Denial of Confirmation of Fee-Only Plan

Posted by NCBRC - February 25, 2014

The Eleventh Circuit upheld the lower court’s denial of confirmation in the debtor’s fee-only chapter 13 plan finding that it did not satisfy the good faith requirements of section 1325(a)(3) and (7). Brown v. Gore (In re Brown), No. 13-10260 (11th Cir. Feb. 14, 2014). In a decision driven by personal philosophy, the bankruptcy court denied confirmation stating: “I will say, though, until the Eleventh Circuit tells me wrong, then that’s going to be my ruling in these cases. So you all are going to have to do an awful lot of appeals and the district court may get mad at us all but, until the Eleventh Circuit or the U.S. Supreme Court tells me otherwise, I am not going to allow these folks to come in here to pay lawyers[.]” No. 11-42825 (Bankr. N.D. Ala. March 16, 2012). The district court affirmed. No. 12-2202 (N.D. Ala. Dec. 13, 2012).

Despite the bankruptcy court’s language suggesting the application of a per se rule, the circuit court upheld the denial of confirmation, but it did so in reliance on a case-by-case, “totality of circumstances,” analysis in keeping with the decisions out of the first and fifth circuits. In its analysis, the eleventh circuit ticked off the Code provisions permitting a debtor to file a chapter 13 case. It then turned to the good faith provisions of sections 1325(a)(3) (plan proposed in good faith) and 1325(a)(7) (petition filed in good faith). The court both relied on and distinguished In re Kitchens, 702 F.2d 885 (11th Cir. 1983), which upheld a fee-only plan that had the additional benefit of addressing potential foreclosure on the debtor’s residence. In Kitchens, the court set forth fourteen considerations for determining good faith under paragraph (a)(3) which the Brown court found applicable to paragraph (a)(7) as well.

Applying these factors, the court found that the bankruptcy court did not commit clear error in finding that neither the petition nor the plan were filed in good faith. The court agreed with the bankruptcy court’s factual 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.” Ultimately, the court agreed that a chapter 13 benefited only the debtor’s attorney and was not in the debtor’s own best interest.

The court also expressed doubt as to the likelihood of success of a chapter 13 plan that proposed to contribute all of the debtor’s discretionary income to the plan. In a foray into speculation, it agreed with the bankruptcy court’s finding that the debtor was unlikely to complete the plan beyond repayment of his attorney fees.

The court distinguished Sikes v. Crager (In re Crager), 691 F.3d 671 (5th. Cir. 2012), which permitted the debtor’s fee-only plan. In that case, the fifth circuit found that, under the totality of the circumstances, the debtor’s proposed plan was based on legitimate concerns of pressing debt and potential future medical expenses and that it was, therefore, not proposed in bad faith under section 1325(a)(3) or (7). Most importantly, the court explicitly stated that: “There is no rule in this circuit that a Chapter 13 plan that results in the debtor’s counsel receiving almost the entire amount paid to the Trustee, leaving other unsecured creditors unpaid, is a per se violation of the ‘good faith’ requirement, and the district court erred when it reversed the bankruptcy court on that ground.” Likewise, the First Circuit has specifically rejected a per se prohibition of fee-only chapter 13 plans. Berliner v. Pappalardo (In re Puffer), 674 F.3d 78 (1st Cir. 2012).

While the outcome of this case was not good for the debtor its overall conclusion is that fee-only cases are not per se prohibited.

Brown opinion




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