In Re Stein
OPINION AND ORDER DENYING CONFIRMATION OF DEBTOR’S AMENDED CHAPTER 13 PLAN
I. Preliminary Statement
This matter is before the Court following a hearing held to consider confirmation of the Amended Chapter 13 Plan (“Plan”) filed by Michael P. Stein and Linda Stein (“Debtors”). The confirmation hearing was held in this case on May 10, 1988, following which the Court took under advisement the issue of the confirmability of the Plan.
The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this District. This is a core proceeding which the Court may hear and determine. 28 U.S.C. § 157(b)(1) and (b)(2)(L). The following opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule (“B.R.”) 7052.
II. Findings of Fact
The Plan provides for monthly payments of $860, which will result in full payment of allowed secured and priority unsecured claims, and a dividend of 10% to holders of allowed unsecured claims. A period of 60 months will be required for the Plan’s completion. The Plan provides for the rejection of a lease agreement with Jack Schmidt Lease, Inc. (“Schmidt Lease”) under which Debtors lease a 1985 Oldsmobile Cutlass. In addition, the Plan contains the following provision which will allow the Debtors to enter into two new leases:
6. Debtor(s) will have authority, without further notice and/or hearing, to enter into executory contracts for the lease of two automobiles if the leases have a term of 48 to 60 months, aggregate monthly lease payments of no more than $465.00, and no balloon payment or obligation to purchase. Debtors will thus reduce, from $598.00 to $465.00, their monthly automobile lease payments.
According to their Chapter 13 statement, Debtors’ combined monthly net income is $5,367. Dr. Stein is employed by Tucker-man Optical Co. (“Tuckerman”) as an optometrist. Mrs. Stein, too, is employed by Tuckerman as Director of Merchandise. The Debtors support three dependent children: a daughter, age 15, and two sons, ages 13 and 11. The Debtors’ Amended Chapter 13 Statement lists the following
(1) Home mortgage payment $1,433
(2) Utilities 340
(3) Food 780
(4) Clothing 250
(5) Laundry and cleaning 100
(6) Newspapers, periodicals, and books (including school books and supplies) 45
(7) Medical and drug expenses 200
(8) Insurance (not deducted from wages) (a) Auto 100
, (b) Other (Life) 325
(9) Transportation (leases, gasoline, repairs, parking) 700
(10) Recreation 50
(11) Dues, union, professional, social or otherwise (not deducted from wages) 75
(12) Taxes (not deducted from wages) —
(13) Alimony, maintenance, or support payments —
(14) Other payments for support of dependents not living at home —
(15) Religious and other charitable contributions —
(16) Other: home maintenance and personal/household emergencies; accountant 70
TOTAL $4,468
The Chapter 13 trustee (“Trustee”) filed his “First Revised Chapter 13 Trustee’s Recommendations” (“Recommendation”) on May 10, 1988. The Recommendation delineates certain deficiencies in the Plan which, in the Trustee’s opinion, impede confirmation. Most of the items set forth in the Recommendation relate to minor procedural infirmities in the Plan and accompanying schedules. According to Debtors’ counsel, these procedural deficiencies have been cured in the Amended Chapter 13 Statement filed with the Court on April 29, 1988.
The Recommendation also contains a substantive concern: whether Debtors have proposed the Plan in good faith. At the hearing, the Trustee argued that the Debtors’ rejection of the Schmidt Lease and intention to enter into, two new leases constitutes bad faith, apparently on the ground that the Debtors are essentially asking the unsecured creditors to finance two replacement new cars which are not reasonably necessary for the maintenance or support of the Debtors or their dependents.
III. Legal Discussion
A. Status of Recommendation as an Objection to Confirmation
The initial matter for determination by this Court is whether a negative recommendation by the Trustee should be viewed as a formal objection to confirmation. In its previous decision in
In re Rich,
No. 2-87-03060, slip op. at pp. 3-5 (Bankr.S.D.Ohio December 21, 1987) [
The Court finds that the Trustee’s objection to the confirmation of debtors’ Chapter 13 plan of the debtors is not before the Court in its proper procedural posture. LBR C-3.18.5 governs objections to confirmation and provides as follows:
Objections to confirmation of a plan must be in writing and must specifically set forth the statutory grounds upon which the objections are based. Unless such objections must be filed with the Court and served upon the Trustee, the debtor and the debtor’s attorney at least three (3) days prior to the meeting of creditors or ten (10) days prior to confirmation, whichever is later. Unless the Court orders otherwise, objections to confirmation will be heard at the time of the hearing on confirmation.
The Recommendation filed by the Trustee clearly does not constitute a proper objection to confirmation in the view ofthis Court. The Recommendation does not set forth the statutory ground upon which the Trustee’s objection to confirmation is based.... Further, the Trustee’s Recommendation also was not filed within ten (10) days prior to the hearing as required by LBR C-3.18.5.
Thus, the Court holds that the Trustee, like any other party-in-interest, must comply with the Court’s procedural guidelines in lodging objections to confirmation.
