Opinion
Case No. 95-13668-AM
May 6, 1996
Gerald M. O'Donnell, Esquire, Alexandria, VA, for standing chapter 13 trustee
Bennett A. Brown, Esquire, Gilliam Sanders Brown, P.C., Fairfax, VA, counsel for the debtor
Robert K. Coulter, Esquire, Alexandria, VA, counsel for the Internal Revenue Service
MEMORANDUM OPINION
A hearing was held on April 23, 1996, (1) on the objection of the standing chapter 13 trustee to confirmation of the debtor's second amended chapter 13 plan dated February 1, 1996, and on (2) the trustee's motion to dismiss for delay prejudicial to creditors. The basis of the trustee's written objection, filed March 11, 1996, was the plan's failure to pay priority tax claims in full. Based on amended proofs of claim filed by the Internal Revenue Service and the Virginia Department of Taxation, however, it now appears that the plan does in fact pay the priority tax claims in full. The trustee, however, continues to oppose confirmation and orally objected at the hearing that the plan — which provides for only a 2% dividend to unsecured creditors — was not proposed in good faith and does not provide for the submission of the debtor's entire disposable income during the plan period. For the reasons set forth in this opinion, the court concludes that confirmation should be denied but that the debtor should be afforded one further opportunity to propose a confirmable plan.
The Internal Revenue Service's amended proof of claim filed December 5, 1995, asserts a priority claim in the amount of $6,447.20, while the Virginia Department of Taxation's amended proof of claim filed April 8, 1996 asserts a priority claim in the amount of $1,180.39.
Facts
The debtor, a real estate agent, filed a voluntary chapter 13 petition in this court on August 30, 1995. He had previously (with his then-wife, Louise Jennings) filed a voluntary chapter 11 petition in this court on March 29, 1991. That case was converted to chapter 7 on May 21, 1992, and the debtor received a discharge on October 7, 1992. The debtor's schedules reflect that he owns an undivided one-half interest, as tenant in common, in investment property valued at $65,000 and subject to a deed of trust in the aggregate amount of $52,000. He lists total personal property, all but $520 of it claimed exempt, in the amount of $1,520. In addition to the amount owed on the investment property, he lists tax debts owed to the United States and the Commonwealth of Virginia in the amount of $226,877 and non-tax unsecured debts in the amount of $19,215, most of that for relatively small personal loans.
This filing is not disclosed on the debtor's petition in the place provided for the debtor to list any prior bankruptcy case filed within the last five years.
Although the schedules call for listing the value of the "debtor's interest" in the property, it is unclear whether the $65,000 figure represents the entire value of the property or only the debtor's one-half interest.
The listing does not include any motor vehicles, although the debtor testified at the hearing that a 1993 Mercury which he drives is registered in both his and his wife's names with the Virginia Department of Motor Vehicles, and his budget includes line items of $360 per month as a car payment and $65 per month for automobile insurance. The car loan is solely in his wife's name because, he testified, he was unable to get a loan in his own name. In any event, it is clear from the testimony that the debtor is the beneficial owner of the vehicle.
Initially, the debtor proposed to pay the chapter 13 trustee $200 per month for 36 months. The current plan — the debtor's fourth — proposes to pay the trustee $519.94 per month for 60 months, for a total of $30,766.40. Out of this would be paid first the trustee's statutory commission, a fee to the debtor's attorney of $1,500, and a total of $11,104.20 to the Internal Revenue Service and the Virginia Department of Taxation on account of their priority claims. The debtor would pay the regular monthly payments in the amount of $57.29 per month on a second deed of trust against his current wife's house outside the plan. The debtor would also pay outside the plan the regular monthly payment in the amount of $600 per month on the deed of trust against the investment property. The Internal Revenue Service is treated as being secured by the investment property to the extent of $8,020 per month, and would be paid that amount with interest at 9% through the plan in 60 monthly installments of $166.48 per month. Unsecured creditors would receive a dividend of 2 cents on the dollar over the 60 months. The debtor estimates that in a chapter 7 liquidation, general unsecured creditors would receive a dividend of 2 cents on the dollar.
This creditor is not listed anywhere in the debtor's schedules.
None of the non-tax unsecured creditors has filed a proof of claim, and the bar date for filing claims has long past. Accordingly, the only unsecured claims that would actually be paid are the Internal Revenue Service's nonpriority unsecured claim in the amount of $157,079.73 and the Virginia Department of Taxation's nonpriority unsecured claim in the amount of $50,124.99.
