Opinion
Case No. 08-07044-B13.
12-15-2009
In re ROBERT and MARY-ANN SCHANEMAN, Debtors.
I. INTRODUCTION
The chapter 13 trustee ("Trustee") moved pursuant to § 1329 to modify the chapter 13 plan of debtors ("Plan"), Robert and Mary-Ann Schaneman ("Debtors") to extend the plan length from 35 months to 36 months, and to increase the dividend to general unsecured creditors from 0% to 15% or a pro rata share of $ 15,000, whichever is greater ("Modified Plan"). The reason for the modification is that the real property secured creditors withdrew their claims, and the Plan will be completed in only 15 months. It is undisputed that the Debtors have no "disposable income" under current law. However, the Debtors' Schedules "I" and "J" reflect that they actually have positive net monthly income of $720.00 which they agreed to pay to their Plan for a period of 35 months.
In 2005, Congress overhauled the Bankruptcy Code's definition of "disposable income" through the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub. L. No. 109-8 (2005), effective in cases commenced on or after October 17, 2005. Amended § 1325(b)(2) defines "disposable income" to mean the debtor's "current monthly income" — as rigidly defined by new § 101(10A) — less the expenses set forth in new §§ 1325(b)(2) or (b)(3), which apply depending on whether the debtor's "current monthly income" is above or below the applicable state family median income. Under BAPCPA, the Debtors have no "disposable income" even though they have $720.00 in monthly net income.
The Trustee argues that the Court must treat this motion to modify the Plan to increase the payments the same as it would treat a motion to modify the Plan to reduce the payments. He urges that the Court would routinely modify the Plan to reduce the payments below the amount required by the disposable income test if the Debtors' post-confirmation financial circumstances negatively changed. Similarly, the Court must modify the Plan to increase the payments where the Debtors' post-confirmation financial circumstances enable the Debtors to pay more to their general unsecured creditors than they agreed to pay.
The Debtors object to the Modified Plan. They argue that In re Kagenveama, 541 F.3d 868, 875-77 (9th Cir. 2008) holds that there is no minimum "applicable commitment period" for their Plan since they have no projected disposable income. They object to being forced to continue paying $720.00 for the full 35 months (or 36 months as the Trustee has requested), if their changed post-confirmation financial circumstances allow them to complete their Plan in only 15 months.
The phrase "applicable commitment period" is another new term added to § 1325(b) by BAPCPA. Amended § 1325(b)(1)(B) replaced the minimum "three year" plan period with the term "applicable commitment period," which is defined in new § 1325(b)(4) to be three years, or five years if the debtor's "current monthly income" is above the applicable state family median income. However, in the Ninth Circuit the minimum "applicable commitment period" in § 1325(b)(1)(B) is inapplicable to a debtor with no "disposable income." Kagenveama, 541 F.3d at 875-77.
Having had the opportunity to review the case law and having duly considered the arguments of counsel, the Court grants the motion but limits the Modified Plan length to 35 months.
II. ISSUE
Under § 1329(a), may the Court modify a plan of reorganization to increase the amount paid to unsecured creditors and extend the time for such payment to 36 months even though the debtor has no "projected disposable income" and no minimum "applicable commitment period" under § 1325(b)?
III. FACTS
The Debtors filed their voluntary chapter 13 petition on July 29, 2008. Their bankruptcy petition Schedules "I" and "J" listed monthly income of $4,772.53 and monthly expenses of $4,051.58, yielding total monthly net income of $720.95. [D.E. # 11] The Debtors' Form B22C lists "current monthly income" of $2,594.53 because, pursuant to new § 101(10A), the term "current monthly income" excludes their Social Security income. [D.E. # 12] Lines 12-17 of the Debtors' Form B22C reflect annualized "current monthly income" of $31,134.36, placing them below the $ 61,742 applicable median family income for a family of two in California. Because their Form B22C reflects that they have below median income, Line 23 of Form B22C provides that the Debtors were not required to utilize § 1325(b)(3) — which incorporates the "means test" in § 707(b) — to calculate their expense deductions and their "disposable income." Instead, the Debtors could utilize their Schedule "J" expenses to calculate their monthly expenses and their "disposable income," but under current law, these expenses must be deducted from their "current monthly income" listed on Form B22C instead of from their actual monthly income listed on Schedule "J." See 11 U.S.C. § 1325(b)(2). Accordingly, the Debtors have fictitious negative "disposable income" of $1,457.05 even though they have positive net monthly income of $720.95.
