FILED MAY 09 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 ORDERED PUBLISHED O F TH E N IN TH C IR C U IT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. EC-11-1349-PaDMk ) 7 ANGEL LEPE, ) Bk. No. 10-60264 ) 8 Debtor. ) ___________________________________) 9 ) ) 10 MICHAEL H. MEYER, Chapter 13 ) Trustee, ) 11 ) Appellant, ) 12 ) CORRECTED OPINION* v. ) 13 ) ANGEL LEPE, ) 14 ) Appellee. ) 15 ___________________________________) 16 17 Argued and Submitted on March 22, 2012 at Sacramento, California 18 Filed - May 9, 2012 19 Appeal from the United States Bankruptcy Court 20 for the Eastern District of California 21 Hon. Whitney Rimel, Bankruptcy Judge, Presiding 22 23 Appearances: Deanna K. Hazelton argued for appellant Michael H. Meyer; Thomas O. Gillis argued for appellee Angel 24 Lepe. 25 Before: PAPPAS, DUNN and MARKELL, Bankruptcy Judges. 26 27 28 * Two minor revisions have been made to this Opinion, originally issued on May 9, 2012, as reflected in the Clerk's Notice Re Clerical Corrections filed contemporaneously herewith. 1 PAPPAS, Bankruptcy Judge: 2 3 Chapter 131 trustee Michael H. Meyer (“Trustee”) appeals the 4 order of the bankruptcy court confirming the amended plan of 5 debtor Angel Lepe (“Lepe”). We AFFIRM. 6 FACTS 7 The material facts are undisputed. 8 Lepe filed a petition for relief under chapter 13 on 9 September 2, 2010. In his accompanying schedules, Lepe listed 10 assets valued at $363,900, liabilities of $581,380 (including $549 11 of unsecured debts), monthly income of $2,631, and expenses of 12 $2,481. In Lepe’s original chapter 13 plan, he proposed to pay 13 directly the payments on the first mortgage on his house, to 14 “strip” the second mortgage on his house and to treat that 15 creditor’s claim as unsecured, and to pay $150 per month for 36 16 months to Trustee. The payments to Trustee would provide an 17 estimated 17.25 percent dividend to Lepe’s unsecured creditors, 18 including the soon-to-be-unsecured second mortgage creditor’s 19 claim. 20 None of the creditors objected to confirmation of Lepe’s 21 plan, including the second mortgage secured creditor whose lien 22 would be stripped. However, on October 20, 2010, Trustee objected 23 to confirmation. Trustee argued that neither Lepe’s plan or 24 petition had been filed in good faith, as required by 25 §§ 1325(a)(3) and (a)(7), respectively. Trustee alleged that, 26 1 27 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure are referred to as “Civil Rules.”
-2- 1 since Lepe’s total unsecured debt at the time he filed his 2 petition was only $549, and because he had monthly income 3 sufficient to pay all of his monthly expenses and his debts, the 4 only reason Lepe had filed the bankruptcy case was to use chapter 5 13 to strip the second mortgage on his house. In Trustee’s 6 opinion, Lepe’s strategy amounted to an abuse of the bankruptcy 7 laws. Trustee later submitted a brief identifying several errors 8 in Lepe’s schedules, and expanding on his argument concerning 9 Lepe’s alleged lack of good faith. 10 Lepe filed a First Amended Plan on February 24, 2011. It 11 increased the monthly plan payments to Trustee from $150.00 to 12 $275.00, which in turn increased the proposed payback on unsecured 13 claims.2 Lepe also amended his schedules to include certain 14 assets not disclosed in the original filings. 15 2 Trustee accepted without question Lepe’s estimate that 16 dividends to unsecured creditors would amount to 17.25 percent under the original plan, and 17.5 percent under the First Amended 17 Plan. The bankruptcy court relied upon the latter estimate in its finding that the payments to unsecured creditors under the First 18 Amended Plan would be “not insignificant.” Moreover, neither party has questioned these estimates in this appeal. 19 Under Lepe’s original plan, the plan payments were $150 per month for 36 months, for a total of $5,400. The unsecured claims 20 were approximately $29,540, including the unsecured portion of the second mortgage after the lien strip. Allowing for some trustee 21 fees and administrative expenses, this yields approximately a 17.25 percent dividend for creditors from the payments over the 22 term of the plan. However, we are unable to confirm that Lepe’s First Amended 23 Plan would provide a 17.5 percent dividend to unsecured creditors. That plan called for payments of $150 for five months ($750), then 24 $275 for 31 months ($8,525), for a total of $9,275. Even allowing for increased administrative fees, the increased payments proposed 25 in the First Amended Plan should result in something closer to a 30 percent return to unsecured creditors, not 17.5 percent. 26 If there is error in these calculations (either ours or that of the parties), it is harmless. Trustee has not challenged the 27 calculations under the First Amended Plan, and because the bankruptcy court determined that a 17.5 percent dividend was “not 28 insignificant,” any higher dividend to unsecured creditors would also presumably be “not insignificant.”
