UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
No. 97-6019
In re: *
*
CHARLES ROBERT NIELSEN and LEANN *
JEAN NIELSEN, *
*
Debtors. *
*
*
*
CHARLES ROBERT NIELSEN and LEANN * APPEAL FROM THE UNITED
JEAN NIELSEN * STATES BANKRUPTCY COURT
* FOR DISTRICT OF MINNESOTA
Appellants, *
*
v. *
*
DLC INVESTMENT, INC. *
*
Appellee. *
Submitted: July 1, 1997
Filed: August 7, 1997
Before KOGER, SCHERMER and SCOTT
SCHERMER, United States Bankruptcy Judge:
Charles Robert Nielsen and Leann Jean Nielsen (the “Debtors”)
appeal from the bankruptcy court’s order denying confirmation of their
chapter 13 plan and converting their
chapter 13 case to chapter 7. We remand to the bankruptcy court for
consideration of Debtor’s pre-petition modified plan.
I
After filing their chapter 13 petition, Debtors filed a chapter 13
plan (the “original plan”) and later, a pre-confirmation modified plan
(the “modified plan”). DLC Investment, Inc. (“DLC”) objected to the
original plan requesting denial of confirmation and a finding that
Debtors proposed their plan in bad faith. DLC also filed a separate
motion requesting conversion of Debtor’s chapter 13 case to chapter 7.
Debtors schedules reflect $80,269 in secured claims, $66,323 in
unsecured, non-priority claims, $1,493 in monthly net income and $1,384
in monthly expenses. Debtors claim $317,737 in exempt retirement plans
including four IRA accounts, a 401K account and a profit sharing.
Debtors’ original plan proposed $100 monthly payments for thirty six
months paying creditors $3,600 while the modified plan proposed $130
payments for sixty months paying creditors $7,800.
DLC’s claim against Debtors arose as a result of protracted, pre-
petition litigation concerning a real estate contract.1 Based on a jury
verdict, a Minnesota state court entered a $35,000 judgement in favor of
DLC and Larry Paul, DLC’s president, and against Debtors in
1
Debtors contracted to purchase certain real estate from DLC. Pursuant to the contract,
DLC notified the Debtors that it received a competing offer and notified Debtors that they had 48
hours to remove the contingency. DLC attempted to sell the property to the competing bidder.
The sale could not close because Debtors filed suit against DLC for specific performance in
Minnesota District Court. DLC prevailed on a temporary restraining order, and the Minnesota
court ordered the Debtors’ lis pendens removed from the property. Debtors’ lawsuit was
dismissed by summary judgement, and the Minnesota court again ordered Debtors to remove the
lis pendens. Debtors appealed the grant of summary judgement against them, but the Minnesota
Appellate Court affirmed. The Minnesota Supreme Court denied Debtors petition for certiorari.
2
DLC’s slander of title action. Specifically, the Minnesota court found
Debtor’s filing of a notice of lis pendens and complaint, Debtor’s
opposition to summary judgement in that action, the Debtors’ appeals and
Debtors’ defense of the slander of title counter claim to be based on
reasonable arguments. None of these litigation tactics supported an
award of sanctions. However, the court found that Debtors’ refusal to
timely remove the lis pendens warranted an attorney fees sanction, and
accordingly, it ordered Debtors to pay $7,950 in attorneys fees pursuant
to MINN.STAT. § 549.21 (allowing Minnesota trial courts to award
sanctions).
The bankruptcy court held a hearing on the confirmation of
Debtors’ plan. DLC presented its good faith and best efforts
objections. See 11 U.S.C. §§ 1325(a)(3) and (b)(1)(B). The bankruptcy
court took the matter under advisement and issued a written opinion
which denied confirmation of Debtors’ original plan and converted their
case to chapter 7. Although the modified plan had been filed, the
bankruptcy court denied confirmation of the original plan by referring
to the $100 monthly payment and the 36 month duration. The court found:
While the debtors harbor over $300,000 in tax
exempt retirement accounts (which could well be
available to creditors in a Chapter 7 case), they
propose to pay their creditors a total of $3,600
(or 6% of claims) over three years. The plan is
designed, essentially, to continue the debtors’
record of malicious activity toward the objecting
creditor, which has gone on for several years, and
to avoid paying a $35,000 judgement that was
entered against the debtors and in favor of the
creditor in state court. The debtors have not
been candid with the court; their initial petition
and schedules failed to disclose assets that
should be available for creditors (cars, raw land,
a boat, etc.). The plan has not been filed in
good faith and it does not meet the best interests
of creditors test.
3
The bankruptcy court converted the case, and this appeal followed.
4
II
Debtors raise three (3) points on appeal. First, they argue that
the bankruptcy court erred in finding that their original plan was not
proposed in good faith because it sought to discharge a liability
arising out of a civil judgement. Next, they challenge the bankruptcy
court’s findings of fact as clearly erroneous. Finally, Debtors argue
that the bankruptcy court erred in not conducting an evidentiary
hearing.
III
A bankruptcy appellate panel shall not set aside findings of fact
unless clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of the
witness. Fed.R.Bankr.P. 8013. We review the legal conclusions of the
bankruptcy court de novo. First Nat’l Bank of Olathe Kansas v. Pontow,
111 F.3d 604, 609 (8th Cir.1997); Estate of Sholdan v. Dietz, (In re
Sholdan), 108 F.3d 886, 888 (8th Cir.1997). “A finding is ‘clearly
erroneous’ when although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and firm
conviction that a mistake has been committed.” Anderson v. City of
Bessemer, 470 U.S. 564, 573 (1985) (quoting U.S. v. U.S. Gypsum Co., 333
U.S. 364, 395 (1948)). The determination of good faith in proposing a
chapter 13 plan is a factual finding reviewed under the clearly
erroneous standard. Handeen v. LeMaire, (In re LeMaire), 898 F.2d
1346, 1350 (8th Cir.1990).
