Opinion
Bankruptcy No. 04-12973DWS.
October 22, 2004
MEMORANDUM OPINION
Before the Court is the Objection of Aetna US Healthcare ("Aetna") to Confirmation of Chapter 13 Plan (the "Objection"). After an evidentiary hearing and review of the submitted briefs, I conclude that the Objection must be sustained for the reasons set forth below. The Debtor shall file an amended plan consistent with this Memorandum Opinion.
BACKGROUND
Aetna is the holder of an unsecured claim by reason of a judgment entered in the United States District Court for the District of New Jersey in the amount of approximately $70,000. Schedule F. The judgment arises from sanctions awarded to Aetna under 28 U.S.C. § 1927 in connection with Debtor's conduct as an attorney in Veneziano v. Long Island Pipe Fabrication Supply Corp. The basis for the Court's award is documented at 238 F.Supp. 2d 683 (D.N.J. 2002).
While a court may not take judicial notice sua sponte of facts contained in the debtor's file that are disputed, In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942), it may take judicial notice of adjudicative facts "not subject to reasonable dispute . . . [and] so long as it is not unfair to a party to do so and does not undermine the trial court's factfinding authority." In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir. 1995) ( citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules). Moreover, "factual assertions in pleadings, which have not been superceded by amended pleadings, are judicial admissions against the party that made them. Larson v. Gross Bank. 204 B.R. 500, 502 (W.D. Tex. 1996) (statements in schedules). See also In re Musgrove, 187 B.R. 808 (Bankr. N.D. Ga. 1995) (same); In re Leonard, 151 B.R. 639 (Bankr. N.D.N.Y. 1992) (same).
On March 1, 2004 Debtor filed the instant Chapter 13 case which seeks to discharge the Aetna claim and approximately $34,000 of additional claims through performance of a Chapter 13 plan. The Chapter 13 plan filed with the Debtor's petition provided for payment of $76.00 monthly to the Chapter 13 trustee for 36 months. Debtor is employed as a carrier for the United States Post Office and part-time attorney earning monthly net income of $2,034.00 from the former and $231 from the latter. Schedule I. Her monthly expenses, including rent of $925 and business costs of $27.00, total $2,190. Schedule J.
On August 5, 2004 the Chapter 13 trustee filed a motion to dismiss the Chapter 13 case on the grounds that the Debtor had not committed all her disposable income to the plan. On August 9, 2004 Debtor filed an amended plan (the "Plan") that increased the term of the plan to sixty months but continued monthly payment at $76.00. The Chapter 13 trustee has no objection to confirmation at this juncture.
Aetna contends that the Plan is not confirmable because it has not been proposed in good faith and does not commit all of the Debtor's disposable income over the next three year period toward plan payments. Debtor testified in opposition to both these contentions. DISCUSSION
Section 1325(b)(1) provides that the court may not approve a Chapter 13 plan unless the unsecured claims are paid in full or the plan provides that all of the debtor's projected disposable income over three years will be applied to make payments under the plan. 11 U.S.C. § 1325(b)(1). It is undisputed that creditors will not receive payment in full in this case. Thus, I must find that debtor is committing all of her projected disposable income over three years in order to confirm the Plan.
The total plan funding is $4,560 and unsecured claims are in excess of $100,000 without regard to the trustee's commission, debtor's attorney fee and the tax claim included in the Plan.
Aetna argues that Debtor's earnings have been managed to allow her to confirm a plan that fixes her repayment obligation below the level she can realistically attain to the prejudice of her creditors. Whether deliberate or not, I am persuaded that this plan does not represent her best effort. Debtor is an attorney and practices part-time although she is essentially winding down her practice. The record is silent as to why she no longer practices full-time but rather has taken a job as a part-time mail carrier. While she explained that her lack of seniority with the Post Office has limited her ability to secure a full-time job there, she acknowledged that she will eventually gain such a position with the attendant increase in pay and benefits. She was vague as to when that might happen. She also stated that she continued to look for full-time employment although again her testimony was sketchy on the details of her search.
Debtor's last high earning year was 1998 when she earned $102,277 in business income from her private law practice and over $2,000 in investment income. Exhibit D-3. In 1999 her business income plummeted to less than $2,000 and she appeared to live off of the proceeds of her investments. Exhibit D-4. There is no evidence about calendar year 2000 but apparently she did not become a postal worker until 2001. She indicated that she would not be practicing law again although it is not clear why. Nor is it clear why a person of Debtor's education and intelligence cannot secure full-time employment.
I agree with Aetna that Debtor's objective in this case is to pay the absolute minimum amount that she is compelled to pay. That was evidenced when she proffered a 36 month plan which was only extended to 60 months when the Trustee objected. While it is clear that Debtor is paying all her disposable income now to the Trustee, Aetna argues that she is not paying all her projected disposable income for the first three years of the plan.
Given the insubstantial record made, the resolution of the Objection will depend on the applicable burden of proof. Unlike objections based on § 1325(a) which governs mandatory requirements of confirmation, a § 1325(b) objection stands on another footing. As my colleague Bankruptcy Judge Bruce I. Fox reasoned in In re Fries, 68 B.R. 676 (Bankr. E.D. Pa. 1986), a case cited by Aetna:
By comparison, the requirements of subsection (b) are not mandatory; a plan can be confirmed which does not comply with subsection (b). The requirements of this subsection apply only when an unsecured creditor files an objection to the plan; it is the objection that puts the disposable income test before the court. . . .
