Opinion
Case No. 97-16378-SSM
July 6, 1998
Charles C. Cowsert, Esquire, Fredericksburg, VA, Of Counsel for the debtors
Gerald M. O'Donnell, Esquire, Alexandria, VA, for Chapter 13 trustee
MEMORANDUM OPINION AND ORDER
This matter is before the court on the objection of the chapter 13 trustee to confirmation of a modified plan filed by the debtors on April 27, 1998. A hearing was held on June 16, 1998, at which counsel for the debtors and the chapter 13 trustee appeared and presented argument. At the conclusion of the hearing the court took the matter under advisement to review the case file and the applicable law.
Background
The debtors, Damian Jerome Ray and Patricia Sue Ray, filed a voluntary petition under chapter 13 of the Bankruptcy Code in this court on August 27, 1997. The debtors filed their original plan on September 10, 1997, which proposed payments to the chapter 13 trustee of $300 per month for 55 months and a dividend to unsecured creditors of 21 cents on the dollar. The chapter 13 trustee objected to confirmation on the ground that the plan violated § 1322(a), Bankruptcy Code, by failing to make any provision for priority taxes. On October 21, 1997, the debtors filed a modified plan which provided for payments to the chapter 13 trustee of 1 payment of $300 followed by 59 payments of $327.09, for a dividend to unsecured creditors of 14 cents on the dollar. The plan included a provision for payment of delinquent Federal income taxes and Stafford County real estate taxes as priority claims. The trustee again objected to confirmation, and the debtors responded by filing a second modified plan on December 16, 1997. This plan provided for 1 payment of $300, 2 payments of $327.00, and 57 payments of $387.20 for a dividend to unsecured creditors of 14 cents on the dollar. This plan now provided for delinquent Stafford County personal property taxes as a priority tax claim, in addition to the other priority claims. It also included a provision for payment, through the plan, of $1,350 in attorneys fees, if approved by the court. The second modified plan was confirmed by order entered on February 25, 1998.
The bulk of the payments under the plan go to pay off an automobile and to cure a mortgage arrearage.
Stafford County subsequently filed a statement that the delinquent personal property taxes had been paid in full.
The debtors filed the plan currently before the court . . . their fourth in this case . . . on April 27, 1998. This plan was filed to account for and to pay Federal income taxes that became due post-petition in the amount of $936.00. After the hearing, the Internal Revenue Service ("IRS") filed on June 24, 1998, a "Request for Payment of Internal Revenue Taxes" asserting a $936.00 claim for income taxes for the calendar year 1997, the same year the debtors filed their case. Because of the need to pay the pay post-petition taxes, the plan reduced the projected dividend to unsecured creditors from 14 cents on the dollar to 3 cents on the dollar. However, having reviewed the unsecured claims that have been filed, it appears that the actual dividend that would be paid to unsecured creditors, after accounting for payments to secured and priority creditors (including the trustee's statutory commission) would be significantly higher, approximately 17 cents on the dollar.
The deadline for filing proofs of claim in the case expired on December 23, 1997, for non-governmental entities and on February 23, 1998, for government entities.
The chapter 13 trustee objects to confirmation on the basis that the reduced dividend to unsecured creditors resulting from the inclusion of post-petition taxes in the plan violates § 1325(a)(3), Bankruptcy Code, which requires a plan to be proposed in good faith. At the hearing, counsel for the debtors asserted that under the Fourth Circuit's "totality of the circumstances" test for determining whether a plan is proposed in good faith, it is not critical for unsecured creditors to realize a high percentage return on their claim. Furthermore, counsel proffered . . . but did not offer any evidence to prove . . . that the debtors simply and without any malevolent intent miscalculated their tax withholdings during the year and have since adjusted their withholdings so that the shortfall that occurred for 1997 would not occur again.
Conclusions of Law I.
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(1), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
II. A.
Under § 1329, Bankruptcy Code, certain parties in interest may seek a modification of the confirmed plan "at any time" before completion of the plan. Section 1329, provides in relevant part:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to —
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments; or
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.
Clearly, § 1329(a) contemplates that the debtor may request modification of a confirmed chapter 13 plan. Unlike when a trustee or other party in interest is seeking to modify a confirmed plan, the debtor need not show any change in circumstances. See In re Davis, 34 B.R. 319, 319-20 (Bankr. E.D. Va. 1983) (Bostetter, C.J.); 8 Collier on Bankruptcy ¶ 1329.02, at 1329-4 (Lawrence P. King, ed., 15th ed. rev. 1998). As noted by Collier, since chapter 13 is a completely voluntary choice on the part of the debtor, the debtor may propose any modified plan that satisfies the requirements of chapter 13. 8 Collier on Bankruptcy ¶ 1329.02, at 1329-4. Moreover, while res judicata will prohibit many modifications sought by the trustee or a party in interest, the debtor is not so affected since the debtor could achieve the same result by dismissing the current chapter 13 case and refiling. 8 Collier on Bankruptcy ¶ 1329.02, at 1329-4.
B.