-3- 1 Trustee submitted a detailed opposition to Lepe’s amended 2 plan on March 24, 2011. In addition to repeating earlier 3 arguments on good faith, Trustee discussed the separate chapter 13 4 case filed by Lepe’s girlfriend, Elsa Antonio, and how the cases 5 were related.3 Lepe filed a response to Trustee’s submissions on 6 April 29, 2011; Trustee filed a reply brief on May 5, 2011. 7 At a June 2, 2011 confirmation hearing concerning both 8 Antonio’s plan and Lepe’s amended plan, the bankruptcy court 9 announced its findings of fact, conclusions of law, and decision 10 regarding confirmation. In material part, the court found and 11 concluded that: 12 - Any inaccuracies in Lepe’s schedules were occasioned by his 13 lawyer’s inadvertence, and did not evidence any lack of good faith 14 by Lepe. 15 - The amount of payments being made under Lepe’s amended plan 16 to unsecured creditors was “not insignificant.” 17 - The bankruptcy court was not persuaded that “the fact that 18 [Lepe and Antonio] don’t have very much unsecured debt makes 19 [them] ineligible to be a debtor in chapter 13.” 20 - “[I]t is a proper reorganization purpose to deal with 21 secured claims as well as to deal with unsecured claims” in 22 chapter 13 cases. 23 - The second mortgage creditor, whose lien was being stripped 24 in Lepe’s plan, had not opposed confirmation. 25 26 3 Trustee did not include in the record on appeal any of the documents or pleadings from the Antonio bankruptcy case. As a 27 result, although Trustee and the bankruptcy court frequently refer to the Antonio case, the Panel must rely on the “second-hand” 28 information about the financial relationship between Lepe and Antonio as related in argument by the parties.
-4- 1 - While deeming the decision “a very close call,” the 2 bankruptcy court concluded both plans should be confirmed.4 3 The bankruptcy court entered the order confirming Lepe’s 4 amended plan on July 1, 2011. Trustee filed this timely appeal. 5 JURISDICTION 6 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 7 and 157(b)(2)(L). The Panel has jurisdiction under 28 U.S.C. 8 § 158. 9 ISSUES 10 Whether the bankruptcy court erred in finding that Lepe’s 11 First Amended Plan was filed in good faith. 12 Whether the bankruptcy court erred in confirming Lepe’s First 13 Amended Plan. 14 STANDARDS OF REVIEW 15 The bankruptcy court’s determination regarding a debtor’s 16 good faith in proposing a chapter 13 plan for confirmation is a 17 factual finding reviewed under the clearly erroneous standard. 18 Figter Ltd. v. Teachers Ins. & Annuity Ass’n (In re Figter Ltd.), 19 118 F.3d 635, 638 (9th Cir. 1997); Ho v. Dowell (In re Ho), 274 20 B.R. 867, 870 (9th Cir. BAP 2002). 21 Whether a chapter 13 plan should be confirmed involves mixed 22 questions of fact and law, where factual determinations are 23 reviewed under the clearly erroneous standard, and determinations 24 of law are reviewed de novo. Andrews v. Loheit (In re Andrews), 25 4 In addition, the bankruptcy court reduced the attorney’s 26 fees allowed to the lawyer representing both Lepe and Antonio from $5,000 to $3,500 in the Antonio case, and from $3,500 to $3,000 in 27 Lepe’s case. Since Antonio paid these fees in cash before the bankruptcy cases were filed, the court ordered that the difference 28 be returned to Antonio.
