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Bradley R. Kirk & Associates, Inc. v. Spellman (In re Spellman)

Ninth Circuit Bankruptcy Appellate Case No. CC-15-1026-KiKuF (March 22, 2106) Not for Publication
The Bankruptcy Appellate Panel ("BAP") affirmed the holding of the bankruptcy court. To determine whether the Debtor proposed his Chapter 13 Plan in good faith, the BAP considered the following: (1) whether the debtor misrepresented facts, unfairly manipulated the Bankruptcy Code or otherwise proposed the plan in an inequitable manner; (2) the history of the debtor's filings and dismissals; (3) whether the debtor intended only to defeat state court litigation; and (4) whether the debtor's behavior was egregious. Therefore, the Chapter 13 Plan was proposed in good faith. The BAP further analyzed the following to determine whether the best interest of creditors was met: (1) the present value of the property to be distributed to unsecured creditors (the value of the stream of plan payments) as of the “effective date of the plan;” and (2) the amount available to unsecured creditors if a chapter 7 liquidation were held on the “effective date of the plan.” The BAP affirmed that bankruptcy court's ruling applying the applicable laws of California related to the spend thrift language of the Trust. Lastly, the BAP affirmed that no evidentiary hearing was required based on the fact that Kirk did not provide any support as to what additional evidence the bankruptcy court should consider, and the bankruptcy court was amply familiar in light of the litigation regarding the case prior to the confirmation hearing.
Procedural context:
Kirk appealed the bankruptcy court's order confirming the Debtor's Chapter 13 Plan. Kirk presented 8 issues on appeal, which the BAP consolidated into three issues: (i) did the bankruptcy court err in finding that Debtor’s proposed plan satisfied the good faith requirements of § 1325(a)(3)? (ii) did the bankruptcy court err in finding that Debtor’s proposed plan satisfied the “best interests of creditors” test under § 1325(a)(4)? and (iii) did the bankruptcy court abuse its discretion in not holding an evidentiary hearing on confirmation of Debtor’s Plan?
Debtor is the beneficiary of the Giles J. Spellman Living Trust ("Trust"). The Trust contained a spend thrift provision wherein the Debtor was not permitted to receive distribution until he reached the age of 35 (November 22, 2017). Creditor represented the Debtor prior to the bankruptcy related to litigation regarding the Trust. There were 2 fee agreement executed by the Debtor. The second agreement provided that Creditor would get 33% of all property the Debtor eventually received from the Trust. The referee appointed to the Trust litigation found that there was no revocation of the Trust; therefore, Debtor was recommended as successor trustee. Debtor asserts that he believed creditor would get 3% - 7% of the trust. Therefore if spend thrift language was immediately removed Debtor would owe creditor $200,000 in legal fees. Shortly after Debtor terminated Creditor's representation. Despite the termination, Creditor sought entry of judgment on behalf of Debtor that would allow Trust assets to the Debtor immediately. However, Debtor was not given notice. The state court directed immediate distribution of Trust assets. Debtor and Creditor participate in fee arbitration, and the arbitrator found in favor of the Creditor. The successor trustee appointed by the state court successfully set aside the removal of the spend thrift language. Creditor petitioned the state court for the release of his fees, and Debtor filed Chapter 13 prior to the matter going to hearing. Debtor's amended Chapter 13 plan provided for total payment of $7,012 over the course of 36 months. Creditor filed a proof of claim, and Debtor objected to it on the basis that the Creditor was not a creditor of the Debtor's Estate, because it was individually filed not on behalf of the firm. Creditor amended its proof of claim, and the bankruptcy court entered an order reducing Creditor's claim to approximately $44,000(bankruptcy court's ruling was overturned by the District Court). Kirk objected to the Debtor's Chapter 13 Plan asserting the case and Plan were filed in bad faith.

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