Opinion
Case No. 95-13493-AM
January 29, 1996
David E. Jones, Fairfax, VA, counsel for the debtor
MEMORANDUM OPINION AND ORDER
This matter is before the court on the objection of the chapter 13 trustee to the debtor's first amended plan dated November 13, 1995. A hearing was held in open court on January 23, 1996, and the matter taken under advisement.
Bank United of Texas FSB, which holds a deed of trust against the rental townhouse owned by the debtor and his wife, filed an objection to the debtor's original plan. While it does not appear that the amended plan specifically addresses the issues raised by Bank United of Texas, the creditor has not objected to the amended plan, and the court therefore treats the previously filed objection as withdrawn.
Background
The debtor, an electrical engineer working for a defense contractor, filed a voluntary chapter 13 petition in this court on August 9, 1995. His debts consist of two deeds of trust totalling $389,000 on his and his wife's personal residence (valued at $375,000), $154,310 owed on a deed of trust against a $170,000 townhouse, $7,500 owed on a $3,000 automobile, and $86,500 in unsecured credit card and consumer loan debt. The debtor previously filed a chapter 11 case in this court on October 28, 1992, and a plan was confirmed on November 20, 1994. With the exception of one of the unsecured claims, all of the debts are obligations being paid under the confirmed chapter 11 plan. The debtor's assets, besides the home and the townhouse, consist of $150 in cash and savings, a one-half interest, with his non-debtor wife, in household goods valued at $2,440, clothing worth $1,000, an interest in his employer's ESOP and stock savings plan worth $650, and a 1982 and 1988 Lincoln Towncar automobiles, each with over 100,000 miles, worth an aggregate of $5,000. The debtor earns $8,082 per month gross and takes home $4,836 per month. He and his wife receive $1,100 per month rent on the townhouse. His wife brings home an additional $2,216.49 per month. The debtor and his wife have no dependents. Total household personal and household expenses (which include debts being paid under the chapter 11 plan) are listed as $7,860, leaving an excess of $292 per month.
The debtor's plan proposes to pay $300 per month to the chapter 13 trustee for 60 months, or a total of $18,000. After payment of the trustee's commission of 10% on sums disbursed and $995 for attorney's fees to the debtor's counsel, unsecured creditors would receive a dividend of approximately 19 cents on the dollar. There are no arrearages on the two deeds of trust against the personal residence, and the debtor would make the regular monthly payments of $3,543 outside the chapter 13 plan (but pursuant to the terms of the confirmed chapter 11 plan). The debtor would also make outside the plan the regular monthly payment of $1,325 per month plus payments of $439 per month for 36 months to cure an existing $15,804 arrearage on the townhouse. The debtor would also pay outside the plan the balance due on the 1988 Lincoln Towncar in accordance with the confirmed chapter 11 plan.
The trustee's objection is grounded on violation of the good faith requirement of § 1325(a)(3), Bankruptcy Code. Specifically, the trustee asserts that the debtor is proposing only nominal payments resulting in a minimal dividend to unsecured creditors, while enjoying a gross joint household income of more than $11,400 per month and continuing to live in an expensive house, retain investment real estate, and indulge in excessive expenditures for utilities, home maintenance, clothing, transportation, and recreation. The trustee also asserts that the record of claims filed in the case reflects that the debtor is in default under his confirmed chapter 11 plan. The debtor's budget shows the following expenses:
Home mortgage payment $3,543.00 Electricity and heating fuel 300.00 Water and sewer 20.00 Telephone 100.00 Garbage 22.00 Home maintenance 300.00 Food 325.00 Clothing 150.00 Laundry and drycleaning 45.00 Medical and dental expenses 100.00 Transportation 400.00 Recreation, newspapers, magazines, etc. 100.00 Charitable contributions 20.00 Life insurance 70.00 Automobile insurance 60.00 Personal property taxes 50.00 Auto payments 354.00 Mortgage on rental property 1,325.00 Home owners association (rental property) 54.00 Chap. 11 plan payment to credit union 83.00 "Catch-up" payment on rental property 439.00
At the hearing on the trustee's objection, the debtor testified that he lived in an "all electric" home and that as a result he routinely had electric bills in the approximate amount of $300 per month. He further testified that the house had an on-going problem with leaking pipes, resulting in the need for extensive plumbing and drywall repairs. The amounts budgeted for transportation included $105 per month for tickets on the Metro mass transportation rail system and $50 per month parking. He also testified that half of the $150 per month shown on the budget for clothing was for dry cleaning, which he explained was a necessity in his business since he travelled a great deal and was required to be neatly dressed. He testified that his budget included a generous allowance for automobile maintenance (under "transportation") because of the age and mileage of his cars, a 1982 Lincoln Towncar with 140,000 miles and a 1988 Lincoln Towncar with 100,000 miles.
This explanation is somewhat puzzling, since there is a separate budget item of $45 per month for laundry and dry cleaning.
With respect to the rental townhouse, the debtor testified that he and his wife originally purchased it in 1988 as a residence for his elderly father-in-law. After the father-in-law came down with Alzheimer's disease, the father-in-law moved in with the debtor and his wife. At that point, the debtor testified, he could not sell it for what he paid for it, and, because he could not sell it, rented it. He and his wife receive $1,100 per month as rent. The monthly deed of trust payment is approximately $1,500 per month (plus $439 per month being paid to cure the existing arrearage). An additional expense associated with the townhouse is homeowners association dues in the approximate amount of $140 per quarter. He testified, however, that because he and his wife can deduct depreciation in addition to the interest and real estate taxes, he believed the expenses and income related to the townhouse were essentially a "wash." He further testified that although his schedules reflected that he had some small amount of equity in the townhouse "on paper," the tax assessment was less than the amount of the deed of trust, and he felt it was likely that, if the property were sold, he would have to come up with additional money at the settlement to close.
