Opinion
Bankruptcy No. 02-15040DWS.
April 21, 2004
MEMORANDUM OPINION
Before the Court is the Debtor's request for confirmation of her Third Amended Chapter 13 Plan (the "Plan"). At the confirmation hearing held on February 12, 2004, I was prepared to enter an order confirming the Plan based on the amendments that had been made and the certificates of service on and no objection of the Pennsylvania Housing Finance Authority but for certain aspects of Plan ¶ 8(g) ("Paragraph 8(g)") that I believed did not comport with applicable law and which Debtor's counsel insisted be preserved in the Plan. The Chapter 13 trustee (the "Trustee") has objected to that provision, and both parties have briefed the issue. For the following reasons, I am not persuaded to confirm the Plan containing such provision. Since Debtor's counsel did not agree to confirmation of the Plan without Paragraph 8(g) and since I may not rewrite a debtor's plan, I have no option but to deny confirmation. I will, however, allow the Debtor 15 days to amend the Plan consistent with this Opinion.
Debtor correctly notes that the Trustee was prepared to recommend confirmation, the objections he had previously raised having been remedied. The Court sua sponte raised a question concerning the consequence of Paragraph 8(g) and after Debtor's counsel explained what was intended by it, the Trustee expressed an objection thereto.
BACKGROUND
On November 21, 2003 I approved a stipulation (the "Stipulation") entered into between Debtor and EMC Mortgage Corporation ("EMC") settling an adversary proceeding the Debtor had commenced against EMC. The Stipulation was incorporated into the Plan which herefore had been unconfirmable because EMC's claim exceeded the Plan funding. The Stipulation contemplates that commencing December 1, 2003, the Debtor shall make payments to the Trustee sufficient to amortize the agreed unpaid mortgage balance with interest. Paragraph 8(c) of the Plan indicates that payments to the Trustee consisting of the EMC negotiated claim and the Trustee's commission will commence December 1, 2003 and continue for eighteen months through May 1, 2005.
Paragraph 8(g) of the Plan provides:
Additional payments on account of the unpaid principal balance of the allowed secured claim may be made by Debtor at any time without penalty. One hundred per cent of the unpaid principal balance of the allowed secured Class 3 Claim of EMC, along with accrued interest, may be paid early by the Debtor without penalty. Any payments made by Debtor directly to EMC shall reduce the amount that the debtor will have to pay to EMC through Trustee. As necessary, debtor may file a motion to modify her plan in accordance with the applicable rules of bankruptcy procedure to reflect any payments that may be made directly to EMC subsequent to the date of this Third Amended Plan.
The emphasized language is the subject of this memorandum. Based on its inclusion, the Plan contemplates that the Debtor may elect at any time to make payments to EMC directly in lieu of making its payment to the Trustee. Debtor's counsel indicates that its purpose is to allow the Debtor to avoid the Trustee's commission. While EMC has raised no objection to this Paragraph 8(g), the Trustee points out that it is contrary to the Stipulation which expressly provides that payments shall be made to the Trustee. Thus, the Plan which incorporates the Stipulation is internally inconsistent. The Trustee also objects on the grounds that the elective payment provision will render the Plan extremely burdensome to administer.
DISCUSSION
While § 1322(a)(1) establishes the general rule that a debtor's disposable future income shall be submitted to the supervision and control of the Chapter 13 trustee for execution of the plan, § 1326(c) supports variance from this procedure. The decision to allow the debtor to act as his own disbursing agent is committed to the discretion of the bankruptcy judge. Matter of Aberegg, 961 F.2d 1307, 1308 (7th Cir. 1992); Matter of Foster, 670 F.2d 478, 486 (5th Cir. 1982). That discretion has notably been exercised with varying results from district to district. It is beyond the scope of this memorandum to canvas the divergent views on the permissible scope of debtor disbursement since the Plan expressly provides that the Trustee, not the Debtor, is the contemplated disbursing agent. The narrow issue that I must address is whether a plan that provides for disbursements by the trustee can allow the debtor the option to depart from that form of payment at her own discretion. In concluding that it may not, I reject the Debtor's contention that the failure of the Code to expressly prohibit this provision requires me to confirm the Plan as drafted.
Section 1326(c) states: [E]xcept as otherwise provided in the plan or the order confirming the plan, the trustee shall make payments to creditors under the plan." Courts have described the Chapter 13 as containing a presumption that the trustee will make disbursements and often require a significant reason to deviate therefrom. E.g., Jutila v. Rodgers (In re Jutila), 111 B.R. 621 (W.D. Mich. 1989); In re Slaughter, 188 B.R. 29, 31 (Bankr. D.N.D. 1995).
Acknowledging the court's discretion, the Debtor focuses on cases that prove that disbursement by debtors is permissible, a proposition with which I agree but is not at issue here. See Memorandum of Debtor in Support of Confirmation of Her Third Amended Chapter 13 Plan ("Debtor's Memo") at 9. The issue is rather whether her Plan's provision to displace the Trustee as discharging agent in her Plan should be allowed.
As EMC is Debtor's only creditor, a plan that contemplated payment directly by the Debtor would have no purpose. Whether the Debtor recognized as much in providing for disbursements by the Trustee or whether EMC insisted on the provision as part of the Stipulation is not known but it is not relevant to my analysis.
I therefore find the cases cited by the Debtor inapposite. It is an accepted practice in this district to provide for the trustee's payment of arrears and the debtor's payment of current installments under a long term mortgage. That is not what is at issue here. In the former, there are two disbursing agents for two types of payments. Here two disbursing agents are contemplated for one type of payment with no clearly defined role for either.