The debtor is employed as a real estate sales agent. His compensation consists solely of commissions on sales of real estate for which he is either the listing or selling agent. He receives no draw or advance against commissions, and only gets paid when the property goes to settlement. In 1995, he was paid approximately $25,000, and in 1994 he was paid approximately $32,000. In 1996, the only income he has received to date is a commission of $2,653.25, evidently related to a contract that was written in 1995. For the first quarter of 1966, he has a total of six contracts on which he is slated to receive a total of $12,597 in commissions. He expects most of these contracts, all of which are non-contingent, to close in June.
The debtor's wife, Vicki Jennings, who is not liable with him on any of the liabilities, is also employed as a real estate sales agent, although at a different brokerage. In 1995, her net income was approximately $52,000. For 1996, she projects a net income of approximately $60,000 to $65,000. She has two children — the debtor's step-children — under the age of 12. On his schedule of current income, the debtor shows a combined family income of $3,752 per month, and total monthly expenses for the family of $3,860, for a deficit of $108 per month. At the hearing, the debtor, in response to a request by the trustee, submitted a revised schedule purporting to list only his own expenses and totalling $2,981.92 per month.
This amounts to 77% of the amount previously reported as the total expenses for him, his wife, and the two step-children.
Conclusions of Law and Discussion A.
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)(L).
B.
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 (4th Cir. 1982), the Fourth Circuit rejected the argument that good faith included an implied requirement of "substantial repayment," and while recognizing that "[f]ailure to provide substantial repayment is certainly evidence that a debtor is attempting to manipulate the statute rather than attempting honestly to repay his debts," nevertheless 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). Id. at 972. The Deans opinion set forth a suggested and non-exclusive list of factors to be considered:
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.
In this case, the proposed payment on account of the unsecured claims is minimal, whether considered in percentage terms (2%) or dollar amounts ($4,144.09) Although the debtor estimates the creditors would receive no more if his nonexempt property were liquidated, the fact is that they would receive it all at once rather than in minuscule dribbles over 60 months. Given that there is a time value to money, payment over 60 months of no more than the amount the creditors would receive in the event of a liquidation means that in a realistic sense the creditors receive less than they would in a liquidation. The debtor is earning a reasonable, if modest, income, and his prospects for continued gainful employment appear good, although obviously another downturn in the real estate market could seriously affect his financial situation. The debtor does not have any unusual financial obligations or expenses. He has agreed to make payments over a period of 60 months, which is commendable and results in a larger payout to unsecured creditors than would otherwise be the case. The only unsecured claims that have been filed are for income taxes owed to the United States and to the Commonwealth of Virginia. These were incurred in connection with his participation in several real estate partnerships that failed in the late 1980's. The tax years involved — 1989 for the Federal taxes and 1988 and 1989 for the Virginia taxes — were nondischargeable in his prior bankruptcy. Due to the passage of time, they are now presumptively dischargeable, but the debtor is not eligible at this time for a chapter 7 discharge, because it has been less than 6 years since the debtor filed the previous case in which he received a chapter 7 discharge. § 727(a)(8), Bankruptcy Code.
This is based on the $207,204.72 in filed unsecured claims.
The payout would amount to approximately $69.00 per month.
"[A] dollar in hand today is worth more than a dollar to be received a day, a month or a year hence." In re Birdneck Apt. Assocs. II, L.P., 156 B.R. 499, 507 (Bankr. E.D. Va. 1993) (Tice, J.) Although the observation in Birdneck was made in the specific context of the requirements for "cramdown" of a secured creditor's claim in chapter 11 — where deferred payments on account of an allowed secured claim must have a present value at least equal to the value of the creditor's collateral — the reasoning is equally applicable in the context of the § 1325(a)(4) liquidation test, which requires as a condition of confirmation that "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" (emphasis added). See, 5 Lawrence P. King, Collier on Bankruptcy ¶ 1325.05, p. 1325-28 (for purpose of § 1325(a)(4), court "must capitalize the proposed payments, by converting deferred payments offered the creditor into an equivalent capital sum as of the effective date of the plan.")
Under § 523(a)(1), a chapter 7 discharge does not discharge an individual debtor from a debt "for a tax . . . (A) of the kind and for the periods specified in section . . . 507(a)(8)." The taxes specified in § 507(a)(8)(A)(i) in turn consist of income or gross receipts taxes for any tax year for which the return was last due within 3 years of the filing of the bankruptcy petition.
Since the issue is not squarely before the court, the court makes no express ruling. Even though the due date for the tax return falls outside the three-year window of § 507(b)(8)(A)(i), a tax on income or gross receipts would nevertheless be nondischargeable if (1) it was assessed within 240 days before the petition was filed, (2) no return was filed, (3) a late return was filed within two years of the bankruptcy petition, or (4) the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax. §§ 507(a)(8)(A) (ii) and 523(a)(1)(B)(i), (B)(ii), and (C). There has been no suggestion that any of these circumstances apply.
