Geraldine T. Saiz-TenBrink

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Geraldine T. Saiz-TenBrink
05-15660
Memorandum Opinion re: [5-1] Chapter 13 Plan .
Received on: 2006-05-08 14:45:43.000
2006-05-08 00:00:00.000
2006-05-08 00:00:00.000
Patti Hennessy
Case 05-15660-m7 Doc 28 Filed 05/08/06 Entered 05/08/06 16:06:00 Page 1 of 12

1The Chapter 13 Trustee asserts that LLMA has no standing to object to confirmation
because it has not filed a proof of claim, and that LLMA's objection should, therefore, be
stricken. Because the Debtor's plan provides for payment to LLMA (albeit directly, outside the
plan), the Court finds that LLMA is a "party in interest" with standing to object to confirmation
of the Debtor's chapter 13 plan. 11 U.S.C. 1324(a) ("A party in interest may object to
confirmation of the plan."); In re Davis, 239 B.R. 573, 579 (10th Cir. BAP 1999) (noting that
some courts have found that "party in interest" does not include parties who do not have an
allowed claim (i.e., have not timely filed a proof of claim), but following the generally
understood definition of "party in interest" to mean "all persons whose pecuniary interests are
directly affected by the bankruptcy proceedings" and extending such definition "to include
anyone who has an interest in the property to be administered and distributed under the Chapter
13 plan.") (citation omitted).
1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	GERALDINE SAIZ-TENBRINK, 	No. 13-05-15660 MA
Debtor.
MEMORANDUM
THIS MATTER is before the Court for confirmation of the Debtor’s chapter 13 plan.
Debtor’s plan of reorganization seeks to pay certain amounts arising out of a Judgment and
Suspended Sentence issued by the Thirteenth Judicial District Court which included an order of
restitution as a condition to probation based on Debtor’s plea of guilty to one count of
embezzlement of over $20,000.00 outside the plan. The Chapter 13 Trustee objected to
confirmation asserting that such direct payment amounts to a separate classification of an
unsecured debt that unfairly discriminates against other unsecured creditors contrary to 11 U.S.C.
§ 1322(b)(1). 	Los Lunas Medical Associates (“LLMA”) also filed an objection to confirmation,
asserting, among other things, that the Debtor’s plan was not filed in good faith, and that the plan
is not feasible because the Debtor faces incarceration if she fails to make the restitution payments
and would be left with no means of funding her plan.1
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2LLMA supports Debtor’s proposal for direct payment of the court ordered restitution
outside the plan.
2
At the final hearing on confirmation, the Court directed the parties to submit letter
memoranda on the issue of whether restitution payments can be made outside the plan. 	The
Debtor, the Chapter 13 Trustee, and LLMA each filed a brief. 2 Upon review of the briefs and the
relevant case law in light of the record of the Debtor’s bankruptcy proceeding, and being
otherwise sufficiently informed, the Court finds that the Debtor’s plan cannot be confirmed.
Debtor has not provided a sufficient justification for the separate classification of the restitution
claim, and her plan, consequently, unfairly discriminates against general unsecured creditors.
FACTS AND BACKGROUND
In 2004, Debtor plead guilty to one count of embezzlement of over $20,000.00, and
received a suspended sentence with probation conditioned upon payment of restitution ordered
pursuant to N.M.S.A. 1978 § 31-17-1(D) in the amount of $665.00 per month for a period of five
years, beginning June 5, 2005. See Plea and Disposition Agreement (Exhibit A to Memorandum
Supporting Payment of Court Ordered Restitution Outside Chapter 13 Plan (“LLMA
Memorandum”); Judgment and Suspended Sentence (Exhibit B to LLMA Memorandum).
Failure to make the required restitution payments can result in revocation of probation and
incarceration. See Judgment and Order Reinstating Probation (Exhibit C to LLMA
Memorandum).
