Opinion
Case No. 95-13007-AM
December 20, 1995
Joseph Goldberg, Esquire, Washington, DC, Of Counsel for the debtor
Gerald M. O'Donnell, Esquire, Alexandria, VA, for chapter 13 trustee
Bennett Brown, Esquire, Fairfax, VA, Of Counsel for Brian Lattimer and Dale Hamburg
Alan Rosenblum, Esquire, Alexandria, VA, Of Counsel for John and Teresa A. Kearney
MEMORANDUM OPINION
A hearing was held on December 12, 1995, on the objections filed by the chapter 13 trustee and by Brian Lattimer and Dale Hamburg to confirmation of the debtor's amended chapter 13 plan filed October 31, 1995. In addition, the chapter 13 trustee has moved to dismiss the case. For the reasons set forth in this memorandum opinion, confirmation will be denied, and the case will be dismissed.
Although they did not file formal objections, John and Teresa A. Kearney appeared by counsel at the hearing and also opposed confirmation.
Facts
The factual background is fully set forth in the court's prior memorandum opinion dated October 26, 1995, denying confirmation of the debtor's prior plan, and will not be repeated. Subsequent to the entry of the order denying confirmation of that plan, the debtor filed an amended chapter 13 plan on October 31, 1995. The amended plan proposed to pay an "average" of $700.00 per month for 60 months into the plan, for a total of $42,000.00, and in addition provided that the debtor would pay into the plan "any excess of increase in Net Disposable Income" during the 60-month plan term. The resulting projected dividend to unsecured creditors would be 30%. This is a modest increase from the prior plan, which proposed payments of $625.00 per month for 60 months, or an aggregate of $37,500.00, and a 22% dividend to unsecured creditors. No testimony or evidence was presented to show that the debtor had the ability to make the increased payments. Indeed, the debtor's budget attached to the amended plan continues to reflect net monthly income of $3,166 per month and monthly expenses of $2,543, leaving only $623 per month with which to fund her plan.
The actual proposed payment schedule is as follows:
Months 1-12 $650.00 per month Months 13-24 $675.00 per month Months 25-36 $700.00 per month Months 37-48 $725.00 per month Months 49-60 $750.00 per month
Discussion
The issue, as with the prior plan, is whether the amended plan complies with § 1325(a)(3), Bankruptcy Code, which conditions confirmation on a finding that "the plan has been proposed in good faith and not by any means forbidden by law." As discussed at length in the prior memorandum opinion, the Fourth Circuit has required an examination of "the totality of circumstances . . . on a case by case basis." Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982). Relevant to the present case, among the factors to be considered is whether "a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims." Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986). As noted in the prior memorandum opinion, two of the three unsecured claims (constituting 89% of the total) that the debtor is attempting to compromise in her plan were adjudged to be non-dischargeable in her prior chapter 7 case as based on false representations.
The court observed in its prior memorandum opinion, which discussed in detail the application of the Deans and Neufeld factors, that the issue of good faith was close. The debtor has responded by proposing a slight increase in plan payments that in turn would increase the payout on unsecured claims, including the two claims adjudged non-dischargeable in the debtor's chapter 7 case, from 22% to 30%. The chapter 13 trustee argues that the increase is minimal and that the amended plan is no more proposed in good faith than the prior plan. The debtor, in response, cites to a number of cases, each of which involved substantial amounts of nondischargeable debt, where this court and other courts have confirmed chapter 13 plans proposing much smaller dividends than the debtor has agreed to pay here. In re Harlan, 179 B.R. 133 (Bankr. W.D. Ark. 1995) (14%); In re Short, 176 B.R. 886 (Bankr. S.D. Ind. 1995) (20%); In re McAloon, 44 B.R. 831 (Bankr. E.D. Va. 1984) (Shelley, J.) (25%); In re Kazzaz, 62 B.R. 308 (Bankr. E.D. Va. 1986) (Shelley, J.) (16%).
