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In re Escarcega

United States Bankruptcy Appellate Panel for the Ninth Circuit

September 6, 2017

In re: DENNIS MICHAEL ESCARCEGA; NANETTE MARIE SISK, dba About Face Skin Care; EUGENE EDWARD VICK; MARK IRVIN CANDALLA; JERI LYLE SALDUA MERCADO, Debtors. DENNIS MICHAEL ESCARCEGA; NANETTE MARIE SISK, dba About Face Skin Care; EUGENE EDWARD VICK; MARK IRVIN CANDALLA; JERI LYLE SALDUA MERCADO, Appellants. Bk. Nos. 16-50368-SLJ, 16-50548-SLJ, 16-50401-MEH, 16-50659-SLJ, 16-50651-SLJ

          Argued and Submitted on June 22, 2017 at San Francisco, California

         Appeals from the United States Bankruptcy Court for the Northern District of California Honorable M. Elaine Hammond, Bankruptcy Judge, Presiding Honorable Stephen L. Johnson, Bankruptcy Judge, Presiding

          James J. Gold of Gold and Hammes argued for appellants Dennis Michael Escarcega, Nanette Marie Sisk, dba About Face Skin Care, and Mark Irwin Candalla;

          James S.K. Shulman of the Law Offices of James S.K. Shulman argued for appellants Eugene Edward Vick and Jeri Lyle Saldua Mercado;

          Ben A. Ellison of Cairncross & Hempelmann, P.S. argued for National Association of Consumer Bankruptcy Attorneys, as Amicus Curiae, by special leave of the Panel, supporting the appellants' position.

          Before: JURY, FARIS, and BRAND, Bankruptcy Judges.

          OPINION

          JURY, BANKRUPTCY JUDGE.

         When Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a primary purpose was to help ensure that debtors who can pay creditors do pay them the maximum they can afford. Ransom v. FIA Card Servs., N.A., 131 S.Ct. 716, 721 (2011); see also Whaley v. Tennyson (In re Tennyson), 611 F.3d 873, 879 (11th Cir. 2010) ("'The heart of [BAPCPA's] consumer bankruptcy reforms . . . is intended to ensure that debtors repay creditors the maximum they can afford.'"). The Ninth Circuit in Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013), embraced this ideal by ruling that if the provisions of § 1325(b)(1)(B)[1] are triggered by an objection, debtors must commit to a fixed plan term (either 36 or 60 months) because "[a] minimum duration for Chapter 13 plans is crucial to an important purpose of § 1329's modification process: to ensure that unsecured creditors have a mechanism for seeking increased (that is, non-zero) payments if a debtor's financial circumstances improve unexpectedly." Id. at 860 (citing Fridley v. Forsyth (In re Fridley), 380 B.R. 538, 543 (9th Cir. BAP 2007)).

         Notwithstanding this background and purpose, debtors in the Northern District of California, San Jose Division sought to modify the district's mandatory Model Plan, which required a fixed plan term, so that the plan would be for an indeterminate duration. Such plan therefore could be completed without further modification and debtor discharged as soon as all priority and secured debt was repaid, insuring that the unsecured creditors would never receive any payment on their claims. Not only did the debtors propose such plans, but their chapter 13 trustee devised a mechanism by which she could avoid filing an objection to the proposed plan - an act which would trigger the mandatory imposition of the applicable commitment period under Flores[2] - by providing debtors' attorneys with a "draft objection" which allowed them to make required amendments to the plan outside the court proceeding. The brash purpose of the "draft objection" was to create a work-around of the impact of Flores for the local debtors' bar so that debtors could avoid paying unsecured creditors what they might be entitled to receive.

         Two bankruptcy judges sitting in the San Jose Division challenged the propriety of these debtors' attempts to modify the Model Plan and issued a joint decision denying confirmation of such plans. Their well-reasoned ruling found that these plan provisions were inconsistent with the statutory requirements of §§ 1328 and 1329 which, read together, accord a discharge to debtors only if their plans could be modified upon motion by an unsecured creditor when debtors' circumstances changed and they became able to pay a return to such creditors - i.e., a return of more than the zero dollars debtors wanted to ensure they would receive - at some point during the plan's fixed duration. They also held that such plans were not proposed in good faith, because they unfairly manipulated the Bankruptcy Code and were proposed in an inequitable manner.