Debtor filed her voluntary petition under Chapter 13 of the Bankruptcy Code on July 12,
2005. Her statements and schedules list unsecured, non-priority claims in the total amount of
$250,315.35. Of this amount, $39,900.00 is identified on Debtor’s Schedule F as a claim for
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3Paragraph 3. of Debtor’s Chapter 13 Plan of Reorganization is entitled “Payments Made
Directly to Creditors” and lists the following creditors with the following estimated claim
amounts:1) Ford Motor Credit Company - $33,000.00; 2) Los Lunas Medical Associates -
$39,000.00. 	Based on Debtor’s Schedule F, it is clear that the claim identified in Paragraph 3 of
Debtor’s Plan of Reorganization represents the restitution debt.
3
“restitution” to LLMA, and $151,419.35 is identified on Debtor’s Schedule F as a claim of
LLMA for “conversion of company funds.” 	Debtor’s Chapter 13 plan proposes monthly
payments of $125.00 for a minimum of thirty-six months, but up to a maximum of sixty months
as necessary to complete funding of the plan. The plan also proposes to pay the regular monthly
payment due under the restitution order directly.3 Debtor’s Schedule J reflects a monthly
expense in the amount of $665.00 identified as restitution. After deduction of all itemized
expenses, Debtor’s Schedule J reflects net monthly income in the amount of $125.55. 	LLMA
has not filed a proof of claim. 	The only unsecured claims on file are a claim for priority taxes
filed by New Mexico Taxation and Revenue Department in the amount of $5,000.00, and a
claim filed by LVNV Funding LLC, Resurgent Capital Services, in the amount of $7,585.23.
DISCUSSION
Confirmation of a Chapter 13 plan of reorganization is governed by 11 U.S.C. § 1325
which provides, among other things, that the Court shall confirm a plan provided that the plan
complies with all of the provisions under Chapter 13 and other applicable provisions under the
Bankruptcy Code. 11 U.S.C. § 1325(a)(1). Pursuant to 11 U.S.C. § 1322(b)(1), a debtor may
propose a plan that designates separate classes of unsecured claims, provided such designation
does not “discriminate unfairly” against any class of unsecured creditors. 11 U.S.C. §
1322(b)(1). 	"Unfair discrimination" is not defined in the Bankruptcy Code, and courts have
struggled to develop and apply certain factors to determine whether a proposed treatment
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discriminates unfairly. See In re Williams, 231 B.R. 280, 281 (Bankr.S.D.Ohio 1999) (noting
that the Bankruptcy Code has not defined "unfair discrimination"); In re Crawford, 324 F.3d 539,
542 (7th Cir. 2003) ("The courts have striven to formulate a more precise standard for
determining the legitimacy of classifications proposed by Chapter13 debtors, but without
success.”); In re Leser, 939 F.2d 669, 672 (8th Cir. 1991) (establishing the following four-factor
test: "1) whether the discrimination has a reasonable basis; 2) whether the debtor can carry out a
plan without the discrimination; 3) whether the discrimination is proposed in good faith; and 4)
whether the degree of discrimination is directly related to the basis or rationale for the
discrimination.") (citing In re Wolff , 22 B.R. 510, 512 (Bankr.9th Cir. 1992) (remaining citations
omitted)). Whether a separately designated class of unsecured creditors unfairly discriminates is
ultimately determined on a case-by-case basis, taking into consideration the particular facts and
circumstances present in each case. In re Whitelock, 122 B.R. 582, 588 (Bankr.D.Utah 1990)
("The decision [of whether a separate classification unfairly discriminates] is to be made on a
flexible, case-by-case approach, taking into account the particular facts and circumstances of
each case."); Williams, 231 B.R. at 281 (noting that "courts propose a flexible standard
considering the totality of the circumstances on a case by case basis.") (citing In re Bowles, 48
B.R. 502, 507 (Bankr.E.D.Va. 1985) (remaining citation omitted)).
