Opinion
No. 13-01-13479 ML
April 8, 2004
Louis Puccini, Jr., Albuquerque, NM, for Debtor
George Moore, Albuquerque, NM, for Saenz Torres
MEMORANDUM
Central to the issues raised in this proceeding is the Debtors pending personal injury lawsuit resulting from an automobile accident that occurred prior to the filing of the Debtors bankruptcy petition. Debtor initially filed her petition under Chapter 7 of the bankruptcy code, and, after receiving her discharge and after the Chapter 7 trustee filed a motion to approve a settlement of the personal injury lawsuit, converted her case to Chapter 13, proposing to take her personal injury lawsuit to trial, claiming exemptions in the recovery from the lawsuit, and proposing to contribute a portion of the anticipated recovery to fund her Chapter 13 plan. Presently before the Court is the Debtors proposed Chapter 13 plan. Also before the Court is the Debtors Motion to Employ Doug Perrin as Special Counsel and the objections to Debtors claimed exemptions.
The Chapter 13 Trustee and Saenz Torres, P. A. object to the amount of the Debtors claimed exemptions in the proceeds from the personal injury lawsuit and the potential malpractice claims against Debtors former personal injury counsel and bankruptcy counsel.
The Court held a final hearing on January 13, 2004 , at which time the Court took the matter under advisement and instructed counsel to submit letter memoranda on whether the Debtors plan can be confirmed. Upon the Courts additional request, counsel also submitted proposed findings of fact and conclusions of law. After considering the evidence presented at trial and all materials submitted by counsel, and being otherwise sufficiently informed, the Court finds that the Debtors plan cannot be confirmed. Because the plan is not confirmable in its present form, the Court will not rule on the Debtors Motion to Employ Doug Perrin as Special Counsel.
FACTS, BACKGROUND AND PROCEDURAL HISTORY
Debtor filed this case in May of 2001 under Chapter 7 of the bankruptcy code. Pre-petition, Debtor was severely injured in an automobile accident, and had retained Saenz Torres, P. A. (Denise Torres) as counsel to represent her in a personal injury suit against Bowen Machine Fabricating, Inc. Denise Torres commenced a lawsuit on behalf of the Debtor against Bowen Machine Fabricating, Inc. in the Dona Ana District Court as Case No. CV-2001-769. Upon Debtors filing of her Chapter 7 petition, Philip J. Montoya was appointed the Chapter 7 trustee. The Chapter 7 trustee filed a motion with the Court seeking to employ Saenz Torres, P. A. as counsel for the Chapter 7 trustee to pursue the personal injury lawsuit on behalf of the bankruptcy estate. An order approving employment of Saenz Torres, P. A. as special counsel for the Chapter 7 trustee was entered on November 12, 2002. Following settlement negotiations, the Chapter 7 Trustee filed a motion to approve a settlement of the personal injury claim (See Docket #17) in the amount of $265,000. 00, which the Chapter 7 trustee estimated would result in payment of 100% of all unsecured claims. Debtor filed an objection to the Chapter 7 Trustees motion, asserting that the settlement amount was too low, and that the personal injury suit should go to trial. Before the final hearing on the Chapter 7 Trustees motion to approve the settlement, the Debtor obtained new bankruptcy counsel and filed a motion to convert her chapter 7 proceeding to chapter 13.
The Court issued a memorandum opinion on the motion to convert, holding that the Debtor has a one-time absolute right to convert to chapter 13 pursuant to 11 U.S.C. § 706(a), despite the fact that the Debtor had already received her discharge while her case was being administered under chapter 7.
In re Rigales, 290 B.R. 401, 404-405 (Bankr. D. N.M. 2003 ). An order converting the case to chapter 13 was entered on June 13, 2003 , following proper notice of the motion to convert. Debtor converted her case to chapter 13 in order to regain control over the personal injury lawsuit. She asserts that neither her bankruptcy counsel nor her personal injury counsel properly informed her that if she filed bankruptcy under chapter 7, the Chapter 7 trustee would have control over her pending personal injury lawsuit.
In reaching its conclusion, the Court determined that the only statutory bases for objecting to a debtors one-time absolute right to convert are a prior conversion or the eligibility standards for proceeding under chapter13 set forth in 11 U.S.C. § 109(e). Id. See also In re Miller, 303 B.R. 471, 476 (B. A. P. 10 th Cir. 2003 ).