"The court shall grant the debtor a discharge unless — . . . (8) the debtor has been granted a discharge under this Section . . . within six years before the date of the filing of the petition."
Based on the debtor's schedules and the testimony presented at the confirmation hearing, the court is unable to conclude that the debtor is making an honest effort in this chapter 13 case to pay his creditors. Initially, the debtor offered to pay a total of $7,200 into the plan and has increased that amount, seemingly grudgingly, only in response to creditor and trustee objections. His proposed budget includes expenditures for debts (such as the automobile loan and the first deed of trust on his wife's house) on which he is not legally liable and his plan includes payment on account of a deed of trust against property he does not own (and to a creditor who is not listed in his schedules). Some of the expense items (such as $400 per month solely for his own food) appear excessive. The debtor testified at the confirmation hearing that the automobile with respect to which he proposed to make monthly payments was registered in his name with the Department of Motor Vehicles, but he did not list the vehicle on his schedules. The debtor also testified at the hearing that rent received on the investment property covered the deed of trust, but on his statement of income he lists no rental income. Essentially, the sole purpose of the debtor's plan is to enable him to keep the investment property and to discharge over $203,000 in tax debt which he is unable to discharge in chapter 7 (since he is not eligible at this time for a chapter 7 discharge) with seemingly little financial sacrifice on his part. Having given due consideration to all the circumstances, the court is left with the firm conviction that the debtor's plan does not constitute a good faith effort to repay his creditors to the best of his ability, and accordingly, the court will deny confirmation.
The $207,204.72 in unsecured nonpriority tax claims minus the estimated dividend of 2%.
As noted above, the court would independently deny confirmation based on the failure to satisfy the liquidation test of § 1325(a)(4). Because the court will deny confirmation based on the § 1325(a)(3) good faith test, the court need not rule on the trustee's alternate argument that the plan does not satisfy the § 1325(b)(1)(B) net disposable income test. Suffice it to note, however, that the debtor's evidence at the confirmation hearing was sufficiently vague and conflicting that the court would have a difficult time concluding that the proposed payments of $519.94 per month constitute "all of the debtor's projected disposable income" in the first 36 months of the plan.
C.
There remains for consideration the trustee's motion to dismiss the case for delay prejudicial to creditors. This case has been pending for nearly eight months. The debtor has proposed four plans, none of which have been confirmed. Under F.R.Bankr.P. 3015(b), the debtor in a chapter 13 case is required to file a plan not later than 15 days after the filing of the petition, and that time "may not be further extended except for cause shown." The debtor is required to commence making the payments proposed by the plan within 30 days after it is filed. § 1326(a)(1), Bankruptcy Code. Clearly, chapter 13 contemplates prompt action by the debtor to obtain confirmation of a plan. Of course, there may well be legitimate reasons why a plan initially proposed cannot be confirmed and why the debtor may have to amend the plan, perhaps more than once, in an effort to meet creditor objections. In the present case, for example, it was clearly necessary — in order to determine whether the plan satisfied the requirement of § 1322(a)(2) that the plan "provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title" — to resolve exactly what portion of the tax claims filed by the Internal Revenue Service and the Virginia Department of Taxation were entitled to priority. Both taxing authorities filed proofs of claim asserting very large amounts as entitled to priority. Although the Internal Revenue Service filed an amended proof of claim resolving its dispute with the debtor in December 1995, it was not until April 8, 1996, that the Virginia Department of Taxation filed an amended proof of claim reducing the priority component of its claim from over $51,000 to $1,180.39. While one can speculate that more diligent negotiations might have resulted in an earlier resolution of this matter, the court is also aware that decision-making by governmental authorities proceeds at its own pace and cannot always be rushed. In any event, after considering all the circumstances, the court concludes that the debtor should be allowed one last opportunity to propose a confirmable plan before his case is dismissed. Accordingly, the trustee's motion to dismiss will be denied without prejudice.
"[O]n request of a party in interest . . . and after notice and a hearing, the court . . . may dismiss a case under this chapter . . . for cause, including — (1) unreasonable delay by the debtor that is prejudicial to creditors." § 1307(c)(1), Bankruptcy Code.
While the amended proof of claim was not filed until April 8, 1996, it appears that the debtor and the Virginia Department of Taxation had reached oral agreement on the amounts sometime in January, since the plan dated February 1, 1996 embodies the figures set forth on the April 8, 1996, proof of claim.
Under Local Rule 313(G), however, unless the debtor, within 10 days of the entry of the order denying confirmation, files a modified plan, files a motion for reconsideration, or appeals the denial of confirmation, the case will be automatically dismissed.
D.
A separate order will be entered denying confirmation and denying the trustee's motion to