Lerin Brown v. Linda B. Gore , 742 F.3d 1309 ( 2014 )

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[PUBLISH] ``
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 13-10260
________________________
D.C. Docket No. 1:12-cv-02202-RDP,
BKCY No. 1:11-bk-42825-JJR
In re: LERIN BROWN,
Debtor.
___________________________________________
LERIN BROWN,
Plaintiff-Appellant,
versus
LINDA B. GORE,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(February 14, 2014)
Before CARNES, Chief Judge, HULL and COX, Circuit Judges.
HULL, Circuit Judge:
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Debtor Lerin Brown appeals the district court’s decision, which affirmed the
bankruptcy court’s order denying confirmation of Brown’s proposed Chapter 13
plan. The debtor filed a Chapter 13 petition, instead of a Chapter 7 petition, only
so that his attorney could be paid in installments through the proposed Chapter 13
plan. The bankruptcy court found that Brown had not filed his petition or his
proposed plan in “good faith,” as required by 11 U.S.C. § 1325(a)(3) and (a)(7)
respectively. After careful review of the record and the briefs, and with the benefit
of oral argument, we conclude that Brown has not shown that the bankruptcy
court’s fact findings were clearly erroneous.
We set forth the facts that led the bankruptcy court to deny confirmation of
Brown’s Chapter 13 plan.
I. FACTS AND PROCEDURAL HISTORY
A. Brown’s Chapter 13 Bankruptcy Petition
In 2011, petitioner Brown filed a voluntary petition for bankruptcy under
Chapter 13 of the bankruptcy code. See 11 U.S.C. § 1301 et seq. Brown reported
$1,134 in Social Security disability insurance benefits each month. His only other
income was $230 in rental income each month. His rental income plus Social
Security benefits combined for a monthly total of $1,364. His average monthly
expenses were $1,214, leaving him with a monthly net discretionary income of
$150.
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As for assets, Brown estimated that he had $920 in personal property,
including: (1) $20 in cash; (2) $800 in household goods; and (3) $100 in clothes.
Brown did not list any real property assets or even a vehicle.
Brown filed a schedule showing he owed a total of $16,203 to ten different
creditors (the “scheduled creditors”), all of whom held unsecured, nonpriority
claims. The scheduled creditors and the amounts Brown reported to owe them
were: (1) $1,100 to “Allied Interstate Inc.”; (2) $852 to “Ar Resources Inc.”; (3)
$562 to “Capio Partners LLC”; (4) $1,015 to “Comcast Cable”; (5) $93 to
“Covington Credit”; (6) $700 to “Credit Central”; (7) $600 to “Gadsden
Financial”; (8) $994 to “Nco-Medclr”; (9) $287 to “Paragon Rev”; and (10)
$10,000 to “Rainbow Health Care.”1
B. Brown’s Chapter 13 Reorganization Plan
Brown proposed a Chapter 13 reorganization plan to span three years. The
plan called for Brown to make monthly payments of $150 for 36 months, for a
total of $5,400. At oral argument, the parties confirmed that from this $5,400
amount, Brown would pay: (1) $2,000 to his attorney in attorney’s fees; (2) $281
to the bankruptcy court as a filing fee; (3) $50 to his attorney to cover Brown’s
required credit counseling; (3) $20 to his attorney to purchase a credit report; and
(4) 4.5 percent of each $150 payment as the Chapter 13 trustee’s commission.
1
Additionally, Brown reported that he had sent unspecified claim notices to three other
creditors: (1) Jon Barry & Associates; (2) Riverview RMC; and (3) Rural Metro Ambulance.
3
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Brown’s 36-month plan proposed to pay all attorney’s fees and
administrative expenses before any distributions to creditors. It would take 17
months of $150 payments by Brown to pay the attorney’s fees and administrative
costs. 2 The creditors would have to wait almost 17 months before getting their
first dollars. Even assuming Brown completed his plan, the scheduled creditors
collectively would receive $2,806, which was only 17 percent of the $16,203
Brown owed.
