Opinion
Cause No. NA00-0044-C-B/G
March 30, 2001
DECISION
This is an appeal from the order by the Bankruptcy Court confirming the Debtor's Chapter 13 Plan. Appellant/Creditor Jerry D. Watson contends that this order was erroneous in that the Bankruptcy Judge approved a plan lacking good faith, and thus was contrary to the requirements of 11 U.S.C. § 1325(a)(3). Appellee/Debtor Edwin R. Smith rejoins that Watson is raising this bad faith issue for the first time on appeal and therefore has waived it under Rule 8006, Rules of Bankruptcy Procedure, and that in any event the Plan was not proposed or adopted in bad faith and, in fact, the contested debt was dischargeable under Chapter 13 in the manner that the Bankruptcy judge allowed.
We note from the parties' submissions that this Jerry D. Watson is a woman, which we mention here only for purposes of avoiding confusion in the reading of our order.
We are forced to conduct this review on a meager record. The scant briefing by counsel for the parties has left us pretty much on our own in analyzing the issues and in resolving them, which is essentially the same position in which the Bankruptcy Judge must have found himself. We begin with a statement of our jurisdiction.
This court has jurisdiction over this appeal under 28 U.S.C.A. § 1334, it being a matter arising under 11 U.S.C.A. § 1325. The bankruptcy court decided the case as a core proceeding under 28 U.S.C.A. § 157(b)(2)(L) involving confirmation of a plan, and we review the decision of the bankruptcy judge pursuant to 28 U.S.C.A. § 158.
A district judge, in resolving an appeal from the bankruptcy court, is required to accept the bankruptcy judge's findings on questions of fact as long as they are not clearly erroneous. Matter of Generes, 69 F.3d 821, 824 (7th Cir. 1995). The clearly erroneous standard is a highly deferential one. "Under this standard, if the (bankruptcy) court's account of the evidence is plausible in light of the record viewed in its entirety, a reviewing court may not reverse even if convinced that it would have weighed the evidence differently as trier of fact." Matter of Love, 957 F.2d 1350, 1354 (7th Cir. 1992). Indeed, reversal under the clearly erroneous standard is only warranted if "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Id., citing, EEOC v. Sears, Roebuck Co., 839 F.2d 302, 309 (7th Cir. 1988). We note, however, that the bankruptcy court's conclusions of law are subject to de novo review on appeal. Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994); Matter of Wiredyne, Inc., 3 F.3d 1125, 1126 (7th Cir. 1993); Peoples State Bank v. Port Royal Aggregates, Inc., 193 B.R. 1020 (SD Ind. 1996).
The background facts in this appeal are not in dispute and can be summarized succinctly. In September of 1997, Watson obtained a jury verdict against Smith in state court in the amount of $197,247.88 plus interest; the claim against Smith was for fraudulent misrepresentations and the award included both compensatory and punitive damages. This judgment was thereafter affirmed on appeal. In 1999, Smith filed a Chapter 7 Bankruptcy petition in an effort to discharge his debt to Watson, but the debt was determined by the Bankruptcy Court to be non-dischargeable in a summary judgment ruling entered on July 23, 1999. On September 20, 1999, Smith filed a Chapter 13 Bankruptcy petition seeking again to discharge the debt to Watson. Watson objected to the Debtor's proposed Chapter 13 Plan, on three grounds: that the payments called for in the Plan were less than Watson would have received in a liquidation, that the Plan provides for discharge of the remaining debt after the payments are made under the plan even though the debt is non-dischargeable, and that the Chapter 13 Plan was not proposed in good faith. (Amended Objection to Debtor's Chapter 13 Plan, filed November 17, 1999.)