-5- 1 155 B.R. 769, 770 (9th Cir BAP 1993). 2 DISCUSSION 3 I. 4 In order to confirm a plan, the debtor must show, and the 5 bankruptcy court must find, that the debtor’s “plan has been 6 proposed in good faith and not by any means forbidden by law.” 7 § 1325(a)(3). In his brief, Trustee concedes that the “debtor was 8 not ‘bad’ in any way.” Even so, Trustee argues that, given these 9 facts, the bankruptcy court’s order confirming Lepe’s amended plan 10 must be reversed because Lepe “fails to pass the ‘good faith 11 standard [not] because the debtor is ‘bad,’ but because what the 12 debtor is proposing, stripping a second mortgage while being 13 otherwise solvent, is not within the spirit or purpose of Chapter 14 13.” It is the Trustee’s view that, as a matter of law, any 15 debtor who is “otherwise able to pay [his or her] debts,” and 16 whose “sole purpose” for filing for relief under chapter 13 is to 17 strip a totally unsecured lien on the debtor’s home, while paying 18 unsecured creditors (including the mortgage creditor holding the 19 stripped lien) only a percentage of that debt over the term of the 20 plan, lacks good faith.5 21 22 5 Another confirmation standard, § 1325(a)(7), requires the debtor to show that “the action of the debtor in filing the 23 petition was in good faith.” This subsection was added to the Bankruptcy Code by BAPCPA in 2005. Although Trustee argued in the 24 bankruptcy court that Lepe could not satisfy this requirement, he has not raised Lepe’s compliance with § 1325(a)(7) as an issue on 25 appeal. See Tr. Op. Br. at 1 (“The single issue on appeal is whether the Bankruptcy Court erred in finding that the Debtor’s 26 Chapter 13 plan was [proposed] in good faith pursuant to 11 U.S.C. § 1325(a)(3).”) Though the Panel has held that “[t]he difference 27 between good faith in filing a case and good faith in proposing a (continued...) 28 -6- 1 Based upon the long-standing precedents of this circuit, we 2 reject Trustee’s construction of the Code. We also disagree with 3 Trustee’s characterization of the facts in this case. 4 The decisional law in the Ninth Circuit guiding a bankruptcy 5 court’s examination of a chapter 13 debtor’s good faith under the 6 Code is well-known. Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th 7 Cir. 1982), was one of the first decisions to construe the 8 § 1325(a)(3) good faith requirement, and its holding has 9 continuing vitality. 10 Goeb noted that neither the former Bankruptcy Act, nor the 11 then-new Bankruptcy Code, defined good faith, and that there was 12 no controlling case law assigning meaning to the term. In light 13 of the equitable nature of bankruptcy court proceedings, when 14 weighing a debtor’s good faith in a chapter 13 case, Goeb held 15 that a bankruptcy court should ask whether the debtor had acted 16 equitably in proposing the plan. Id. at 1390. More precisely, 17 according to the court, a bankruptcy court should inquire “whether 18 the debtor has misrepresented facts in his plan, unfairly 19 manipulated the Bankruptcy Code, or otherwise proposed his Chapter 20 13 plan in an inequitable manner.” Id. To make its decision 21 about a debtor’s good faith (or lack of it), Goeb emphasized that 22 23 5 (...continued) plan is relatively minor, and the evidence on both issues may 24 properly be considered together[,]” Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 918 (9th Cir. BAP 25 2011), we deem Trustee’s objection to confirmation based on § 1325(a)(7) waived because “we consider only those issues argued 26 specifically and distinctly in a party's opening brief.” Leigh v. Salazar, ___ F.3d ___, 2012 WL 1255043 at * 4 (9th Cir. 2012) 27 (quoting Greenwood v. Fed. Aviation Admin., 28 F.3d 971, 977 (9th Cir.1994)). 28 -7- 1 a bankruptcy court must engage in a “case-by-case” analysis of the 2 “particular features of each Chapter 13 Plan,” and should consider 3 “all militating factors.” Id. To do justice to the purposes of 4 the Code, the court stated: 5 We emphasize that the scope of the good-faith inquiry should be quite broad. The statement most quoted on the 6 meaning of “good faith” is: [“]Good faith itself is not defined but generally the inquiry is directed to whether 7 or not there has been an abuse of the provisions, purpose, or spirit of Chapter XIII in the proposal or 8 plan.[”] 10 W. Collier, Bankruptcy ¶ 29.06[6] (14th ed. 1980). However, even this generalization does not 9 adequately reflect the range of relevant considerations. . . . Too much weight should not be given to Collier’s 10 observation. . . . [B]ankruptcy courts cannot substitute a glance at [one factor such as the amount to 11 be paid under the plan] for a review of the totality of the circumstances. 12 13 In re Goeb, 675 F.2d at 1390 n.9; see also Chinichian v. 14 Campolongo (In re Chinichian), 784 F.2d 1440, 1444 (9th Cir. 1986) 15 (stating that the good faith inquiry “should examine the 16 intentions of the debtor and the legal effect of the confirmation 17 of a Chapter 13 plan in light of the spirit and purposes of 18 Chapter 13”). 19 Goeb is particularly instructive in resolving the issue in 20 this appeal because, in that case, the court reversed the decision 21 of a bankruptcy court refusing to confirm the debtors’ plan solely 22 because it would pay primarily secured and priority debt, and not 23 “substantially repay their unsecured creditors.” 675 F.3d at 1391 24 (“Although these two considerations are relevant, they are not 25 determinative. Unless the [bankruptcy] court can muster other 26 evidence of bad faith on remand, it must confirm the Goebs’ 27 plan.”). After ruling that a plan provision providing a nominal 28 repayment to unsecured creditors was “one piece of evidence that
-8- 1 the debtor is unfairly manipulating Chapter 13 and therefore 2 acting in bad faith,” the Ninth Circuit then cautioned: 3 However, bankruptcy courts cannot substitute a glance at the amount to be paid for a review of the totality of 4 the circumstances. Because the court below did not inquire adequately into whether the Goebs acted in good 5 faith, we must reverse and remand. 6 In re Goeb, 675 F.2d at 1391. 7 In short, Goeb established that, in this circuit, a good 8 faith determination in connection with chapter 13 plan 9 confirmation cannot be based on any single factor or feature of a 10 proposed plan, to the exclusion of review of all other relevant 11 information. Importantly, it is of no moment that a single factor 12 may be indicative of bad faith, or that a specific plan feature is 13 not consistent with the “spirit of chapter 13” or may indicate 14 manipulation of the Bankruptcy Code. Factors indicating good and 15 bad faith may not be considered in isolation, but must always be 16 weighed against the totality of the circumstances in each case. 17 Later decisions by the BAP and Ninth Circuit have 18 consistently reaffirmed this principle. For example, in Downey 19 Sav. & Loan Ass’n v. Metz (In re Metz), 67 B.R. 462 (9th Cir. BAP 20 1986), aff’d In re Metz, 820 F.2d 1495 (9th Cir. 1987), a so- 21 called “chapter 20 case,”6 the creditor argued that the debtor 22 should not be allowed to use a chapter 13 plan to discharge 23 mortgage arrearages that could not be discharged in his earlier 24 chapter 7 case. The Ninth Circuit held that the fact that a 25 6 In the vernacular of bankruptcy, a “chapter 20” case 26 usually refers to a chapter 13 case that follows on the heels of a chapter 7 case filed by the same debtor, in which unsecured debt 27 has been discharged. The debtor then utilizes a chapter 13 plan to deal with secured (or possibly nondischargeable) debts. Nelson 28 v. Meyer (In re Nelson), 341 B.R. 671, 677 n.10(9th Cir. BAP 2007).