Brown proposed his plan on November 4, 2011, before the deadline for the
scheduled creditors to file proofs of claim. However, as the bankruptcy court later
noted in denying confirmation, only three creditors ended up filing claims within
the deadline, in amounts of $501.50, $489.46, and $364.12, for a total of
$1,355.08. Therefore, Brown would pay $2,000 to his attorney and $1,355.08 to
creditors under the plan. The bankruptcy court speculated that few “creditors
bothered to file claims perhaps because the likelihood of any meaningful payments
was not feasible” under Brown’s meagre budget, and any “distribution from the
trustee will be of little consequence.”
C. Trustee Gore’s Objection to Confirmation
2
Based on the face of Brown’s plan, and the parties’ explanation of it at oral argument, all
of Brown’s first $150 payment and most of his second $150 payment would go to paying the
$281 court filing fee. Then payments towards the $2,000 attorney’s fee would start.
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Trustee-appellee Linda Gore, the Chapter 13 trustee, requested that the
bankruptcy court not confirm Brown’s Chapter 13 plan. In her written objections,
trustee Gore provided two reasons for her recommendation: (1) “the plan is not
proposed in good faith in that debtor may need to be in a Chapter 7 case”; and (2)
“it does not appear the debtor will be able to comply with the plan.”
To understand trustee Gore’s objections to Brown’s Chapter 13 plan, it helps
to explain how a straight Chapter 7 liquidation would have worked for Brown.
The court filing fee for Chapter 7 is $306, which can be paid in four installments.
The bankruptcy court noted that Brown appeared to qualify for an in forma
pauperis waiver of the Chapter 7 filing fee but no such waiver is available in
Chapter 13 cases. In a Chapter 7 case, Brown would not have to pay a trustee’s
commission.
Under Chapter 7, a debtor liquidates any non-exempt assets and receives a
full discharge of his outstanding debts within just a few months. Brown had no
non-exempt assets to liquidate, so he could have filed a Chapter 7 petition and
received a full discharge a few months later. A successful Chapter 7 petition
discharges all debts. 11 U.S.C. § 727(a)–(b).
A Chapter 7 case was thus clearly more beneficial to Brown except for the
fact that his attorney’s fees could not be financed through a Chapter 7. See Lamie
v. U.S. Tr., 540 U.S. 526, 538–39, 124 S. Ct. 1023, 1032 (2004) (holding that the
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Bankruptcy Code “does not authorize compensation awards to debtors’ attorneys
from estate funds” in a Chapter 7 case, unless the attorney is “employed by the
trustee and approved by the court”). Rather, Brown would have to pay up front
attorney’s fees of $750 to $1,000 for an attorney to file a Chapter 7. 3
D. Bankruptcy Court’s Confirmation Hearing
On February 9, 2012, the bankruptcy court held a confirmation hearing on
Brown’s Chapter 13 plan. Brown appeared, represented by counsel. The
bankruptcy court noted that it had continued an earlier confirmation hearing to
allow Brown time to convert his Chapter 13 petition into a Chapter 7 liquidation
petition because “Mr. Brown unquestionably would be better off in Chapter 7.”
Brown, however, had not done so. Thus the bankruptcy court considered
whether Brown’s proposed plan met the requirements for confirmation under
Chapter 13, concluding that Brown’s plan did not.
The bankruptcy court suggested that the only reason Brown had filed under
Chapter 13 instead of Chapter 7 was because Brown did not have the money up
front to pay his attorney’s fee. The bankruptcy court stated: “All he has got to do
is not make any payments, is to hold those [$150] payments that he would make to
the trustee for a few months and then he can pay his lawyer and then he can file
Chapter 7 and he will then permanently have those debts erased . . . . But, here, all
3
The bankruptcy court stated “[a]ttorneys in this Division often charge $1,000 or less to
file a simple Chapter 7 case.”
