Paul Stephen Penland and Leslie D. Penland

1 There were no objections to confirmation of Debtors’ plan, nor did any party in
interest seek dismissal. Rather, the Court denied confirmation and dismissed the case on
its own motion in discharging its independent duty to review whether a proposed plan
complies with the “good faith” confirmation standard of § 1325(a)(3). 	In re Warren, 89
B.R. 87, 90 (9th Cir. BAP 1988). 	The Chapter 13 trustee is the sole other interested
party listed in Debtors’ notice of appeal and only party served with Debtors’ motion for a
stay. Since the trustee did not oppose confirmation, the Court presumes he will also not
actively participate in the appeal nor oppose the motion.
MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
______________________________________________________
In Re:
Bankruptcy Case
PAUL S. PENLAND and 	No. 05-00172
LESLIE D. PENLAND,
Debtors.
______________________________________________________
MEMORANDUM OF DECISION
______________________________________________________
Debtors have appealed this Court’s order denying confirmation of
their proposed Chapter 13 plan and dismissing their case entered on November 8,
2005. See Docket Nos. 62 and 64. On November 22, 2005, Debtors filed a
Motion for Stay Pending Appeal. Docket No. 66. The Court determines that,
under these unusual circumstances,1 no hearing or additional argument concerning
Debtors’ motion is required or would be helpful to the Court to dispose of this
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MEMORANDUM OF DECISION - 2
motion.
Debtors seek a stay pending appeal under Fed. R. Bankr. P. 8005. In
order to obtain a stay pending appeal in this circuit, Debtors as appellants must
show a likelihood of success on the merits; the potential for irreparable injury if a
stay is not granted; that no substantial harm will come to others if a stay is issued;
and that the stay will not harm the public interest. In re Wymer, 5 B.R. 802, 806
(9th Cir. BAP 1980). 	The bankruptcy court may exercise discretion whether to
grant a stay pending appeal. Id.
After due consideration, the Court declines to grant Debtors’ motion.
While issuance of a stay under these facts will not likely result in harm to any
public interest, Debtors have failed to show they meet the other requirements for a
stay.
1. Likelihood of Success on Appeal.
A bankruptcy court’s decision whether to confirm a Chapter 13 plan
is reviewed for abuse of discretion. In re Slade, 15 B.R. 910, 911 (9th Cir. BAP
1981). So, too, is its decision to dismiss a Chapter 13 case. Leavitt v. Soto (In re
Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999). Such decisions entail a fact-
specific, case-by-case analysis. In re Porter, 102 B.R. 773, 775 (9th Cir. BAP
1989). Debtors bear the burden of establishing their plan is proposed in good faith,
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2 Debtors originally sought Chapter 7 relief. They converted their case to a
Chapter 13 case only after the Court and U.S. Trustee expressed interest in whether the
case should be dismissed for substantial abuse under 11 U.S.C. § 707(b), and on the eve
of their Rule 2004 exams. Debtors filed three proposed plans, the first proposing a
meager $300 per month for their creditors. After several months and considerable
prodding by the trustee, Debtors eventually increased the proposed payment to $1,025
per month, still a modest amount in light of Debtors’ $120,000 + per year income.
MEMORANDUM OF DECISION - 3
Smyrnos v. Padilla (In re Padilla), 213 B.R. 349, 352 (9th Cir. BAP 1997), and
whether they have done so is a question of fact. Id. (citing In re Metz, 820 F.2d
1495, 1497 (9th Cir. 1987)). 	A bankruptcy court’s findings of fact may not be set
aside on appeal unless they are clearly erroneous. Fed. R. Bankr. P. 8013.
In this case, the Court decided that Debtors failed to satisfy their
burden of proving their plan was proposed in good faith as required by
§ 1325(a)(3). While Debtors argue they will succeed in obtaining a reversal of the
Court’s order denying confirmation and dismissing this case, the Court
respectfully disagrees that its finding constitutes clear error.
The Memorandum of Decision explaining the reasons for the Court’s
order, Docket No. 61, details a long list of factors that collectively persuaded the
Court that Debtors’ plan was not proposed in good faith. These factors included:
Debtors’ questionable conduct in conducting their bankruptcy case;2 Debtors’
agreement to allow Mrs. Penland’s parents to reside with Debtors rent-free without
any apparent financial justification for this arrangement; Debtors’ excessive
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3 Debtors’ motion correctly points out that one of the cases cited by the Court in
its decision, In re Smith, 95 I.B.C.R. 194 (Bankr. D.Idaho 1995) was vacated by the BAP
on appeal. Smith v. Spurgeon (In re Smith), 207 B.R. 888 (9th Cir. BAP 1996). The
Court regrets this oversight. In Smith, the BAP determined it was an error when this
Court adopted a “blanket rule” that life insurance premiums are not necessary expenses
in a Chapter 13 case. 207 B.R. at 889-890. Instead, the BAP decided that whether such
premiums constitute a necessary expense “must be determined on a case-by-case basis.”
Id. at 890. Of course, that is exactly what the Court did in this case. In light of Debtors’
other resources, most notably the amounts on deposit in their retirement accounts, the
Court decided it was not necessary that Debtors maintain significant life insurance
coverage. See Mem. of Decision at 18.
