and expenses. In the Kingry Declaration, she states that her request to reduce monthly payments from $575 to $420 and reduce the plan allowance for allowed unsecured creditors from 70 percent to zero is justified by changes in her financial circumstances. According to the Kingry Declaration, those changes included: (1) a change from full-time employment to a three-day per week job; and (2) an increase in her rent payments.
The amended Schedules I and J, filed with the bankruptcy court on October 8, 2004, are consistent with the statements in the Kingry Declaration. The rent payments increase from $699 to $755 per month. Kingry's projected income declines from $2,520.33 to $2,071.38 per month, while her total projected expenses increase from $1,651.00 to $1,945.00. Although the total expenses increase, the schedules projected a reduction in some items, including home maintenance, clothing, laundry and dry cleaning, recreation, health and car insurance. Under the amended Schedules, the estimated excess of income over expenditures is $420.38, which is consistent with Kingry's motion to reduce her monthly plan payments to the Trustee to $420.00.
On October 4, 2004, Kinder also filed an objection to Kingry's September 16, 2004, proposed plan modification. In his Addendum to Objection, Kinder repeats many of the allegations originally appearing in his complaint in the adversary proceeding, as well as the objections he earlier raised in opposition to the May 21, 2004, modification motion. Kinder alleged that: (1) he held a judgment debt of $20,000, including punitive damages for intentional torts; (2) Kingry listed her debt to Kinder at only $1,000 and that was fraud on the court; and (3) Kingry had failed to demonstrate that she is minimizing her expenses and engaging in " belt tightening." Although in the Addendum to Objection Kinder repeats his claim that Kingry owes him a debt for $20,000 that includes punitive damages, Kinder does not repeat the allegation of the complaint that Kingry's debt to him is nondischargeable.
The excerpts of record of Kinder's objection does not include the " Addendum to Objection to Confirmation of Proposed Modification to Chapter 13 Plan" (" Addendum to Objection") referenced in the objection. However, the Panel deemed it appropriate to obtain a copy of this pleading directly from the docket of the bankruptcy case.
On February 15, 2005, Trustee objected to the September 16, 2004, motion to modify the plan arguing: (1) that the modification was not submitted in good faith, in that Kingry was seeking to reduce her working hours without showing that she was no longer able-bodied or had dependents that would preclude her from working a normal week; and (2) that Kingry lacked the ability to make the payments proposed in the modified plan.
Trustee had also moved to dismiss the chapter 13 case because Kingry had failed to make plan payments. The bankruptcy court never acted on the motion to dismiss. However, at the hearing on the motion to modify the plan held on February 16, 2005, Trustee indicated that he would only urge dismissal if the court denied the motion to modify the plan. Transcript of hearing (February 16, 2005) at 8.
A hearing on the motion to modify the plan was conducted by the bankruptcy court on February 16, 2005. Kingry and the Trustee appeared through counsel and Kinder appeared pro se. No additional evidence or testimony was offered by the parties at the hearing, although all parties were heard and argued their respective positions.
After considering the parties' arguments, the bankruptcy court recited its decision on the record. Concerning the challenge made by both the Trustee and Kinder to Kingry's good faith, the bankruptcy judge discussed whether Kingry should be required to " maximize [her] employment effort" as argued in the objections by observing:
I think there's going to be [a] case that's going to come into this court. It's going to test the question of whether to get the advantage of chapter 13, the debtor would be required to go out and maximize their employment effort. I don't think this is the appropriate case. I think you get to a certain age. I've already reached that age. I think many of the people in this courtroom or some of the people in this courtroom have already reached that age who are already beyond the average age of retirement and I'm not sure this is a good case to make a test case of what power this court has to require people to work more than - at least on a temporary basis. I think there are certain advantages to a debtor to get full-time work even when they're in a chapter 13 so I have to think that if that is something that is available and the debtor feels healthy enough to - should perhaps engage in full-time work. And the quarterly reports will help reflect that. I think under these facts and circumstances that I am inclined to approve the modified plan along with the additions that we discussed [quarterly income reports and pay stubs required from Kingry and tax returns] and that will be the order of the court.
Transcript of hearing (February 16, 2005) at 15-16 (emphasis added).
