Opinion
Case No. 11-27847-B-13 DC No. JHH-6 DC No. JPJ-2
08-15-2016
In re: TIMOTHY MANSOURI and LYDIA MANSOURI, Debtor(s).
ORDER GRANTING MOTION FOR HARDSHIP DISCHARGE AND DENYING MOTION TO DISMISS
Introduction
There are two motions before the court. The first, filed by chapter 13 debtors Timothy Mansouri and Lydia Mansouri, is a motion for hardship discharge pursuant to 11 U.S.C. § 1328(b). The second, filed by the chapter 13 trustee, is a motion to dismiss pursuant to §§ 1325(b)(4) and 1307(c)(1) based on the debtors' failure to conclude a plan within 60 months and failure to timely reconcile payment of estimated and actual unsecured claims, respectively. Both motions were heard on August 2, 2016. The hearing on both motions was continued to August 16, 2016, for purposes of the court's decision.
This order constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a) made applicable by Federal Rules of Bankruptcy Procedure 7052 and 9014. For the reasons explained below, the debtors' motion for a hardship discharge will be granted and the trustee's motion to dismiss will be denied as moot. Background
The debtors filed a chapter 13 petition on March 30, 2011. The debtors filed a chapter 13 plan with their petition. The debtors' initial plan estimated unsecured claims at $124,824.37 and proposed to pay 0% to unsecured creditors.
On May 3, 2011, FIA Card Services filed a $26,725.23 unsecured proof of claim. The FIA claim was not included in the Schedules. The debtors omitted the FIA claim from the Schedules because they believed the claim was settled in 2009 when it was held by Bank of America. Thus, the debtors believed the FIA claim was no longer enforceable against them in March of 2011.
The debtors filed a first amended plan and motion to confirm it on June 3, 2011. The first amended plan estimated unsecured claims at $76,175.97. It also obligated the debtors to pay 100% of unsecured claims. However, when the first amended plan was filed in June of 2011, according to the claims register, unsecured claims totaled approximately $113,364.10 and not $76,175.97. The former amount included the $26,725.23 FIA claim filed earlier in May of 2011.
The first amended plan was ordered confirmed on July 21, 2011. The confirmation order was entered on August 12, 2011. There were no objections to confirmation of the debtors' first amended plan.
Almost a year later, on April 18, 2012, the trustee filed a notice of claims filed. According to that notice, there were $108,542.97 in unsecured claims. That amount included the $26,725.23 FIA claim.
Debtors, through their attorney, timely objected to the FIA claim on June 16, 2012. However, because the debtors were unable to produce sufficient evidence to prove that the FIA claim was no longer enforceable, in an order filed on August 3, 2012, the court overruled the debtors' objection without prejudice.
For the next 3½ years, the debtors paid their disposable monthly income into the first amended plan. They also made the plan payments the first amended plan required them to make. On the other hand, during that same year period, the debtors' attorney did nothing to reconcile the difference between actual and estimated unsecured claims. With the objection to the FIA claim overruled, and aware of the amount unsecured claims stated in the trustee's earlier notice, the debtors' attorney knew or should have known that the debtors' plan payments premised on the payment of estimated unsecured claims in the first amended plan were insufficient to pay 100% of actual unsecured claims.
It was not until March 24, 2016, that the debtors' attorney finally filed a motion to reduce the amount and percentage paid to unsecured creditors. In other words, in March of 2016 the debtors' attorney filed the motion which should have been filed immediately after the objection to the FIA claim was overruled in August of 2012. However, because the debtors made their last plan payment on March 22, 2016, under § 1329(a), the motion to modify was untimely and was denied with prejudice.
As it now stands, the debtors have completed plan payments for a 60-month plan term under the first amended plan. However, those payments did not pay 100% of unsecured claims as the first amended plan required. Whereas actual unsecured claims total $108,542.97, the debtors report that the trustee has distributed only the estimated unsecured claim total of $76,175.97. That means the debtors are $32,367 - or approximately 30% - short in the payment of unsecured claim. Put another way, the debtors have paid only about 70% of unsecured claim whereas the first amended plan obligated them to pay 100% of those claims. Discussion
Section 1328(b) of the Bankruptcy Code provides for the so-called "hardship" discharge. It permits the court to grant a discharge to a debtor who has not completed payments if certain requirements are met. The section states as follows:
Subject to subsection (d), at any time after the confirmation of the plan and after notice and a hearing, the court may grant a discharge to a debtor that has not completed payments under the plan only if—11 U.S.C. § 1328(b).
(1) the debtor's failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable;
(2) the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title on such date; and
(3) modification of the plan under section 1329 of this title is not practicable.