More significantly, this critical distinction between subsections (a) and (b) leads me to conclude that Congress did not intend to allow creditors, by doing no more than filing an objection under section 1325(b), to prevail on an objection to confirmation. Even assuming arguendo that the debtor has the burden of proof on confirmation on section 1325(a) objections, had Congress intended to similarly place the burden on the debtor under subsection (b), it would not have permitted confirmation of plans which do not comply with subsection (b) in the absence of objection; it would simply have added the disposable income test as an additional requirement under section 1325(a)(1)-(6). Therefore, I hold that the objecting creditor has the initial burden of producing satisfactory evidence to support the contention that the debtor is not applying all of his disposable income for three years to the chapter 13 plan. [citations omitted]
I also hold that once the creditor has met its initial burden under section 1325(b)(1), the ultimate burden of persuasion rests with the debtor. Assigning the ultimate burden of persuasion to the debtor makes policy sense. Detailed knowledge of income and expenses is peculiarly within the debtor's possession. Once a creditor has met its initial burden of going forward, it is fair to require the debtor to come forward with evidence that all disposable income is being submitted toward plan payments. While the objecting creditor certainly has at its disposal an adequate arsenal of discovery tools to ferret out the facts, see Bankr. Rules 9014, 7026, 7028-37, it may often be economically infeasible for an unsecured creditor to put the necessary resources into such a case, particularly since the result may only be a modest percentage increase in the fund to be divided pro rata among all holders of unsecured claims. For these reasons, it is fair, once the creditor has met its burden of going forward, to place the ultimate burden of proof on the debtor.
Id. at 684-85.
Aetna contends that it has met its burden of going forward. I agree. Through Debtor's testimony and tax return, it has established that Debtor is an attorney with a earning capacity proven by past income. While she does not expect to return to the practice of law full-time, she still does some legal work and apparently there is no impediment to her continuing to do so. Aetna has also shown that Debtor has worked part-time since 2001 and elicited her concession that she expects to secure full-time employment with the Post Office at some point during the life of her Chapter 13 plan. The inexorable consequence of that event will be an increase in income and a decrease in medical insurance expense. This record was sufficient to shift the burden to Debtor to establish that she would be unable to commit more than $76 monthly to the Chapter 13 trustee for the first three years of her plan, i.e., until March 1, 2007.
Debtor also provides a home to her 25 year old college son who pays "most of his expenses." Answer to Objection at ¶ 13. Presumably these additional costs (e.g., utilities) would reduce in the near future as well.
A review of Debtor's testimony falls short of meeting that burden. She provided no specifics as to why she was unable to find full-time employment, or why she ceased practicing law or has not sought a law-related job for which she is trained. Her statement that she had applications for other jobs at many places was unsupported and vague. While she credibly testified why she was a part-time, non-career postal worker, it is not clear why she has accepted that limitation on her earning power since 2001. Rather her testimony that she expected to secure full-time employment as a postal worker undermines her position that this Plan is the best she can do.
Because I find that this Chapter 13 plan cannot be confirmed on this record by reason of the § 1325(b)(1) objection, it would appear that I need not address the other basis of Aetna's claim,i.e., that the plan is not filed in good faith. However, as Aetna contends Debtor's Plan is otherwise filed in bad faith, there would be no utility to allowing an amendment to cure the funding deficiency if Aetna is correct in that contention.
Accordingly, I turn now to the question of whether the plan has been proposed in bad faith. In support of this prong of the Objection, Aetna essentially proffers the same evidence of insufficient plan funding that has supported the § 1325(b)(1) objection. The basic difference between the § 1325(b)(1) objection and the bad faith objection is Aetna's argument that Debtor's choice to file a Chapter 13 case is grounded on her wish to secure a discharge without dischargeability litigation which would follow had she filed a case under Chapter 7. As Aetna believes that its sanctions judgment would not be dischargeable under § 523(a)(6), a Chapter 13 case with its broader discharge seemingly avoids that complication. This motive, Aetna argues, is indicative that this case is not a good faith filing. However, as Aetna conceded, the Third Circuit Court of Appeals has concluded that a plan that seeks to discharge a non-dischargeable debt, as Aetna assumes its debt would be, is not unconfirmable as a plan filed in bad faith filing. In re Lilley, 91 F.3d 491 (3d Cir. 1996).
It also questions some of the Debtor's Schedules. I am not persuaded that there is an inaccuracy in the reporting of her income from her legal practice. She indicated that the revenue is from some prior services for which fees were still being collected. Rather than having a steady income of $231 per month as scheduled, that figure represents fees that she has reported by dividing the income by twelve months. She was not questioned about the expenses.
Contrary to Aetna's argument, I find no abuse of the provisions of the Bankruptcy Code so as to establish bad faith. The Aetna judgment was secured in 2002, some years after Debtor ceased enjoying a large income. There is no proven connection between the Debtor's current limited financial resources and the entry of that judgment. Moreover, Debtor has debts other than the Aetna judgment and bankruptcy relief is appropriate to address all these obligations. Thus, there is no impediment to Debtor successfully reorganizing provided she commits her projected disposable income, and I will therefore allow Debtor an opportunity to amend her Plan consistent with this ruling.
An Order consistent with this Memorandum Opinion shall be entered.
ORDER
AND NOW, this 22nd day of October 2004, upon consideration of the Objection of Aetna US Healthcare to Confirmation of Debtor's Chapter 13 Plan (the "Objection"), after notice and evidentiary hearing, review of the submitted briefs, and for the reasons stated in the foregoing Memorandum Opinion;
It is hereby ORDERED that:
1. The Objection is SUSTAINED.
2. Confirmation of the Debtor's Amended Plan dated August 9, 2004 is DENIED, provided, however, that Debtor shall file a further amended plan consistent with the foregoing Memorandum Opinion on or before November 10, 2004. A hearing to consider confirmation of such plan shall be held on December 9, 2004 at 10:30 a.m. in the Robert N.C. Nix, Sr. Federal Courthouse, 2nd floor, 900 Market Street, Courtroom #3, Philadelphia, PA.