After a further exchange with Kinder in which Kinder again expressed his doubt that Kingry's health prevented her from working more hours, the bankruptcy court amplified the basis for its ruling:
I did not base this on some concern about the debtor's medical ability to work full time. I'm assuming she could work more hours than she is working. That's not what I ruled. I ruled, given her age, that I don't think we're in a position to require her to do more if she's doing enough to support the modified plan so it's feasible. On the other hand, I think that given her level of income, this is the most she can be expected to pay over the course of these proceedings. You mentioned living expenses, payment to the trustee, and these are the things she has to deal with. We all know that most people like to have a few luxuries so that's the incentive to work harder and that will be reflected in these quarterly reports and the court has retained jurisdiction to revisit the question at any appropriate time once it's brought to the court's attention by an interested party based upon this quarterly report and the tax returns and with that I think we've said everything that's going to be said today on this issue and that's the order of the court.
Transcript of hearing (February 16, 2005) at 17-18.
The bankruptcy court entered its order granting Kingry's motion and approving the modification of Kingry's plan on March 21, 2005. Kinder timely filed this appeal on April 1, 2005.
JURISDICTION
The bankruptcy court had jurisdiction to approve a modification of a confirmed chapter 13 plan under 28 U.S.C. § § 1334 and 157 (b)(1) and (2)(L). This Panel has jurisdiction over this appeal under 28 U.S.C. § 158(b)(1).
STANDARD OF REVIEW
The bankruptcy court's rulings with respect to plan modification are reviewed for abuse of discretion. Sunahara v. Burchard (In re Sunahara), 326 B.R. 768, 772 (9th Cir. BAP 2005); Powers v. Savage (In re Powers), 202 B.R. 618, 621 (9th Cir. BAP 1996). An abuse of discretion is " a plain error, discretion exercised to an end not justified by the evidence, a judgment that is clearly against the logic and effect of the facts as are found." Rabkin v. Oregon Health Sciences University, 350 F.3d 967, 977 (9th Cir. 2003).
Whether a plan modification has been proposed in good faith by the debtor is a question of fact, and the bankruptcy court's findings on that issue are reviewed for clear error. Downey Sav. & Loan Ass'n v. Metz (In re Metz), 820 F.2d 1495, 1497 (9th Cir. 1987).
ISSUE
Did the bankruptcy court abuse its discretion in approving the modification of the plan?
DISCUSSION
Modification of a confirmed chapter 13 plan is authorized by § 1329(b)(1), which provides, in part:
At any time after confirmation of the plan, but before the completion of payments under such plan, the plan may be modified, upon request of the trustee . .., to --
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan; . . . .
Modification of a confirmed plan involves, essentially, a new plan confirmation, and the modified plan must comply with the statutory requirements for confirmation of a plan. Max Recovery, Inc. v. Than (In re Than), 215 B.R. 430, 434 (9th Cir. BAP 1997). Under § 1329(b)(1), " the [confirmation] requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section." One of these requirements, § 1325(a)(3), requires that a plan (or in this case, a modification to a confirmed plan) be proposed by the debtor in good faith. Kinder argues here that Kingry's proposed modification was not proposed in good faith.
Trustee did not appeal the bankruptcy court's order. In its brief, Trustee's position is that the bankruptcy court did not abuse its discretion in approving the modification. Trustee's Opening Br. at 3.
The burden of establishing that a plan is submitted in good faith is on the debtor. Fidelity & Casualty Co. Of New York v. Warren (In re Warren), 89 B.R. 87, 93 (9th Cir. BAP 1988). Further, the bankruptcy court has an independent duty to determine that a chapter 13 plan is proposed in good faith. Villanueva v. Dowell (In re Villanueva), 274 B.R. 836, 841 (9th Cir. BAP 2002).
" As good faith under § 1325(a)(3) is neither defined by the statute nor explained in legislative history, courts in this circuit have adopted a multi-factor, case-by-case approach to the good faith inquiry." In re Villanueva, 274 B.R. at 841. It has long been the test in this circuit that the bankruptcy court review the totality of the circumstances in deciding whether good faith has been shown. Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir. 1982).
The BAP has developed a list of factors to be considered by the bankruptcy court in determining good faith, which include, but are not limited to: (1) the amount of the proposed payments and the amount of the debtor's surplus; (2) the debtor's employment history, ability to earn, and likelihood of future increases in income; (3) the probable or expected duration of the plan; (4) the accuracy of the plan's statements of the debts, expenses and percentage of repayment of unsecured debt, and whether any inaccuracies are an attempt to mislead the court; (5) the extent of preferential treatment between classes of creditors; (6) the extent to which secured claims are modified; (7) the type of debt sought to be discharged, and whether any such debt is dischargeable in chapter 7; (8) the existence of special circumstances such as inordinate medical expenses; (9) the frequency with which the debtor has sought relief under the Bankruptcy Code; (10) the motivation and sincerity of the debtor in seeking chapter 13 relief; and (11) the burden which the plan's administration would place upon the trustee. In re Warren, 89 B.R. at 93.
