by A bankruptcy court may not deny confirmation of a debtor’s chapter 13 plan in the absence of objection by the trustee or unsecured creditor, based on its belief that the debtor miscalculated her disposable income. Briggs v. Johns (In re Briggs), No. 17-1080 (W.D. La. Sept. 28, 2018).
In calculating her disposable income, chapter 13 debtor, Marlea Briggs, deducted $913.00 as mortgage or rental expenses based on the IRS Local Standard. Though no one objected to the plan, the bankruptcy court scheduled a hearing and denied confirmation sua sponte. The court required Ms. Briggs to file a new plan calculating her income using her actual mortgage payments of $438.20. The court then confirmed the plan over Ms. Briggs’s objection. She appealed.
The court began its analysis with the question of the bankruptcy court’s authority to object to a debtor’s plan sua sponte. Under section 1325(b)(1)(A) and (B) a court may not confirm a chapter 13 plan to which the trustee or holder of an allowed unsecured claim objects, unless the plan pays the claim in full, or “the plan provides that all of the debtor’s projected disposable income . . . will be applied to make payments to unsecured creditors under the plan.”
In lodging its sua sponte objection, the bankruptcy court relied on United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), where the Supreme Court found that a confirmed plan, which provided for paying off the debtor’s student loan principal in full but discharging the interest, was binding despite the fact that the debtor had not brought an adversary proceeding to address his treatment of the presumptively non-dischargeable student loan under section 523(a)(8). In its discussion of the case, the Supreme Court added that a bankruptcy court has an obligation to ensure that a plan conforms to the requirements of the Code even in the absence of objection. The question for purposes of this case was whether that obligation applies only to self-executing provisions of the Code—as in the case of non-discharge of student loans—or to all Code provisions. The bankruptcy court found that the Court’s discussion in Espinosa imposed the broader obligation.
The district court disagreed. In its reading of Espinosa, the district court found that the fact that the student loan discharge provision was self-executing was essential to the Supreme Court’s holding and, therefore, its later discussion about a bankruptcy court’s obligation to step in applied only in the circumstance of a self-executing provision. A finding to the contrary would place a burden on the bankruptcy court to monitor every chapter 13 plan for any defect. This would be both unworkable from a practical standpoint, and it would shift the role of the chapter 13 trustee to the bankruptcy court.
The court then turned to whether the plan provision at issue in Briggs was self-executing and therefore subject to the bankruptcy court’s sua sponte oversight. In the case of a student loan discharge, the student loan is not subject to discharge unless the debtor initiates an adversarial proceeding and demonstrates undue hardship. In the case of plan confirmation, the court may not confirm a plan unless it is 100% or the debtor applies all of her disposable income to it. Unlike section 523(a)(8) where, in the absence of any action, a student loan is not subject to discharge, in the case of plan confirmation, there is an intervening step specified in the Code where the bankruptcy court’s obligation to deny confirmation arises only upon objection by the trustee or an unsecured creditor. Based on this distinction, the court found, section 1325(b)(1) is not self-executing.
The court rejected the trustee’s argument that section 1325(a)(1), which provides that a court shall confirm a plan that “complies with the provisions of this chapter and with the other applicable provisions of this title,” provides an independent basis for the court’s sua sponte objection to confirmation. Rather, the court found that section 1325(a)(1) is a general provision that permits sua sponte objection by the bankruptcy court only where the objection is based on a separate, self-executing provision.
The court was likewise unconvinced by the bankruptcy court’s assertion that its power to enter the sua sponte objection arose out of its duty to ensure that the debtor’s plan was proposed in good faith. While the district court agreed that a bankruptcy court has the power to look into a debtor’s good faith even in the absence of challenge by the trustee or other party, here, because Ms. Briggs’s good faith was not brought into issue, the court did not conduct a thorough examination of the totality of circumstances relevant to that finding. The district court, therefore, remanded for the purposes of addressing that issue more completely.
Finally, finding that the correctness of Ms. Briggs’s disposable income calculation was irrelevant to the bankruptcy court’s power to raise a sua sponte objection, the court declined to reach any decision on that issue.
The district court thus reversed with respect to the denial of confirmation on the disposable income question but remanded for a more thorough examination of the question of good faith.