Here, Debtor’s plan does not designate LLMA as a separately classified unsecured
creditor, but instead proposes to pay the court-ordered restitution directly, outside the plan. 	As
pointed out by LLMA, whether a debtor can provide for direct payment to creditors outside the
plan lies within the discretion of the Bankruptcy Court. See In re Barber, 191 B.R. 879, 883 (D.
Kan. 1996) (whether debtor may act as disbursing agent is committed to the court's sound
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discretion). But the effect of Debtor’s proposed plan is the equivalent of separate classification
of the restitution debt because the plan provides for payment of the restitution according to the
terms of the Judgment and Suspended Sentence, while other general unsecured claims will be
paid pro-rata from plan payments. Cf. In re Limbaugh, 194 B.R. 488, 491 (Bankr.D.Or. 1996)
(considering whether debtor's proposal to pay restitution claim in full directly to Multnomah
County while paying 0% to other unsecured creditors was an impermissible separate
classification was unfairly discriminatory). The Court’s decision, therefore, is not based on
whether the Debtor may make direct payments outside the plan, but on whether the plan unfairly
discriminates.
“It is the debtor’s burden to prove a reasonable basis for the favorable treatment of the
restitution claim.” Williams, 231 B.R. 281 (citing In re Brigance, 219 B.R. 486, 494
(Bankr.W.D.Tenn. 1998). See also, Whitelock, 122 B.R. at 588 (“The debtors have the burden of
establishing the rationale and fairness of a discriminatory treatment of unsecured claims.”) (citing
In re Furlow, 70 B.R. 973, 977 (Bankr.E.D.Pa. 1987) (remaining citation omitted)). Debtor and
LLMA assert that the fact that the debt to LLMA is non-dischargeable in her Chapter 13
proceeding serves as adequate justification for separate treatment of the restitution claim. The
non-dischargeable nature of a debt is, in fact, insufficient justification on its own for separate
classification and discriminatory treatment under a Chapter 13 plan. See, e.g., In re Ponce, 218
B.R. 571, 575 (Bankr.E.D.Wash. 1998)(holding that debtor cannot base discriminatory
classification on non-dischargeable nature of the debt, and concluding that debtor's separate
classification of non-dischargeable criminal traffic fines unfairly discriminated); Williams, 231
B.R. at 282 ("The non-dischargeability of a debt alone is not sufficient justification to treat a debt
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more favorably than other unsecured claims, at least during the initial 36 months of a plan.")
(citations omitted); In re Mason, 300 B.R. 379, 385 (Bankr.D.Kan. 2003) (non-dischargeable
nature of claim is not by itself, a legitimate debtor interest sufficient to justify preferential
treatment of student loan); In re Willis, 197 B.R. 912 (N.D.Okla. 1996) (absent some other
justification for discriminatory treatment, non-dischargeable status of student loans insufficient
basis for separate, more favorable treatment of student loans over other general unsecured
claims).
Debtor cites In re Riggel, 142 B.R. 199 (Bankr.S.D.Ohio 1992) for the proposition that
the exception from discharge of restitution included as part of a criminal sentence under 11
U.S.C. § 1328(a)(3) serves as a rational basis for separate classification of a restitution debt
under § 1322(b)(1). The statement in Riggel that "[a] debtor must show obligations under a
restitution order, as contemplated under 11 U.S.C. § 1328(a)(3), before a reasonable basis arises
for favorable treatment of claims arising from returned checks" was only dicta, inasmuch as there
was no evidence before the court that the claim for debts arising from returned checks was an
obligation under a restitution order issued as part of a sentence for a criminal conviction. 142
B.R. at 204. See also, Williams, 231 B.R. at 282 n.1 (noting that the suggestion in Riggel that a
"'criminal action or conviction' may support a plan which discriminates in favor of the unsecured
restitution creditor . . . was only dicta which was not further explained.").