After converting to Chapter 13, Debtor filed statements and schedules, listing unsecured debts in the amount of $104,704.62. Debtor later amended her statements and schedules to reflect unsecured debts in the amount of $123,112.62. Debtor has no priority or secured debts. Debtor claims exemptions in the following: 1) the anticipated recovery from the personal injury lawsuit; 2) a professional liability claim against Saenz Torres, P. A.; and 3) a professional liability claim against Oralia B. Franco, her former bankruptcy counsel.
Debtor has not yet filed lawsuits against her former personal injury attorney or her former bankruptcy counsel.
Debtors proposed plan of reorganization includes the following: Debtor shall pay to the Trustee $50.00 per month (or more), for thirty-six (36) months (up to sixty months (60)) or upon payment in full of all amounts needed to pay in full all allowed administrative claims . . . and the pro-rata share of up to 100% as provided of all allowed unsecured claims. . . . Debtor reserves the right to pay a lump sum payment (from the proceeds of her personal injury claim) to the allowed secured, priority and unsecured claims allowed.
Debtors proposed plan of reorganization also states that she will use the proceeds from the personal injury suit as follows: first, to pay special counsel his 33% contingency fee; second, to pay bankruptcy counsels attorneys fees; third, in payment of Debtors allowed exemptions; and fourth, 50% of the remainder pro rata to unsecured creditors (less Chapter 13 Trustees fees), and 50% to the Debtor. The Chapter 13 Trustee, Denise Torres, and the former Chapter 7 Trustee each filed objections to the Debtors proposed Chapter 13 plan. At the final hearing on confirmation, the Court ruled that the Chapter 7 Trustee had no standing to object to the Debtors proposed plan since he had not filed a proof of claim and, therefore, held no pecuniary interest in the outcome of Debtors reorganization plan.
See In re Stewart, 46 B.R. 73, 77 (Bankr. D. Or. 1985) (holding that because creditor failed to timely file formal proof of claim, he was not a party in interest and had no standing to object to confirmation of Chapter 13 debtor's plan); 8 Collier on Bankruptcy ¶ 1324. 03 (Alan N. Resnick and Henry J. Sommer, eds., 15 th ed. rev. 2003 ) ([A] creditor who does not hold an allowed claim, because, for example, a claim was never filed, generally is not a party in interest with standing to object to confirmation of the plan.); But cf. In re Davis, 239 B.R. 573, 579 (B. A. P. 10 th Cir. 1999) (finding that Chapter 7 trustee had standing as party in interest to object to debtors chapter 13 plan when trustees objection involved issues related to pending adversary proceeding); In re Barnes, 275 B.R. 889, 892-893 (Bankr. E. D. Cal. 2002) (former chapter 7 trustee who had already been awarded compensation as an administrative expense had standing to object to debtors claimed exemptions and proposed chapter 13 plan).
DISCUSSION
A. 11 U.S.C. § 1325(a)(4) — Best interest of creditors test One of the requirements for confirmation of a chapter 13 plan is that it meet the best interest of creditors test contained in 11 U.S.C. § 1325(a)(4). That section provides that, in order to confirm a chapter 13 plan:
the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.
This provision ensures that unsecured creditors will not receive less when the debtor chooses to proceed under Chapter 13 than if the debtors estate were liquidated under Chapter 7. See In re Coonrod, 135 B.R. 375, 377 (Bankr. D. Neb. 1991) (noting that § 1325(a)(4) maintains a statutory quid pro quo [where] the debtor keeps his or her assets and creditors are assured of receiving what they would be paid in a Chapter 7 liquidation.). Under a best interest of creditors analysis, the Court must determine the amount to be distributed to unsecured creditors under the terms of the proposed Chapter 13 plan, and compare that figure to the estimated distribution unsecured creditors would receive in a hypothetical chapter 7 proceeding as of the effective date of the plan. 11 U.S.C. § 1325(a)(4). In other words, the Court must estimate the present value of the proposed plan payments to unsecured creditors and measure it against the estimated value of non-exempt assets that would be available under a Chapter 7 liquidation for payment to unsecured creditors, taking into account any administrative expenses in each scenario. In re Dewey, 237 B.R. 783, 788 (B. A. P. 10 th Cir. 1999). The best interest of creditors test is met only when the amount available to unsecured creditors in the estimated liquidation is not more than the estimated distribution to unsecured creditors under the debtors proposed chapter 13 plan. Id.