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we are really doing is we are financing the lawyer’s fee . . . , and that is not a
purpose of Chapter 13.”
The bankruptcy court then pressed Brown’s attorney: “Other than you can’t
come up with attorney’s fees, you tell me why he wants to file Chapter 13.”
Brown’s attorney responded: “Well, the reason he wants to is because he wants
some relief and he can’t get it with a Chapter 7 because he has no money.” The
bankruptcy court countered: “And he has no money to, you have to finish the
sentence, pay his lawyer.” Brown’s attorney implied that this was correct, stating:
“Well, or pay the [court] filing fee.” The bankruptcy court pointed out that a
debtor “can pay the filing fee in installments in Chapter 7 to the same extent that
he can in Chapter 13.” Brown was present during this exchange and apparently
acquiesced to his attorney’s statements.
In light of the fact that the only reason Brown filed a Chapter 13 petition,
instead of a Chapter 7 petition, was so Brown could pay the $2,000 attorney’s fee
through installments under a Chapter 13 plan, the bankruptcy court found that the
petition and plan were not filed or proposed in good faith. Explaining this
conclusion, the bankruptcy court stated: “I am not going to allow these folks to
come in here to pay lawyers . . . . I think there is a real ethical issue of doing this .
. . . [I]f they can’t come up with the attorney fee, I don’t see how in the world you
expect that they are going to be able to pay a five or three-year plan and not default
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and then, once they do, they are back in the soup again and they have made no
headway.” 4 The bankruptcy court was particularly concerned that Brown would be
obligated to pay $150 for three years, would pay his attorney $150 each month for
16 months, and then would default on his plan and be right back in the same
predicament without having received a discharge.
Thus, the bankruptcy court orally denied confirmation of the proposed
Chapter 13 plan. Advising Brown to “save some money . . . to pay the lawyer to
put [him] in Chapter 7,” the bankruptcy court explained the benefits of a Chapter 7
liquidation. It told Brown: “When you file Chapter 7, then you are discharged and
that’s it. You don’t have to pay any more. You don’t have to pay a three-year
plan, two-year plan, six-month plan, one-week plan. You pay the lawyer and the
filing fee.” The bankruptcy court further explained that Brown would only have to
pay an attorney approximately $750, in a lump sum payment, for a Chapter 7
petition, instead of the $2,000 the proposed Chapter 13 plan called for him to pay
his attorney. In fact, the bankruptcy court suggested to Brown that if he could
make $150 in Chapter 13 payments, he could wait a few months and “save some
money . . . until you come up with enough to pay the lawyer to put you in Chapter
7.”
E. The Bankruptcy Court’s Order Denying Confirmation
4
Although it was Brown’s first bankruptcy case, the bankruptcy court noted that other
Chapter 13 debtors in the district had “filed twelve, thirteen, fourteen,” or “eighteen” cases.
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After the hearing, the bankruptcy court explained in a thorough order its
reasons for denying confirmation of the Chapter 13 plan. See In re Jackson, Nos.
11-42528-JJR-13, 11-42825-JJR-13, 2012 WL 909782 (Bankr. N.D. Ala. Mar. 16,
2012), aff’d sub nom, Brown v. Gore (In re Brown), No. 1:12-CV-02202-RDP,
2012 WL 6609005 (N.D. Ala. Dec. 13, 2012).5
The bankruptcy court assessed Brown’s proposed plan against the factors
this Court set forth in In re Kitchens for determining good faith (the “Kitchens
factors”). Id. at *7–8 (quoting In re Kitchens, 702 F.2d at 888–89). One Kitchens
factor is “the motivations of the debtor and his sincerity in seeking relief under the
provisions of Chapter 13.” Id. at *7 (internal quotation marks omitted).
Evaluating that factor, the bankruptcy court found that Brown’s motivations and
sincerity “were tainted because [he] sought relief under chapter 13, not to adjust
debts and preserve assets, but to accommodate payment of attorney fees.” Id. at
*8. The bankruptcy court explained the reasons for that finding “at length.” Id.