Discussion
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." There can be no doubt that the goal of chapter 13 is 100 percent repayment of debts. This will not always be possible, however, and chapter 13 does permit a debtor to compromise claims when the debtor's financial circumstances do not allow full repayment. § 1322(b)(8), Bankruptcy Code; Deans v. O'Donnell, 692 F.2d 968, 971 (4th Cir. 1982) (Congressional intent "was to provide debtors in various states of economic indebtedness with the opportunity to perform promises realistic to their particular situations: ". . . In some cases the plan will call for full repayment. In others, it may offer creditors a percentage of their claims in full settlement.'") The only explicit statutory restrictions on plans paying less than 100% are set forth in § 1325(a)(4), Bankruptcy Code, which requires that unsecured creditors receive under the plan at least as much as they would in a chapter 7 liquidation, and § 1325(b)(1)(B), which requires that, if an unsecured creditor or the trustee objects to confirmation, the plan must provide "that all of the debtor's 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 payments due under the plan." "Disposable income" is defined as income "received by the debtor and which is not reasonably necessary to be expended — (A) for the maintenance or support of the debtor or a dependent of the debtor." § 1325(b)(2), Bankruptcy Code. In addition to the "disposable income" test, the Fourth Circuit, in Deans v. O'Donnell, supra, held that, although there is no implied requirement of "substantial repayment" in chapter 13, nevertheless when a no-repayment or minimal repayment chapter 13 plans is challenged on good faith grounds, "the totality of circumstance must be examined on a case by case basis." In Deans, the court set forth a non-exclusive list of factors to be considered in such cases:
Without attempting either to be exhaustive or to establish a criteria "check-list," these factors might include, depending on the particular case, not only the percentage of proposed repayment, but also the debtor's financial situation, the period of time payment will be made, the debtor's employment history and prospects, the nature and amount of unsecured claims, the debtor's past bankruptcy filings, the debtor's honesty in representing facts, and any unusual or exceptional problems facing the particular debtor.
Id.
Applying these principles to the case before the court, I find that while the proposed payments of $300.00 per month do not constitute all of the debtor's disposable income, it comes close. It does appear that the budgeted expenses for clothing duplicate in part the budget item for dry cleaning and laundry. Additionally, even given the age of the two automobiles and the debtor's commuting costs, the provision for transportation expenses seems somewhat high. While the retention of the rental townhouse is obviously a serious drain on the debtor's cash flow, that drain is offset to some extent by the benefit of the resulting tax income tax deductions for depreciation, interest, and real estate taxes. Additionally, it does not appear, given the value of the property, that the debtor and his wife could reasonably sell it at this time except at a loss. The same is true with respect to their residence. This is a chapter 13 plan that was filed essentially to treat one debt, an $82,000 claim arising from a travel card issued to the debtor. All the other debts are to be paid outside the plan in accordance with the previously confirmed chapter 11 plan. Thus, although $300 per month would appear on its face to be a shockingly low payment for a person earning over $8,000 per month with a working spouse and no dependents, the reality is that, taking into account the payments (other than the regular mortgage payments) being made under the chapter 11 plan, the debtor will be paying a total of $1,176.00 per month on account of the debts being treated under this plan.
A proof of claim was not in the file at the time of the hearing on confirmation, but counsel advised the court that, based on information recently received from the creditor, the claim would actually be in a significantly smaller amount, which would increase the dividend on unsecured claims to approximately 30%.
The trustee has not objected to this feature of the plan.
As noted above, the trustee asserts, as one of the grounds militating against good faith, the debtor's default under the chapter 11 plan. The debtor testified at the hearing, however, that he was current on all his chapter 11 payments. The proofs of claim that the trustee cites as evidence that the debtor is behind in his payments unfortunately do not state whether the arrearages set forth are the original arrearages being paid off under the chapter 11, or whether some portion or all arose after confirmation of the chapter 11 plan. Given the lack of testimony from the creditors involved, I find that the evidence of record is insufficient to find that the debtor is in default under his chapter 11 plan.
Having carefully considered the debtor's budget, I find that the proposed payment of $300.00 per month does not constitute all of the debtor's disposable income, and I will require, as a condition of confirmation, that payments be increased to at least $375.00 per month. I will also require that the debtor, during the first three years of the plan, contribute any income tax refunds over $200.00 and to furnish the standing chapter 13 trustee with such information as the trustee may reasonably require to determine whether the debtor is paying into his plan his net disposable income. Accordingly, it is
ORDERED:
1. The debtor shall advise the standing chapter 13 trustee within 10 days of the entry of this order whether the debtor consents to the plan modification required by this opinion. If the debtor does not consent or fails to notify the trustee of his position, the trustee shall so advise the court, and an order will be entered denying confirmation. If the debtor does consent to the required modification, the chapter 13 trustee shall present an order of confirmation setting forth the modifications required by this opinion.
2. The clerk will mail copies of this memorandum opinion and order to counsel for the debtor and to the standing chapter 13 trustee.