The Debtors proposed plan of reorganization fails to satisfy 11 U.S.C. § 1325(a)(4). In this case, the benchmark for determining the amount necessary to satisfy the best interest of creditors test is the settlement amount contained in the former Chapter 7 trustees motion to approve compromise of the personal injury lawsuit. Cf. In re Sanchez, 270 B.R. 322, 324 (Bankr. D. N. H. 2001) (holding that personal injury lawsuit that arose post-petition did not have to be taken into account in conducting liquidation analysis under § 1325(a)(4)). While this case was proceeding under Chapter 7, the Chapter 7 trustee filed a motion to approve a settlement of the Debtors personal injury lawsuit for $265,000.00. The Chapter 7 trustee estimated that this amount would be sufficient to pay 100% of the unsecured claims listed in the Debtors statements and schedules. Because the Debtors personal injury claim accrued pre-petition, it must be included in the calculation, and since the motion to approve settlement includes an exact figure, it is appropriate to use that figure as the estimated amount available as of the effective date of the plan. Id. See also In re Britton, 288 B.R. 170, 173-174 (Bankr. N. D. N.Y. 2002) (holding that chapter 13 plan failed to meet the requirements of § 1325(a)(4) because it did not contribute to the plan the present value of the non-exempt portion of debtors right to receive payments under settlement of personal injury action).
As with any lawsuit that goes to trial, there is uncertainty as to the amount of recovery from Debtors personal injury lawsuit, and there is the risk that the Debtor may not recover anything. However, the risk of no recovery or substantially less recovery from trial than from accepting the settlement figure is not what causes Debtors plan to run afoul of the requirements of 11 U.S.C. § 1325(a)(4). Rather, it is the lack of evidence to support a finding that Debtors proposed plan will leave unsecured creditors no worse off than they would have been under Chapter 7. Debtor failed to offer any evidence of the estimated value of the personal injury lawsuit at the final hearing on plan confirmation. Her proposed new special counsel did not testify. Without any testimony as to the anticipated value of the personal injury lawsuit if it goes to trial, the Court cannot determine that the unsecured creditors stand to receive as much through the Debtors proposed chapter 13 plan as they would in a chapter 7 liquidation. In order to satisfy the best interest of creditors test, Debtor must have offered some evidence that the estimated recovery from the personal injury lawsuit would be at least as much as the $265,000 settlement offer achieved by the Chapter 7 trustee. This the Debtor did not do.
The Court notes that the Chapter 7 trustees motion to approve compromise of personal injury lawsuit estimated that the unsecured claims totaled $34,000. Debtors amended schedules filed in the Chapter 13 phase of this proceeding now list unsecured debts in the amount of $123,000.00. However, because the effective date of the plan establishes the time for applying the best interest of creditors test, the fact that there may now be more unsecured claims than there were in the chapter 7 phase of the proceeding is not relevant. The question is whether the unsecured creditors would receive at least as much as they would in a hypothetical chapter 7 proceeding as of the effective date of the plan. 11 U.S.C. § 1325(a)(4).
Normally, satisfaction of the best interest of creditors test when the chapter 7 liquidation analysis finding payment of 100% to unsecured creditors would require a showing that a chapter 13 plan include interest on unsecured claims, since those claimants would not receive full payment upon the effective date of the plan, but instead, would receive payments over the life of the plan. See 8 Collier on Bankruptcy ¶ 1325.05[2][b] (Alan N. Resnick and Henry J. Sommer, eds., 15 th ed. rev. 2003 ) (noting that the present value language in [§ 1325(a)(4)]. . . dictates that interest be paid to compensate for the lost time value of the money caused by the deferral of payments.). However, given the uncertainty of proceeding to trial and the lack of evidence as to the estimated recovery if Debtor proceeds to trial, the Court will not factor that additional requirement into its analysis.