The bankruptcy court found that Brown was a “quintessential candidate[] for
chapter 7 relief,” and then asked why did Brown “seek relief under chapter 13 that
postpones discharge pending completion of at least a 3-year plan, when [he] easily
5
In this same order, the bankruptcy court explained why it was denying the Chapter 13
plan of another debtor, Steven Jackson. Jackson, 2012 WL 909782, at *1. Like Brown,
Jackson’s plan primarily involved only paying an attorney’s fee in installments. Id. The same
law firm represented both debtors. Id. at *2 n.8. The initial attorney’s fee in Jackson’s case was
$2,500, which the attorney later reduced to $1,500. Id. at *1 n.4. Jackson is not a party to this
appeal.
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qualified for chapter 7 relief that will provide [him] with [a] prompt discharge[]
and no long-term commitments?” Id. at *1.
The answer, the bankruptcy court found, was because of Brown’s “inability
or unwillingness” to prepay his attorney’s fees in one lump sum before his petition
for relief was filed. Id. The bankruptcy court recounted that, at the confirmation
hearing, “Brown’s counsel candidly admitted the only reason Brown filed for relief
under chapter 13 was to finance his attorney fees because he could not come up
with the funds needed to prepay fees for a chapter 7 case.” Id. at *2.
The bankruptcy court then reviewed the purpose of Chapter 13 as compared
with Chapter 7. Quoting this Court’s Kitchens precedent, the bankruptcy court
noted that Chapter 13 was “‘designed to facilitate adjustments of debts of
individuals with regular income through extension and composition plans funded
out of future income, under the protection of the court.’” Id. at *3 (quoting In re
Kitchens, 702 F.2d at 887 (additional internal quotation marks omitted)).
Therefore, “the precept for chapter 13 relief is adjustment of an individual’s debts
by way of developing a plan for their repayment.” Id. A Chapter 13 debtor is able
to “preserv[e] assets that otherwise might be liquidated under chapter 7.” Id.
However, Chapter 13 “was not intended as a payment collection and enhancement
device for attorneys.” Id. at *4.
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The bankruptcy court stressed that, in Brown’s case, there was no
meaningful adjustment of his debts and none of his assets were being protected—
they were all exempt. Id. at *3. Brown was not saving his home by paying
mortgage arrears or protecting non-exempt equity or assets; neither was he
avoiding repossession of vehicles, nor holding at bay tax or domestic support
creditors. Id. at *6.
Indeed, Brown’s plan was an “attorney-fee-centric” plan because it
“provided some small distribution to unsecured creditors,” but Brown’s “main
purpose for choosing chapter 13 as opposed to chapter 7 was to finance attorney
fees.” Id. at *5 (internal quotation marks omitted). The bankruptcy court pointed
out that “[w]hat is telling are provisions in such [attorney-fee-centric] plans that
delay the commencement of payments to unsecured creditors until after attorney
fees are fully paid. Such a provision has always been present in the Brown case.”
Id. at *5 n.13.
The bankruptcy court acknowledged that “[i]n most chapter 13 cases, paying
attorney fees through a plan is not only permitted, it is the norm.” Id. at *7.
Nevertheless, Brown’s attorney-fee-centric plan “abuse[d] the provisions, purpose
and spirit of chapter 13” because payment of attorney’s fees was “the overriding
purpose for filing a chapter 13 case.” Id. This was particularly true in Brown’s
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case, where “relief under chapter 7 would be the logical choice if it were not for
the attorney-fee hurdle.” Id.
