Opinion
Case No. 96-12891-SSM
September 16, 1996
Robert K. Coulter, Esquire, Alexandria, VA, of Counsel for the Internal Revenue Service
MEMORANDUM OPINION
This matter is before the court on an objection filed by the Internal Revenue Service to confirmation of the debtor's proposed chapter 13 plan dated June 14, 1996. A hearing was held on September 10, 1996, at which time the court took the matter under advisement.
Facts
The debtor, Karriem El-Amin Shabazz, filed a voluntary chapter 13 petition in this court on May 30, 1996. This is the fourth chapter 13 case he has filed in this court in the space of approximately two and a half years. The prior filings, and their disposition, are as follows:
Date Filed Case Number Disposition Jan. 27, 1994 94-10304-MVB Dismissed 10/17/94 after confirmationdenied. Oct. 25, 1994 94-14067-DOT Dismissed 7/20/95 after confirmation of amended plan denied. Debtor's motion for relief from dismissal order denied 9/13/95. Oct. 16, 1995 95-14536-MVB Dismissed 3/26/96 after confirmation of plan denied. Debtor's motion to amend order denied 5/21/96. In his schedules, the debtor lists as his assets a duplex home in Florida valued at $47,500 (subject to a $40,000 mortgage) and $3,300 in personal property. Besides the mortgage on the house, he lists as his debts priority tax claims in the amount of $13,605.30 and two unsecured claims in the aggregate amount of $41,500 "one for non-priority Federal taxes and the other apparently a student loan. His schedules reflect that he is employed as a mental health therapist grossing $4,056 per month. He lists expenses of $2,921.60 per month. The excess of his monthly takehome pay over his monthly expenses is $748.90. His plan, dated June 14, 1996, proposes to pay to the chapter 13 trustee $244.57 per month for 60 months, for a total of $14,674.20. This would go entirely to pay the trustee's commission and what the debtor asserts are only $12,000 in priority tax claims. He proposes no payment on general unsecured claims.The Internal Revenue Service ("IRS") has filed a timely proof of claim asserting a claim for unpaid income taxes, including penalties and interest, in the amount of $48,188.31 as a priority claim and $16,770.22 as a general unsecured claim. The priority tax claims relate to tax years 1990 through 1995. For two of those years (1994 and 1995), the tax liability is estimated, since the debtor has not filed returns. The IRS had filed a similar proof of claim in the debtor's last case. In that case, the debtor filed an objection to the IRS proof of claim on January 30, 1995, and a hearing was held on February 6, 1996, before Chief Judge Bostetter of this court. Judge Bostetter ruled from the bench that the claim was valid, and a formal order was entered on March 26, 1996, overruling the debtor's objection to the IRS proof of claim. The debtor filed a motion to alter or amend the order, but that motion was denied on May 21, 1996 as having been untimely filed. No appeal has been taken from that order.
The amounts claimed were $38,775.71 as a priority claim (for the tax years 1990 through 1994) and a $15,493.93 general unsecured claim.
The objections were entirely directed to asserted formal defects with respect to the IRS proof of claim. Significantly, the debtor did not assert (1) that he had in fact paid all the taxes owed for the years in question or (2) that he was not liable for the taxes claimed. In his first chapter 13 case, the debtor had apparently taken the position, in a hearing before Judge Tice of this court, that he was not subject to Federal income taxation, a position which Judge Tice determined to be meritless. In re Karriem El-Amin Shabazz, No. 94-10304-AB, Findings of Fact, Conclusions of Law and Order, p. 3-4 (Bankr. E.D. Va., Aug. 3, 1994).
Conclusions of Law and Discussion
Confirmation of a plan in an individual debtor's adjustment of debts case under chapter 13 of the Bankruptcy Code is governed by § 1325, Bankruptcy Code, 11 U.S.C. § 1325. The court is required to confirm a plan if certain conditions are met, among them the following:
(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title;
* * *
(3) the plan has been proposed in good faith and not by any means forbidden by law.
§ 1325(a), Bankruptcy Code. The reference to "provisions of this chapter" in § 1325(a)(1) most importantly includes § 1322, Bankruptcy Code, which sets forth certain provisions a plan must contain and certain provisions it may contain. Among those things a plan must do is the following:
provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title [ 11 U.S.C. § 507], unless the holder of a particular claim agrees to a different treatment of such claim.