         We AFFIRM the rulings of the bankruptcy court in these cases and in doing so endorse its conclusions that such plans are inconsistent with the statutory requirements of §§ 1328 and 1329. We also agree the such provisions are not proposed in good faith, as a blatant attempt to avoid the consequences of modification under § 1329 which would compel debtors to pay their creditors what they are able to afford during the term of their chapter 13 plans. Moreover, we seriously question the tactics of this chapter 13 trustee who essentially colluded with the debtors' bar to avoid the consequence that filing an objection would have under controlling Ninth Circuit case law. Her role in insuring that unsecured creditors would never receive a dividend in these cases strikes the Panel as inconsistent with the diligence required of such trustees.

         I. FACTS

         A. Debtors and Counsel

         Dennis Michael Escarcega (Escarcega), Nanette Marie Sisk (Sisk), Eugene Edward Vick (Vick), Mark Irvin Candalla (Candalla), and Jeri Lyle Saldua Mercado (Mercado) (collectively, Debtors), each filed a chapter 13 petition in the San Jose Division of the United States Bankruptcy Court with the assistance of counsel from one of two different law firms - Gold and Hammes (G&H) or the Law Offices of James S.K. Shulman (Shulman) (collectively, Counsel).

         Sisk is an above-median income debtor while the others are below-median income debtors. Debtors each proposed zero percent plans to unsecured creditors.[3] Neither the chapter 13 trustee (Trustee) nor any creditor objected to Debtors' plans.

         B. The Model Plan

Bankruptcy Local Rule (BLR) 1007-1 provides:
The Court may approve and require the use of pre-printed practice forms. The Court may also approve practice forms which are not pre-printed but the format of which is required to be followed. Practice forms may be adopted on a district-wide or division-wide basis. Required forms will be available in the Clerk's office, on the Court's website (http://www.canb.uscourts.gov) and, with respect to Chapter 13 practice, in the office of the Chapter 13 Trustee or on the Chapter 13 Trustee's website.

         Consistent with this rule, beginning February 1, 2016, the San Jose bankruptcy court orally announced that chapter 13 debtors were required to use the Model Plan posted on the court's website.[4]

         Under section 5 of the Model Plan, debtors may propose additional provisions that modify the plan:

[A]s long as consistent with the Bankruptcy Code, the Debtor may propose additional provisions that modify the preprinted text. All additional provisions shall be on a separate piece of paper appended at the end of this plan. Each additional provision shall be identified by a section number beginning with section 5.01 and indicate which section(s) of the standard plan form have been modified or affected.

         Debtors used the Model Plan and attached a separate page of additional plan provisions which modified the language in sections 1.01(a) and 2.12 of the Model Plan and others not at issue in this appeal.[5] Counsel developed additional provisions 5.02(a) and 5.03 based on their belief that the Model Plan substantively abridged Debtors' rights without them. Set forth below are the objectionable Model Plan provisions and Counsels' arguments regarding those objections:

         1. Section 1.01(a) of the Model Plan:

Plan payments. To complete this plan, Debtor shall:
a. Pay to Trustee $___ per month for___ months from the following sources: (describe, such as wages, rental income, etc.): ___ . Debtor shall after ___ months, increase the monthly payment to $___ for___ months.

         Objection to section 1.01(a) of the Model Plan:

         Counsel interpret subsection (a) to require not only a specific dollar amount for the monthly payments, but also the precise number of months for those payments.[6] They contend that most debtors cannot precisely calculate the exact number of months it will take for the proposed monthly payment to complete the plan due to many factors, including fluctuations in the trustee's fee percentage throughout the term of the plan. They also argue that unless an unsecured creditor objects to the plan under § 1325(b), the term of the plan will be of no concern to the creditor. Zero dollars paid over 48 months or zero dollars over 60 months have the same impact on the creditor. According to Counsel, neither term is more meaningful than the other - zero dollars is still zero dollars.

         Corrective Language:

         To correct the perceived problems with section 1.01(a), G&H added additional provision 5.02(a) which provides: "The length of the plan as reflected in the cumulative terms of the monthly payments provided in section 1.01(a) [of the Model Plan] is the estimated length of the plan." (Escarcega, Sisk, and Candalla plans).

         Mr. Shulman added: "Notwithstanding [s]ection 1.01(a) [of the Model Plan], once the debtor has paid all allowed secured and priority claims and administrative expenses as provided for in this plan, the plan shall be deemed completed and no further payment to the Trustee shall be required." (Vick and Mercado plans).

         2. Section 2.12 of the Model Plan

This section provides:
Class 7: All other unsecured claims. These claims, including the unsecured portion of secured recourse claims not entitled to priority, total approximately $___ . The funds remaining after disbursements have been made to pay all administrative expense claims and other creditors provided for in this plan are to be distributed on a pro-rata basis to class 7 claimants.
[select one of the following options:]
___Percent Plan. Class 7 claimants will receive no less than ___% of their allowed claims through this plan.
___Pot Plan. Class 7 claimants are expected to receive ___% of their allowed claims through this plan.