The bankruptcy court also discussed another factor mentioned in Kitchens:
“the substantiality of repayment to the unsecured creditors.” Id. at *8. Regarding
this factor, the bankruptcy court noted that, at first glance, it may appear Brown
should be permitted to proceed under Chapter 13 because his plan at least proposed
“to pay small, albeit tenuous distributions to unsecured creditors—something being
better than nothing.” Id. The bankruptcy court, however, explained that even if
Brown made some payments to his creditors, those payments would “be of little
consequence.” Id. The creditors’ expenses would, “in most instances, exceed the
recovery.” Id. Furthermore, the bankruptcy court stressed the “abysmal failure
rate of chapter 13 cases” generally, and noted that Brown had “little incentive to
stay the course for three years.” Id.
The “burden which the plan’s administration would place on the trustee” is
another Kitchens factor the bankruptcy court emphasized. Id. at *7 (internal
quotation marks omitted). The bankruptcy court pointed out that the primary job
of the trustee in Brown’s case would be to collect and distribute plan payments in
order to pay his attorney’s fees. Id. at *8. And the bankruptcy court noted that
Brown proposed paying the trustee only a “fraction of her expenses and overhead
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related to servicing” his plan. Id. Brown’s plan would thus force the trustee to
subsidize the work she did on his case. See id.
Thus, the bankruptcy court found that Brown did not file his petition or
propose his plan in good faith, as there was “no meaningful or legitimate debt
adjustment purpose” to be found in Brown’s case or plan. Id. at *10. The
bankruptcy court considered “most glaring” the fact that even if Brown’s proposed
Chapter 13 plan was ultimately paid, everything that might be accomplished over
the next three years could be achieved more quickly and cheaply, and with greater
certainty—especially a discharge—under Chapter 7. Id.
The bankruptcy court gave Brown “14 days to convert his case to a case
under chapter 7.” Id. Brown did not do so and instead appealed to the district
court, which affirmed. Brown timely appealed to this Court.
II. DISCUSSION
A. Standard of Review
In a bankruptcy case, this Court “sits as a second court of review and thus
examines independently the factual and legal determinations of the bankruptcy
court and employs the same standards of review as the district court.” Torrens v.
Hood (In re Hood), 727 F.3d 1360, 1363 (11th Cir. 2013). Furthermore, when a
district court affirms a bankruptcy court’s order, as the district court did here, this
Court reviews the bankruptcy court’s decision. Educ. Credit Mgm’t Corp. v.
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Mosley (In re Mosley), 494 F.3d 1320, 1324 (11th Cir. 2007). “We review the
bankruptcy court’s factual findings for clear error and its legal conclusions de
novo.” Id.
“A bankruptcy court’s determination whether a chapter 13 plan has been
proposed in good faith is a finding of fact reviewable under the clearly erroneous
standard.” Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869 F.2d 1434, 1438
(11th Cir. 1989). The bankruptcy court judge is in the best position to evaluate
good faith and weigh the relevant Kitchens factors, as it sits as a finder of fact and
can best assess motives and credibility. See id. The bankruptcy court must utilize
its fact finding expertise and judge each case on its own facts after considering all
of the circumstances. See In re Kitchens, 702 F.2d at 888–89.
B. Chapter 13 Reorganization Generally
As the bankruptcy court aptly noted, Chapter 13 of the Bankruptcy Code “is
designed to facilitate adjustments of the debts of individuals with regular income
through extension and composition plans funded out of future income, under the
protection of the court.” Id. at 887 (internal quotation marks omitted). Under
Chapter 13, “any individual with regular income” may file for Chapter 13
reorganization and make “payments to a trustee under bankruptcy court protection,
with the trustee fairly distributing the funds deposited to creditors until all debts
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have been paid.” United States v. Devall, 704 F.2d 1513, 1515–16 (11th Cir.
1983) (quotation marks omitted).
Chapter 13, therefore, differs from a liquidation proceeding under Chapter 7.