§ 1322(a)(2), Bankruptcy Code. Finally, under § 1325(b), Bankruptcy Code,
(1) if the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan —
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides 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 make payments under the plan.
(2) For purposes of this subsection, "disposable income" means income which is 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. . . .
The issues in this case are whether the debtor's plan complies with the requirement of § 1322(a)(2) for the payment of priority claims in full, with the "good faith" requirement of § 1325(a)(3), and with the disposable income requirement of § 1325(b)(1)(B).
A.
At the outset, the debtor objects that a hearing on confirmation is premature because a meeting of creditors under § 341, Bankruptcy Code, has not been held. While it is certainly the normal course of events that a meeting of creditors is held in a chapter 13 case prior to a confirmation hearing, there does not appear to be any requirement either in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure that the sequence occur in that order. The purpose of the meeting of creditors is not to confer any rights on the debtor but to permit the trustee and creditors to examine the debtor under oath. In any event, a meeting of creditors was in fact convened on July 15, 1996. The standing chapter 13 trustee, who presided at the meeting, advises that there were no creditors present. The debtor objected on religious grounds to the taking of an oath, and the trustee did not examine the debtor. The trustee explained that the reason he did not do so was because he was familiar with the debtor as a result of the prior filings and there was nothing to be gained from an examination, since at bottom the chapter 13 case was a dispute between the debtor and the IRS. Regardless of the trustee's reasons, the fact that he elected not to examine the debtor does not mean that a meeting of creditors was not held or that the debtor was there by deprived of any right conferred by the Bankruptcy Code or Federal Rules of Bankruptcy Procedure.
B.
Turning to the statutory requirements for confirmation, the plan on its face does not provide for full payment of the $48,188.31 priority claim asserted by the Internal Revenue Service. The plan, as noted above, provides for payment of only $12,000 in priority tax claims. The debtor, however, asserts that he disputes the IRS claim and is entitled to file, and to have this court determine, an objection to the IRS's claim prior to a ruling on confirmation. The IRS's claim was filed on July 25, 1996, and no objection had been filed to the proof of claim at the time of the confirmation hearing. Additionally, the debtor did not state at the confirmation hearing the basis, if any, upon which he intended to object to the claim.
Certainly, a debtor is entitled to object to any creditor's claim in a chapter 13 case. A proof of claim, unless objected to, is allowed. § 502(a), Bankruptcy Code. Even if objected to, a proof of claim that is properly filed is prima facie evidence of the validity and amount of the creditor's claim, and the debtor has the initial burden of presenting sufficient probative evidence to overcome such prima facie effect. F.R.Bankr.P. 3001(f); In re C-4 Media Cable South, L.P., 150 B.R. 374, 377 (Bankr. E.D. Va. 1992). Once the debtor has done so, the burden of proof then shifts to the creditor to establish the validity and amount of its claim.
The problem here is that the debtor has already, in his last chapter 13 case, filed an objection to an IRS proof of claim that differs from the one in this case only in the addition of one more tax year and the interest accruing since the last chapter 13 case. That objection was overruled, and no appeal was taken from the ruling. The principal of collateral estoppel, or issue preclusion, bars relitigation of issues actually litigated and necessarily decided between the same parties in a different cause of action. In re Wizard Software, Inc., 185 B.R. 512, 515 (Bankr. E.D. Va. 1995), citing Brown v. Felsen, 442 U.S. 127, 139, n. 10, 99 S.Ct. 2205, 2213, n. 10, 60 L.Ed.2d 767 (1979). Essentially, a party, having lost on an issue in one forum or proceeding, is not entitled to a second bite at the apple in another forum or proceeding. There is admittedly some conceptual difficulty in applying collateral estoppel in the context of claims allowance, since collateral estoppel requires that the prior determination be a final ruling, and a bankruptcy court has continuing authority to reconsider the allowance or disallowance of a claim "for cause . . . according to the equities of the case." § 502(j), Bankruptcy Code. Nevertheless, in view of the failure of the debtor in three prior chapter 13 cases to successfully contest the amount of the IRS's proof of claim, and his failure in this case to file an objection to the IRS's claim or to otherwise set forth a real and substantial basis for objecting to the IRS's claim "when that was the central issue in his prior cases" the court can only conclude that the debtor would be highly unlikely to prevail on the merits of an objection to the IRS claim, even should one be filed. Accordingly, the court concludes that the plan fails to provide for the IRS priority claim and, under § 1322(a)(2), Bankruptcy Code, cannot be confirmed.
