Opinion
Case No. 95-13007-AM
October 26, 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 objectants Brian Lattimer and Dale Hamburg
Alan Rosenblum, Esquire, Alexandria, VA, Of Counsel for objectants John and Teresa A. Kearney
MEMORANDUM OPINION
This matter is before the court on the objections filed by the chapter 13 trustee and by Brian Lattimer and Dale Hamburg to confirmation of the debtor's chapter 13 plan dated July 21, 1995. A hearing was held on October 24, 1995, at which counsel for John and Teresa A. Kearney appeared and also opposed confirmation. The common issue raised by all the objecting parties is whether the plan complies with the good faith requirement of § 1325(a)(3) of the Bankruptcy Code.
As noted below, the plan was filed with the court on July 24, 1995.
Findings of Fact
The debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code in this court on July 10, 1995. On July 24, 1995 she filed the proposed plan of reorganization that is presently before the court. The plan proposes to pay to the chapter 13 trustee $625.00 per month for 60 months, for a total of $37,500.00. From the payments received, the trustee would receive as his fee 10% of all sums disbursed to creditors, pay the Internal Revenue Service $7,657.00 due on account of unpaid income taxes, pay $232.72 per month for 60 months to Ferne Adasynski in satisfaction of an $11,000.00 claim secured by a 1989 Mercedes 560 SL convertible, and pay general unsecured creditors, of whom there are only three, 22% of the amount of their claims.
The issue before the court arises from the fact that two of the general unsecured claims that are being compromised were adjudicated to be nondischargeable in an earlier chapter 7 case filed by the debtor. Specifically, the debtor filed a voluntary chapter 7 petition in this court in 1992. In the course of that case, three nondischargeability complaints were filed against her. One was resolved in her favor. A second, brought by Brian Lattimer and Dale Hamburg resulted in a finding of non-dischargeability, apparently based on a finding that she misrepresented that a loan they made her was secured by her house when in fact no deed of trust was recorded. The third, brought by John and Teresa Kearney, resulted in a settlement and stipulated judgment in which an agreed amount of $14,000.00 was determined to be nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code. A note was executed for that amount that did not require any payments for one year.
In re Diana L. Falke, Case No. 92-14108, filed 8/25/92. A discharge was granted on December 16, 1992.
The judgment order, entered on December 15, 1993, granted Lattimer and Hamburg judgment in the sum of $21,448.15, court costs of $120.00, attorney fees of $5,000.00, and interest at the rate of 12% from August 28, 1992. The proof of claim filed in this case is for the total amount of $34,004.46. The debtor testified at the hearing on the objection to the plan that although she had signed a note, which was the basis for the judgment, in the amount of $20,000.00, the actual cash advanced was only $10,500.00.
The stipulated judgment was entered on August 3, 1993.
The debtor is, and has been for approximately 17 years, a real estate agent. She is divorced and has three adult children, none of whom live with her. One child, however, is autistic and lives at the Northern Virginia Training Center. This child usually stays with her one night a week, and she incurs incidental expenses related to his care. In the late 1980's and early 1990's, she was able to achieve an income in the range of $100,000.00 per year. Since 1992, however, her annual income has been in the range of $38,000.00 to $40,000.00 because of the weak real estate marker. Her income is currently stable, and she has no health problems. She offered in her testimony to increase the amount of her plan payment if her income were to increase during the plan period.
At the time she filed her chapter 7 petition in 1992, she owned a home in Manassas, Virginia and two pieces of investment real estate. All ultimately went into foreclosure because she was not able to make the payments. Her schedules filed in the chapter 13 case reflect current monthly income of $3,166.00. Her scheduled monthly expenses total $2,543.00 and include rent of $1,000.00 per month, food of $225.00 per month, transportation expenses of $120.00 per month, health insurance premiums of $150.00 per month, automobile insurance of $100.00 per month, personal property taxes of $83.00 per month, Federal and state estimated income tax payments of $275.00 per month, support for her autistic child of $100.00 per month, as well as a number of other expenditures (utilities, personal grooming, business license, and car repairs), none of which appear to be excessive or suggestive of a lavish lifestyle. Her major asset consists of the 1989 Mercedes 560 SL, which she valued on her schedules at $24,525.00. She testified that she purchased the automobile in November 1988; that it had 148,000 miles and some slight body damage; and that she used and needed it in her business.
Conclusion of Law
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(1).
Confirmation of an individual debtor's chapter 13 plan of repayment is governed by § 1325 of the Bankruptcy Code, which requires that the court "shall" confirm a plan if certain enumerated requirements are met. Relevant to the present controversy is the requirement of § 1325(a)(3) that "the plan has been proposed in good faith and not by any means forbidden by law." In Deans v. O'Donnell, 692 F.2d 968, 972 (4th Cir. 1982), the Fourth Circuit held that "the totality of circumstance must be examined on a case by case basis" in determining whether a chapter 13 plan meets the general good faith standard of § 1325(a)(3). The Deans opinion set forth a suggested and non-inclusive list of factors to be considered, none of which specifically addressed the non-dischargeability of the claim in the chapter 7 context. That issue was squarely raised in Neufeld v. Freeman, 794 F.2d 149, 152 (4th Cir. 1986), in which the Fourth Circuit held that "although the discharge of an obligation which would be nondischargeable in Chapter 7 is not, standing alone, a sufficient basis on which to find bad faith or deny confirmation, it is a relevant factor to be considered in the § 1325(a)(3) good faith inquiry." As the court explained,
Resort to the more liberal discharge provisions of Chapter 13, though lawful in itself, may well signal an "abuse of the provisions, purpose, or spirit" of the Act, especially where 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 under the plan. Similarly, a Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan represents a good faith effort by the debtor to satisfy his creditors' claims.
