In re Swain
Chapter 13
MEMORANDUM OPINION
Before the Court is the motion of the Chapter 13 Trustee, Carl M. Bates, to modify the Chapter 13 plan of debtors Anthony Joseph Swain and Carrie Collins Swain “due to an unanticipated and substantial change in the debtors’ circumstances -” The Trustee makes his motion pursuant to § 1329 of the Bankruptcy Code,
The Debtors agree that a modification of the plan is appropriate but disagree with the Trustee over the terms of the modification. The Trustee contends that payments under a modified chapter 13 plan for debtors whose income has substantially changed must be determined pursuant to the formula set out in § 1325(b) of the Bankruptcy Code, which necessitates a post-petition recalculation of “current monthly income” in order to ensure that the debtors comply with the requirement of § 1325(b)(1)(B). Under that section, debtors must provide all of their projected disposable income to make payments to unsecured creditors under the plan. The Debtors propose modifications to the plan that disregard the § 1325(b) formula but
The Court agrees with the Trustee that the Debtors’ plan should be modified in light of the Debtors’ increased income. However, the Court does not agree with the Trustee’s position that § 1325(b) applies to plan modifications under
This Memorandum Opinion sets forth the Court’s findings of fact and conclusions of law pursuant to
Jurisdiction
The Court has subject matter jurisdiction over this contested matter pursuant to
Procedural Background
The Debtors filed a Chapter 13 bankruptcy case on November 13, 2009. On November 19, 2009, the Debtors filed their initial Chapter 13 plan. An order confirming the plan was entered on February 2, 2010.
On February 1, 2012, the Trustee filed a motion to dismiss the Debtors’ case for “unreasonable delay that is prejudicial to creditors.” Prior to the hearing on the Trustee’s motion, the Debtors filed a modified plan. In response, the Trustee withdrew his motion to dismiss.
On March 30, 2012, the Trustee filed an objection to confirmation of the modified plan and scheduled a hearing on the objection for April 11, 2012. The parties continued the April 11 hearing to April 25, May 23, July 18, August 15, September 12, and finally September 25. At the hearing held September 25, 2012, the Trustee’s objection to the first modified plan was sustained by the agreement of the parties.
On October 16, 2012, the Debtors filed a second modified plan. The Trustee filed an objection to the confirmation of the second modified plan and scheduled it for a hearing on November 28, 2012. The hearing was continued until December 12, 2012, at which time the Trustee’s objection was sustained by agreement.
On January 2, 2013, the Debtors filed their third modified plan. On February 12, 2013, the Trustee filed both an objection to the confirmation of the third modified plan and a motion to modify the Debtors’ chapter 13 plan. The Trustee’s motion seeks to modify the plan by increasing the plan payment and the percentage distribution to unsecured creditors.
The hearing on the Trustee’s objection to confirmation of the third modified plan was scheduled on February 20, 2013, but was continued to March 20, 2013, so that it could be heard simultaneously with the Trustee’s modification motion. On March 20, 2013, the hearings on the motion to modify and the objection to confirmation of the third modified plan were continued until May 1, 2013, and both hearings were again continued, this time until August 13,
The day before the continued hearings, the Debtors filed amended Schedules I and J as well as a response to both the motion to modify and the Trustee’s objection to the confirmation of the third modified plan. The Trustee filed a memorandum in response immediately prior to the October 10, 2013, hearing.
At the October 10 hearing, the parties asked the Court to sustain by agreement the Trustee’s objection to the third modified plan. Both parties offered exhibits, which were admitted into evidence without objection, and agreed to continue the hearing on the motion to modify for a further evidentiary hearing on November 4, 2013. The parties advised the Court that they would attempt to submit factual stipulations prior to that date.
On November 1, 2013, the parties filed a stipulation of facts with the Court. In lieu of conducting a further hearing on November 4, 2013, the Court established a briefing schedule on the Trustee’s motion to modify. A hearing on the motion to modify was scheduled for December 16, 2013, in the event the parties desired to offer additional evidence and arguments. On November 18, 2013, the parties submitted an amended stipulation. The Court cancelled the hearing scheduled for December 16, 2013, upon the joint request of the parties. The parties now seek a ruling on the motion to modify based upon the existing record.
