Summary:
The Debtor proposed a plan that would have paid roughly a 3.8% dividend to general unsecured claims, but would have separately classified his non-dischargeable student loans and paid them in full. The general unsecured class did not accept this plan.
11 U.S.C. § 1129(b)(1) provides the bankruptcy court shall confirm a plan that "does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan."
"There can be ‘discrimination,’ so long as it is not ‘unfair’’" 7 Collier on Bankruptcy ¶ 1129.03[3] (16th ed. 2009).
In Ownby v. Jim Beck, Inc. (In re Jim Beck, Inc.), 214 B.R. 305, 307 (W.D. Va. 1997), aff’d, 162 F.3d1155 (Table) 1998 WL 546067 (4th Cir. 1998), the 4th Circuit approved a test for unfair discrimination using the following factors:
(1) whether there is a reasonable basis for the discrimination;
(2) whether the plan can be confirmed and consummated without the discrimination;
(3) whether the discrimination is proposed in good faith; and
(4) the treatment of the classes discriminated against.
Noting that this test has variously been criticized as too strict, too generous and too vague, the bankruptcy court cited cases that imposed a rebuttable presumption of unfair discrimination whenever there is:
(1) a dissenting class;
(2) another class of the same priority; and
(3) a difference in the plan’s treatment of the two classes that results in either:
(a) a materially lower percentage recovery for the dissenting class (measured in terms of the net present value of all payments); or
(b) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in connection with its proposed distribution.
Ultimately, the bankruptcy court seems to combine these two tests, first finding that the Debtor’s proposed plan created a rebuttable presumption and then analyzing the treatment under the Ownby factors.
Under those criteria, the fact that the general unsecured claims would receive as much under the proposed plan as would be received under a Chapter 7 liquidation was not by itself a sufficient reasonable basis for discrimination in favor of the student loans. That the Debtor was paying more to general unsecured creditors than those creditors would receive in Chapter 7 was not persuasive, especially as that only amounted to a 3.8% dividend.
That the Debtor’s proposed plan satisfied the liquidation test, was counterbalanced first by the fact that the Debtor would have between $500 and $800 a month in disposable income over at least the next six months. If the treatment of the student loans and other unsecured claims were combined, all creditors would receive a 36% dividend. (And then the Debtor would pay the remainder owed on the student loans.)
Additionally, his plan provided that he would retain approximately $60,000 following completion. While 11 U.S.C. § 1129(b)(2)(B)(ii) provides that he "may" retain assets, this does not mean he can require that he be allowed to keep such property. When doing so, this weighs against the proposed discrimination.
Commentary:
As noted in the opinion, this treatment is more frequently proposed in Chapter 13 cases. The Bankruptcy Court here does not foreclose this treatment and this case is a good opening for attempting such in Chapter 13, particularly in a case where not only would the liquidation test not require any dividend, but also where the Means Test did not result in any projected disposable income. Further, given that the E.D.N.C. treats the Applicable Commitment Period ("ACP") as a multiplier and not as a time period, a Debtor could propose a plan that paid student loans by remaining in Chapter 13 longer than necessary. Similarly, this could be done by Below Median Income Debtors in jurisdictions where ACP would require a 36-month plan, by remaining in Ch. 13 for up to 24 more months. This would, in either case, endanger the Debtor’s discharge by stretching the plan longer than necessary and direct payment, following completion, would likely be preferable. As scenario where it might makes sense is where it allowed the Debtor to pay something to student loans during this extension, while retaining the protection of the bankruptcy court.
For a copy of the opinion, please see:
Sutton- Separate Classification of Student Loans in Chapter 11.PDF
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