See 11 U.S.C. § 701 et seq. In a Chapter 7 case, a trustee gathers up a debtor’s
non-exempt property, sells that property, and uses the cash proceeds to repay the
debtor’s creditors. See id. § 704(a)(1). Afterwards, the Chapter 7 debtor is entitled
to a discharge of all outstanding debts. See id. § 727(a). Chapter 7 requires a
debtor to give up his non-exempt assets but allows him immediate debt relief. See
id. Here, it is undisputed that Brown had no non-exempt assets. Therefore, Brown
was not attempting to preserve any assets by pursuing a Chapter 13 petition. In
short, Chapter 7 would have given Brown immediate relief.
On the other hand, Chapter 13 enables a debtor to retain his non-exempt
assets and use his regular income (instead of those assets) to repay his debts.
Chapter 13 requires a debtor to file a debt repayment plan. Id. § 1321. That plan
must, inter alia, “provide for the submission of all or such portion of future
earnings or other future income of the debtor to the supervision and control of the
trustee as is necessary for the execution of the plan.” Id. § 1322(a)(1). A Chapter
13 debtor does not receive a discharge until the end of his plan. As discussed,
Brown’s plan here required him to make monthly payments of $150 for three years
to receive his discharge.
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After a debtor files a Chapter 13 plan, the bankruptcy court must “hold a
hearing on confirmation of the plan” during or before which “[a] party in interest
may object to confirmation.” Id. § 1324(a). The bankruptcy court may confirm
the plan if, inter alia: (1) “the plan has been proposed in good faith and not by any
means forbidden by law”; and (2) “the action of the debtor in filing the petition
was in good faith.” Id. § 1325(a)(3), (a)(7). At any point before discharge, a
debtor: (1) may convert a case under Chapter 13 to a case under Chapter 7; or (2)
may request that the bankruptcy court dismiss a Chapter 13 case. Id. § 1307(a)–
(b).
C. “Good Faith” Under Chapter 13
As quoted above, Chapter 13 contains two “good faith” requirements. First,
subsection (a)(3) of § 1325 requires the bankruptcy court to determine if the plan
was proposed in good faith. 11 U.S.C. § 1325(a)(3). Subsection (a)(7), similarly,
mandates consideration of whether the petition was filed in good faith. Id.
§ 1325(a)(7). 6 Congress did not define or articulate standards for “good faith” in
subsections (a)(3) or (a)(7).
6
The former provision was an original component of Chapter 13, enacted as part of the
Bankruptcy Reform Act. See Pub. L. No. 95-598, § 1325, 92 Stat. 2549 (1978). Congress added
the second good faith requirement when it enacted the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005. See Pub. L. No. 109-8, § 102, 119 Stat. 23.
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As to subsection (a)(3), this Court has set forth a non-exhaustive list of
factors relevant to whether a plan was proposed in good faith. In re Kitchens, 702
F.2d at 888–89. These factors are: (1) “the amount of the debtor’s income from all
sources”; (2) “the living expenses of the debtor and his dependents”; (3) “the
amount of attorney’s fees”; (4) “the probable or expected duration of the debtor’s
Chapter 13 plan”; (5) “the motivations of the debtor and his sincerity in seeking
relief under the provisions of Chapter 13”; (6) “the debtor’s degree of effort”; (7)
“the debtor’s ability to earn and the likelihood of fluctuation in his earnings”; (8)
“special circumstances such as inordinate medical expense”; (9) “the frequency
with which the debtor has sought relief under the Bankruptcy Reform Act and its
predecessors”; (10) “the circumstances under which the debtor has contracted his
debts and his demonstrated bona fides, or lack of same, in dealings with his
creditors”; (11) “the burden which the plan’s administration would place on the
trustee”; (12) “the extent to which claims are modified and the extent of
preferential treatment among classes of creditors”; (13) “substantiality of the
repayment to the unsecured creditors”; and (14) “other factors or exceptional
circumstances.” Id.
These same Kitchens factors for subsection (a)(3) are equally relevant to
determining whether a petition was filed in good faith under subsection (a)(7).