Id. at 152-153.
Combining the list of suggested factors in Deans and in Neufeld gives the following significant circumstances to be considered by this court in assessing whether the debtor's plan meets the good faith requirement of § 1325(a)(3) of the Bankruptcy Code:
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. 9. 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 under the plan. 10. Whether, despite even the most egregious pre-filing conduct, the plan nevertheless represents a good faith effort by the debtor to satisfy creditors' claims.
As noted above, the proposed percentage of payment on unsecured claims is 22%. The debtor's financial condition is stable, as is her employment. Although she has earned more in the past, the evidence does not suggest that she is voluntarily underemployed at the present time or that she is living an extravagant lifestyle. The objecting creditors raised a specific question concerning her retention of the Mercedes automobile. On the one hand, the automobile was purchased at a time when her annual earnings were almost three times higher than they currently are, and the automobile is now nearly 7 years old and has 148,000 miles. On the other hand, despite the age and mileage, she has equity in the automobile of approximately $13,525.00. If the Mercedes were sold, and the $11,000.00 lien paid off, the equity realized would probably be sufficient to purchase a reliable used vehicle or to make a very large down payment on a more utilitarian new vehicle with monthly payments less than the $225.00 per month she is proposing to pay on account of the $11,000.00 lien against the Mercedes. The resulting elimination or reduction in car payments would make a greater amount available for application to her plan.
The debtor's proposed plan payments extend over 60 months, which is the maximum period permitted under chapter 13 and results in creditors receiving significantly more than they would receive if the debtor merely satisfied the bare minimum standard of § 1325(b)(1)(B), which requires a debtor, if the trustee or an unsecured creditor objects to confirmation, either to pay 100% of the allowed unsecured claims or to pay into the plan all of the debtor's projected disposable income for three years. Additionally, as noted above, she has offered to increase the amount of her plan payments if her income should increase over the 5 year plan period.
As noted above, the debtor has previously filed a chapter 7 bankruptcy case; that filing occurred approximately three years prior to the filing in the current case. Of the three unsecured claims to be treated under the chapter 13 plan in the current case, two, comprising approximately 89% of the total, were adjudicated to be nondischargeable in the prior chapter 7 case as having been procured through false representations. There is no evidence, however, that the debtor has been dishonest in connection with the current bankruptcy filing or has misrepresented her circumstances. There are no unusual circumstances present in her case other than her obligation to supplement the care of her adult autistic child, whose general support is apparently paid for by the state. As a result of the need to assist in his support, she incurs approximately $100.00 per month in out of pocket costs and, in order to provide a place for him to stay during his weekly visits, incurs the additional rental expense of a two-bedroom rather than one-bedroom apartment.
Since it is clear that a major portion of the debt that the debtor seeks to discharge in this chapter 13 case is nondischargeable under chapter 7, Neufeld requires this court to determine whether the debtor "proposes only minimal repayment" of such claims. Neufeld does not attempt to define what constitutes a "minimal" level of repayment. Here, the amount to be repaid on amount of unsecured claims is 22 percent, or approximately $12,263.00. Whether such a payment is "minimal" necessarily depends on the surrounding circumstances, and this court is not inclined to set a particular percentage figure as constituting a floor below which plan payments would presumptively be considered "minimal." In Neufeld, the bankruptcy court had approved a plan that paid 30 percent on account of unsecured claims; the Fourth Circuit remanded for reconsideration. In an unpublished opinion, Provident State Bank v. Hubbard, 900 F.2d 254, 1990 WestLaw 34194 (4th Cir. 1990), the court upheld the confirmation of a three-year 12.4% plan where 86% of the unsecured debt had been held to be nondischargeable based on a false financial statement. The proposed payment on unsecured claims in this case is larger, both in percentage and absolute amounts, than the payment in Hubbard; at the same time, it is less than the equity in the debtor's Mercedes, which she is proposing to keep, and, in order to keep it, will have to make payments of $225.00 per month that might otherwise be available, at least in part, to increase the payout on unsecured claims.
The case had originally begun as a chapter 7 case but was converted by the debtors to chapter 13 after the court had ruled that the objecting creditors' debt was non-dischargeable.
Recognizing that each case must be decided on its own facts, and while the facts in this case are close, this court is unable, after considering all the circumstances, to conclude that a chapter 13 plan which proposes to only pay 22% on over $55,000 in unsecured claims, of which approximately 89% was determined nondischargeable in a prior chapter 7 case, and which allows the debtor to retain an automobile valued at over $23,000.00 while paying unsecured creditors less than the amount of her equity in the vehicle over the 5 year plan period, represents a good faith effort to square her accounts, to the best of her ability, with the creditors she deceived. Accordingly, a separate order will be entered denying confirmation.