Opinion
Case No. 3:16-bk-3070-PMG
07-19-2017
In re: Clifton Doyle Morris, Debtor.
Chapter 13 ORDER ON CONFIRMATION OF SECOND AMENDED CHAPTER 13 PLAN, AND OBJECTION TO CONFIRMATION BY CHRISTY STEPHENS
THIS CASE came before the Court for hearing to consider confirmation of the Debtor's Second Amended Chapter 13 Plan, and also to consider the Objection to Confirmation filed by Christy Stephens. (Docs. 24, 33).
For a Chapter 13 plan to be confirmed under §1325(a) of the Bankruptcy Code, the Court must find that the debtor filed the plan and the bankruptcy petition in good faith. In determining a debtor's good faith, the ultimate question is whether the debtor abused the provisions, purpose, or spirit of the Bankruptcy Code.
In this case, the Court cannot find that the Debtor abused the purpose of the Bankruptcy Code, because the record indicates that he had a valid need for financial relief as of the petition date. In his Chapter 13 case, for example, the Debtor dealt with three claims related to his homestead property, a claim for past-due federal income taxes in the amount of $22,406.00, and general unsecured claims in an amount exceeding $79,000.00.
Under these circumstances, the Debtor's Second Amended Chapter 13 Plan may be confirmed as satisfying the good faith requirement of §1325(a), even though the Debtor's initial schedules omitted certain prepetition transfers and insider debts, and even though the petition was filed while Christy Stephens was seeking to enforce her equitable distribution claim.
Background
The Debtor served twenty-one years in the United States Navy, and currently is not employed. His income consists primarily of his pension or retirement benefit from the Navy.
The Debtor and Christy Stephens (Stephens) were married on April 27, 2013. On January 6, 2015, the Debtor filed a petition to dissolve the marriage in the Circuit Court for St. Johns County, Florida. (Stephens' Exhibit 14).
On May 5, 2016, the State Court entered a Final Judgment of Dissolution of Marriage. (Stephens' Exhibit 10). According to the Final Judgment, Stephens and the Debtor were both discharged of any claims for alimony or spousal support. With respect to equitable distribution, the Final Judgment provided an award to Stephens in the amount of $24,002.62, and ordered the Debtor to pay Stephens the lump sum amount of $24,002.62 within sixty days of the Judgment.
The Debtor did not pay the amount awarded to Stephens by July 5, 2016. On July 8, 2016, Stephens filed a Motion in the State Court for Civil Contempt and to enforce the equitable distribution award. (Stephens' Exhibit 14).
On August 12, 2016, the Debtor filed a petition under Chapter 13 of the Bankruptcy Code.
On January 27, 2017, the Debtor filed a Second Amended Chapter 13 Plan. (Doc. 33). Generally, the Plan provides for the Debtor to pay the Chapter 13 Trustee the sum of $976.52 per month for five months, and the sum of $1,090.49 per month for the following fifty-five months of the 60-month Plan, for total payments into the Plan of $64,859.55. From the Plan payments, the Chapter 13 Trustee would pay the claim of the Internal Revenue Service for past-due taxes, the claims of South Hampton Association, Inc. and Regions Bank related to the Debtor's homestead property, the claim of Wells Fargo for a financed hot tub that was sold prepetition, and an estimated dividend to unsecured creditors, including Stephens, in an amount that is "no less than $1,833.28."
The Chapter 13 Trustee initially objected to confirmation of the Debtor's Plan, but advised the Court at the confirmation hearing that the Debtor had resolved the Trustee's concerns.
Discussion
Stephens objects to confirmation of the Second Amended Plan. (Doc. 24). Generally, Stephens asserts that the Plan does not satisfy the requirements of §1325(a)(3) and §1325(a)(7) of the Bankruptcy Code because the Chapter 13 petition and Plan were not filed in good faith.
Section 1325(a) establishes nine requirements for confirmation of a Chapter 13 plan, including the good faith requirements of §1325(a)(3) and §1325(a)(7):
11 U.S.C. §1325. Confirmation of plan11 U.S.C. §1325(a)(3)(7). The issues surrounding a debtor's good faith under §1325(a) "are inherently factual questions, not capable of any bright-line test or formulation." In re Bradley, 567 B.R. 231, 236 (Bankr. D. Me. 2017).
(a) Except as provided in subsection (b), the court shall confirm a plan if—
. . .
(3) the plan has been proposed in good faith and not by any means forbidden by law;
. . .
(7) the action of the debtor in filing the petition was in good faith.