Importantly too, “the facts of each bankruptcy case must be individually examined
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in light of [these] various criteria to determine whether the chapter 13 plan at issue
was proposed in good faith.” Id. at 888. While Kitchens does not use this phrase,
it basically adopts a “totality of the circumstances” approach for determining good
faith or lack thereof, which is what other circuits do, too. See id. at 888–89; see
also Sikes v. Crager (In re Crager), 691 F.3d 671, 675 (5th Cir. 2012) (“In this
circuit, courts apply a ‘totality of the circumstances’ test to determine whether a
Chapter 13 petition and plan are filed in good faith . . . .”); Berliner v. Pappalardo
(In re Puffer), 674 F.3d 78, 83 (1st Cir. 2012) (reversing because the bankruptcy
court did not consider the totality of the circumstances when evaluating whether
the debtor proposed his Chapter 13 plan in good faith but, rather, applied a per se
rule that attorney-fee-centric Chapter 13 petitions and plans are filed and proposed
in bad faith). Further, “prudence dictates that we hew to the overarching principle
that the presence or absence of good faith should be ascertained case by case.” Id.
With this background, we turn to Brown’s Chapter 13 petition and plan.
D. Application of Good Faith Standards Here
Here, the bankruptcy court found that Brown did not file his petition or
propose his plan in good faith. See 11 U.S.C. § 1325(a)(3), (a)(7). After close
review of the record and the totality of the circumstances, we cannot say that the
bankruptcy court’s findings were clearly erroneous.
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First, the bankruptcy court did not clearly err in its determinations as to the
debtor’s motivations and sincerity in seeking Chapter 13 relief, which is a Kitchens
factor. The record supported the bankruptcy court’s findings that Brown sought
Chapter 13 relief not to adjust debts and preserve assets but to pay his attorney’s
fees, and that Brown was far better off in a Chapter 7, over a Chapter 13,
bankruptcy. Brown had no non-exempt assets for the trustee to liquidate, and
Brown to lose, in a straight Chapter 7 liquidation. Brown did not have a home or a
vehicle he was trying to protect or preserve in a Chapter 13 case. Brown’s
monthly income was low and barely exceeded his monthly expenses. In addition
to being a “no asset” case, Brown’s income was fixed, not fluctuating, and Brown
did not have an ability to earn more money over the next three to five years.
Brown’s Social Security income would not have been subject to garnishment in a
Chapter 7 liquidation. These undisputed financial facts heavily favored a Chapter
7, over a Chapter 13, bankruptcy.
The record also supported the bankruptcy court’s finding that the only
reason Brown filed a Chapter 13 petition and plan was so that Brown’s attorney’s
fees could be paid in installments through a Chapter 13 plan. Brown’s Chapter 13
plan was all about attorney’s fees, and not Brown’s best interest or the creditors.
While the choice of chapter is one made by the debtor, we cannot say the
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bankruptcy court clearly erred in finding this Chapter 13 plan was for the benefit of
the lawyer and not in the best interest of the debtor Brown.
Indeed, there was no evidence in this particular record revealing unique
circumstances that would lead to the conclusion that it was in Brown’s best interest
to file under Chapter 13. See In re Crager, 691 F.3d at 675–77 (affirming
bankruptcy court’s confirmation of attorney-fee-centric plan when debtor “had a
legitimate fear that a future medical problem might leave her in a situation in
which she had to take on more debt and might need to file another Chapter 13
petition”).
As to the administrative burden Brown’s plan would place on the trustee,
another Kitchens factor, the trustee would have worked primarily for the attorney
to collect $150 for 17 months. Because the attorney was paid in full before the
creditors received a dime, the bankruptcy court suggested that “the primary job of
the trustee . . . [would] be to collect and distribute plan payments to pay attorney
fees.” Only three of the ten scheduled creditors bothered to file claims, totaling
$1,355.08, but no part of that sum would be paid for 17 months until the attorney
received his full $2,000.