In the plan before the court, the debtors are seeking to provide for the claim filed by the IRS pursuant to § 1305, Bankruptcy Code, for the tax year 1997 . . . the year in which they filed their bankruptcy petition. Section 1305 of the Bankruptcy Code provides for an exception to the general rule that a bankruptcy case affects only claims arising before the filing of the bankruptcy petition. United States v. Ripley (In re Ripley), 926 F.2d 440, 443 (5th Cir. 1991); In re Owens, 67 B.R. 418, 425 (Bankr. E.D. Pa. 1987), aff'd, United States v. Owens, 84 B.R. 361 (E.D. Pa. 1988); 8 Collier on Bankruptcy ¶ 1305.01, at 1305-2. Relevant to the present controversy, § 1305(a)(1) provides that "[a] proof of claim may be filed by any entity that holds a claim against the debtor for taxes that become payable to a governmental unit while the case is pending." In cases brought under chapter 13 of the Bankruptcy Code, unlike those brought by "individuals" under chapters 7, 11, or 12, a separate taxable entity is not created, and any income of the debtor, or the estate, is taxed to the debtor individually. Compare § 346(b)(1), Bankruptcy Code (requiring post-petition income of the estate in cases brought by individuals under chapters 7, 11, or 12 to be taxed to the estate), with § 346(d) (requiring post-petition income of the estate or the debtor in cases brought under chapter 13 to be taxed to the debtor); see also I.R.C. § 1398(a), (d) (providing for an election to be made by an individual debtor in cases brought under chapters 7 or 11 to terminate the debtor's taxable year as of the day before the commencement of the case); In re Gyulafia, 65 B.R. 913, 917 (Bankr. D. Kan. 1986) (noting that since post-petition taxes cannot be charged to the estate in a case brought under chapter 13, such taxes are not entitled to an administrative priority under § 503(b)(1)(A) as an "actual, necessary cost and expense of preserving the estate"); 15 Collier on Bankruptcy ¶¶ TX1.10[10], at TX1-75 TX2.03[2][ii], at TX2-14. Allowance of post-petition claims for taxes filed under § 1305(a) promotes a policy of permitting a debtor, whose budget may already be stretched thin by the confirmed chapter 13 plan, a longer time (i.e., through the plan) to pay the post-petition tax than would otherwise be permitted under applicable nonbankruptcy law. Ripley, 926 F.2d at 443 n. 12; In re King, 217 B.R. 623, 626 (Bankr. S.D. Cal. 1998); Dixon v. United States (In re Dixon), 210 B.R. 610, 615-16 (Bankr. W.D. Okla. 1997); In re Cotton, 102 B.R. 891, 893 (Bankr. M.D. Ga. 1989); Gyulqfia, 65 B.R. at 917; 8 Collier on Bankruptcy ¶ 1305.02[1], at 1305-4.
Although not an issue in this particular case, the court notes briefly that courts have disagreed as to exactly when taxes "become payable" for purposes of § 1305. Compare Dixon v. United States (In re Dixon), 210 B.R. 610, 615 (Bankr. W.D. Okla. 1997) (taxes for the year in which the debtor filed become payable immediately upon close of the calendar year in which they accrued), aff'd, 218 B.R. 150, 152 (Bankr. 10th Cir. 1998) (also reasoning that a debtor's tax liability becomes payable at the close of the tax year), with United States v. Ripley (In re Ripley), 926 F.2d 440, 444 (5th Cir. 1991) (taxes for the year in which the debtor filed become payable on April 15 of the following year — the date on which the debtor's tax return was due); In re Epstein, 200 B.R. 611, 613 (Bankr. S.D. Ohio 1996) (same); Matravers v. United States (In re Matravers), 149 B.R. 204, 206 (Bankr. D. Utah 1993) (same); In re Phillips, 27 B.R. 94, 95 (Bankr. E.D. Va. 1983) (Bostetter, C.J.) (same). The court need not reach that issue, however, because under either standard the 1997 taxes in this case arise post-petition.
Whether to file a claim under § 1305(a) is a voluntary decision on behalf of the governmental unit, and it is well established that the debtor, trustee, or any other party in interest other than the governmental unit cannot file a proof of claim on behalf of the taxing authority. See, e.g., Ripley, 926 F.2d at 443 n. 12; Dixon, 210 B.R. at 612, 615; Epstein, 200 B.R. at 614; In re Dickey, 64 B.R. 3, 4 (Bankr. E.D. Va. 1985) (Bostetter, C.J.); Gyulqfia, 65 B.R. at 915-16; 8 Collier on Bankruptcy 11305.02, at 1305-2 to 3. Once filed, however, § 1305(b) provides that the claim is allowed or disallowed under § 502 and is entitled to priority unsecured status under § 507(a)(8) as if the claim had arisen prepetition. See King, 217 B.R. at 625 (noting that § 1305(b) creates the "legal fiction" of transforming a post-petition claim into a prepetition claim entitled to priority status). The holder of a post-petition claim may elect not to file a claim, thus waiving the right to distribution under the chapter 13 plan, choosing instead to recover against the debtor after the conclusion of the plan. 8 Collier on Bankruptcy ¶ 1305.02, at 1305-3. Of course, any post-petition claim for taxes not provided for by the plan is unaffected by the debtor's discharge under § 1328(a). 8 Collier on Bankruptcy ¶ 1305.02, at 1305-2 to 3. Finally, the court notes that it is by no means clear as to when the proof of claim asserting a post-petition claim must be filed. Since it is a claim arising post-petition, Collier suggests that the proof of claim may be filed at any time during the pendency of the chapter 13 case (with leave of court), and that the deadline is certainly later than that for prepetition claims. 8 Collier on Bankruptcy ¶ 1305.02, at 1305-3 to 4.