Also related to the best interest of creditors analysis is the amount of the Debtors allowed exemptions, since the amount available to unsecured creditors in a hypothetical chapter 7 liquidation would not include exempt assets. See In re Jackson, 173 B.R. 168, 170 (Bankr. E. D. Mo. 1994) (noting that hypothetical chapter 7 liquidation analysis under best interest of creditors test does not include exempt property). However, a chapter 7 debtor and a chapter 13 debtor can claim the same exemptions. In re Tomasso, 98 B.R. 513, 515 (Bankr. S.D. Cal. 1989); 8 Collier on Bankruptcy ¶ 1300.81 (Alan N. Resnick and Henry J. Sommer, eds., 15 th ed. rev. 2003 ). Thus, resolution of the objections to Debtors claimed exemptions is not necessary to the Courts determination that the Debtors proposed plan is otherwise not confirmable.
B. 11 U.S.C. § 1325(b) — disposable income Debtors plan proposes to retain 50% of the proceeds from her lawsuit, after payment of attorneys fees, and after payment of her allowed exemption, and only contribute the remaining 50% (from which Chapter 13 trustees fees are to be first deducted) to the unsecured creditors. The Chapter 13 trustee objects to this provision of Debtors proposed plan, implicating the application of 11 U.S.C. § 1325(b)(1). This section requires a debtor to contribute all of his or her projected disposable income to the plan for three years, unless the plan otherwise provides for payment of all allowed unsecured claims in full. 11 U.S.C. § 1325(b)(1). Debtors plan provision outlined above violates this section. Until and unless there is a recovery from the personal injury lawsuit, there is no way to determine with certainty that all allowed unsecured claims will be paid in full. Because there is no certainty that unsecured creditors claims will be paid in full Debtor must devote all of her projected disposable income for three years to the plan in order to satisfy 11 U.S.C. § 1325(b)(1)(B). Proceeds from the personal injury lawsuit, at least the non-exempt portion, are considered part of the Debtors projected disposable income. See Tomasso, 98 B.R. at 516 (holding that non-exempt portion of settlement from personal injury suit received post-petition constitutes part of the debtors projected disposable income under § 1325(b)). Cf. In re Pendleton, 225 B.R. 425, 427 (Bankr. E. D. Ark. 1998) (holding that the exempt proceeds from debtors personal injury settlement constitute disposable income under § 1325(b)(2)). See also In re Richardson, 283 B.R. 783, 799 (Bankr. D. Kan. 2002) (income that is foreseeable at confirmation is included as part of a debtors projected income); In re Marcus, 128 B.R. 294, 295 (Bankr. D. Colo. 1991) (noting in dicta that If a debtor receives a personal injury cash settlement, those funds could be considered disposable income which must be dedicated to the plan pursuant to 11 U.S.C. § 1325(b)(1)(B).), affd, 140 B.R. 803 (D. Colo. 1992), revd on other grounds, 1 F.3d 1050 (10 th Cir. 1993). Debtor must, therefore, contribute the non-exempt proceeds from the settlement of her personal injury lawsuit to her chapter 13 plan.
That section provides:
If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtors projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
11 U.S.C. § 1325(b)(1)(A) and (B).
Granted, Debtor may not be successful in her personal injury lawsuit or the personal injury suit may not get resolved within three years, in which case, her proposal to pay $50.00 per month arguably qualifies as devoting all of Debtors projected disposable income to repayment of her creditors. Notwithstanding those scenarios, the Debtors proposed plan provision violates 11 U.S.C. § 1325(b)(1) because it excludes 50% of the remaining recovery in addition to Debtors allowed exemptions, without providing that unsecured creditors will first be paid in full. The Court, therefore, concludes that this plan provision renders the Debtors plan unconfirmable. C. 11 U.S.C. § 1325(a)(3) — Good Faith As previously discussed by the Court in Rigales, because of a debtors one-time absolute right to convert, the issue of good faith is addressed at confirmation. Rigales, 290 B.R. at 406-407. The Debtor bears the burden of showing that her plan has been proposed in good faith. 11 U.S.C. § 1325(a); In re Davis, 239 B.R. 573, 577 (B. A. P. 10 th Cir. 1999). The Tenth Circuit has adopted a totality of circumstances test for determining whether a debtors plan was proposed in good faith. Flygare v. Boulden, 709 F.2d 1344, 1347 (10th Cir. 1983). There are a number of factors for the Court to consider in evaluating the Debtors good faith, including, the motivation and sincerity of the debtor in seeking Chapter 13 relief and the amount of the proposed payments and the amount of the debtor's surplus. Flygare, 709 F.2d at 1347-1348 (quoting United States v. Estus (In re Estus), 695 F.2d 311, 317 (8th Cir. 1982)).