Most courts that have considered a debtor's proposed separate classification and preferred
treatment of a restitution claim have concluded that such separate classification unfairly
discriminates. See, e.g., Williams, 231 B.R. 280 (plan proposing to pay restitution claim in full
while paying other unsecured creditors 5% on their claims was unfairly discriminatory and could
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not be confirmed); Limbaugh, 194 B.R. at 491 (plan proposing payment of restitution claim in
full while other general unsecured creditors were paid 0% unfairly discriminated against general
unsecured creditors); In re Bowles, 48 B.R. 502, 507 (Bankr.Va. 1985) (plan proposing payment
of restitution claim arising from criminal proceedings in full while other general unsecured
creditors are paid 20% of their allowed claims unfairly discriminated). 	The fact that a debtor
might face incarceration for failing to comply with an order for restitution generally does not
serve as sufficient additional justification for separate classification and preferential treatment of
such claim. See Williams, 231 B.R. at 282 (discussing Ponce, 218 B.R. at 575 and Limbaugh,
194 B.R. at 491-493). 	Incarceration may very well result in a debtor's inability to make any
payments under a Chapter 13 plan. 	However, as the court in Bowles reasoned, by allowing a
debtor to separately classify and prefer a claim for restitution over other general unsecured
creditors forces the general unsecured creditors "to suffer the consequences of the debtors' own
misdeeds . . . " 48 B.R. at 508. Similarly, the court in Limbaugh reasoned:
By allowing debtors to separately classify the restitution debt this court would reduce the
impact of criminal sanctions imposed by the state court by requiring debtors' innocent
unsecured creditors to subsidize [the debtor's] criminal sanctions.
194 B.R. at 493.
In this case, Debtor's proposal to pay the restitution claim directly in accordance with the
terms of the Judgment and Suspended Sentence unfairly discriminates. The Chapter 13 Trustee
points out that LLMA has failed to file a proof of claim; consequently, LLMA is not entitled to
any distribution under the Chapter 13 Plan. See Rule 3002(a), Fed.R.Bankr.P.; In re Van
Hierden, 87 B.R. 563, 564 (Bankr.E.D.Wis. 1988) (unsecured creditor must file proof of claim in
order to recover from the bankruptcy estate, even if the debtor makes a provision for such
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4As discussed by the court in Williams, some courts have indicated that confirmation of a
plan which proposes to separately classify a claim for restitution might be possible provided that
"the discrimination is the minimum necessary to complete the plan." 231 B.R. at 283 (citing
Bowles, 48 B.R. at 509 and In re Games, 213 B.R. 773 (Bankr.E.D.Wash. 1997)). This might be
accomplished where a plan pays all unsecured creditors pro-rata for the first thirty-six months,
with the restitution creditor to be paid in full after that time, or where the plan is extended to five
years in order for the restitution claim to be paid in full while other unsecured creditors still
receive a meaningful payment. Id. (discussing Games, 213 B.R. at 779-180 and Limbaugh, 194
B.R. at 495).
8
creditor in his or her plan of reorganization) (citation omitted). 	Under Debtor's proposed plan,
LLMA will continue to receive the regular payments under the restitution order, while other
general unsecured creditors will only receive a pro-rata share from Debtor's plan payments.
Because this arrangement will result in general unsecured creditors bearing the cost of Debtor's
criminal restitution, and because LLMA failed to file a proof of claim, the Court finds that the
separate classification and treatment of LLMA under Debtor's proposed plan unfairly
discriminates.4
Debtor asserts that because the debt to LLMA could have been discharged in Chapter 7,
by filing Chapter 13 where such debt is not dischargeable, she has shown that her plan has been
filed in good faith. 	Good faith is one of the factors courts have considered in determining
whether a separate classification unfairly discriminates. See, e.g., Leser, 939 F.2d at 672 (third
factor); Williams, 231 B.R. at 282 (noting that the good faith requirement under 11 U.S.C. §
1325(a)(3) is coupled with the separate classification issue). Debtor's motivation for filing a
Chapter 13 proceeding may very well be sincere. Likewise, it is not unreasonable to conclude
that Debtor's proposal to continue paying the restitution according to the requirements of the
Judgment and Suspended Sentence was proposed in good faith. However, the Debtor's good
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5The hearing was held June 14, 2005, though the Judgment and Suspended Sentence was
entered on July 21, 2005. See Exhibit B to LLMA Memorandum.