-9- 1 chapter 13 case was filed after the debtor had sought and received 2 a chapter 7 discharge was not per se a basis for finding that the 3 debtor had engaged in bad faith. Indeed, after analyzing the 4 totality of the circumstances in Metz, the court held that the 5 debtor’s plan could be confirmed. Id. at 1499. 6 To implement the totality of circumstances approach, the BAP 7 has identified a variety of factors to assist a bankruptcy court 8 in determining whether a chapter 13 debtor has proposed a plan in 9 good faith on a case-by-case basis. A bankruptcy court might 10 consider: 11 1) The amount of the proposed payments and the amount of any surplus of debtor’s income after paying expenses; 12 2) The debtor’s employment history, ability to earn, and 13 likelihood of future increases in income; 14 3) The probable or expected duration of the plan; 15 4) The accuracy of the plan’s statements of the debts, expenses and percentage of repayment of unsecured debt, 16 and whether any inaccuracies are an attempt to mislead the court; 17 5) The extent of any preferential treatment between 18 classes of creditors; 19 6) The extent to which secured claims are modified; 20 7) The type of debt sought to be discharged, and whether any such debt is nondischargeable in chapter 7; 21 8) The existence of special circumstances such as 22 inordinate medical expenses; 23 9) The frequency with which the debtor has sought bankruptcy relief; 24 10) The motivation and sincerity of the debtor in 25 seeking Chapter 13 relief; and 26 11) The burden which the plan’s administration would place upon the trustee. 27 28 Fid. & Cas. Co. of N.Y v. Warren (In re Warren), 89 B.R. 87, 93
-10- 1 (9th Cir. BAP 1987) (citing In re Brock, 47 B.R. 167, 169 (Bankr. 2 S.D. Cal. 1985), which in turn quoted United States v. Estus (In 3 re Estus), 695 F.2d 311, 317 (8th Cir. 1982)).7 4 The Ninth Circuit has likewise amplified the criteria to be 5 employed by parties and bankruptcy courts in applying the 6 “totality of circumstances” chapter 13 good faith analysis: 7 [In determining whether the debtor has acted in good faith, a] bankruptcy court should consider the following 8 factors: 9 (1) whether the debtor “misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy 10 Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner,” id. [citing In re Goeb, 11 675 F.2d at 1391]; 12 (2) “the debtor’s history of filings and dismissals,” [citing In re Nash, 765 F.2d 1410, 1415 (9th Cir. 1985)]; 13 (3) whether “the debtor only intended to defeat state 14 court litigation,” [citing In re Chinichian, 784 F.2d at 1445-46]; and 15 (4) whether egregious behavior is present, (citing 16 Colonial Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 937; In re Bradley, 38 B.R. 425, 432 (Bankr. C.D. Cal. 17 1984)). 18 Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 19 1999). But while a Warren/Estus and Leavitt “factors approach” 20 may be helpful to bankruptcy courts faced with good faith issues, 21 it must be remembered that these lists are guidelines to be 22 understood as “the beginning and not the end of the analysis.” In 23 re Nelson, 343 B.R. at 677 n.10.8 24 7 25 Within the Ninth Circuit, these eleven points are often referred to as the Warren factors. Outside the Ninth Circuit, 26 they are usually referred to as the Estus factors. Here we will refer to them generally as the Warren/Estus factors. 27 8 Whether a bankruptcy court employs the eleven point 28 Warren/Estus factors (some of which are arguably dated) or the (continued...)
