Judge Johnson’s Dismissal of Chapter 13 Reversed by District Court

Posted by NCBRC - October 23, 2013

The mean-spirited, and legally insupportable approach to chapter 13 cases that led to denial of confirmation and dismissal of the debtor’s case in In re Mycek, has been reversed and remanded by the district court for the Central District of California. No. 12-369 (C.D. Cal. Oct. 22, 2013).

When the debtor’s wife became terminally ill, the debtor used his IRA account to pay her medical expenses. Upon depleting those funds he opened a line of credit using his house as collateral. When that no longer sufficed, he retired from his job to stay home to care for his wife. Both debtor and his wife then suffered a series of surgeries and medical difficulties. Debtor used some of his remaining IRAs and sold his vehicle, but nonetheless, fell behind on his debts and filed chapter 13 bankruptcy. At the confirmation hearing, Judge Johnson denied confirmation and dismissed the case. Seeking to save his home from foreclosure, the debtor refiled a chapter 13 petition as a below-median debtor. The zero-percent plan proposed to pay $155.00 per month for 44 months and strip a junior mortgage. Once again, Judge Johnson denied confirmation and dismissed, explaining that there was “insufficient evidence for the debtor to demonstrate that the plan is feasible or that it has been filed in good faith.” He denied the debtor’s motion for reconsideration.

Applying a “clearly erroneous” standard of review the district court stated, “[i]f the bankruptcy court did not identify the correct legal rule, or its application of the correct legal standard to the facts was illogical, implausible, or without support in inferences that may be drawn from the facts in the record, then the bankruptcy court has abused its discretion.” While noting that denial of confirmation is cause for dismissal of a chapter 13 case, the court found several errors in the lower court’s denial of confirmation.

Confirmation requires that the proposed plan be feasible under section 1325(a)(6) and feasibility is a factual determination. Even in the presence of evidence supporting a court’s finding of infeasibility, however, a reviewing court left with a “definite and firm conviction” that a mistake has been made, may reverse. Turning to Judge Johnson’s stated bases for finding infeasibility, the court found several errors. First, although unsupported by the Code or bankruptcy case law, Judge Johnson found that in zero percent cases the debtor carries a higher burden of demonstrating feasibility and that this burden may not be satisfied by information contained in schedules I and J because those schedules are “not evidence of future payments nor is it even evidence of prior payments.”

The district court found the lower court applied the wrong legal standard when it applied a higher evidentiary bar, as the fact that a plan is zero percent, while one of many factors that may be considered in the good faith inquiry, is irrelevant to the issue of feasibility. The court also found legal error in the lower court’s speculation that if the debtor has miscalculated his income by as little as $10 or $20, there will be a deficit. Feasibility must be determined upon the supported facts, and hypothetical scenarios may not be considered.

Turning to the issue of bad faith under sections 1325(a)(3) and (7), the court stated the rule that the “bankruptcy court must inquire whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner.” In re Goeb, 675 F.2d 1386, 1390 (9th Cir. 1982). In its review of the finding of a lack of good faith, it found that the inferior court had failed to consider the facts in light of the recent holding in In re Welch, 711 F.3d 1120 (9th Cir. 2013), in which the Ninth Circuit held that the existence of income that is specifically excluded from the bankruptcy estate (in that case, Social Security Income) may not be considered when determining whether a plan has been proposed in bad faith. It appeared that, when the bankruptcy court found that the debtor had surplus income not dedicated to the plan, it considered income that the Code specifically excludes from the calculation of disposable income. The district court remanded for reconsideration of the facts and issues in light of Welch.

The court specifically did not address the debtor’s argument that the bankruptcy court’s decision was due, in part, to Judge Johnson’s personal view that a chapter 13 plan must pay at least 10% to unsecured creditors in order to meet the good faith standard. Although Judge Johnson cited that “rule” in the first denial of confirmation, he did not cite it in the second denial of confirmation which was the basis of the appeal.

Congratulations to debtor’s attorney, NACBA member Jenny Doling, and NCBRC’s Tara Twomey who assisted on the brief.

Mycek opinion

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