In Re Frank J. Leser and Alicia K. Leser. J.J. Mickelson, Trustee of the Bankruptcy Estate of Frank J. Leser and Alicia K. Leser v. Frank J. Leser and Alicia K. Leser

Citation: 939 F.2d 669Docket: 90-5492

Court: Court of Appeals for the Eighth Circuit; September 17, 1991; Federal Appellate Court

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A Chapter 13 bankruptcy plan can separately classify and treat unsecured claims for child support arrearages assigned to county collection departments by the debtor's former spouse. The confirmed plan ensures full payment to the counties for their claims while general unsecured creditors receive only 8% of their claims pro rata. The trustee, J.J. Mickelson, appealed the District Court's affirmation of this plan, but the appellate court upheld the decision.

This case addresses a novel legal question regarding the classification of child support claims under Chapter 13 of the Bankruptcy Code, with no prior published opinions on whether such claims could be separately classified. The standard of review for bankruptcy appeals involves assessing the correctness of legal conclusions and the clarity of factual findings, with this case focusing solely on legal interpretation due to the absence of factual disputes.

According to the Bankruptcy Code, specifically 11 U.S.C. § 1322(b)(1), a Chapter 13 plan can designate separate classes for unsecured claims without unfair discrimination. Section 1122 allows claims to be classified together if they are substantially similar, but it does not mandate that all unsecured claims be grouped in one class. The court reaffirmed its previous ruling that the Code does not prevent the placement of similar claims into different classes, thus supporting the plan's confirmation.

In the case at hand, the distinction from Hanson, which involved a Chapter 11 plan, is emphasized, particularly regarding the remedies available to unsecured creditors in different bankruptcy chapters. The trustee's argument against separate classification of the counties' unsecured claims is rejected, as adopting this view would conflict with section 1322(b)(1) of the Bankruptcy Code, which allows for multiple classes of unsecured creditors with equal rights to the debtor's estate. 

The focus then shifts to whether the separate classification of the counties' claims unfairly discriminates against other unsecured claims. The Bankruptcy Court acknowledges that while separate classes can permit some discrimination, only unfair discrimination is prohibited. A four-part test is referenced to evaluate the fairness of proposed classifications, which includes considerations such as the reasonableness of discrimination, feasibility of the plan without it, good faith in proposing it, and the relationship of the degree of discrimination to its rationale.

Although the Bankruptcy Court did not explicitly apply this test, its conclusion that the Lesers' Chapter 13 plan did not unfairly discriminate against other unsecured creditors is deemed correct based on implicit findings. Judge Kressel's reliance on prior case law, particularly in Storberg, supports this conclusion, especially regarding the public policy favoring child support obligations. 

Furthermore, the Code treats claims for child support—whether held by custodial parents or assigned to county collection agencies—indistinguishably, meaning that such obligations remain non-dischargeable. Section 523(a)(5) specifies that discharge under section 1328(b) does not apply to debts for child support, affirming that assigned claims for delinquent child support to a county agency are also non-dischargeable under Chapter 13.

Past due child support claims are nondischargeable in Chapter 13 bankruptcy, and their separate classification meets a four-part test established by a bankruptcy court. This classification is justified as it pertains to a non-dischargeable debt, and failing to fully pay back child support signals a lack of good faith, which may hinder plan confirmation. Typically, a Chapter 13 plan would struggle for confirmation without separate classification for child support, except in cases of complete payout. The impact on remaining unsecured creditors is minimal, as their debts would generally be discharged under Chapter 7 anyway, while child support arrears remain enforceable.

The court affirms that child support claims, when assigned to a county, can be classified separately without unfair discrimination against other unsecured claims. Consequently, the confirmation of the Lesers' Chapter 13 plan is upheld. The document also references previous cases that have addressed the separate classification of claims, noting the explicit allowance for such classification for administrative convenience under 11 U.S.C. Sec. 1122(b).