The Ninth Circuit has taken a more general approach in reviewing whether a debtor's plan is proposed in good faith. Factors it has relied upon include the substantiality of proposed plan payments; whether the debtor has misrepresented facts in the plan; whether the debtor has unfairly manipulated the Bankruptcy Code; and whether the plan is proposed in an equitable manner. In re Goeb, 675 F.2d at 1390. And " [w]hile there is no substantial repayment requirement in the Ninth Circuit, In re Goeb, 675 F.2d at 1389, the debtor's proposed plan term and percentage payment to unsecured creditors are factors the court may consider in determining good faith. In re Warren, 89 B.R. at 93. Nominal payment by the debtor does not necessarily constitute bad faith. Id. at 93." In re Villanueva, 274 B.R. at 841.
In resolving the similar issue of whether a debtor has engaged in " bad faith" as cause for dismissal of a chapter 13 case, the court has instructed bankruptcy courts to consider: whether the debtor misrepresented facts in a petition, unfairly manipulated the Bankruptcy Code in the plan, or otherwise filed the petition or plan in an inequitable manner; the debtor's history of filings and dismissals; whether the debtor only intended to defeat state court litigation; and whether egregious behavior is present. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1998).
There is no requirement that a debtor demonstrate that she has experienced a substantial, unanticipated change in circumstances to justify a modification proposing a reduction in plan payments. In re Powers, 202 B.R. at 622. And § 1329(b)(1) does not incorporate the requirements in § 1325(b)(1) that, if challenged, the debtor show that all of her projected disposable income is devoted to making plan payments under the modified plan. In re Sunahara, 326 B.R. at 781-782. Instead, a debtor's circumstances, and her proposal to deal with them in the modified plan, are considered in the context of the good faith analysis. Id.
The Ninth Circuit has emphasized the importance of the bankruptcy court considering all relevant factors in determining good faith. The court has warned that " [the] bankruptcy courts cannot substitute a glance [at one good faith factor] for a review of the totality of the circumstances . . .. If " the [bankruptcy] court below did not inquire adequately into whether the [debtor] acted in good faith, we must reverse and remand. . . .") In re Goeb, 675 F.2d at 1391.
In this case, Kinder and the Trustee argued to the bankruptcy court that Kingry's proposed modification to her plan failed the good faith test in part because she did not establish that she could no longer work full-time, was no longer able-bodied, or that she had dependents that would preclude her from working a normal schedule. Kinder also argued that a modification that resulted in no payment on his unsecured claim was unfair since his debt was allegedly based upon Kingry's fraud.
The bankruptcy court disposed of these arguments in its comments at the conclusion of the hearing. As the excerpts from the hearing transcript reflect, the bankruptcy court appeared hesitant through its ruling to, in effect, compel a debtor to work full-time. The court noted that Kingry's willingness and ability to work could be demonstrated over the term of the plan and could be monitored by the Trustee, the court and concerned creditors by requiring her to submit periodic income reports to Trustee. The court indicated that " under these facts and circumstances, " the modification should be approved. Then, in response to further comments by Kinder, the court summarized its ruling by saying:
I did not base this on some concern about the debtor's medical ability to work full time. I'm assuming she could work more hours than she is working. That's not what I ruled. I ruled, given her age, that I don't think we're in a position to require her to do more if she's doing enough to support the modified plan so it's feasible.
Transcript of hearing (February 16, 2005) at 17.
As noted above, Kingry had the burden of proving that her modification was submitted in good faith, In re Warren, 89 B.R. at 93, something which the bankruptcy court must determine based on the totality of circumstances. In re Goeb, 675 F.2d at 1390. To do so, the case law directs the bankruptcy court to analyze a variety of factors. These cases also indicate that the bankruptcy court abuses its discretion if its focus is but a single factor.
Here, in response to Kinder's and Trustee's concerns about Kingry's ability, and willingness, to work full time, the bankruptcy court seemed to focus upon but a single factor, Kingry's age. A fair interpretation of the court's comments is that the court concluded that, given Kingry's age, it could not force Kingry to work more hours than she was willing to work. And, in particular, the bankruptcy court made it clear that it was not relying upon Kingry's health as a reason to support her decision to work only part-time.