Debtor's view is that the Plan meets the requirements of § 1325(a), leaving me with no discretion to refuse confirmation in the absence of an objection. His position begs the question of whether the Plan does comply with the provisions of Chapter 13 of the Bankruptcy Code. As discussed below, I conclude that it does not.
I agree with the Trustee that the Plan is internally inconsistent. While the Stipulation is incorporated in the Plan, and the Trustee must give effect to it, the Plan would allow the Debtor to withhold payments from the Trustee at will in order to make direct disbursements to EMC. Under such circumstances, the Trustee would be unable to properly administer the Plan. Moreover, the Trustee would have no way of knowing whether EMC is being paid as he would not be controlling the distribution. The Trustee's failure to receive payments would trigger a motion to dismiss the bankruptcy case which presumably the Debtor would seek to refute by evidence of her direct payment to EMC. Thus, Paragraph 8(g), if implemented, could lead to unnecessary litigation that would burden the Court and the Trustee.
One of the factors that courts have considered in evaluating plans which allow a debtor to make disbursements is whether doing so would impair the standing trustee's ability to perform his duties. Barber v. Griffin (In re Barber), 191 B.R. 879, 885 (D. Kan. 1996); In re Gregory, 143 B.R. 424, 427 (Bankr. E.D. Tex. 1995). One duty implicated is the trustee's ability to monitor future direct payments. In re Genereaux, 137 B.R. 411, 412 (Bankr. W.D. Wash. 1992); In re Bettger, 105 B.R. 607, 609 (Bankr. D. Ore. 1989). The Trustee has persuasively described the confusion and burden that would result from the acceptance of Paragraph 8(g) in its present form. It outweighs the advantage to the Debtor of reducing the trustee commission she must pay.
Many courts have found that the desire to reduce payment of trustee commissions standing alone is not sufficient to warrant an exception to the normal practice of trustee disbursement.E.g., Genereaux, 137 B.R. at 413; In re Harris, 107 B.R. 204, 207 (Bankr. D. Neb. 1989). Indeed in other jurisdictions, trustees have objected to debtor disbursements as undermining the economic foundation of the Chapter 13 program in those districts.See Gregory, 143 B.R. at 426 (citing cases).
The rejection of Paragraph 8(g)'s authorization of elective direct payments would not preclude the Debtor from accelerating the payment of the secured claim so long as any prepayments are made through the Trustee. Thus, the Debtor will not lose the opportunity to save interest expense by prepayment.
Finally, I find unpersuasive Debtor's attempt to characterize Paragraph 8(g) as a mere articulation of her rights under § 1329(a). Of course, debtor has a right to request modification of her Plan to reduce the time for payments. However, if Paragraph 8(g) merely expresses that right and does nothing more than § 1329(a) expressly permits, why not delete the provision when questioned or at least clarify it. Why would Debtor's counsel hold up her confirmation for a right she already has? The answer appears to be that Paragraph 8(g), is not redundant of § 1329(a) but goes farther. Section 1329(a) permits a debtor upon request to modify a plan. Under Paragraph 8(g), the Debtor is free to make multiple payments to EMC directly as she sees fit and thereafter file a motion to modify her plan "to reflect any payments that may be made directly to EMC." This language suggests that the modification would be intended to conform the payments made outside the Plan to the Plan, not to request that leave be granted to modify the plan. Indeed Debtor acknowledges as much: "The only time Paragraph 8(g) contemplates a motion by Debtor to modify her plan would be if the debt to EMC is entirely paid off early or is about to be paid off early because of direct payments to EMC." Debtor's Memo at 12.
In re Tucker, 35 B.R. 35 (Bankr. M.D. Tenn. 1983), cited by Debtor, is inapposite. The case involved a request by the Debtor to determine the proper application of the insurance proceeds received upon destruction of his automobile. The Debtor's confirmed plan provided for a 100% payout of the secured and unsecured components over 41 months. The lender sought to be paid the proceeds but the court recognized that the confirmed plan was binding pursuant to § 1327(a). However, as the debtor agreed that the lender should be paid the remaining amount owed on its claim from the insurance proceeds, the court treated the application as a modification request. I do not disagree with the court's approach and indeed if Debtor were to seek to pay off its plan obligation to EMC early, it could expect the similar outcome of a request to modify the plan. That is far different than the periodic direct debtor payments permitted by Paragraph 8(g).
In short, EMC is Debtor's sole creditor. Debtor had the option of litigating with EMC outside of bankruptcy and entering into the same agreement that resolved the adversary proceeding without proposing a Chapter 13 plan. She opted for bankruptcy protection under Chapter 13 for the express purpose of proposing a plan with payments to be administered by the Trustee. Having done so, I will not confirm a plan that would allow the Debtor to circumvent the Trustee at her discretion. I find Paragraph 8(g) as drafted inconsistent with § 1322(a) and unsupported by § 1326(c). As such, I would deny confirmation because all of the requirements of § 1325, specifically § 1325(a)(1), are not met.
An Order consistent with this Memorandum Opinion shall be entered.
ORDER
AND NOW, this 21st day of April 2004, upon consideration of the Debtor's request for confirmation of her Third Amended Chapter 13 Plan (the "Plan"), after notice and hearing, and for the reason stated in the accompanying Memorandum Opinion;
It is hereby ORDERED that confirmation of the Plan is DENIED. The Debtor has 15 days from the date of this Order to amend the Plan consistent with this Memorandum Opinion. Absent such amendment, an order to show cause why this case should not be dismissed shall be entered scheduling a hearing on notice.