In the instant case, the Trustee’s Recommendation is not an objection to confirmation because it does not comply with the requirements of LBR C-3.18.5 or B.R. 3020(b)(1), which is the national rule concerning objections. It is, therefore, simply an advisory recommendation. However, even if the Court were to treat the Trustee’s Recommendation as an objection to confirmation, it would not be sustainable. The Trustee asserts that Debtors’ proposed rejection of the Schmidt Lease is indicative of Debtors’ bad faith because the Debtors are rejecting a year-old lease on a 1985 model car in favor of two automobile leases which, together, will require an aggregate monthly payment of $465 or less. The Court finds this assertion to be untenable for several reasons. First, the Trustee has provided no support, evidentiary or otherwise, for his contention. While the Debtors bear the ultimate burden of persuasion on the issue of compliance with the confirmation criteria contained in 11 U.S.C. § 1325(a), an objecting party must meet the initial burden of producing evidence in support of his objection.
See, Education Assistance Corp. v. Zellner,
B. Compliance With The Good Faith Standard of 11 U.S.C. § 1325(a)
Having determined that there are no pending objections' to confirmation, the Court, nevertheless, has an independent duty to ensure that the Plan meets all the requirements for confirmation as set forth in 11 U.S.C. § 1325(a), including the good faith standard of § 1325(a)(3).
In re Bowles,
Specifically, the Court finds that the Debtors’ estimated monthly expenditures, set forth in their proposed budget, exceed expenses which are reasonably necessary for the maintenance and support of Debtors or their dependents. Relevant to the Court’s inquiry is 11 U.S.C. § 1325(b)(1), which imposes the following requirements if there is an objection to confirmation:
Section 1325(b)(1) of the Code provides as follows:
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.
Section 1325(b)(1) represents Congress’ attempt to statutorily resolve issues relating to the appropriate minimum requirements for funding a Chapter 13 plan from a debt- or’s post-petition income.
See, In re Pierce,
Congress responded to the courts’ disparate application of the good faith standard — as a means of regulating the amount of payments and the length of Chapter 13 plans — by considering a number of proposals which would have required a good faith effort by a debtor to provide payments to creditors consistent with the debtor’s ability, including a so-called “best efforts test.” H.R.Doc. No. 1195, 96th Cong., 2d Sess. 24 (1980). Instead, Congress adopted the “ability-to-pay” provisions of § 1325(b), proposed by the National Bankruptcy Conference, which provided that the amount that a debtor could reasonably afford to pay would become both a floor and a ceiling for Chapter 13 plan payments. Oversight Hearings on Personal Bankruptcy Before the Subcommittee on Monopolies and Commercial Law of the House Committee on the Judiciary, 97th Cong., 1st Sess. 181-203 (1981-82). It has been commented that:
Through this ability-to-pay test, Congress hoped to create a concrete standard which would both eliminate the disparity between the judicial districts and be consistent with the basic consumer credit theory of extending credit based on future income.
Silver, The Disposable Income Test: An Attempt Toward Uniformity, 4 Bankr. Dev.J. 221, 225 (1987) (footnotes omitted).
Pierce,
The language of the provision and legislative history makes clear that, unlike the confirmation standards of section 1325(a), the ability-to-pay test may not be raised by the court sua sponte, nor may it be raised by the holder of only a secured claim or the holder of a claim which has not been allowed. It may be raised only by the trustee or by the holder of an allowed unsecured claim.
5 Collier on Bankruptcy ¶ 1325.08[2] at 1325-45 (15th ed. 1988).
Although § 1325(b) may not be raised by a bankruptcy court
sua sponte,
it is appropriate for the Court to consider the standards of § 1325(b) in determining whether a debtor’s proposed plan comports with § 1325(a)(3)’s good faith requirement.
Davis,
(a) the amount of income of the debtor and the debtor’s spouse from all sources;
(b) the regular and recurring living expenses for the debtor and his dependants [sic];
(c) the amount of the attorney’s fees to be awarded in the case and paid by the debtor;
(d) the probable or expected duration of the Chapter 13 plan;
(e) the motivations of the debtor and his sincerity in seeking relief under the provisions of Chapter 13;
(f) the ability of the debtor to earn and the likelihood of future increase or diminution of earnings;
(g) special situations such as inordinate medical expense, or unusual care required for any member of the debtor’s family;
(h) the frequency with which the debtor has sought relief under any section or title of the Bankruptcy Reform Act or its predecessor’s statutes;
(i) the circumstances under which the debtor has contracted his debts and his demonstrated bona fides, or lack of same, in dealing with his creditors;
(j) whether the amount or percentage of payment offered by the particular debtor would operate or be a mockery of honest, hard-working, well-intended debtors who pay a higher percentage of their claims consistent with the purpose and spirit of Chapter 13;
(k) the burden which the administration of the plan would place on the trustee; and
(l) the salutary rehabilitative provisions of the Bankruptcy Reform Act of 1978 which are to be construed liberally in favor of the debtor.