9
faith fails to mitigate the fact that by paying the restitution debt as proposed unfairly
discriminates against other unsecured creditors and, in effect, shifts the burden of Debtor's
restitution payments onto her other general unsecured creditors.
In supporting the Debtor's plan for direct payment of the court-ordered restitution, LLMA
argues that restitution imposed as a condition to probation is not a debt, so that it is appropriate
for the Debtor to continue to paying restitution according to the terms of the Judgment and
Suspended Sentence. 	Under New Mexico law “[a] condition of restitution by a court placing a
defendant on probation creates neither a debt nor a debtor-creditor relationship between the
persons making and receiving restitution.” State v. Lack, 98 N.M. 500, 506, 650 P.2d 22, 28 (Ct.
App. 1982); State v. Steele, 100 N.M. 492, 493, 672 P.2d 665, 666 (Ct.App. 1983). LLMA also
points out that at the time the Judgment and Suspended Sentence was issued5
, LLMA had no
right to enforce the order of restitution. See N.M.S.A. 1978 § 31-17-1(D) (2005 Cum.
Supp.)(amending subsection D, effective June 17, 2005, to provide that an order requiring
payment of restitution is a judgment and lien which may be recorded and enforced by the victim
entitled under the order to receive restitution). However, for purposes of bankruptcy, restitution
constitutes a “debt” within the meaning of 11 U.S.C. § 101(12). ("'debt' means liability on a
claim."); Pennsylvania Public Welfare Dept. v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126,
109 L.Ed.2d 588 (1990) (superceded by statute, 11 U.S.C. § 1328(a)(3), making debts for
restitution non-dischargeable in a chapter 13 proceeding, but rejecting petitioner's argument that
restitution is not a “right to payment” because neither the probation department nor the victim
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10
stands in a traditional debtor-creditor relationship with the criminal, and holding that restitution
obligations are “debts” within the meaning of the Bankruptcy Code).
Finally, LLMA asserts that because the restitution is part of a criminal proceeding, public
policy dictates that the Bankruptcy Court not interfere, and that the Office of Parole and
Probation provides sufficient oversight for such payments. 	By finding that the Debtor's
treatment of the restitution debt unfairly discriminates, the Court is not interfering with the
ongoing criminal jurisdiction of the state court. Cf. In re Cuevas, 205 B.R. 457 (Bankr.D.N.J.
1997) (incarceration of debtor due to non-payment of pre-petition traffic fines was continuation
of criminal proceeding and was not subject to the automatic stay).
Based on the foregoing, the Court concludes that Debtor's plan unfairly discriminates
against general unsecured creditors and cannot be confirmed. 	This opinion constitutes the
Court's findings of fact and conclusions of law issued pursuant to Rule 7052, Fed.R.Bankr.P. An
order will be entered accordingly.
_________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
I certify that on the date shown on the attached document verification, a true and correct copy of
the foregoing was either electronically transmitted, faxed, delivered or mailed to the listed
counsel and/or parties.
Steven E. Sessions 	James C. Jacobsen
Attorney for Debtor 	Attorney for New Mexico Taxation and Revenue
122 10th Street NW 	111 Lomas Blvd. NW, Suite 300
Albuquerque, NM 87102 	Albuquerque, NM 87102
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Kelley L. Skehen 	Allan L. Wainwright
Chapter 13 Trustee 	Attorney for Ford Motor Credit
625 Silver SW, Suite 350 	920 Lomas NW
Albuquerque, NM 87102 	Albuquerque, NM 87102
Laurence P. Guggino, Jr. 	Office of the United States Trustee
Attorney for LLMA 	PO Box 608
PO Box 2430 	Albuquerque, NM 87103
Los Lunas, NM 87031
___________________________
Patti G. Hennessy
Law Clerk (505) 348-2545
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