At the hearing on Watson's objection to the plan, conducted by the Bankruptcy Court on February 28, 2000, and at which Smith and Watson both testified, the only issue developed in the evidence presented by Watson's counsel was phrased in the following terms: "(T)he gross income of the debtor has been under-reported based upon the income in recent years and the income . . . particularly in 1999. This fellow's got about $400 a month more income than he is reporting as gross income on his Schedule I, not counting his interest and dividend income, which has been several hundred dollars per year. It's not a lot, but every little bit counts." (Mr. Lohmeyer's closing argument, TR 70, February 28, 2000 Hearing) At the conclusion of the hearing, in his final argument to the Bankruptcy Court, Mr. Lohmeyer reiterated his objection to the proposed plan, stating:
This fellow is salting away more money in investments by paying his household expenses out of his check and allowing his wife's check to go into these investments than he is proposing to pay under the plan. That, in my opinion, is not a good faith plan, and I hope to God it's your opinion, too.
No other issues or objections were raised by Watson at the evidentiary hearing.
Thereafter, Bankruptcy Judge Lorch, in issuing his ruling from the bench, outlined the required legal analysis and statutory requirements and entered his factual findings and legal conclusions; no objections were noted on the record. Judge Lorch's final order reflected a modification of the Debtor's proposed plan by requiring Smith to make somewhat larger monthly payments than the Debtor had originally proposed, with the payments extended out over a 60-month period, resulting in a total payment by Smith to Watson of "a minimum of $20,000." In his post-hearing written order, Judge Lorch held, in language tracking the statutory requirement, that "the plan has been proposed in good faith and not by any means forbidden by law." (Paragraph 3 of the Order Confirming Plan.)
"A bankruptcy judge's finding that a debtor's plan is proposed in good faith is a finding of fact reviewed under the clearly erroneous standard." In re Metz, 820 F.2d 1495, 1497 (9th Cir. 1987) (collecting cases). See, Bankruptcy Rule 8013; and In re Smith, supra, FN2.
Watson criticizes this confirmation order in the argument portion of her appellate brief essentially on monetary grounds, objecting to the fact that the Court had reduced her previous judgment from $267,000 to $20,000, and extended payment of the obligation over the 60 months, interest free. In the Statement of Issues portion of her brief, Watson's counsel set forth her objection is less specific language: "Whether or not the Bankruptcy Court's confirmation of the debtor's Chapter 13 Plan discharging Jerry Watson's debt was clearly erroneous." Watson's brief focuses on the Court's determination that the Plan was proposed in good faith, contending that it did not comport with the factors laid out in the Eighth Circuit's opinion in In re LeMaire, 898 F.2d 1346, 1349 (8th Cir. 1990) as adopted more recently in In re Johnson, 228 B.R. 663, 668 (N.D.Ill. 1999), to wit: whether the debtor stated his debts and expenses accurately, whether the debtor fraudulently mislead the bankruptcy court, or whether the debtor unfairly manipulated the bankruptcy code. In addition to her contention that those requirements were not satisfied, Watson maintains that Smith acted without the requisite "sincerity" in putting forth his Chapter 13 Plan in that its financial inadequacies indicate that Smith lacked any sincere attempt to repay Watson. Finally, Watson raises the issue of Smith's pre-filing conduct."
Reciting again the history of this indebtedness, Watson's counsel states: "There is ample evidence in the record in the evidence to support a finding that the Debtor proposed his chapter 13 plan in bad faith and virtually no evidence in the record to find otherwise." (Appellant's Brief, page 8) But what this "ample evidence" is, specifically, Watson fails to delineate.
We begin our legal analysis with the following, succinct distillation of the purpose of Chapter 13 relief, as set out in In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990):
Chapter 13 provides, for individuals, a counterpart to Chapter 11 of the Bankruptcy Code, which authorizes the reorganization of bankrupt enterprises in lieu of their liquidation. Instead of the trustee's seizing and selling the bankrupt's nonexempt assets, as in a Chapter 7 proceeding, under Chapter 13 (as under Chapter 11) the bankrupt proposes a plan for the repayment of his debts out of future income. Sometimes the plan is in the creditors' own best interests, but even if they object to it the bankruptcy judge can cram it down their throats. (citations omitted) He can do so however only if the plan is in "good faith," (§ 1325(a)(3)) a term neither defined in the statute nor discussed in the legislative history.