The debtor bears the burden of proof on all elements of § 1328(b). In re Harrison, 1999 WL 33114273 *1 (Bankr. E.D. Va. 1999). The grant or denial of a request for a hardship discharge is within the discretion of the bankruptcy court. Bandilli v. Bovaiian (In re Bandilli), 231 B.R. 836, 838 (1st Cir. BAP 1999).
Upon review of the evidence presented, the court is satisfied that a hardship discharge is appropriate under the facts and circumstances of this case. The court also concludes there is no reasonable cause to believe that § 522(q)(1) may be applicable to the debtors and also there also is no reasonable cause to believe there is a pending proceeding that would render the debtor subject to § 522(q)(1)(A) or (B). Therefore, the court will exercise its discretion and order that the debtors receive a hardship discharge.
Section 1328(b)(1) is satisfied. The debtors made all of the plan payments they were required to make under the first amended plan. The debtors were unable to increase plan payments during the plan term to account for the difference between estimated and actual unsecured claims and pay 100% of the latter because any additional income they could have earned would have been offset by additional childcare expenses incurred to earn the additional income. The debtors' attorney, on the other hand, has offered no explanation for his great disservice to the debtors during that same 3½-year period. Knowing after August of 2012 that actual unsecured claims exceeded the unsecured claims estimated in the first amended plan, the docket reflects absolutely no effort by the debtors' attorney between August of 2012 and March of 2016 to reconcile the difference or reduce the amount and percentage paid to unsecured creditors. When the debtors' attorney finally attempted to modify the plan to reduce the amount and percentage paid to unsecured creditors, he was 2 days late. See 11 U.S.C. § 1329(a). Inasmuch as the debtors' failure to complete plan payments under the first amended plan by paying 100% of unsecured claims is attributable to the carelessness and neglect of their attorney, those are circumstances for which the debtors should not justly be held accountable.
Doing nothing to address the problem during this 3½-year period means the motion to modify and the hardship discharge motion are not unanticipated. See LBR 2016-1(c)(3). Moreover, it is not reasonable to award compensation for post-confirmation work under these circumstances. See 11 U.S.C. § 330(a)(1)(A). --------
Section 1328(b)(2) is also satisfied. Whereas the first amended plan requires the debtors to pay 100% of unsecured claims, the debtors have paid approximately 70% to unsecured creditors. That percentage is greater than the 0% unsecured creditors would have received in the debtors' chapter 7 case. Therefore, the value distributed under the first amended plan is significantly greater than the chapter 7 liquidation value.
Section 1328(b)(3) is likewise satisfied. The debtors made their last plan payment on March 22, 2016, which means after that date further plan modifications are not possible. See 11 U.S.C. § 1329(a). Although a motion to modify the first amended plan to reduce the amount and percentage paid to unsecured creditors was filed on March 24, 2016, it was denied with prejudice because it was 2 days late. See 11 U.S.C. § 1329(a).
Therefore, based on the foregoing;
IT IS ORDERED that the debtors' motion is GRANTED as follows:
(1) The debtors shall be granted a discharge under 11 U.S.C. § 1328(b).
(2) The debtors shall be discharged from all unsecured debts provided for by the first amended plan or disallowed under 11 U.S.C. § 502, except any debt provided for under 11 U.S.C. § 1322(b)(5), or of a kind specified in 11 U.S.C. § 523(a).
(3) Within seven days of entry of this order, the debtors' attorney shall (a) serve both this order and a notice on all creditors and parties in interest in the manner provided in Federal Rule of Bankruptcy Procedure 2002 and (b) file a certificate of service that service has been effected.
(4) As stated in Federal Rule of Bankruptcy Procedure 4007(d), subject to any further appropriate extensions, creditors and parties in interest shall have thirty (30) days from the date of service of this order and the above-referenced notice to file a complaint to determine the dischargeability of any debt under 11 U.S.C. § 523(a)(6).
IT IS FURTHER ORDERED that the trustee's motion to dismiss is DENIED as moot.
IT IS FURTHER ORDERED that the continued hearing on August 16, 2016, at 1:00 p.m. is VACATED.
Dated: August 15, 2016.
/s/_________
UNITED STATES BANKRUPTCY JUDGE
INSTRUCTIONS TO CLERK OF COURT
SERVICE LIST
The Clerk of Court is instructed to send the attached document, via the BNC, to the following parties: Judson H. Henry
5150 Sunrise Boulevard, Suite H-6
Fair Oaks CA 95628 Jan P. Johnson
PO Box 1708
Sacramento CA 95812