5
6
IV
Before a bankruptcy court confirms a chapter 13 plan, it must find
“the plan has been proposed in good faith and not by any means forbidden
by law.” 11 U.S.C. § 1325(a)(3).2 Good faith is not defined in the
Bankruptcy Code nor is it discussed in the legislative history. Prior
to 1984, Eighth Circuit courts focused on “whether the plan constitutes
an abuse of the provisions, purpose or spirit of Chapter 13” and
employed an eleven factor test in determining whether the plan has been
proposed in good faith. In re Estus, 695 F.2d 311, 317 (8th
Cir.1982)(listing factors). The Bankruptcy Amendments and Federal
Judgeship Act of 1984 added subsection (b) to § 1325 which allows a
bankruptcy court to confirm a plan in which all the debtor’s disposable
income for three years was devoted to repayment of creditors. After the
1984 amendments, the Eighth Circuit concluded that the “ability to pay”
criteria narrowed the good faith inquiry. In re Education Assistance
Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir.1987). The good faith
inquiry now turns on “whether the debtor has stated his debts and
expenses accurately; whether he has made any fraudulent
misrepresentation to mislead the bankruptcy court; or whether he has
unfairly manipulated the Bankruptcy Code.” Id. at 1227; see also
LeMaire, 898 F.2d at 1349.
In making this determination, courts must employ a “totality of
circumstances approach.” LeMaire, 898 F.2d at 1348 (8th Cir.1990)(“[I]t
is recognized that Zellner preserved the traditional ‘totality of
circumstances’ approach with respect to the Estus factors not addressed
2
The Bankruptcy Code is 11 U.S.C. §§ 101-1330. All future references are to title 11
unless otherwise indicated.
7
by the legislative amendments”). Factors not addressed by the
legislation include the type of debt
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sought to be discharged and whether such debt is dischargeable in a
chapter 7 and the debtor’s motivation and sincerity in seeking chapter
13 relief. LeMaire, 898 F.2d at 1349 (citing Estus, 695 F.2d at 317).
V
In the instant case, the bankruptcy judge denied confirmation
based on lack of good faith and failure to meet the best interest of
creditors test. In the February 6, 1997 Order denying confirmation and
converting the case, the bankruptcy judge cited three (3) reasons.
(1) the proposed $3,600 (6% of claims) payment to creditors over
36 months while harboring over $300,000 in tax exempt retirement
accounts which could be available to creditors in a chapter 7
proceeding,
(2) the plan is designed, essentially, to continue the debtors’
record of malicious activity toward [DLC] , which has gone on for
several years, and to avoid paying a $35,000 judgement that was entered
against the debtors in favor of [DLC] in state court.
(3) Debtors’ lack of candor with the court; namely, the failure to
disclose their initial assets (cars, raw land, a boat, etc.) in their
petition and schedules.
The bankruptcy court considered the original plan’s proposed
repayment to unsecured creditors to be an indicia of bad faith in light
of Debtor’s retention of a the retirement accounts. However, it is
apparent that the bankruptcy court considered the original plan and not
the modified plan. After receiving DLC’s objection, Debtors filed the
modified plan, presumably to address those objections. Debtors have the
right to modify the plan before the confirmation hearing, § 1323(a), and
“the plan as modified becomes the plan.” § 1323(b).
Appellees argue that the modified plan is irrelevant such that the
bankruptcy court’s failure to consider it is harmless error. The record
before the court, however, does not support this argument. Rather, the
bankruptcy court heard argument on the issues, accepted the briefs
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and statements of counsel,3 an affidavit of the Debtors, without
objection, as well as the Debtor’s schedules which were before the Court
under its independent obligation to determine good faith. § 1325(a)(3).
The bankruptcy court took the matter under advisement in order to review
all the documents and, if necessary, set an evidentiary hearing.
Apparently, the bankruptcy court concluded after this review that no
further hearing was necessary and entered an order later that same day
denying confirmation and converting the case. In the order, it appears
that the court reviewed only the original plan, rather than the modified
plan. The bankruptcy court’s specific findings cannot be ignored.4 The
modified plan replaced the original plan and the good faith and best
interest of creditors requirements under the Bankruptcy Code must be
considered under the plan the Debtor is attempting to confirm.
Accordingly on remand, the bankruptcy court should consider the
good faith issue in light of the increased repayment and duration of the
modified plan as well as the requirements of § 1325(a)(4) with respect
to the retirement accounts.
3
Of course, neither statements of counsel nor exhibits to a brief are evidence unless
expressly stipulated as admissible evidence. See generally Exeter Bankcorporation, Inc. v.
Kemper Securities Group, Inc., 58 F.3d 1306, 1312 n.5 (8th Cir.1995)(statements of counsel not
evidence); Boston Five Cents Savings Bank v. Department of Housing and Urban Development,
768 F.2d 5, 11-12 (1st Cir.1985)(matters submitted upon stipulations authorize the court to rule
on the written record, even if material facts are disputed, whereas mere submission of documents,
even in the form of cross-motions for summary judgement, does not.
4
Neither party availed itself of Rules 7052, Federal Rules of Bankruptcy Procedure, which
incorporates Rule 52, Federal Rules of Civil Procedure, to ask the trial court to make additional
findings in light of this discrepancy. See Fed.R.Bankr.P. 9014 (Rule 7052 applies in contested
matters). Rather, they simply appealed.
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VI
For the reasons stated, we remand to the bankruptcy court to
consider confirmation of the modified plan proposed by the Debtors.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
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