As to the Kitchens factor regarding substantiality of repayment to those
creditors, there was a reasonable likelihood that Brown would not complete his
Chapter 13 plan and would never pay those creditors anything. Brown’s monthly
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income was $1,364 and his monthly expenses were $1,214, leaving $150 in
discretionary income. The plan proposed Brown would pay that entire $150 every
month to the trustee for three years. This left no margin of error or room for
unforeseen expenses. If Brown could not save $150 for five months to pay his
attorney up front for a Chapter 7 petition, a Chapter 13 plan requiring him to pay
$150 monthly for three years seemed doomed to failure. The bankruptcy court
emphasized the “abysmal failure rate of chapter 13 cases,” pointing out that in the
Eastern Division of the Northern District of Alabama “approximately 65% of all
chapter 13 cases fail before debtors complete their plans and become eligible for a
discharge.” During oral argument, the parties agreed that, in their experiences,
approximately two-thirds of Chapter 13 plans fail.
Furthermore, if the bankruptcy court confirmed Brown’s Chapter 13 plan,
Brown could have simply made the payments to his attorney and then converted
his case to a Chapter 7 and received a discharge. As the bankruptcy court
succinctly stated, “there is no good faith to be found in a temporary chapter 13 case
filed to accommodate payment of attorney fees as a prelude to a conversion to
chapter 7.” Allowing Brown to do so would circumvent the Supreme Court’s
holding in Lamie that attorney’s fees cannot be paid out of the funds of a Chapter 7
estate, absent the approval of the trustee and the court. See 540 U.S. at 538–39,
124 S. Ct. at 1032.
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Notably too, the bankruptcy court did not apply a categorical rule
prohibiting attorney-fee-centric or attorney-fee-only Chapter 13 plans. 7 During
oral argument, the Chapter 13 trustee agreed that debtors, such as Brown, need an
attorney to successfully navigate both Chapter 7 and Chapter 13 proceedings. And
no one disputed that reasonable compensation to a debtor’s attorney may be paid in
installments from the debtor’s estate in Chapter 13 cases. Here, the bankruptcy
court found Brown’s Chapter 13 plan was not proposed in good faith because: the
totality of the factual circumstances showed Brown was best served by a Chapter 7
bankruptcy; only Brown’s attorney benefitted from proceeding under Chapter 13;
and Brown was likely to default in his Chapter 13 case and end up without a
discharge. Our precedent demands a multi-factor analysis of the particular facts of
a case to determine whether good faith existed, see In re Kitchens, 702 F.2d at
888–89, which is what the bankruptcy court did here.
For all of these reasons above, we cannot say that the bankruptcy court’s
findings that Brown’s petition and plan did not meet the Chapter 13 good faith
7
A few months after denying Brown’s Chapter 13 plan, this same bankruptcy judge
confirmed an attorney-fee-centric Chapter 13 plan, which involved a 60-month repayment
period, a total payment of $5,400, and an attorney’s fee of $1,800. See In re Armstrong, No. 12-
40530-JJR13 (Bankr. N.D. Ala. Jun. 7, 2012). Although the debtor in that case subsequently
failed to make the scheduled payments, the bankruptcy court’s confirmation of that Chapter 13
plan further indicates that the court does not apply a categorical rule.
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requirements were clearly erroneous. 8 We offer no opinion as to other attorney-
fee-centric Chapter 13 plans. There is no hard and fast rule to be applied. Each
case has its own special circumstances, and Chapter 13 requires a case-by-case
analysis by the fact-finder.
III. CONCLUSION
In light of the foregoing, we affirm the bankruptcy court’s denial of
confirmation of Brown’s Chapter 13 bankruptcy plan.
AFFIRMED.
8
Perhaps the bankruptcy court could have restructured Brown’s plan in this manner and
then confirmed it. However, the bankruptcy court did afford the parties continuances after
noting its concern with the plan’s satisfaction of the good faith requirements. Moreover, the
parties did not ask the bankruptcy court to restructure the plan. Thus, we cannot say that the
bankruptcy court erred in failing to do so sua sponte.
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