To the extent that the bankruptcy court concluded it could not evaluate Kingry's good faith by considering the amount of hours Kingry was willing to work while in chapter 13, it was incorrect. Indeed, Kingry's work history and ability to earn, together with her sincerity and motivation, are two of the Warren factors. In re Warren, 89 B.R. at 93. And Kingry's decision to work less than full-time, assuming her health allowed her to work more hours, is surely a relevant fact under the Goeb approach in deciding whether she was treating her creditors " equitably" in her modified plan. In re Goeb, 675 F.2d at 1390. Based upon our review of the record, while Kingry's age was one consideration in the analysis, it certainly was not the only, nor even necessarily the most important, factor the bankruptcy court should have considered in its overall good faith review.
We are aware of no case law forbidding a bankruptcy court from considering the age of a chapter 13 debtor in determining that debtor's ability to make plan payments and good faith. In other, similar contexts, the debtor's age is often a critical factor. For example, it is a significant Brunner factor in determining whether a partial, full or no discharge is appropriate in determining " undue hardship" in student loan cases. See, e.g., Gonzalez v. Davis (In re Davis), 323 B.R. 732, 736 (9th Cir. BAP 2005); In re Birrane, 287 F.R. 490, 499 (9th Cir. BAP 2002).
The amount Kingry was paying her unsecured creditors under the modified plan, in this case zero, was another important factor for the bankruptcy court to consider under these facts. While there is no requirement that she pay a substantial amount to her creditors, the fact that she was proposing to pay unsecured creditors nothing deserved consideration by the bankruptcy court.
In addition, Kinder argued that Kingry lacked good faith because the modified plan would pay him nothing on his alleged fraud claim, which he contended would be excepted from discharge in a chapter 7 case. The bankruptcy court should have addressed this argument in making its decision.
The Ninth Circuit reviewed a similar argument in Lawrence Tractor Co. v. Joseph S. Gregory (In re Gregory), 705 F.2d 1118 (9th Cir. 1983). There, Gregory, a chapter 13 debtor, owed Lawrence $16,540.58 as the result of a state court judgment finding that Gregory had committed an embezzlement. Lawrence did not file a complaint to determine the dischargeability of his claim against Gregory until two months after the bankruptcy court confirmed Gregory's chapter 13 plan. The Ninth Circuit ruled that the debt would be discharged because, having permitted the plan confirmation order to become final, Lawrence was precluded from raising an objection in subsequent proceedings. In re Gregory, 705 F.2d at 1121. However, the court observed in a footnote:
The facts presented to this court suggest that Gregory's plan might have been vulnerable to challenge on the absence of good faith ground. Bankruptcy courts have held that although the use of Chapter 13 to obtain the discharge of debts nondischargeable under chapter 7 by itself is not sufficient to prove bad faith, it is a factor to be considered with others (citations omitted).
In re Gregory, 705 F.2d at 1120, n. 4 (emphasis added).
The record shows Kingry may be accomplishing something through her plan modification that she might not be able to achieve in a chapter 7 case: discharge of Kinder's debt for actual fraud. How a plan treats potentially nondischargable debt is one of the Warren factors. It is also relevant to the equitable analysis prescribed under Gregory. Because the bankruptcy court apparently did not consider Kinder's argument in its decision, we cannot know whether this factor, or the other various Warren factors, were considered by the bankruptcy court in deciding " under these facts and circumstances, " that the modification should be approved.
In this circuit, a trial court's findings must be sufficiently explicit on the ultimate issues to allow an appellate court to understand clearly the basis of the trial court's decision, and to enable the reviewing court to determine the grounds on which the trial court relied in making its decision. Louie v. United States, 776 F.2d 819, 822-23 (9th Cir. 1985). As observed above, in a chapter 13 case, if the bankruptcy court does not adequately explain whether the debtor is proposing a plan in good faith, we must remand to the bankruptcy court for further findings. In re Goeb, 675 F.2d at 1391. In this case, other than Kingry's age, it unclear from its decision what other factors the bankruptcy court might have considered in finding that the modification had been proposed in good faith. As a result, the bankruptcy court's decision to approve the modification must be remanded for a more complete explanation as to the basis for its ruling.
CONCLUSION
The order of the bankruptcy court granting Kingry's motion and approving the modification of Kingry's confirmed chapter 13 plan is VACATED and this case is REMANDED to the bankruptcy court for further proceedings consistent with this decision.