-11- 1 In summary, then, in the Ninth Circuit, in determining 2 whether a debtor has proposed a plan in good faith under 3 § 1325(a)(3), a bankruptcy court must examine the totality of the 4 circumstances. Stated another way, in evaluating good faith, a 5 bankruptcy court must never view one factor in isolation, even if 6 that one factor is indicative of bad faith. In re Goeb, 675 F.2d 7 at 1391. 8 II. 9 In this appeal, Trustee argues that the bankruptcy court 10 erred in finding that Lepe proposed his plan in good faith, 11 because any debtor who is otherwise able to pay debts, and whose 12 sole purpose for filing for relief under chapter 13 is to strip a 13 totally unsecured lien on the debtor’s home, while paying 14 unsecured creditors (including the mortgage creditor holding the 15 stripped lien) only a percentage of that debt over the term of the 16 plan, lacks good faith. 17 The courts find good faith in only those cases where the debtor is “insolvent” meaning that he “needs” bankruptcy 18 and where there is an actual “reorganization” of the debtor’s debts. The Debtor here simply does not need to 19 reorganize anything and appears to be seeking a short cut on his second mortgage. 20 21 Trustee contends that because Lepe proposes to use a chapter 22 13 plan to strip a second mortgage on his home although Lepe is, 23 using Trustee’s vernacular, “solvent,” requires the bankruptcy 24 court to find that Lepe lacks good faith. In making this 25 8 26 (...continued) four-point Leavitt guidelines, some combination, or even its own 27 matrix, it is important, as per In re Goeb, that the court not base its findings regarding the debtor’s good faith (or lack of 28 it) on a single factor, but rather, that it consider the totality of the circumstances.
-12- 1 argument, Trustee invites the bankruptcy court and this Panel to 2 isolate our attention on only one of the four Leavitt criteria: 3 whether the debtor has “unfairly manipulated the Bankruptcy 4 Code . . . .” In re Leavitt, 171 F.3d at 1224. That approach is 5 improper; it is patently at odds with the Ninth Circuit case law 6 discussed above. 7 Trustee cites no “lien strip” cases to support his argument. 8 Instead, Trustee relies upon decisions examining chapter 13 plans 9 in which the debtor proposes to pay only the debtor’s attorney 10 fees and not other creditors, or plans filed in chapter 20 cases. 11 Of course, Lepe’s plan is not one designed to benefit only his 12 attorney. And because Lepe has not previously sought chapter 7 13 relief, this is also not a chapter 20 case. Trustee nonetheless 14 insists that “both of these lines of cases are instructive in 15 determining good faith in the instant case. What is important to 16 both lines of cases is that there is a reorganization in process 17 and that lien avoidance is given extra scrutiny.” We disagree 18 that the cases cited by Trustee support denial of confirmation in 19 this case. 20 Trustee refers to four attorney fee cases: In re Molina, 420 21 B.R. 825 (Bankr. D.N.M. 2009); In re Sanchez, 2009 WL 2913224 22 (Bankr. D.N.M. 2009); In re Montry, 393 B.R. 695 (Bankr. W.D. 23 Miss. 2008); In re Paley, 390 B.R. 53 (Bankr. N.D.N.Y. 2008). 24 In In re Molina, the debtor secured a chapter 7 discharge 25 about five years before commencing the chapter 13 case. Her 26 chapter 13 plan proposed to pay only trustee fees and her 27 attorney’s fees. While cited by Trustee for support, the 28 bankruptcy court actually confirmed Molina’s plan after a detailed
-13- 1 application of the eleven Warren/Estus factors to the facts, 2 thereby conducting a classic totality of the circumstances 3 analysis. In re Molina, 420 B.R. at 830. 4 In re Sanchez involved facts similar to those in Molina, 5 i.e., a plan proposing payment only for the debtor’s attorney’s 6 fees. In re Sanchez, 2009 WL 2913224 at *1. Unlike the Molina 7 court, though, the Sanchez court denied confirmation, in part 8 finding that filing a plan that would pay only attorney fees was 9 an abuse of the bankruptcy process. However, like Molina, the 10 Sanchez court reached that conclusion after explicitly analyzing 11 the plan and applying the eleven Warren/Estus factors. Id. at * 12 2. The court in In re Paley took a similar approach, and reached 13 a similar result to Molina. In re Paley, 390 B.R. at 59-60. 14 In re Montry would appear to be the only decision that 15 seemingly supports the notion that “attorney fee only” plans are 16 per se bad faith filings justifying denial of confirmation. 17 Unlike the other three attorney fee cases cited by Trustee, the 18 bankruptcy court in Montry, purportedly relying on Paley, declined 19 to perform a detailed analysis of the debtor’s good faith, 20 observing that “[a] point-by-point application of [the Warren- 21 Estus] factors is unnecessary here because, as the court in Paley 22 concisely stated,[a] plan whose duration is tied only to payment 23 of attorney’s fees simply is an abuse of the provisions, purpose, 24 and spirit of the Bankruptcy Code.” In re Montry, 393 B.R. at 25 696. In our view, Montry misstates the holding in Paley, because 26 the Paley bankruptcy court reached its conclusion denying 27 confirmation only after what it described as a “case-by-case 28 analysis of the totality of the circumstances” and applying the
