- Eighth Circuit Court of Appeals, No 12-4018 (Jan. 31, 2014)
- The Eighth Circuit affirmed the lower courts' rulings that the debtors' proposed chapter 13 plan unfairly discriminated against other unsecured creditors by proposing to pay nondischargeable tax debts before other unsecured claims.
- Procedural context:
- The debtors filed chapter 13 and proposed a plan which provided for payment of unsecured, non-priority state and federal tax debts ahead of other unsecured creditors. The bankruptcy court rejected the plan. The debtors then amended their plan to remove the special classification, but objected to their own plan. The bankruptcy court overruled the objection. The debtors amended the plan again, and renewed their objection. The bankruptcy court again overruled the objection to the lack of preferential treatment to the nondischargeable tax debt and confirmed the plan. The debtors appealed. On appeal, the Bankruptcy Appellate Panel affirmed. On further appeal, the Eighth Circuit also affirmed.
- The debtors' proposed plan created a "special class" of unsecured creditors, comprised entirely of nondischargeable, unsecured, non-priority tax debts. The chapter 13 trustee estimated that based upon the filed claims, over the life of this plan the debtors would pay roughly 97% of the tax claims and nothing to the remaining unsecured claims. The bankruptcy court concluded that this proposal unfairly discriminated against the other unsecured creditors. After the debtors amended their plan, the bankruptcy court confirmed a plan that did not contain the special classification. The debtors appealed, arguing that the bankruptcy code permitted separate classification (and payment in full) of tax creditors. The BAP affirmed the bankruptcy court ruling. On further appeal, the Eighth Circuit considered the issue to be one of the appropriate use of judicial discretion when a plan results in unfair discrimination between classes of creditors. While 11 U.S.C. Section 1322(b)(1) permits a plan to designate a class of unsecured claims, it may not "discriminate unfairly" against any such class. The court found that nondischargeability does not itself justify special classification, especially where the nondischargeability of tax debts reflects an emphasis on timely filing, and the debtors could have avoided the issue had they filed their pre-petition tax returns on time. The court further agreed with the lower courts' determination that the plan was not proposed in good faith, insofar as the debtors were prioritizing payment to creditors who would be entitled to payment regardless of the terms of the plan at the expense of creditors who had no other recourse.
- Wollman, Smith, and Kelly
The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust
Summarizing by Amir Shachmurove
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