Generally, "good faith" is evaluated by applying a multi-factor approach. In the Eleventh Circuit, the factors to consider include the debtor's income and expenses, his motivation in filing the bankruptcy case, his sincerity in dealing with his creditors, and any special circumstances affecting his financial situation. In re Kitchens, 702 F.2d 885, 888 (11th Cir. 1983)(cited in Orcutt v. Crawford, 2011 WL 4382479, at 4 (M.D. Fla.)). In all cases, however, the "basic inquiry is whether, under the circumstances, the debtor has abused the provisions, purpose, or spirit of the Bankruptcy Code." In re Vick, 327 B.R. 477, 486 (Bankr. M.D. Fla. 2005)(citing In re Kitchens, 702 F.2d at 888-89).
A. Stephens' Objection
In this case, Stephens asserts that the Debtor's motivation in filing the bankruptcy petition was to avoid his obligation to her under the Final Judgment dissolving their marriage, and that his improper motive is evidenced by a number of inaccuracies in his bankruptcy schedules and statements. (Doc. 24).
The initial papers filed by the Debtor contained misstatements related to certain debts and prepetition transfers. According to Stephens, the misstatements include the following:
1. The Debtor listed Stephens as a creditor holding a priority claim in Schedule E of his original and first amended schedule of liabilities, and in his first Chapter 13 Plan. (Docs. 1, 4, 21). Stephens contends that the original schedules and Plan mischaracterized her claim as a priority claim, and filed a Proof of Claim as a nonpriority unsecured claim based on the equitable distribution award. (Claim No. 18).
The Debtor filed an Amended and Second Amended Chapter 13 Plan on January 27, 2017, and Stephens is treated in the Amended Plans as a general unsecured creditor. (Docs. 32, 22). Additionally, the Debtor filed a Second Amended Schedule of Liabilities on February 22, 2017, and listed Stephens as a creditor holding a nonpriority unsecured claim. (Doc. 38).
2. The Debtor omitted at least four friends or family members from his initial schedule of unsecured creditors. The omitted individuals had been included as
creditors on an Affidavit filed in the divorce case on January 6, 2016. (Doc. 1, Stephens' Exhibit 11).The Court has considered the inaccuracies in the Debtor's original schedules and statements, and cannot find that they evidence the Debtor's lack of good faith in filing the Chapter 13 petition or Plan.
On November 11, 2016, the Debtor filed an Amended Schedule of Liabilities, and added the friends and family members as unsecured creditors. (Doc. 21).
3. The Debtor omitted twelve transfers from his initial statement of financial affairs, in his response to a question asking for transfers within two years before the filing of the bankruptcy petition. (Doc. 1).
The Debtor added the transfers to his Amended Statement of Financial Affairs filed on November 11, 2016. (Doc. 21). Ten of the transfers related to items that were sold for $225.00 or less over the two-year look-back period. The other two transfers involve the sale of a hot tub for $7,000.00 in December of 2014, and the sale of a Harley motorcycle for $13,000.00 in February of 2015.
First, the Debtor filed amended schedules to correct the original misstatements. The willingness to file amended documents to rectify the initial inaccuracies is relevant in determining the Debtor's motivation and good faith. Orcutt v. Crawford, 2011 WL 4382479, at 5-6(The debtor "acknowledged the problems and corrected them. A refusal to correct the problems would have clearly signified bad faith.").
Second, and perhaps more importantly, none of the discrepancies show that the Debtor had the ability to pay Stephens' claim before he filed his Chapter 13 petition, but simply refused to do so. The sale of the hot tub and motorcycle, for example, took place at least fifteen months before the entry of the Final Judgment awarding Stephens the sum of $22,000.00, and at least eighteen months before the Debtor filed his Chapter 13 petition. The Debtor testified that he had used the money from the sales to pay bills, and there is no evidence that the Debtor retained any portion of the sale proceeds at the time that the equitable distribution award was made, or at the time that the bankruptcy petition was filed.
If the Debtor had possessed the sum of $22,000.00 but simply refused to pay Stephens' claim, of course, such a refusal might indicate an improper motive in filing the bankruptcy case. But the Debtor testified that he had no liquid assets with which to pay Stephens, and no evidence was presented to show that he had concealed any assets or that his initial misstatements affected his ability to pay his creditors.
B. Financial need
On the contrary, the record indicates that the Debtor had a valid need for financial relief as of the petition date. See In re Dunson, 550 B.R. 537, 549 (Bankr. D. Kan. 2016)(The debtor's petition and plan were filed in good faith under §1325(a), where it was clear that she needed financial relief.). In this case, the Debtor testified at trial that he filed the Chapter 13 petition for the primary purposes of saving his home and paying his federal income tax debt.
In fact, the record shows that the Debtor dealt with three claims related to his home during the course of his Chapter 13 case.