Section 1325 of the Bankruptcy Code, which sets out a list of the requirements for confirmation of a chapter 13 plan, provides inter alia that "the plan (have) been proposed in good faith and not by any means forbidden by law." 11 U.S.C.A. § 1325(a)(3). "Good faith" as used in the chapter 13 context depends on the "totality of the circumstances;" many of which have been enumerated and discussed in Seventh Circuit opinions, the "most fundamental and encompassing" of which is "whether the debtor has dealt fairly with his creditors." In re Schaitz, supra, at 453; In re Smith, 848 F.2d 813, 817 (7th Cir. 1988). In a series of cases, courts have gone in search of a definition of "good faith," as used in the Chapter 13 context; the First Circuit, for example, has recently adopted the following definition which is both helpful and attractive for its simplicity: "Congress presumably used the phrase `good faith' in its ordinary sense . . . (imposing) a standard of simple honesty." In re Keach, 243 B.R. 851, 856 (1st Cir BAP 2000).
The Seventh Circuit has held that "good faith" in this context must be defined on a case-by-case basis because "`[a] comprehensive definition of good faith is not practical'." (Internal citations omitted) The Court has adopted what it characterizes as a nonexhaustive list of relevant factors in In re Rimgale, 669 F.2d 426, 427 (7th Cir. 1982) which has been referenced often in subsequent cases, including in In re Smith, cited by Appellee. See, In re Smith, supra, at 817.
The burden of proving that the Debtor filed his bankruptcy petition in bad faith is on Appellant. In re Love, 957 F.2d 1350, 1355 (7th Cir. 1992); In re McNichols, ___ B.R. ___, 2001 WL 199857 (Bankr., ND/Ill, 1/11/01).
In her appeal, Watson contends that the Order Confirming Plan reflects bad faith on the part of Smith and that the Court, in not requiring a more generous pay out to Watson which would have overcome that bad faith, acted erroneously. Watson's primary difficulty in advancing this argument in this appeal is that she did not previously advance these specific claims before the bankruptcy court.
As we read Watson's appeal, she seems to be relying on a series of stacked inferences to establish the financial inadequacy of the pay out under the plan, which is really her only issue. She asks us to draw inferences from what she regards as Smith's culpable pre-filing conduct relating to the fraudulent misrepresentation lawsuit by Watson against Smith from which the judgment arose creating this debt. She asks us to draw additional inferences from the fact that Smith attempted to have this debt discharged in a prior Chapter 7 bankruptcy, but when it survived as a non-dischargeable debt, Smith filed the instant Chapter 13 proceeding. And she asks us to infer from this history a lack of sincerity on Smith's part in putting for his proposed plan, culminating in an overall lack of good faith. Unfortunately for Watson, none of this was specifically raised or otherwise developed in the Bankruptcy Court. In fact, our read of the transcript of the hearing discloses no mention of "good faith" by Watson's attorney, except in the context of their disagreement with the bottom-line money pay out, as we have quoted earlier in this opinion.
We note with approval that Watson is not contending in this appeal that it is impermissible as a per se violation of the "good faith" requirement for a Debtor simply to seek the discharge of a debt in a Chapter 13 proceeding after that debt it has been determined to be nondischargeable in a Chapter 7 proceeding. The Debtor has that option under existing law, given the different purposes of Chapter 7 and Chapter 13 and the types of relief they afford. See, Smith, supra, at 818 ("That a debt would be nondischargeable under Chapter 7, however, is not alone sufficient as a matter of law to constitute bad faith.")
Obviously, we face great difficulty in trying to pass on these issues in this appeal without the benefit of the bankruptcy court's initial consideration and resolution of them. Though arguably the bankruptcy judge was familiar with this pre-filing history, at least inferentially, since it was a matter of record in the court file, Watson's counsel did not preserve or otherwise "tee up" this issue or the other issues that he seeks now to have viewed as the predicates to a finding of a lack of good faith. Neither through his objections to the Debtor's proposed plan or to the Court's Order Confirming Plan, or through the evidence and argument at the hearing, did Watson specifically advance these issues so that the judge could resolve them. They simply went unaddressed.