However, the percentage payout, although important, is by no means the sole or controlling consideration; it is only one of many that must be considered. In Harlan, for example, the court specifically found as a fact that the chapter 13 filing was motivated by a subsequent intervening event (an IRS levy on her bank account) and not as a response by the debtor to collection activity by a creditor who held a claim that was determined to be nondischargeable in her prior chapter 7 case as resulting from embezzlement. 179 B.R. at 140. This court, in In re Oliver, 186 B.R. 403 (Bankr. E.D. Va. 1995) (Tice, J.), denied confirmation of a 60-month, 17% chapter 13 plan based on lack of good faith where, among other factors, 80% of the scheduled debt had been determined non-dischargeable in a prior chapter 7 case and the evidence demonstrated the debtor filed his chapter 13 petition because the objecting creditor "was attempting to collect a judgment which had previously been declared nondischargeable" and that the debtor had "made no effort to repay his unsecured creditors in between his previous discharge and the filing of this petition." 186 B.R. at 405-406. In the present case, there is no evidence that the chapter 13 filing was motivated by any consideration other than enforcement efforts related to the debts adjudged nondischargeable in the debtor's prior chapter 7 case.
Moreover, even if the court were inclined to accept that the $75.00 per month increase in the debtor's "average" plan payments tipped the balance in favor of confirmation, there is simply no evidence in the record to suggest that the debtor actually has the ability to make the higher payments. As noted above, the debtor (who did testify at the prior confirmation hearing) did not testify at the hearing on the objection to the amended chapter 13 plan. Her budget reflects only $623.00 per month available after payment of monthly living expenses. While the debtor earned substantially more in the heyday of real estate activity in Northern Virginia, her income dropped precipitously with the ensuing slump in the real estate market and does not appear at the present time to be increasing. In short, it appears that the amount of the monthly plan payment has been proposed simply to achieve, on paper, what the debtor hoped this court might accept as a more-than-minimal dividend, without any corresponding ability to perform. While this goes more directly to the feasibility requirement of § 1325(a)(6) — which requires the court to find that "the debtor will be able to make all payments under the plan and to comply with the plan" — than to lack of good faith, inability to perform is also some evidence of lack of good faith where the circumstances suggest the debtor is merely attempting to delay creditors and hold them at bay.
The chapter 13 trustee, in addition to opposing confirmation, has moved to dismiss the debtor's case under § 1307(b)(1), Bankruptcy Code, which permits a court to convert a case to chapter 7 or to dismiss it, whichever is in the best interest of creditors, for, among other reasons, "unreasonable delay by the debtor that is prejudicial to creditors." The debtor filed her chapter 13 petition on July 10, 1995. Neither of the debtor's two proposed chapter 13 plans has been confirmed, and it does not appear that the debtor is in a position to propose a confirmable plan. Chapter 13 envisions prompt confirmation of a repayment plan. In the present case, more than 5 months have elapsed since the debtor filed her petition, and confirmation appears less certain than ever. Allowing the debtor to continue in Chapter 13 would simply permit her to delay creditors further by proposing a succession of plans, each a slight variant of the prior, and each just as likely to founder on the shoals of § 1326(a)(3). Conversion to chapter 7 would serve no purpose, since there are only 3 claims, two of which were determined to be nondischargeable in the prior chapter 7 case; the debtor is not entitled to a discharge in any event; and it does not appear that there would be any non-exempt assets available to pay a dividend to creditors in the chapter 7 case. For these reasons, the best interest of creditors is better served by dismissal than by conversion.
"The court shall grant the debtor a discharge, unless — . . . (8) the debtor has been granted a discharge under this section . . . in a case commenced within six years before the filing of the petition." § 727(a), Bankruptcy Code. The debtor received a discharge in her prior chapter 7 case, which was filed on August 25, 1992.
A separate order will be entered denying confirmation and dismissing the debtor's case.