The Debtors receive $2,518 in monthly Social Security income. {See Schedule "I"]
The Debtors' Plan dated August 12, 2008 proposed to pay $720.00 monthly to the Trustee for payment of:
¶ 3 — Administrative claims including statutory trustees fees; ¶ 6 — Personal property secured claim of Wells Fargo estimated to be $5,831.87; ¶ 9 — Real property secured claims estimated to be $1,400 owed to the County of San Diego Tax Collector for real property taxes (Dan McAllister), and mortgage arrearages estimated to be $10,000 owed to First Federal Savings; and ¶ 13 — 0% to general unsecured creditors. However, because the percentage amount was filled in at less than 100% and the dollar amount was left blank, this paragraph provides that the Trustee is authorized to increase the percentage, if necessary, to comply with the required applicable commitment period.
Pursuant to Proof of Claim No. 5 filed September 12, 2008, the secured creditor is First Federal Bank of California ("First Federal").
Additionally, ¶ 19 of the Plan proposed that the Debtors would file an adversary proceeding to avoid the second mortgage held by Countrywide Home Loans on the Debtors' principal residence pursuant to § 1322, contingent upon the Debtors' success in the adversary proceeding and completion of their Plan. [D.E. #13]
The Debtors filed a valuation motion in lieu of an adversary proceeding as authorized by In re Pereira, 394 B.R. 501 (Bankr. S.D. Cal. 2008). That motion was granted and an order avoiding the lien was entered on December 18, 2008, contingent upon confirmation and completion of the Plan. [D.E. # 41]
The Trustee objected to confirmation of the Plan for several reasons, including the failure to report all sources of § 101(10A) income and failure to apply all "projected disposable income" for a period of not less than three years. [D.E. #19] These issues were resolved, and the Plan was confirmed by order entered January 28, 2009. [D.E. # 47] Although the language in the Plan suggests a length of 36 months, it is undisputed that the Plan runs 35 months.
In May 2009, First Federal filed a motion for relief from stay alleging, inter alia, that the Debtors had not made any postpetition mortgage payments. [D.E. # 57-58] The Debtors did not contest the motion, and an uncontested order was entered on June 9, 2009. [D.E. # 59] Although the record is unclear, it appears that First Federal may have informally withdrawn its proof of claim as result of the order lifting the stay. Additionally, the record reflects that on September 4, 2009, the Trustee noticed his intent to reconsider and reallow First Federal's Claim No. 5 in the reduced amount of $547.45, most likely because this is the amount of arrearages the Trustee had already paid to First Federal. [D.E. # 67] Because First Federal did not timely object to the Trustee's notice of intent, Claim No. 5 is now reallowed in the reduced amount. Further, the County of San Diego Tax Collector has withdrawn Claim No. 7 for $836.41 in property taxes. [D.E. # 64] Therefore, although it is not expressly stated in the Trustee's motion, it appears that Wells Fargo is the sole remaining secured creditor to be paid.
On September 28, 2009, the Trustee filed his motion to approve the Modified Plan dated September 25, 2009. The Modified Plan is identical to the Plan except for ¶ 13 and ¶ 19. Modified Plan ¶ 13 increases the 0% dividend to general unsecured creditors to 15% or a pro rata share of $15,000, whichever is greater. Modified Plan ¶ 19 still provides for a lien strip of the wholly unsecured second trust deed, but identifies two secured creditors who appear to be strangers to this case. The Trustee's declaration in support of his motion indicates:" Real estate creditors withdrew claims and plan is only 15 months in length at 0%." [D.E. #71] The Trustee's motion does not state that the Modified Plan is 36 months in length. At the hearing on the motion, the Trustee stated that the Modified Plan is 36 months in length.
Modified Plan ¶ 19 appears to be an erroneous cut and paste from a plan proposed in a different chapter 13 case.
The Debtors acknowledge their confirmed Plan was projected to run 35 months in length, but it will likely be completed in 15 months. [D.E. # 72] The Debtors contend they cannot be forced to continue to pay into their Plan for the entire 35 months (or 36 months) because they have no "disposable income" and no "applicable commitment period" for their Plan.
