McCormick v. Banc One Leasing Corp.

• Court: Court of Appeals for the Eleventh Circuit
• Decided: April 19, 1995
• Docket: 94-2381
• Status: Published

Opinion

United States Court of Appeals,

Eleventh Circuit.

No. 94-2381

Non-Argument Calendar.

In re Timothy W. McCORMICK, Debtor.

Timothy W. McCORMICK, Plaintiff-Appellant,

v.

BANC ONE LEASING CORPORATION, U.S. TRUSTEE, Defendant-Appellee.

April 19, 1995.

Appeal from the United States District Court for the Middle District of Florida. (No. 90-1272-CIV-t-21c), L. Clure Morton, Judge.

Before ANDERSON and CARNES, Circuit Judges, and RONEY, Senior Circuit Judge.

PER CURIAM:

The debtor appeals the denial of his Chapter 11 reorganization

plan for lack of good faith in an order which simply stated that

"The Debtor's invocation of his Fifth Amendment privilege in

connection with this case demonstrates that the Plan of

Reorganization was not filed in good faith." The debtor had

invoked the Fifth Amendment and refused to testify in a related

adversary proceeding. The district court affirmed without opinion.

This appeal comes without the benefit of a brief from the appellee.

On the simple issue presented by this appeal, we hold that

the debtor's assertion of the Fifth Amendment in a related

adversary proceeding, standing alone, when all other aspects of his

Chapter 11 Plan of Reorganization are consistent with the goals of

the Bankruptcy Code, is not sufficient evidence of bad faith to

merit the denial of his plan. In order to be confirmed, a Chapter 11 reorganization plan

must be submitted in good faith and not by any means forbidden by

law. 11 U.S.C. § 1129(a)(3). While the Bankruptcy Code does not

define the term, courts have interpreted "good faith" as requiring

that there is a reasonable likelihood that the plan will achieve a

result consistent with the objectives and purposes of the Code. In

re Block Shim Development Company-Irving, 939 F.2d 289, 292 (5th

Cir.1991); In re Madison Hotel Associates, 749 F.2d 410, 425 (7th

Cir.1984); In re Coastal Cable T.V., Inc., 709 F.2d 762, 764-65

(1st Cir.1983) (in corporate reorganization, plan must bear some

relation to statutory objective of resuscitating a financially

troubled company).

Where the plan is proposed with the legitimate and honest

purpose to reorganize and has a reasonable hope of success, the

good faith requirements of section 1129(a)(3) are satisfied. Kane

v. Johns-Manville Corp., 843 F.2d 636, 649 (2nd Cir.1988); In re

Sun Country Development, Inc., 764 F.2d 406, 408 (5th Cir.1985);

In re Mulberry Phosphates, Inc., 149 B.R. 702, 707

(Bankr.M.D.Fla.1993).

The focus of a court's inquiry is the plan itself, and courts

must look to the totality of the circumstances surrounding the

plan, Block Shim, 939 F.2d at 292; Madison Hotel, 749 F.2d at 425,

keeping in mind the purpose of the Bankruptcy Code is to give

debtors a reasonable opportunity to make a fresh start. Sun

Country, 764 F.2d at 408.

Other than the debtor's refusal to testify in a related

adversary proceeding, the totality of the circumstances surrounding Timothy McCormick's proposed reorganization plan would seem to

negate any specific showing of bad faith. McCormick, who filed an

individual, voluntary petition for relief under Chapter 11 of the

Bankruptcy Code, complied with all necessary financial and other

disclosure requirements. McCormick timely filed the required

schedules and statement of financial affairs, and he testified at

the meeting of creditors. The bankruptcy court approved the

disclosure statement. The debtor secured the necessary number of

the ballots by creditors in favor of the plan.

McCormick proposed to distribute approximately $23,000 to his

creditors along with another $200 per month for 36 months.

Apparently, McCormick could have filed a Chapter 7 petition,

liquidating all his assets and obtaining a discharge, leaving his

creditors in worse condition than under the Chapter 11 plan.

There is no doubt that the Fifth Amendment privilege extends

to bankruptcy proceedings. McCarthy v. Arndstein, 266 U.S. 34, 45

S.Ct. 16, 69 L.Ed. 158 (1924). In Chapter 7 liquidation cases, the

Bankruptcy Code provides that absent a grant of immunity, the

debtor is free to invoke his Fifth Amendment privilege and still

receive a discharge from his debts. 11 U.S.C. § 727(a)(6)(B); In

re Martin-Trigona, 732 F.2d 170 (2nd Cir.), cert. denied, 469 U.S.

859, 105 S.Ct. 191, 83 L.Ed.2d 124 (1984).

The Bankruptcy Code does not dictate nor have we found any

other court to have held that a bankruptcy court may deny

confirmation of a reorganization plan solely because the debtor

refused to testify on the basis of the privilege against

self-incrimination in a related proceeding during the pendency of a Chapter 11 case.

While his case was proceeding, one of McCormick's creditors,

First Interstate Credit Alliance, Inc., filed a separate adversary

proceeding against McCormick seeking to declare a debt

non-dischargeable under section 523 of the Code. During a related

deposition, McCormick asserted his Fifth Amendment privilege

against self-incrimination and refused to testify. Notably,

McCormick and First Interstate later agreed to a compromise on the

dispute. The bankruptcy court entered an order approving the

compromise. Prior to the final confirmation hearing, after

McCormick filed the necessary disclosure statement and proposed

reorganization plan, three creditors, Advanta Leasing Corporation,

Banc One Leasing Corporation, and First Interstate, filed

objections to the confirmation claiming McCormick's plan was not

proposed in good faith, as required by section 1129(a)(3) of the

Bankruptcy Code. Only Advanta cited as its reason for objecting to

the plan McCormick's assertion of the Fifth Amendment during the

course of the proceedings. The bankruptcy court concluded that

McCormick's failure to testify in some of the proceedings was

contrary to the goals of the Bankruptcy Code and was evidence he

did not propose the plan in good faith.

As long as McCormick's failure to testify at the First

Interstate deposition did not impede the basic bankruptcy

administration of his case, however, assertion of his Fifth

Amendment privilege alone cannot be the basis for denying

confirmation of his plan. E.g., In re Connelly, 59 B.R. 421

(Bankr.N.D.Ill.1986). It may well be that the bankruptcy court may have denied

McCormick's confirmation for reasons additional to his refusal to

testify in the First Interstate deposition, or that his refusal

impeded the administration of the Chapter 11 plan in a way not

disclosed by this record. If so, that issue may be addressed on

remand. Being unable to find support in this record for the

bankruptcy court's finding of bad faith under section 1129(a)(3) of

the Bankruptcy Code on the refusal to testify alone, however, we

must vacate the decision of the district court and remand for

further proceedings consistent with this opinion.

The petition of the debtor was filed September 13, 1988. The

Order of the bankruptcy court was entered on July 24, 1990. The

Order of the district court affirming was entered on February 22,

1994 by a visiting senior district judge who had not been assigned

the case until some time after December 1993. It may well be that

in the almost five years since the case was before the bankruptcy

court, interceding events or changed circumstances will affect the

proper disposition of this case on remand.

VACATED and REMANDED.