-14- 1 eleven-point Warren/Estus factors. In re Paley, 390 B.R. at 59. 2 Of course, none of these four decisions addresses whether a 3 debtor’s efforts to use a chapter 13 plan to effect a lien 4 avoidance is a factor indicating bad faith. In Paley, the plan 5 provided that the debtor would “continue to pay her sole secured 6 creditor directly in connection with a car loan.” In re Paley, 7 390 B.R. at 56. And in Molina, Sanchez and Montry, no secured 8 debts or liens were treated in the plans at all. Instead, in 9 three of the four decisions, the bankruptcy court reached its 10 conclusion only after conducting a detailed examination of good 11 faith, applying a Warren/Estus multi-factor analysis. 12 In addition, while decided after the parties submitted their 13 briefs, the Panel now has the benefit of a detailed examination of 14 the good faith implications of “attorney fee plans” in Berliner v. 15 Pappalardo (In re Puffer), 674 F.3d 78 (1st Cir. 2010). In 16 Puffer, the court of appeals rejected an argument that such cases 17 present an example of per se bad faith. Indeed, the First Circuit 18 went further and observed that it would constitute reversible 19 error for a bankruptcy court to apply a per se rule, rather than 20 to engage in a totality of the circumstances analysis in 21 determining good faith in chapter 13 confirmations: 22 We believe that the totality of the circumstances approach to adjudicating good faith should apply equally 23 to inquiries under section 1325. . . . The totality of the circumstances test cannot be reduced to a mechanical 24 checklist, and we do not endeavor here to canvass the field and catalogue the factors that must be weighed 25 when determining whether a debtor has submitted a Chapter 13 plan in good faith. . . . But we, like other 26 courts, are reluctant to read per se limitations into section 1325’s good faith calculus. See Johnson v. 27 Vanguard Holding Corp. (In re Johnson), 708 F.2d 865, 868 (2d Cir. 1983) (per curiam) (collecting cases). 28 After all, Congress has legislated nine requirements
-15- 1 that must be met before a Chapter 13 plan can be confirmed, see 11 U.S.C. § 1325(a)(1)–(9), and we do not 2 think that it is our province to insist upon a tenth. In all events, good faith is a concept, not a 3 construct. Importantly, it is a concept that derives from equity. . . . This matters because equitable 4 concepts are peculiarly insusceptible to per se rules. See Johnson v. Spencer Press of Me., Inc., 364 F.3d 368, 5 383 (1st Cir. 2004); see also Rosario–Torres v. Hernandez–Colon, 889 F.2d 314, 321 (1st Cir.1989) (en 6 banc) (stating that “the hallmark of equity is the ability to assess all relevant facts and circumstances 7 and tailor appropriate relief on a case by case basis”). 8 In re Puffer, 674 F.3d at 82. 9 The Puffer majority did note that it was not blessing 10 attorney-fee cases, and that such cases are subject to special 11 scrutiny.9 Nevertheless, the court concluded that a bankruptcy 12 court’s application of a per se bad faith rule, and the failure to 13 examine the totality of the circumstances in determining good 14 faith, was improper. In re Puffer, 674 at 83. 15 Trustee also offers four decisions arising from chapter 20 16 scenarios. In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. 2010), 17 aff’d 814 F. Supp. 2d 946 (N.D. Cal. 2011); In re Okosisi, 451 18 B.R. 90 (Bankr. D. Nev. 2011); In re Fair, 450 B.R. 853 (E.D. 19 Wisc. 2011); In re Hill, 440 B.R. 176 (Bankr. S.D. Cal. 2010). 20 According to Trustee, these cases are instructive because, in 21 each, the bankruptcy courts required the debtor to demonstrate a 22 9 23 Although the Puffer majority held that it was legal error to isolate one factor in performing a good faith analysis, it 24 instructed that, in attorney fee cases, the proponent of good faith needed to establish “special circumstances” limited to 25 “relatively rare” instances in order to support good faith of such filings. Id. at 83. The concurrence in Puffer would not require 26 the application of any special rule in such cases, and instead, would simply rely upon the discretion of the bankruptcy court to 27 determine good faith based on relevant facts. Id. Of course, we express no opinion on whether, under the Ninth Circuit case law, 28 the debtor’s motives in proposing a plan that pays only attorneys fees warrant any “special scrutiny” by the bankruptcy court.