This requirement is satisfied here . . . even though the IRS had not filed a claim as of the time the modified plan was filed . . . because the IRS has now filed a claim pursuant to § 1305.
This issue has not been raised by the parties and since it is not squarely presented, the court declines to address it.
C.
The chapter 13 trustee argues that inclusion of the debtor's post-petition tax liability within the plan . . . to the detriment of unsecured creditors . . . demonstrates a lack of good faith. Under § 1325(a), Bankruptcy Code, the court is required to ("shall") confirm a debtor's plan if certain requirements are satisfied. Among these is the requirement that "the plan has been proposed in good faith and not by any means forbidden by law." § 1325(a)(3), Bankruptcy Code. Whether a plan has been proposed "in good faith" is an "elastic" concept that requires a factual determination on a case-by-case basis. Deans v. O'Donnell, 692 F.2d 968, 972 (4th Cir. 1982); In re Cushman, 217 B.R. 470, 475 (Bankr. E.D. Va. 1998); In re Hurdle, 11 B.R. 304, 306 (Bankr. E.D. Va. 1981) (Bostetter, C.J.); Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 858 (6th Cir. 1988); Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir. 1982); Ravenot v. Rimgale (In re Rimgale), 669 F.2d 426, 431 (7th Cir. 1982); Smyrnos v. Padilla (In re Padilla), 213 B.R. 349, 352 (Bankr. 9th Cir. 1997). The debtor has the burden of proof for establishing that the plan satisfies the good faith test. Cushman, 217 B.R. at 475; In re Harrison, 203 B.R. 253, 255 (Bankr. E.D. Va. 1996) (Tice, J.); Padilla, 213 B.R. at 352. Although a payment plan proposed by a debtor should be a meaningful effort to repay creditors, what is a "meaningful repayment" will vary depending on the circumstances. Hurdle, 11 B.R. at 306.
In Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982), the Fourth Circuit rejected the argument that a zero percent plan was per se proposed in bad faith or that the Bankruptcy Code imposed a requirement of "substantial" repayment in chapter 13 cases. The Court held, rather, that while the percentage of repayment was a relevant consideration, "the totality of circumstances must be examined on a case by case basis" in determining whether a chapter 13 plan meets the good faith standard of § 1325(a)(3). Id. at 972. The Deans opinion sets forth a suggested and non-inclusive list of factors to be considered. These are as follows:
These factors were supplemented in Neufeld v. Freeman, 794 F.2d 149 (4th Cir. 1986), to add an inquiry into 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 those claims; and whether, despite even the most egregious pre-filing conduct, the plan nevertheless represents a good faith effort by the debtor to satisfy creditors' claims. Id. at 152-153. Neither of these inquiries is relevant to the present case.
1. The percentage of proposed repayment.
2. The debtor's financial situation.
3. The period of time payment will be made.
4. The debtor's employment history and prospects.
5. The nature and amount of unsecured claims.
6. The debtor's past bankruptcy filings.
7. The debtor's honesty in representing facts.
8. Any unusual or exceptional problems facing the debtor.
Id.
The problem with the plan currently before the court is that the debtors have offered no evidence — rather only counsel's representations — in support of a finding that the plan has been proposed in good faith. As noted above, the debtor has the burden of proof as to whether a plan has been proposed in good faith, and such determination is a fact-intensive analysis that must be made on a case-by-case basis. While it is clear that the debtors are required to provide for payment of the post-petition IRS claim, the inferences that can be drawn from the debtors' failure to have withheld the proper amount of taxes during the course of the year can weigh both in favor and against the debtors. There simply is no evidence before the court as to how the debtors incurred this additional tax liability — whether because of an honest miscalculation in simply failing to withhold enough during the course of the year or because of some other reason. While the court is sensitive to the burden on the debtors and their attorney in having to appear for yet another hearing, the case law is clear that the court must receive evidence and cannot simply rely on representations of counsel. Accordingly, the court will place the objection to confirmation back on the court's calendar for a hearing at which the debtors will be required to present evidence that the plan has been proposed in good faith.
ORDER
For the foregoing reasons, it is ORDERED:
1. The chapter 13 trustee's objection to confirmation is placed back on the court's calendar. An evidentiary hearing will be held on July 21. 1998. at 1:30 p.m. in Courtroom III, Martin V. B. Bostetter, Jr. United States Courthouse, 200 South Washington Street, Alexandria, Virginia.
2. The clerk will mail a copy of this order to the debtors, counsel for the debtors, and the chapter 13 trustee.