MEMORANDUM OF DECISION - 4
monthly expenditures for their large house and life insurance;3 Mr. Penland’s
failure to offer realistic projections concerning his potential future income; and
Debtors’ failure to even inquire about the availability of their $500,000 in vested
pension funds to deal with their debts. Mem. of Decision at 12-19, Docket No. 61.
Upon consideration of these and other factors constituting the “totality of the
circumstances,” see In re Warren, 89 B.R. 87, 93 (9th Cir. BAP 1988), the Court
concluded that Debtors’ proposal to spend over $60,000 of their $120,000 annual
income each year on living expenses, while paying their creditors about $12,000
per year for five years, did not amount to good faith.
The exercise of discretion in deciding whether to confirm Chapter 13
plans under the amorphous “good faith” standard is hardly science. The Court
acknowledges that perhaps the members of a reviewing court, if called upon to
decide the issues under these facts, would assign different weight to the factors
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MEMORANDUM OF DECISION - 5
upon which this Court based its decision, and perhaps disagree with the Court’s
conclusions. But, as the Court understands the standard, in order to find abuse of
discretion, the reviewing court must conclude that the trial court based its decision
on an incorrect legal standard, a clearly erroneous view of the facts, or that its
ruling leaves the reviewing court with a definite and firm conviction that there has
been a clear error of judgment. SEC v. Coldicutt, 258 F.3d 939, 941 (9th Cir.
2001); Ho v. Dowell (In re Ho), 274 B.R. 867, 871 (9th Cir. BAP 2002). Under
this deferential standard of review, the Court concludes that Debtors have not
shown they will likely be successful on appeal.
While they did not raise them previously, Debtors now also make
generalized “due process” arguments about the Court’s decision. They contend
that they were somehow blind-sided by the Court’s determination that good faith
was an issue in this case, and that they were unfairly deprived of the opportunity to
file yet another amended plan when the Court decided not to confirm the current
plan. A careful review of the record shows these arguments lack merit. Debtors
filed three plans and three confirmation hearings were conducted in this case. At
the second hearing, the Court advised Debtors that the third hearing would be an
evidentiary hearing concerning confirmation, and also would likely be Debtors’
final opportunity to get their proposed plan confirmed. Debtors and their counsel
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4 A significant portion of the mortgage debt is owed to Mrs. Penland’s parents,
the Derrs. Debtors testified at the confirmation hearing that the parents had agreed to
MEMORANDUM OF DECISION - 6
appeared at the third hearing fully prepared. 	Indeed, by that time, there were no
issues concerning confirmation of the plan other than good faith. Both Debtors
testified. 	At the conclusion of the evidentiary hearing, Debtors were invited to,
and then did, file a Second Amended plan and an amended Schedule J, both of
which were considered by the Court.
In short, Debtors had an ample opportunity to make their best case
for confirmation. They were unsuccessful, and in light of the Court’s decision, no
purpose would have been served in allowing them yet another bite at the
confirmation apple.
2. Irreparable Injury.
Debtors allege in their motion that unless a stay is granted,
“Creditors may obtain judgments, garnish wages and disrupt the [Debtors’] cash
flow so that they are not able to pay their current living expenses and current
mortgage payments.” Motion for Stay at 5-6, Docket No. 66 (emphasis added).
Significantly, no evidence was presented by Debtors, either at the confirmation
hearing or since, that they are facing any imminent threat of aggressive creditor
collection activities. No foreclosures were pending when the case was dismissed;
indeed, Debtors were current on their mortgage payments. 4 Debtors have no other
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forego current payments while Debtors were attempting to reorganize under Chapter 13.
This means Debtors will have access to over $600 per month in additional cash flow to
deal with other creditors, assuming those creditors pursue collection.
MEMORANDUM OF DECISION - 7
significant secured debt, and owe no substantial tax obligations. Any allegations
that Debtors face irreparable injury in the absence of a stay are, at this time,
speculative.
3. Harm to Others.
If the Court stays the order denying confirmation of Debtors’ plan
and dismissing the case, a strange circumstance will result. 	Debtors will have the
continuing benefit of the automatic stay, and their unsecured creditors will be
prevented from collecting during the time required to appeal this case to the BAP
and beyond. While under § 1326(a), Debtors presumably must continue to make
payments to the Chapter 13 trustee, that money will simply accumulate in his trust
account, since confirmation is a condition of the trustee’s ability to make
disbursements under § 1326(b). And if Debtors tire of this arrangement, they have
the right to dismiss their case under § 1307(a) “at any time,” and reclaim all
payments from what amounts to a court-protected savings account.
This arrangement seems grossly unfair to creditors, and the Court
declines to tip the scales in Debtors’ favor to such an extent. In the absence of a
stay, Debtors can use their ample monthly income to make at least partial
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MEMORANDUM OF DECISION - 8
payments to creditors should the need arise.
4. Conclusion.
For the reasons stated above, Debtors’ Motion for Stay Pending
Appeal will be denied by separate order.
Dated: December 1, 2005
Honorable Jim D. Pappas
United States Bankruptcy Judge
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