The debtor's schedules state that he is relying on a literal application of the three-year period in § 507(a)(8)(A), Bankruptcy Code "which in general accords priority status to income taxes for those tax years for which a return was due within three years of the bankruptcy filing" to take certain of the tax years for which the IRS claims priority status outside the priority window. Although there is some disagreement among the courts that have considered the issue, the majority view appears to be that the three-year period is suspended during a prior bankruptcy case, when the IRS is barred from collecting the tax. Bowling v. IRS (In re Bowling), 147 B.R. 383 (Bankr. E.D. Va. 1992) (Tice, J.); Shedd v. United States, 190 B.R. 692 (Bankr. M.D. Fla. 1996); In re Taylor, 81 F.3d 20 (3rd Cir. 1996).
C.
With respect to the issue of good faith under § 1325(a)(3), Bankruptcy Code, the court cannot find, on the present record, that the debtor has invoked chapter 13 with the good faith intention of paying his creditors. While successive filings do not, in and of themselves, establish a lack of good faith, the record of filings by this debtor virtually compels the conclusion that the debtor has not filed the present petition in an honest effort to square his accounts with his creditors to the best of his ability, but solely for the purpose of invoking the automatic stay and using this court as his preferred forum for litigating with the IRS. He essentially has no creditors other than the IRS. Moreover, the debtor, although invoking the jurisdiction of this court for approval of a payment plan that deals solely with his tax liability, has failed to file tax returns for the two most recent years in question, thus preventing an accurate determination of those liabilities. In each of his prior cases, he failed to obtain confirmation of a plan for the adjustment of his debts. As each case was dismissed, he has filed a new case and has simply reasserted arguments that failed to carry the day in the prior case. There is no evidence of any significant change in circumstances — either in his debt structure or his income — between the dismissal of one case and the next. The plan proposed by the debtor, moreover, provides for a zero percent payment of general unsecured claims. While under controlling precedent in this circuit, a zero percent plan does not, in and of itself, constitute a lack of good faith, the percentage payment is one of many factors that a court may consider in assessing good faith. Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982). Here, the debtor's own budget reflects that his monthly income exceeds his expenses by $748.90; yet he proposes to devote to his plan only $244.57 per month. Clearly, he has the ability, without financial hardship, to make some significant payment on account of unsecured claims. Under these circumstances, proposing a plan that provides for no payment on account of allowed unsecured claims is redolent of bad faith.
As the Fourth Circuit has noted in the chapter 11 reorganization context, ". . . while it is not impermissible to propose a plan which only adjusts the interests of one creditor, this situation must certainly cause a court to scrutinize the equities involved." Travelers Ins. Co. v. Bryson Assocs. XVIII (In re Bryson Assocs. XVIII), 961 F.2d 496, 505 (4th Cir. 1992).
In Deans, the court set forth a suggested list of factors to be considered in assessing the debtor's good faith. These included (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; (7) the debtor's honesty in representing facts, and (8) any unusual or exceptional problems facing the particular debtor. 692 F.2d at 972.
D.
Finally, it is clear that the plan fails to comply with the disposable income test of § 1325(b). The plan has been objected to by a creditor, does not pay claims in full, and does not provide for the payment of all of the debtor's net disposable income for three years. As noted above, the proposed plan calls for a payment of $244.67 per month for 60 months, or a total of $14,680. The debtor's own schedules reflect a disposable income of at least $748.90 per month, which, if paid for 36 months, would aggregate in that period $26,960.40, or $12,280.40 more than he has proposed to pay into the plan.
E.
In summary, the debtor's proposed chapter 13 plan fails to meet three separate requirements for confirmation. It does not pay priority claims in full, it was not proposed in good faith, and it does not meet the disposable income test. Accordingly, the court has no choice except to deny confirmation. A separate order will be entered consistent with this opinion.