The objecting parties also assert that Debtors plan is not feasible because her Schedules I and J show disposable income of less than the $50.00 per month Debtor proposes in plan payments. In ruling on the Debtors motion to convert, the Court has already determined that Debtor has sufficient regular income to be eligible for Chapter 13 relief, and, since converting to Chapter 13, Debtor has been making the $50.00 per month payments called for in her plan. The Court will, therefore, not deny confirmation on grounds that the plan is not feasible.
The other factors are:
(2) the debtor's employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan's statements of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;. . . . and
(10) the burden which the plan's administration would place upon the trustee.
Id.
In re Dixon, 241 B.R. 234 (Bankr. M. D. Fla. 1999) is a case with facts similar to the case at bar. In Dixon, debtors initially filed their petition under chapter 7, failing to list their personal injury claim in their schedules. Dixon, 241 B.R. at 235. When the Chapter 7 trustee learned of the personal injury claim, he settled the debtors claim. Id. Debtors then converted their chapter 7 proceeding to chapter 13, and the chapter 7 trustee transferred the proceeds from the settlement to the Chapter 13 trustee. Id. The trustee objected to confirmation of the debtors proposed chapter 13 plan under 11 U.S.C. § 1325(a)(3), alleging that the plan was filed in bad faith, solely to prevent him from receiving the settlement proceeds from the personal injury claim. Id. at 236. The bankruptcy court found, based on the totality of circumstances, that the debtors chapter 13 plan which proposed to make payments from the settlement proceeds was not filed in bad faith, and that their failure to list their personal injury lawsuit in their initial petition was not intentional. Id. at 237. Here, the objecting parties point out that the Debtors motivation for converting her case to Chapter 13 was solely for the purpose of regaining control over the lawsuit. This, combined with the offending plan provision examined above, is some evidence of a lack of good faith in proposing the plan now before the Court. However, the uncontroverted testimony is that Debtor was not informed during the chapter 7 phase of her bankruptcy proceeding that the Chapter 7 trustee would control her pending personal injury lawsuit. Debtor also testified that the proposed settlement reached by the Chapter 7 trustee would not be sufficient to cover her ongoing medical expenses resulting from her automobile accident. No testimony was proffered to indicate that Debtor could expect a larger recovery at trial. Another Flygare factor is whether the debtor has any special circumstances, such as large medical bills. 709 F.2d at 1348. Debtors amended schedules reflect that a large portion of her mounting unsecured debt is the result of medical treatments necessitated by the automobile accident. Based on the foregoing, the Court finds that there is insufficient evidence of the Debtors lack of good faith that would bar confirmation on this basis. See Dixon, 241 B.R. at 236 (noting that the debtor bears the burden of proving good faith, but to the extent that a creditor preemptively can demonstrate an absence of good faith, or affirmative presence of bad faith, it will enjoy a valid objection to confirmation.) (quoting In re Baird, 234 B.R. 546, 550 (Bankr. M. D. Fla. 1999)).
CONCLUSION
Debtors proposed plan of reorganization cannot be confirmed for two reasons. First, Debtor failed to offer sufficient evidence to show that the unsecured creditors would receive as much as they would if this case were liquidated under chapter 7, failing to satisfy the best interest of creditors test embodied in 11 U.S.C. § 1325(a)(4). Second, Debtors proposal to retain an additional 50% of the proceeds from her personal injury lawsuit on top of her allowed exemptions violates 11 U.S.C. § 1325(b)(1). The Court, therefore, concludes that confirmation must be denied.
This memorandum constitutes the Courts findings of fact and conclusions of law in accordance with Rule 7052, F.R.Bankr.P. The Court will enter an appropriate order consistent with this memorandum.
I hereby certify that a true and correct copy of the foregoing was either electronically transmitted, faxed, delivered, or mailed to the listed counsel and parties, on the date file-stamped above.