Facts
The evidence consists of the amended stipulation and the exhibits entered into evidence on October 10, 2013. The amended stipulation includes the following:
1. The Swains filed the instant Chapter 13 bankruptcy on November 13, 2009.
2. Carl M. Bates was appointed as the Chapter 13 Trustee in this case.
3. On the Swains’ Original Form B22C (Official Form 22C) filed on November 13, 2009, their combined “Current Monthly Income”, as shown on Line 14, was $9,895.22. At the time, the Swains had a household size of three (3), and their combined annualized current monthly income was above the applicable median family income for their household size. Therefore, the Swains completed Part IV of Form B22C. On Part IV of Form B22C, the Swains took deductions under § 707(b)(2) of $10,218.41, resulting in a “Monthly Disposable Income” (“DMI”), as shown on Line 59, of less than zero (specifically, negative $323.19).
4. The Swains’ first Chapter 13 Plan in this case was filed on November 19, 2009, and confirmed by this Court on February 2, 2010 (the “Confirmed Plan”). The Confirmed Plan provides for payment to the Trustee of $1,435.00 per month for 60 months, for total plan funding of $86,100.00. The Confirmed Plan proposed to pay (1) the remaining attorney fees, (2) priority debt owed to the Virginia Department of Taxation, and (3) claims secured by personal property to owed to First Market Bank, Marks & Morgan, and Navy Federal Credit Union. Additionally, the Confirmed Plan provided for the surrender of the Swains’ primary residence, whichserved as collateral for the loans held by BAC Home Loans and Navy Federal Credit Union. Finally, the Confirmed Plan proposed an estimated dividend of two percent (2%) to unsecured creditors.
5. On February 1, 2012, the Trustee filed a Motion to Dismiss the case because the Confirmed Plan did not provide sufficient funding to provide for all priority and secured claims. This underfunding was due to the Internal Revenue Service’s priority claim (Claim No. 26-1) for $10,871.32, which was not provided for by the Confirmed Plan, as the claim included $6,588.00 in post-petition tax liability.
6. On March 2, 2012, the Swains filed a Modified Plan that provided for the priority and secured claims, and on that basis, the Trustee withdrew his Motion to Dismiss. On March 30, 2012, the Trustee objected to that Modified Plan on the basis that it failed to comply with the disposable income test of11 U.S.C. § 1325(b) .
7. On June 7, 2012, the Internal Revenue Service amended its priority claim to $17,395.32 to include some additional post-petition tax liabilities in the amount of $6,524.00. It is now designated as Claim No. 26-2.
8. The Swains filed Amended Schedules I and J on October 9, 2013. On the Amended Schedule I, Mr. Swain’s gross monthly income is shown as $9,809.91, which is the approximate average of his monthly income over the six (6) months prior to the amendment. Mr. Swain’s monthly tax withholdings were calculated in the same manner. The Swains now have a household size of 4 and their Amended Schedule J shows monthly household expenses of $6,664.00.
9. On November 18, 2013, the Trustee filed with the Court a proposed Revised Form 22C as an Amended Exhibit. On the Trustee’s proposed Revised Form 22C, Mr. Swain’s gross monthly income is shown as $10,099.25, which is an average of his monthly income through the twelve (12) months prior to the October 10, 2013 hearing. Mrs. Swain’s income is the same as shown on her Amended Schedule I. The Revised Form 22C allows the Debtors total deductions of $13,592.99 and results in a Disposable Monthly Income of $2,298.26.
10. The Swains propose to make three (3) payments to the Trustee of $3,274.00 per month beginning in October 2013 and continuing through December 2013. Beginning in January 2014, Mrs. Swain’s health insurance premium will increase by $100.00 per biweekly pay period or $216.66 per month, so the Swains propose to reduce their payment to the Trustee to $3,058.00 per month for the final eleven (11) months of their Plan beginning in January 2014. Taking into account their payments to the Trustee through September 2013 of $65,370.76, this would result in total payments to the Trustee of $108,830.76. This would provide for full payment of administrative expenses, including the Trustee’s commission at approximately six percent (6%), priority claims, and secured claims, plus approximately $11,000.00 which would be available for distribution to non-priority unsecured creditors.