1. First, Ditech Financial LLC filed a secured claim for $202,676.74 based on a first mortgage on the home. (Claim No. 15). During the Chapter 13 case, the Debtor filed a Motion for Approval of Permanent Modification Agreement and to Deem Claim #15 Current. (Doc. 42). The Motion was granted on April 4, 2017. (Doc. 57).Accordingly, it appears that the Debtor faced significant secured debt on his home at the time that he filed his bankruptcy petition, and that he has used the provisions of Chapter 13 to manage and adjust the debt during his case.
2. Second, Regions Bank filed a Claim in the amount of $39,942.27 based on a home equity mortgage on the Debtor's home. (Claim No. 14). On October 19, 2016, the Debtor filed a Complaint against Regions Bank to value its collateral and strip its lien in the Chapter 13 case. (Adv. Pro. 3:16-ap-226). On January 30, 2017, the Court entered a Consent Judgment in the adversary proceeding, determining that Regions Bank "shall have a $15,000.00 secured claim and a $24,942.27 unsecured claim."
3. Third, South Hampton Association, Inc. filed a claim in the amount of $4,341.01 based on prepetition homeowners' association fees. (Claim No. 8). According to the claim, the fees were in default, and the unpaid fees had accrued since July 1, 2015. The Debtor's Second Amended Chapter 13 Plan proposes to pay the claim as a secured claim "to which section 506 valuation does not apply." (Doc. 33).
Additionally, the Debtor has dealt with his past-due federal income taxes during the course of the Chapter 13 case. The Internal Revenue Service filed a Proof of Claim in the amount of $22,406.33 for income taxes due for the 2013, 2014, and 2015 tax years. (Claim No. 3). In his Second Amended Chapter 13 Plan, the Debtor proposes to pay the Claim over the 60-month term of the Plan.
Further, the Debtor has also addressed a debt owed to Wells Fargo in his bankruptcy case. Wells Fargo filed a claim in the amount of $6,717.94 based on an "open-end revolving credit" account. (Claim No. 5). According to the claim, the debt is secured by items purchased from Jacuzzi of Jacksonville. The Debtor asserts that the hot tub was sold in December of 2014, without payment of the secured claim, and the Debtor's Statement of Financial Affairs discloses that Wells Fargo had filed a lawsuit against him in an action assigned Case No. CC 16-0375. (Doc. 1). The Debtor's Second Amended Plan provides for payment of the claim by the conclusion of the Plan term.
Finally, the claims filed in this case indicate that the Debtor owed a significant amount of consumer debt, including a $26,061.34 debt owed to the Navy Federal Credit Union for a credit card obligation. (Claim No. 4). The total amount of the unsecured claims filed in the Debtor's case, including the claim filed by Stephens, is approximately $79,039.00.
In summary, it does not appear that this is a two-party dispute in which the Debtor filed the case solely to avoid paying the marital debt owed to Stephens. In other words, this case is unlike the situation in In re Purpura, 170 B.R. 202, 211 (Bankr. E.D.N.Y 1994), in which a Chapter 11 case was dismissed as a two-party dispute between former spouses, where the bankruptcy petition was filed to hinder the collection of a "state court adjudicated equitable distribution of marital assets." Instead, the Debtor in this case faced substantial third-party debt, including several liens on his home and a $22,406.33 debt to the Internal Revenue Service, and has dealt with the claims through the provisions of Chapter 13. In re Brown, 402 B.R. 384, 402-03 (Bankr. M.D. Fla. 2008).
For these reasons, the Court finds that the Second Amended Chapter 13 Plan complies with the good faith requirements of §1325(a)(3) and §1325(a)(7), and should be confirmed.
Conclusion
For a Chapter 13 plan to be confirmed under §1325(a) of the Bankruptcy Code, the Court must find that the debtor filed the plan and the bankruptcy petition in good faith. In determining a debtor's good faith, the ultimate question is whether the debtor abused the provisions, purpose, or spirit of the Bankruptcy Code.
In this case, the Court cannot find that the Debtor abused the purpose of the Bankruptcy Code, because the record indicates that he had a valid need for financial relief on the petition date. In his Chapter 13 case, for example, the Debtor has dealt with three claims related to his homestead real property, a claim for past-due federal income taxes, and general unsecured claims in an amount exceeding $79,000.00.
Under these circumstances, the Debtor's Second Amended Chapter 13 Plan may be confirmed as satisfying the good faith requirement of §1325(a), even though the Debtor's initial schedules omitted certain prepetition transfers and insider debts, and even though the petition was filed at the time that Stephens was seeking to enforce her equitable distribution claim.
Accordingly:
IT IS ORDERED that:
1. The Objection to Confirmation filed by Christy Stephens is overruled.
2. Within fourteen (14) days of the date of this Order, the Chapter 13 Trustee may submit a proposed Order confirming the Debtor's Second Amended Chapter 13 Plan.
DATED this 19 day of July, 2017.
BY THE COURT
Paul M. Glenn
PAUL M. GLENN
United States Bankruptcy Judge