Watson's only argument to the bankruptcy court was that the judge should disapprove the plan submitted by Smith because Smith had failed to disclose and to allocate all of his disposable income to fund his chapter 13 plan, as he was required to do under 11 U.S.C. § 1325(b)(1)(B). Stated slightly differently, Watson's disagreement goes to the adequacy of the pay-out, and only that.
We repeat: Watson's only contention in this appeal relates to the inadequacy of the pay out by Smith under the plan. This is how we interpret Watson's argument from his statements in his brief to the effect that Smith sought Chapter 13 relief, "not with the intention of satisfying Watson's claim to the greatest extent possible, but with the intention of avoiding payment of that claim to the greatest extent possible." (Appellant's Brief, page 9.)
Even this limited claim by Watson, however, has gone entirely undeveloped in this appeal. There are no references to evidence in the record which Watson contends the bankruptcy judge failed to consider or weighed improperly or erroneously construed; there is no elaboration as to other resources which Watson contends that Smith omitted from his schedules or from his testimony that were established as a part of the evidence at the hearing; and Watson omits as well any identification or discussion of any other specific errors in the plan itself or factors informing the plan that would make the Bankruptcy Judge's order confirming it clearly erroneous and in violation of the "good faith" standard. When the Seventh Circuit directs that these determinations must be made on the basis of the "totality of the circumstances," it obviously assumes that those circumstances will at least be developed in the evidence and cited in the arguments and briefs. The only basis on which we could possibly hold the Bankruptcy Court's decision to be clearly erroneous is through a wholesale substitution of our view for his, which we would never do.
Because Watson has adduced no evidence of Smith's dishonesty in proposing the plan, we are left with the firm conviction that Watson's only real objection to the plan is a sort of subjective, wishful-thinking — that the plan doesn't give her all the money she would like or believes she is entitled to — and she wishes it were otherwise. While we concede that there could be circumstances in which a plan is so conspicuously and entirely deficient in the financial sense, that is, in the meager amount it allows as payment to a creditor given the size of the debt obligating the Chapter 13 Debtor, that, on that basis alone, the amount of the pay out itself could be convincing proof of bad faith on the part of the Debtor, that is not the case here. Most of the time, when it comes to evaluating the adequacy or sufficiency of a Chapter 13 financial plan, the court must anchor its assessments on something other than the numbers themselves; we must look for and find some form of objective measure against which to make the necessary comparisons and assessment, such as evidence of an improper withholding or hiding of financial information or funds by the Debtor, or some misrepresentation of material financial facts by the Debtor, or an indication of a highly suspicious or fraudulent transfer of assets. Those indicia are entirely lacking here, or at least we have not been told of them with citations to the record; without them we are unable to evaluate the adequacy of the pay out plan in the Chapter 13 Order Confirming Plan.
Appellant was obligated to raise these issues specifically with the Bankruptcy Court if she intended to preserve them for review on appeal, and she did not. And Appellant was obligated to develop these issues on appeal, especially in light of our highly deferential review of the Bankruptcy Court decisions. We, therefore, specifically hold that Appellant's "good faith" claims have been waived, pursuant to Rule 8006, Rules of Bankruptcy Procedure. To the extent that Appellant objects on the grounds that Debtor was not required by the Bankruptcy Judge in his Order of Confirmation to make a sufficiently high repayment over the five years of the Plan or that the Debtor withheld accurate information concerning the extent of his debts and expenses and therefore the amount available for payment to Appellant, there simply is insufficient evidence to support these contentions. These are, as we have previously noted, matters on which Appellant has the burden of proof, which burden has not been satisfied here. There being no basis for us to hold that the Bankruptcy Judge's decision was clearly erroneous, the Bankruptcy Court's Order of Confirmation is AFFIRMED.