-16- 1 need for filing a chapter 13 case separate and distinct from the 2 debtor’s desire to employ lien avoidance. However, each of these 3 decisions can be distinguished on the facts. 4 In Okosisi and Hill, the bankruptcy courts ruled that the 5 debtors filed their chapter 13 petitions and proposed their plans 6 in good faith. The debtors in each case were insolvent when they 7 filed, and each had significant debts to reorganize. Both courts 8 reached their good faith conclusion after applying a totality of 9 the circumstances analysis. 10 The district court in Fair actually came to no conclusion 11 regarding the debtor’s good faith. It did, however, pose an 12 observation before remanding that case to the bankruptcy court to 13 engage in further fact-finding regarding good faith: 14 Filing a chapter 13 case “solely for the purpose of the lien avoidance” suggests manipulation of the bankruptcy 15 code and is evidence of bad faith. Hill at 184 (citing Tran [411 B.R.] at 238). The Court expresses no opinion 16 on this issue, which should be explored by the bankruptcy court on remand. In re Sidebottom, 430 F.3d 17 893, 899 (7th Cir. 2005) (listing factors for good faith inquiry).10 18 19 In re Fair, 450 B.R. at 858. In other words, after noting that 20 filing a chapter 13 petition to secure a lien avoidance had in 21 other cases been viewed as “evidence of bad faith,” the Fair court 22 remanded its case to the bankruptcy court to consider that fact as 23 only one relevant factor in the good faith inquiry. 24 Trustee places greatest emphasis on In re Tran. In Tran, 25 the debtor filed a chapter 13 petition after she had received a 26 27 10 The Seventh Circuit in Sidebottom listed seven factors in 28 the good faith analysis, none of which are inconsistent with those identified in Leavitt and Warren/Estus.
-17- 1 discharge in a chapter 7 case. The bankruptcy court determined 2 that Tran’s sole purpose in filing the second bankruptcy case was 3 to avoid a second mortgage on her residence, that the debtor had 4 only a small arrearage on her first deed of trust to cure, and 5 owed no unsecured debt. The bankruptcy court ruled that the 6 debtor lacked good faith. However, that the debtor filed merely 7 to avoid the lien was not the only factor considered in the 8 bankruptcy court’s good faith determination. Both the bankruptcy 9 court, and the district court on appeal, noted that an additional 10 factor influencing the good faith analysis was that the debtor was 11 solvent on a balance sheet basis. 12 Hoping to find support in Tran, Trustee argues that Lepe was 13 “solvent” in this case. But the “insolvency” discussed in Tran 14 refers to a situation where “the sum of [the debtor’s] debts is 15 greater than all of such entity’s property, at a fair 16 valuation[.]” § 101(32)(A). In accounting parlance, a solvent 17 debtor’s assets would exceed liabilities. This balance sheet 18 insolvency must be distinguished, though, from cash flow 19 insolvency, where a debtor is unable to pay its debts when they 20 come due. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 26 (9th 21 Cir. BAP 2009). 22 Whether the debtor suffers from balance sheet insolvency may 23 well be important to a bankruptcy court in evaluating the debtor’s 24 good faith in a chapter 20 scenario because it may indicate that 25 the debtor has assets available with which to pay debts without 26 resort to the bankruptcy process. However, based upon the 27 schedules and other evidence given to the bankruptcy court here, 28 it is clear that Lepe was not balance sheet solvent. Quite the
-18- 1 contrary appears to be true. While Lepe’s cash-flow would 2 arguably allow him to pay his mortgage payments with some small 3 amount remaining each month to apply toward unsecured debts, 4 Lepe’s financial circumstances were, indisputably, dire. As noted 5 above, indisputably, Lepe was balance sheet insolvent, in that the 6 amount of his debts greatly exceeded the value of his assets. 7 Moreover, neither balance sheet insolvency, nor inability to 8 pay debts, is a prerequisite for filing a voluntary petition under 9 the Bankruptcy Code. Stolrow v. Stolrow’s, Inc. (In re Stolrow’s, 10 Inc.), 84 B.R. 167, 171 (9th Cir. BAP 1988); see also Taylor v. 11 Winnecour (In re Taylor), 450 B.R. 577, 579 n.3 (Bankr. W.D. Pa. 12 2011) (“Of course, there is no requirement that an individual be 13 insolvent to be a debtor in bankruptcy. See generally 11 U.S.C. 14 § 109, ‘Who may be a debtor,’ wherein there is no requirement of 15 insolvency regarding individuals.”); In re Local Union 722 Int’l 16 Bhd. of Teamsters, 414 B.R. 443, 450 (Bankr. N.D. Ill. 2009). The 17 eligibility requirements for chapter 13 relief, in particular, 18 make no reference to a debtor’s insolvency or ability to pay his 19 debts. § 109(e) (prescribing that, subject to stated debt 20 limitations, a chapter 13 debtor be “an individual with regular 21 income”). 22 The Ninth Circuit has held that the debtor’s insolvency, 23 while relevant, is not a requirement for finding that a debtor has 24 proposed a plan in good faith in a chapter 11 case. Platinum 25 Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P., 314 26 F.3d 1070, 1074-75 (9th Cir. 2002). In interpreting § 1129(a)(3), 27 the chapter 11 good faith rule, the court rejected any per se 28 approach to determining good faith, observed that “insolvency is