Two of the factors identified by the Sixth Circuit in Okoreeh-Baah — i.e., “the amount of income of the debtor and the debtor’s spouse from all sources”; and, “the regular and recurring living expenses for the debtor and his dependents” — suggest that a bankruptcy court’s good faith inquiry should properly include a scrutiny of a Chapter 13 debtor’s proposed monthly budget. Thus, both the Davis and Oko-reeh-Baah decisions establish that an analysis of a debtor’s budgeted monthly expenses is an appropriate element of a bankruptcy court’s good faith calculus.
The statutory language of § 1325(b) provides little guidance as to the proper scope of inquiry of a bankruptcy court in its determination of whether particular budgeted expenses are reasonably necessary for the maintenance and support of the debtor or the debtor’s dependents. The legislative history of § 1325(b) has been described as “singularly vague and unenlightening.”
In re Jones,
A court determining the debtor’s disposable income is not expected to, and should not, mandate drastic changes in the debtor’s lifestyle to fit some preconceived norm for chapter 13 debtors. The debtor’s expenses should be scrutinized only for luxuries which are not enjoyed by an average American family. For example, since it is not unusual for families to send their children to parochialschools, a court should not deem that a luxury. However, sending a child to a private boarding school is much less common, and could be deemed a luxury if no special necessity were shown. Similarly, it is not unusual for a family to have two automobiles. But there is no necessity that those automobiles both be the latest models or that they be in the luxury class.
In short, the court cannot and should not order debtors to alter their lifestyles where there is no obvious indulgence in luxuries, even where one or more unsecured creditors demand such a change. To engage in such close judgments and supervision would be to contravene the intent of Congress. It would also place impossible burdens on the court in determining the absolute necessity of every expense in each debtor’s budget. Since the views of judges on such value-laden issues differ significantly, such an interpretation of the amendments would contravene their purpose of restoring nationwide uniformity to Chapter 13.
5
Collier on Bankruptcy
111325.08[4][b] at 1325-48 to 1325-49 (15th ed.1988) (footnotes omitted).
See also, In re Tinneberg,
The case law establishes that a bankruptcy court should not “squeeze the last dollar from Chapter 13 debtors to fund a Chapter 13 plan.”
In re Otero,
1. the debtor proposes to use income for luxury goods or services;
2. the debtor proposes to commit a clearly excessive amount to non-luxury goods or services;
3. the debtor proposes to retain a clearly excessive amount of income for discretionary purposes;
4. the debtor proposes expenditures which would not be made but for a desire to avoid payments to unsecured creditors;
5. the debtor’s proposed expenditures as a whole appear to be deliberately inflated and unreasonable.
Navarro,
Applying the
Navarro
criteria to the instant case, the Court finds that two of the five
Navarro
factors are present here, those having been identified in sub-paragraphs (2) and (5) above. It is readily apparent that the Debtors have run afoul of the second
Navarro
criteria by committing a “clearly excessive amount to non-luxury goods or services.” Debtors also have violated the fifth factor enunciated in
Navarro
because their proposed expenditures as a whole “appear to be deliberately inflated and unreasonable.” The budget submitted by Debtors contains several monthly expenditures which are manifestly excessive. Debtors budget $780 a month for food. In light of this Court’s experience in reviewing the budgets of Chapter 13 debtors in hundreds of Chapter 13 cases each year, a $780 monthly outlay for food for a family of five is excessive by local standards. The $700 per month budgeted transportation expense likewise far exceeds
Viewing Debtors’ monthly budget as a whole, the Court is convinced that the budget is “deliberately inflated and unreasonable.”
Navarro,
Finally, the Court notes that it is incumbent upon the Debtors, as the parties seeking confirmation, to affirmatively demonstrate compliance with the confirmation criteria of 11 U.S.C. § 1325.
In re Hogue,
Based upon the foregoing, confirmation of Debtors’ Chapter 13 plan shall be, and is hereby, DENIED. Pursuant to LBR C-3.18.18(b), the Debtors shall have twenty (20) days from the entry of this Opinion and Order to take whatever action they deem appropriate to place the Plan in a posture for confirmation. If no such action is taken, the Court shall dismiss this case.
IT IS SO ORDERED.
Notes
. The legislative history of § 1325(b) provides in relevant part as follows:
Chapter 13 relief is essentially equitable, and contemplates a substantial effort by the debtor to pay his debts. Such an effort, by definition, may require some sacrifices by the debtor, and some alteration in prepetition consumption levels. Thus, the debtor might reasonably be required to devote to the plan that portion of his income which is not necessary for support of the debtor and his family. The courts may be expected to determine norms for such support, and Labor Department cost of living figures may provide some help. This approach will also permit plans to be confirmed where the debtor does make a substantial effort to pay his debts, even though the payment itself is not substantial.
S.Rep. No. 65, 98th Cong. 1st Sess. 22 (1983).
. While the Debtors’ ?1433 monthly mortgage payment appears excessive on its face, the Court was informed by Debtors’ counsel that this large monthly payment is attributable to a recent refinancing of Debtors’ residence which Debtors undertook in order to obtain funds to satisfy their tax obligations to the Internal Revenue Service. Accordingly, the Court concludes that this budget item is reasonable.