11. The Trustee proposes that the Swains’ Plan should be modified to require that they pay their Disposable Monthly Income, as shown on the proposed Revised Form 22C, which is $2,298.26, on a monthly basis for the final thirteen (13) months of the Plan. In order to pay administrative expenses, including the Trustee’s commission at approximately six percent (6%), priority claims, and secured claims, plus $2,298.26 per month to non-priorityunsecured creditors, the Swains would have to pay the Trustee a total amount of $130,123.76, which averages $4,981.00 per month for the final thirteen (13) months of the Plan.
The Exhibits (Nos. 1 through 4, submitted by the Trustee, and A and B, submitted by the Debtors) include the Trustee’s proposed Revised Form 22C (Exhibit 1), pay advices for Mr. Swain for the period from June, 2012, through September, 2013 (Exhibit 2), pay advices for Mrs. Swain for the period from December, 2012, through September, 2013 (Exhibit 3), a copy of
Analysis and Conclusions of Law
A confirmed Chapter 13 plan may be modified pursuant to
The Trustee is seeking a modification of the plan, and the Debtors do not oppose modification. In fact, the Debtors have sought on three occasions to modify the plan by filing modified plans pursuant to the Court’s applicable Local Rule.
The Fourth Circuit in Murphy acknowledged that a bankruptcy court has discretion to grant a motion to modify a confirmed plan pursuant to
Plan Confirmation Requirements.
“Disposable income” is defined in
Official Form 22C calculates a debtor’s monthly disposable income by subtracting the allowed § 707(b)(2) deductions, and other allowed expenses, from the debtor’s current monthly income. This amount is described on Form 22C as the “Monthly Disposable Income Under
Plan Modification Requirements. Confirmation of a plan under Chapter 13 occurs only once. In re Davis,
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor,the trustee, or the holder of an allowed unsecured claim, to—
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments;
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan; or
(4) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor (and for any dependent of the debtor if such dependent does not otherwise have health insurance coverage) if the debtor documents the cost of such insurance and demonstrates that—
(A) such expenses are reasonable and necessary;
(B) (i) if the debtor previously paid for health insurance, the amount is not materially larger than the cost the debtor previously paid or the cost necessary to maintain the lapsed policy; or
(ii) if the debtor did not have health insurance, the amount is not materially larger than the reasonable cost that would be incurred by a debtor who purchases health insurance, who has similar income, expenses, age, and health status, and who Uves in the same geographical location with the same number of dependents who do not otherwise have health insurance coverage; and
(C)the amount is not otherwise allowed for purposes of determining disposable income undersection 1325(b) of this title; and upon request of any party in interest, files proof that a health insurance policy was purchased.
(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements ofsection 1325(a) of this title apply to any modification under subsection (a) of this section.
(2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.
The Trustee argues that all of the requirements of
Courts have split over whether
In re Heideker is representative of the line of cases applying
The weight of authority is that
In In re Davis,
The Fourth Circuit has not directly addressed whether
The first debtors, who had experienced a substantial postpetition reduction in income, sought an early payoff through the refinancing of a mortgage. The court, finding that the refinancing did not alter the financial condition of the debtor and, therefore, did not establish a basis for plan modification, observed that the early payoff benefitted creditors by eliminating the risk that the debtors may be unable to make future payments. Id. at 151. In refusing to grant the trustee’s request that the Debtors utilize sufficient proceeds from the refinance to pay 100% of their debts, the court noted that its decision struck “the right balance between debtors on the one hand and creditors on the other.” Id. Though the case was decided prior to the implementation of BAPCPA, it illustrates the harsh results that would
By contrast, the second pair of joint debtors in Murphy, who had benefited from an unanticipated, substantial postpe-tition increase in the value of their real property, was required to pay 100% to unsecured creditors pursuant to a modified plan. Id. at 152. The court reached this result solely by implicating the standards set forth in
Murphy and its predecessor, Arnold, suggest that it is not likely that the Fourth Circuit would apply
In the present case, the Trustee is seeking to modify the Debtors’ plan to increase the remaining monthly payments
It is not necessary for the Court to pass upon which period of time should be used to calculate the Debtors’ current monthly income because the Court has determined that
The Trustee’s request for modification of the plan and the Debtors’ proposed modifications both seek to increase the amount of payments on claims held by unsecured creditors, a modification permitted under
The Trustee’s sole criteria for determining the modified monthly payment amount is to apply
In evaluating the Debtors’ proposed modification, the Court notes that on October 9, 2013, the Debtors filed an amended Schedule I, which reflects a substantial increase in their average monthly income since the confirmation of the plan, as well as an increase in the Debtors’ household size from three to four. (Amended Stipulation No. 8). At the same time, the Debtors filed an amended Schedule J, which includes changes in the Debtors’ average monthly expenses.
