Gordon R. And Sharon L. Flygare, Debtors-Appellants v. Judith A. Boulden

Citations: 709 F.2d 1344; 8 Collier Bankr. Cas. 2d 1027; 1983 U.S. App. LEXIS 27192; 10 Bankr. Ct. Dec. (CRR) 1044Docket: 81-1683

Court: Court of Appeals for the Tenth Circuit; June 1, 1983; Federal Appellate Court

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Gordon and Sharon Flygare appeal the denial of their Chapter 13 bankruptcy plan's confirmation, arguing the decision was based on a misinterpretation of the 'good faith' requirement under 11 U.S.C. Sec. 1325(a)(3). The Flygares initially filed for Chapter 13 in April 1980, but their case was dismissed. They filed a second petition in July 1980 with a modified plan extending from thirty-six to sixty months and proposing a greater payment to cure their mortgage default, with unsecured creditors receiving approximately three percent of their claims. 

The bankruptcy court denied confirmation for two reasons: it viewed the new plan as essentially similar to the previously denied one, and it concluded that a payment of one to two percent did not constitute a meaningful payment as required by the good faith provision. This decision was affirmed by the district court, which referenced the previous case, In re Iacovoni, where the good faith requirement was interpreted to mean a genuine effort to make meaningful payments to unsecured creditors. The Tenth Circuit Court noted the ongoing ambiguity surrounding the good faith standard, highlighting its contentious nature among bankruptcy courts, and ultimately agreed with the Flygares, remanding for further proceedings.

Bankruptcy court interpretations of the 'good faith' requirement under section 1325(a)(3) can be categorized into three main approaches. One group, exemplified by *In re Iacovoni*, holds that good faith necessitates substantial repayment to unsecured creditors. Conversely, some courts assign minimal importance to the good faith requirement, focusing solely on the stipulation in section 1325(a)(4) that creditors must receive at least as much as they would in a Chapter 7 liquidation. Since many debtors lack nonexempt assets, plans proposing no payments to unsecured creditors may still satisfy this provision.

The 'middle road' approach, adopted by several circuits, does not prioritize the amount of payment to unsecured creditors as determinative of good faith. These courts evaluate plans on a case-by-case basis to determine if they abuse the provisions, purpose, or spirit of Chapter 13, rather than automatically confirming or rejecting plans based solely on payment amounts. This analytical framework follows the Fourth Circuit's guidance in *In re Deans*, emphasizing the bankruptcy court's role in fact-finding and case-specific assessments.

While the percentage of repayment to unsecured creditors is an important consideration, it is not the sole factor in the good faith determination. Courts may also consider additional factors or exceptional circumstances that could justify a finding of good faith, even when a plan proposes only nominal repayments.

The Eighth Circuit's factors for assessing good faith in bankruptcy plans include: 
1) proposed payment amounts versus debtor's surplus,
2) debtor's employment history and income potential,
3) expected duration of the plan,
4) accuracy of debt and expense statements,
5) preferential treatment of creditors,
6) modifications to secured claims,
7) types of debt involved, especially non-dischargeable ones,
8) special circumstances like medical expenses,
9) frequency of previous bankruptcy filings,
10) debtor's motivation and sincerity,
11) administrative burden on the trustee. This list is not exhaustive, and the importance of each factor varies by case.

The bankruptcy court's conclusion that the Flygares' plan lacked good faith was based solely on a previous case and did not consider most of the relevant factors, indicating a possible reliance on a rigid rule rather than a flexible assessment. The court's approach is deemed inappropriate as it conflicts with the flexibility intended in Chapter 13. 

The trustee's argument for affirming the decision based on res judicata is rejected, as the second plan's duration of 60 months distinguishes it from the first 36-month plan. Under Section 1325(a), a plan must meet specific criteria to be confirmed, including compliance with legal provisions, good faith proposal, and debtor's ability to make payments.

The Flygares' plan shows a monthly surplus of $110 after expenses, with a proposed payment of $106, indicating no evidence of bad faith. Historical case law does not establish 'good faith' as a determinant of the payment amounts in plans.