         Objection to section 2.12 of the Model Plan:

         Counsel complain that rather than offering the options of: "will receive ___% of their allowed claims" and "will receive an aggregate dividend of $ ___, " which would make clear or determinable the precise dividend the creditors will receive, the Model Plan required the debtor to select between two nebulous ideas. According to Counsel, based on the provided choices, neither the creditors nor the debtor knew how much the dividends will be at the time the case is filed. Counsel contend that the two provisions to select from, which specify the dividend on general unsecured claims, require the debtor to convert the actual dollar amount intended to be the aggregate dividend into a calculated percentage of the estimate of the general unsecured claims.

         Counsel further complain that both provisions allow the dividend to be increased: the percent plan provides "no less than ___%" and the pot plan states: "expected to receive ___%." According to Counsel, no one should be authorized to make that decision, but at some point the plan must be declared completed, or not. Counsel argue that the vagueness of this language leaves it open to a trustee to make arbitrary judgments about what the dividend is. Counsel thus contend that the Model Plan substantively abridges Debtors' rights by requiring them to make payments to general unsecured creditors in excess of the amounts required by the Bankruptcy Code.

         Corrective Language:

         To correct these perceived problems in section 2.12 of the Model Plan, G&H added additional provision 5.03, which states:

Section 2.12 is modified to add the following, if checked here:
√ Class 7 claimants shall receive an aggregate dividend of $0, which amount can be increased up to $1.00 to an amount sufficient for the trustee to administer payments on these claims, which shall be shared pro-rata based on the amounts of their respective allowed nonpriority unsecured claims. (Escarcega, Sisk, Candalla plans).
Mr. Shulman added:
Section 2.12 of the plan is modified to add the following:
Class 7 claimants shall receive an aggregate dividend of $ 0. (Vick, Mercado plans).

         C. The Confirmation Procedure for Debtors' Plans

         The San Jose bankruptcy court has on its website a chapter 13 calendar procedure packet along with forms.[7] The procedures provide that chapter 13 cases ready for confirmation will be confirmed expeditiously. Confirmation hearings are initially set on a "Chapter 13 Uncontested Confirmation Calendar." Absent timely objection and upon finding that the requirements of § 1325(a) are satisfied, the bankruptcy court will confirm the plan at the confirmation hearing. The procedures state that cases will be considered ready for confirmation when (1) the § 341(a) meeting of creditors has concluded; (2) no objections to confirmation have been filed, or such objections have been resolved or withdrawn without judicial intervention; (3) payments under the proposed plan are current; and (4) there are no other unresolved deficiencies.

         Cases that are not ready for confirmation are placed on Trustee's pending list (TPL). It is generally up to Trustee to monitor the cases on the TPL. If the deficiencies have been cured, outstanding objections resolved, and payments are current, the matter is restored to the "Uncontested Confirmation Calendar." However, when matters are not resolved, parties are instructed to follow the same rules that apply to any motion in a bankruptcy case as provided by BLR 9014-1(a). Matters may be set for hearing on any available contested confirmation calendar date.

         Because Debtors attached additional provisions to the Model Plan, the bankruptcy court directed Trustee to move their cases to the TPL so that the court would have the opportunity to determine if the additional provisions complied with the Bankruptcy Code. Counsel then filed motions for confirmation of the five uncontested plans, prepared supporting declarations and set hearings for the motions on the bankruptcy court's earliest contested confirmation calendars and served all creditors.

         At the initial confirmation hearings, the bankruptcy court expressed its concerns about the additional provisions and made some preliminary comments about the plans' confirmability.[8]Each case was then set for an evidentiary hearing or trial on confirmation. In advance of the hearings, the bankruptcy court issued scheduling orders directing Counsel to address certain legal issues raised by the additional provisions. Debtors filed initial and supplemental briefs addressing those questions.

         G&H, counsel in the Candalla, Escarcega, and Sisk cases, objected to the procedure described above, contending that it violated the Bankruptcy Code. It argued that the initial hearing for each Debtor did not qualify as a confirmation hearing under § 1324(b) since confirmation of the plan was not substantively considered by the court at that hearing. G&H further asserted that all of the evidentiary hearings were held after the 45-day limit in § 1324(b) for a confirmation hearing. Accordingly, G&H maintained that the court violated § 1324(b) by failing to provide a procedure to calendar and hold timely and substantive confirmation hearings for its clients' proposed chapter 13 plans - all of which were uncontested.[9]

         After the evidentiary hearings or trials for all Debtors, the bankruptcy court ...


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