-19- 1 not a prerequisite to a finding of good faith,” and noted that 2 “[t]he fact that a debtor proposes a plan in which it avails 3 itself of an applicable Code provision does not constitute 4 evidence of bad faith.” Id. at 1074-75 (quoting In re PPI Enters., 5 Inc., 228 B.R. 339, 344-45 (Bankr. D. Del. 1998)). 6 III. 7 The Ninth Circuit has also held that a debtor’s chapter 13 8 plan may strip the lien of a creditor holding a claim secured by 9 the debtor’s house where there is no value to support that lien: 10 To put it more simply, a claim such as a mortgage is not a “secured claim” to the extent that it exceeds the 11 value of the property that secures it. Under the Bankruptcy Code, “secured claim” is thus a term of art; 12 not every claim that is secured by a lien on property will be considered a “secured claim.” Here, it is plain 13 that PSB Lending’s claim for the repayment of its loan is an unsecured claim, because its deed of trust is 14 junior to the first deed of trust, and the value of the loan secured by the first deed of trust is greater than 15 the value of the house. 16 Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1223 17 (9th Cir. 2002). Given Zimmer, in proposing to strip the second 18 mortgage, Lepe’s amended plan therefore proposes to do only that 19 which the Bankruptcy Code allows. As a result, the plan’s lien- 20 strip provision, standing alone, cannot support a finding that 21 Lepe lacked good faith. Drummond v. Welsh (In re Welsh), 465 B.R. 22 843, 854 (9th Cir. BAP 2012) (“[A] debtor’s lack of good faith 23 cannot be found based solely on the fact that the debtor is doing 24 what the Code allows.”). 25 Here, had Lepe filed a chapter 7 case, because the 26 creditor’s second mortgage was valueless, it is likely that 27 neither the mortgage creditor, nor any other unsecured creditors, 28 would have been paid at all. By contrast, under Lepe’s proposed
-20- 1 amended plan, both the second mortgage creditor and other 2 unsecured creditors will receive a substantial partial 3 distribution on their claims. As compared to Lepe’s option to 4 seek chapter 7 relief, and as the bankruptcy court found, his 5 proposed plan benefitted unsecured creditors significantly. 6 The bankruptcy court did not clearly err in determining that 7 Lepe filed his chapter 13 petition and proposed his plan in good 8 faith. The court properly recognized at the beginning of the 9 confirmation hearing that “the debtor has the burden of proof to 10 show that the debtor is proceeding in good faith.” See United 11 States v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 12 B.R. 648, 654 (9th Cir. BAP 1994) (burden of proof for 13 confirmation issues is preponderance of the evidence). 14 Turning to the evidence, the bankruptcy court noted the 15 numerous errors in the debtor’s petition and pleadings, but it 16 found that these errors were attributable to the inadvertence of 17 Lepe’s counsel. In making this finding, the court thus addressed 18 both the first and second Leavitt criteria. The third Leavitt 19 factor, whether the debtor was utilizing the plan to defeat state 20 court litigation, is inapplicable in this case since no state 21 court litigation was pending here. And there was no need for the 22 bankruptcy court to address the fourth factor (i.e., whether 23 egregious behavior is present) because Trustee has conceded that 24 he was “not arguing . . . that the Debtor was ‘bad’ in any way.” 25 Trustee’s sole basis for arguing that the bankruptcy court’s 26 good faith finding was clearly erroneous is his contention that 27 Lepe is manipulating the Bankruptcy Code by proposing a plan to 28 strip an unsecured lien on his house while he was, in Trustee’s
-21- 1 imprecise terms, solvent. However, when this argument was briefed 2 by Trustee and presented to the bankruptcy court, the court 3 declined to endorse it. Instead, after considering the totality 4 of his circumstances, the bankruptcy court found that Lepe had 5 filed his plan in good faith. In particular, the bankruptcy court 6 found that the amount paid to unsecured creditors over the term of 7 Lepe’s plan was “not insignificant,” a finding Trustee has not 8 challenged, and which appears to us to be clearly correct. The 9 bankruptcy court also observed that the secured creditors, 10 including the creditor holding the lien to be stripped, had not 11 opposed confirmation. After considering all relevant 12 circumstances, the bankruptcy court concluded that Lepe had 13 established that his petition and plan were filed and proposed in 14 good faith: “I’m persuaded that [Lepe’s plan is] confirmable.” 15 The bankruptcy court’s finding concerning Lepe’s good faith 16 resolved a disputed question of fact. While the bankruptcy court 17 acknowledged that confirmation in this case was “a very close 18 call,” and while another judge might have arrived at a contrary 19 conclusion, “[w]here there are two permissible views of the 20 evidence, the factfinder’s choice between them cannot be clearly 21 erroneous.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 22 400-401 (1990). Simply put, the bankruptcy court’s finding that 23 Lepe proposed his amended plan in good faith was not clearly 24 erroneous. 25 CONCLUSION 26 The bankruptcy court did not clearly err in finding that Lepe 27 acted in good faith in proposing his amended plan. The bankruptcy 28 court’s decision to confirm that plan was not an abuse of
-22- 1 discretion. We AFFIRM. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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