As noted above, modification of a chapter 13 plan pursuant to
Notes
. All subsequent references to the Bankruptcy Code are to
. To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such, and to the extent any of the following conclusions of law constitute findings of fact, they are adopted as such.
. The Debtors' motion represented that the Trustee had consented to the requested continuance.
. Local Bankruptcy Rule 3015-2(F).
. In 2006, one prescient commentator noted that "[a]lthough arguments from statutory construction can be made to capture
. The court in Heideker read
. See e.g. In re Martin, No. 10-64790,
. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005).
. (b)(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 applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
. “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of
.The court addressed the argument made by other courts, including the court in Heideker, that
. The Fourth Circuit has shown a reluctance to apply a mechanical approach in application of
. Courts that would impose the five year applicable commitment period on the basis that it is mandated by
. Likewise, in Arnold v. Weast (In re Arnold),
. "Pre-BAPCPA bankruptcy practice is telling because we will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.” Hamilton v. Lanning,
. Neither party contends that Debtors’ plan should be modified to reduce its length, which is currently 60 months, the maximum length of a chapter 13 plan; therefore, whether the "applicable commitment period” of
. In the Trustee’s brief in support of his motion to modify the plan payments (Docket No. 85, pages 13-14), the Trustee asserts that Mr. Swain’s income is seasonal and that, therefore, a larger period of time, perhaps 12 months, but no less than 9 months, of monthly gross income received prior to the determinative date must be averaged to arrive at a revised "current monthly income” for purposes of determining the "projected” disposable income required to be paid under a modified plan. The Trustee has previously submitted proposed Revised Forms 22C that assert amounts for MDI that differ from the one the Trustee now insists should control, including the Form 22C designated as Exhibit 1 which the Trustee offered at the hearing on October 10, 2013. The existence of numerous versions of the proposed Revised Form 22C calls attention to the lack of objective criteria for determining the period of time to utilize in calculating a "revised" current monthly income figure which, in turn, demonstrates the difficulty of revising Form 22C based on a postpetition change in income and, thus, the impracticality of the Trustee’s position.
"Current monthly income” ("CMI”) is defined in the Bankruptcy Code as “average monthly income ... derived during the 6-month period ending on ... the last day of the calendar month immediately preceding the date of the commencement of the case....”
. The Trustee seeks to require that the Debtors pay $4981.00 per month for the final thirteen months of their bankruptcy which, according to the Trustee’s computations, provides $2298.26 per month for the benefit of
. At least one court has found that, while not mandatory in plan modifications, the expense provisions of § 707(b)(2)(A)(ii)(I) may be used as "an objective point of reference” in evaluating a debtor's expenses. In re Martin, No. 10-64790,
. The monthly payment would be reduced by $216 for the final 11 months as a result of an anticipated increase in health insurance expense.
.The Trustee maintains that the increased payments pursuant to a modified plan should have been commenced sooner, when the Debtors first obtained an increase in income, and that the Debtors should not be allowed to benefit from the procedural delays. The Court notes, however, that on three occasions the Debtors proposed modified plans that would have increased the amount to be paid to unsecured creditors. On each occasion, the Trustee objected, resulting in the denial of the proposed modifications or any other modifications that the Court may have ordered. The Trustee did not seek an order requiring an increase in the payment amounts until he filed his motion to modify on February 12, 2013. The delay in disposing of this motion appears to be attributable to both parties, as the delays were by mutual consent. Therefore, the Court declines to order modification of the Debtor’s plan prior to the October, 2013, date proposed by the Debtors.
The Court notes with concern that the Debtors have failed to pay various postpetition tax obligations, which have resulted in supple