IV. DISCUSSION
The Court must decide whether it should grant the Trustee's motion to modify the Plan to increase the dividend to the class of general unsecured creditors and to extend the length to 36 months even though the Debtors have no disposable income to pay into their Plan, and there is no minimum applicable commitment period requirement for this Plan. Bankruptcy Code § 1329 governs modification of a plan after confirmation. Section 1329(a) provides that a plan may be modified at any time after confirmation but before completion of such payments under the plan, for any of the following reasons:
(1) to increase or reduce the amount of payments on claims of a particular class provided for by the plan; (2) to extend or reduce the time for such payments; (3) to alter the amount of the distribution to a creditor whose claim is provided for by the plan to reflect payments outside the plan; or (4) if appropriate, to reduce the amounts to be paid under the plan by the actual amounts the debtor expends to obtain health insurance.
Section 1329(b)(1) specifies the provisions that apply to post-confirmation plan modifications. Specifically, § 1329(b)(1) specifies that §§ 1322(a), 1322(b) and 1323(c) of this title, and the requirements of § 1325(a) of this title, apply to modifications of a plan under § 1329(a). This section does not, however, incorporate any of the requirements of § 1325(b) of this title to post-confirmation plan modifications. As such, there is no express requirement in § 1329(b)(1) that the disposable income test must be satisfied to approve a post-confirmation plan modification.
This Court has previously reviewed the effect of omitting the disposable income test from § 1329(b)(1) in In re Sounakhene, 249 B.R. 801 (Bankr. S.D. Cal. 2000). The Court relied upon the plain language of § 1329(b)(1) to join the courts that hold the disposable income test in & sect; 1325(b) is not implicated under a strict reading of & sect; 1329(b)(1). Sounakehene, 249 B.R. at 805. We reasoned that the better approach is to utilize components of the disposable income test as a factor weighing upon the Court's overall judgment and discretion to approve the modified plan. Id. at 805.
The holding of Sounakehene was adopted by the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in In re Sunahara, 326 B.R. 768, 781-82 (9th Cir. BAP 2005). The BAP reviewed the competing views and held that the disposable income test in § 1325(b) is not implicated by a strict reading of & sect; 1329(b)(1), except as a factor in determining the good faith of the plan modification. Sunahara, 326 B.R. at 782. Although Congress has since overhauled many parts of the Bankruptcy Code through BAPCPA, Congress did not amend & sect; 1329(b)(1). The BAP has affirmed that its holding in Sunahara continues to apply in cases subject to BAPCPA. In re Fridley, 380 B.R. 538, 543-44 (9th Cir. BAP 2007).
Notwithstanding the above precedents, the Debtors focus on the disposable income test in § 1325(b) as grounds to deny the motion. They argue the holding of the Ninth Circuit Court of Appeals in Kagenveama "compels" the conclusion that they have no disposable income under § 1325(b) and, therefore, have no prescribed minimum applicable commitment for their Plan. The Debtors' position is that their plan payments are voluntary, and they could have proposed as short of a plan as they wanted. They contend that Kagenveama" compels" that the Court must leave the Plan as confirmed even though they will complete it in only 15 months.
See Opposition at 2:10-17 quoting from Kagenveama's dissent as follows:
The majority lays down a rule: So long as the debtor can calculate no "disposable income" at the time his creditor plan is confirmed, he can rest easy. The debtor can propose as short a time period as he wants: a day, a week, or a month.
Kagenveama, 541 F.3d at 877 (quotation marks in original). [D.E. # 72]
It is difficult to understand how the disposable income test in § 1325(b) "compels" that there can be no forced modifications to their Plan since there is still no requirement in § 1329 to satisfy § 1325(b). Fridley, 380 B.R. at 543-44. More troubling is the fact that Kagenveama stressed its holding does not apply to § 1329 plan modifications:
We stress that nothing in our opinion prevents the debtor, the trustee, or the holder of an allowed unsecured claim to request modification of the plan after confirmation pursuant to § 1329. Here, we are dealing with the plan confirmation requirements of § 1325, not plan modification pursuant to & sect; 1329. Another section of the Bankruptcy Code governs modification of a plan before confirmation. II U.S.C. § 1323. Because Congress directly addressed the modification of plan in other sections, we need not transform § 1325 into a plan modification tool.
Kagenveama, 541 F.3d at 877. Since Kagenveama did not apply its holding to § 1329 plan modifications, it certainly cannot "compel" denial of this motion.
The Debtors have proffered no other arguments in support of their opposition. However, the Court has an independent duty to review the Modified Plan to determine if it meets the applicable confirmation requirements, including good faith. See § 1329(b)(1) which incorporates & sect; 1325(a)(3); see also In re Warren, 89 B.R. 87, 90 (9th Cir. BAP 1988) (in order to confirm a plan, § 1325(a)(3) provides that the bankruptcy court must find that it has been proposed in good faith). Good faith is not statutorily defined. Instead, a court must make a factual determination of whether a plan has been proposed in good faith based on the totality of the circumstances. In re Goeb, 675 F.2d. 1386, 1390-91 (9th Cir. 1982).
