Fifth Circuit Hints that Debtors May Retain Property for Recreation and Entertainment

Although the Fifth Circuit was unwilling to make the opinion precedential, the appeals court is nonetheless telling bankruptcy judges that chapter 13 does not require stripping a debtor of property that provides entertainment and recreation.

The Elderly Debtors

The chapter 13 debtors were an elderly couple, the Fifth Circuit said in its three-page per curiam opinion on February 11. The panel was composed of Circuit Judges E. Grady Jolly, Edith H. Jones and James L. Dennis.

The debtors’ income was below median. They proposed a 58-month plan paying $1,200 a month. The proposed distribution to unsecured creditors was only $600, or 4%. The circuit’s opinion said that the debtors were devoting some of their Social Security benefits to plan payments, although they were not required to do so.

The bulk of the plan payments was earmarked for secured debts, including loans collateralized by two autos and living room furniture. In addition, the debtors owed another lender $3,100 secured by three televisions, a riding lawnmower and a 1998 fishing boat, motor and trailer. The plan proposed to pay secured creditors in full so the debtors could retain the properties.

Focusing on the fishing boat that the debtors intended to retain, the bankruptcy judge denied confirmation, finding that the plan was not filed in good faith under Section 1325(a)(3). However, neither the chapter 13 trustee nor any creditor had objected to the plan.

The debtors filed an amended plan surrendering the televisions, the lawnmower and the fishing boat to the lender. The bankruptcy court confirmed the amended plan. The debtors appealed, hoping to reinstate the original plan, but the district court upheld the bankruptcy court. (Some of the foregoing facts are taken from the district court’s opinion.)

The Fifth Circuit’s Analysis

According to the circuit court, the bankruptcy judge believed the original plan was inequitable because the debtors were retaining the fishing boat while paying only 4% to unsecured creditors.

Applying the clearly erroneous standard to the bankruptcy court’s finding of lack of good faith, the circuit court said there were several “apparently overlooked facts.” The appeals court listed the lack of objection from the chapter 13 trustee, the lenders and the unsecured creditors. The court also mentioned the application of Social Security benefits to plan payments.

Giving up the televisions, the lawn mower and the fishing boat was the only difference between the original plan and the confirmed plan, the appeals court said. The payment to unsecured creditors remained the same.

The circuit ruled that the finding of lack of good faith was clearly erroneous in light of this “fact-specific and unusual set of circumstances.”

Observations

We question whether the facts were so unusual or whether the bankruptcy court had overlooked anything. The circuit’s opinion seems less based on facts and more on policy calling for humane treatment of debtors.

Giving up the televisions would have deprived the debtors of inexpensive entertainment. Losing the riding lawn mower might have forced the elderly couple to hire someone to cut the grass.

The debtors scheduled the boat, motor and trailer as worth $1,500. The 20-year-old-boat would have fetched precious little if sold by the lender or trustee, while depriving the debtors of inexpensive recreation.

Cutting through the fancy legal analysis, this writer interprets the opinion to mean that the Bankruptcy Code does not require chapter 13 debtors to give up property that provides entertainment, recreation and utility when unsecured creditors would not benefit materially and the property has minimal resale value.

Viewed from another angle, the opinion seems to mean that the court should not impose amorphous, idiosyncratic standards when a chapter 13 plan complies with the Code’s mathematical requirements, which are punitive enough in themselves. Cf. Law v. Siegel, 134 S. Ct. 1188 (2014).