In Goeb, the Ninth Circuit directed that the proper inquiry is whether the plan proponent "acted equitably" in proposing the plan. Goeb, 675 F.2d at 1390. This "acted equitably" analysis considers whether the plan proponent has misrepresented facts in the plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed the plan in an inequitable manner, taking into account "all militating factors" in a manner that equates with the totality of the circumstances. Id. at 1390-91; see also Fridley, 380 B.R. at 543 (looking to Goeb in a case subject to BAPCPA for the Circuit's long-settled interpretation of the good faith confirmation requirement).
Thus, the Court must review the Modified Plan to determine whether the Trustee has "acted equitably" in proposing the Modified Plan. The Trustee is not acting equitably if he is attempting to achieve through the Modified Plan an unfair manipulation the Bankruptcy Code, or if he has otherwise proposed the Modified Plan in an inequitable manner. See Goeb, 675 F.2d at 1390; Fridley, 380 B.R. at 543. If, for example, the Trustee always intended to bring this § 1329 motion to modify the Plan to increase the payment and extend the length to circumvent Kagenveama's interpretation of § 1325(b), this stratagem would plainly be an unfair manipulation of the Bankruptcy Code, which is a factor named in Goeb as being indicative of bad faith. As Fridley explained:
The existence of the controlling Goeb test of § 1325(a)(3) good faith means that [the BAP in] Sunahara didnot inadvertently license circumvention of § 1325(b) by the ploy of confirming a plan that complies with § 1325(b) [disposable income test] and
then promptly modifying the plan in a manner that does not comply with § 1525(D). Such a stratagem plainly would be unfair manipulation of the Bankruptcy Code, which is a factor named in Goeb as indicative of a plan proponent not acting equitably and, hence, not in good faith. [Citation omitted.]
Fridley, 380 B.R. at 543. Accordingly, the Court cannot (and will not) approve the Modified Plan if it finds the Trustee always intended to modify the Plan to circumvent § 1325(b).
In the present case, there is no evidence suggesting the Trustee always intended to modify the Plan to circumvent § 1325(b). Rather, the Trustee brought this motion in response to the Court's order entered post-confirmation granting relief from stay to First Federal, which reduced the amount of secured claims to be paid through the Plan. The Trustee seeks to assure that the Debtors pay their $720.00 in monthly net income toward repayment of their creditors for the agreed upon length of 35 months. The Trustee correctly anticipated that the Debtors have no intention of paying for the full 35 months. The Debtors contend that all payments under their Plan will be completed in 15 months. The Court does not reach the issue of whether the Debtors' position is legally correct.
Arguably, the 35 month length cannot be shortened without a proper § 1329 motion to modify the Plan to decrease its length. See Fridley, 380 B.R. at 544-45. The Debtors have not brought such a motion.
The proper focus is on whether the Trustee's motive in proposing the Modified Plan is well-intentioned under the totality of the circumstances. This totality of the circumstances test is easily met. There is nothing unfair, manipulative or inequitable about holding the Debtors to their agreed plan period of 35 months. In exchange for making 35 monthly payments of $720.00, the Debtors will receive a discharge of approximately $100,000 in general unsecured debts. [D.E.# 11]
However, the Court cannot discern a good faith reason to extend the Plan length from 35 months to 36 months. Extending the Plan for one more month to collect $ 720.00 will not yield a meaningful increased dividend to general unsecured creditors. The one month extension appears to be a poorly veiled attempt to use § 1329 to circumvent & sect; 1325(b). The Debtors proposed a 3 5-month plan length in good faith. The Trustee may not agree with Kagenveama's interpretation of § 1325(b), but it is not appropriate to use § 1329 to circumvent it.
V. CONCLUSION
The Court grants the motion to modify, in part, based upon its finding that the Trustee has proposed the Modified Plan in good faith. The Modified Plan shall increase the dividend to general unsecured creditors from 0% to 15%, or a pro rata share of $15,000, whichever is greater. The Modified Plan length shall remain 35 months. Further, 119 of the Modified Plan needs to correctly identify the junior secured creditor. The Trustee shall prepare and lodge an order in accordance with this Memorandum Decision within ten days of its entry.