In Re Van Bodegom Smith
DECISION AND ORDER SUSTAINING THE TRUSTEE’S OBJECTION TO CONFIRMATION OF THE DEBTORS’ CHAPTER 13 PLAN
The trustee filed an objection to confirmation of the debtors’ Chapter 13 plan, alleging that the debtors had failed to commit all of their disposable income to the plan as required by
I. FACTUAL BACKGROUND
On March 21, 2006, the debtors both signed a purchase money mortgage with First Indiana Bank for the amount of $55,000, which the debtors promised to pay in regular periodic payments. The debtors promised to pay this obligation in full no later than April 20, 2021. That mortgage was assigned to CitiMortgage, Inc. on March 21, 2006. (See Claim Number 5.) Also on March 21, 2006, in return for receiving $220,000, Mr. Van Bodegom Smith signed an adjustable rate note with First Indiana Bank. (See Claim Number 15.) The debtors had not satisfied the obligations under either note by the time they filed their petition in 2007.
The debtors filed their Chapter 13 petition and Chapter 13 plan on the same day. On the petition, the debtors listed their address as 21480 Ann Rita Drive, Brook-field, Wisconsin. The debtors filed an amended Chapter 13 plan and an amended Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income Form (hereinafter referred to as “Form B22C”) two months later.
At some point after filing their bankruptcy petition, the debtors decided to relocate to Troy, Michigan. In their amended Chapter 13 plan, as in their original plan, they stated their intention to surrender the homestead at 21480 Ann Rita Drive, Brookfield, WI (hereinafter referred to as “Brookfield property”) in satisfaction of the mortgage debts owed to two creditors: CitiMortgage, Inc. and First Indiana Bank. The debtors proposed to pay their unsecured creditors not less than 1.65% of timely-filed and allowed claims.
The debtors are above-median-income debtors and, as such, they were required to complete the entire B22C Form. Even though they stated their intention to surrender the Brookfield property, the debtors deducted the mortgage payments for the that property as expenses on their Form B22C. 1 The debtors deducted $1,274 for the payments due to First Indiana Bank for the first mortgage on the property, and $476 for payments due to CitiMort-gage, Inc. for the second mortgage. (Amended Form B22C, line 47(a)-(b), Docket Number 16.) According to Form B22C, after deducting these amounts and performing all of the necessary calculations, the debtors were left with a monthly disposable income of $56.27.
1. The Trustee’s Argument Against Confirmation
In his objection to confirmation, counsel for the Chapter 13 standing trustee argued that the debtors’ plan did not provide for all of their projected disposable income to be paid to unsecured creditors because the debtors deducted the cost of the mortgages for the Brookfield property on Form B22C, even though their plan stated an intention to surrender the property. The trustee concluded that, because the Chapter 13 plan proposed to surrender the property, the amounts the debtors owed for the mortgages no longer would be “contractually due” once the Chapter 13 plan was confirmed. The trustee argued that the Chapter 13 plan would constitute a new agreement between the debtors and the mortgage holders, one in which the debtors would return the collateral rather than paying the amounts “contractually due” pursuant to § 707(b)(2)(A)(iii)(I). Thus, the trustee contended that it was not proper for the debtors to deduct those amounts as expenses on Form B22C.
The trustee further argued that, even if the mortgage payments for the Brookfield property were “contractually due” at the time the debtors filed their petition pursuant to § 707(b)(2)(A)(iii)(I), the debtors also were required to demonstrate that those amounts were “reasonably necessary to be expended” for the maintenance or support of the debtors or a dependent of the debtors under
Finally, the trustee argued that even if the debtors were justified in subtracting the Brookfield mortgage payments on their Form B22C, they did not file their plan in good faith, because the surrender of the property gave them ability to pay more money to their unsecured creditors than the plan proposed.
2. The Debtors’ Argument In Favor of Confirmation
The debtors responded that
II. LEGAL ANALYSIS
A.
1.
(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.
2.
The statute does not define “projected” disposable income. The next subsection— 1325(b)(2)—does, however, define “disposable income.”
a. Definition of “Current Monthly Income”
b. Definition of “Amounts Reasonably Necessary To Be Expended”
Next,
Amounts reasonably necessary to be expended under paragraph (2), other than subparagraph (A)(ii) of paragraph (2), shall be determined in accordance with subparagraphs (A) and (B) ofsection 707(b)(2) , if the debtor has current monthly income, when multiplied by 12, greater than—
(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $575 per month for each individual in excess of 4.
Thus, if a debtor has a current monthly income, when multiplied by 12, that is greater than the amounts stated in
The trustee argues that even if a court determines that
The bankruptcy court for the Western District of Michigan took the trustee’s suggested approach in
In re McGillis,
Courts have no choice now but to use the debtor’s average historical earnings to calculate the income component ofSection 1325(b) disposable income because that is how BAPCPA defines “current monthly income.” However, Congress elected not to impose a similar definitional constraint upon the calculation of the expense component. Rather, it simply left the deduction of all expenses, whether they be for maintenance and support, charity, or business, to “those amounts reasonably necessary to be expended.”11 U.S.C. § 1325(b)(2) . Likewise, Congress did not replace this phrase with a mandate to the effect that support and maintenance expenses “shall mean those amounts determined underSections 707(b)(2)(A)(i-iii) and (B)” or something similar when the debtor’s current monthly income exceeds theSection 1325(b)(3) limit. Instead, Congress repeated inSection 1325(b)(3) the very same phrase that it had already used todescribe permissible deductions in Section 1325(b)(2) : that is, only those deductions that are “reasonably necessary to be expended.” Indeed, this is the same phrase that was used to describe permissible support and maintenance expenses prior to BAPCPA. However, the 2005 amendments did elaborate upon this familiar concept by imposing yet another limitation, that being that the deductions claimed by the above-median-income debtor be as reasonably necessary must also “be determine in accordance with subparagraphs (A) and (B) ofsection 707(b)(2) ...”.11 U.S.C. § 1325(b)(3) .
Id.
at 729.
See also, In re McPherson,
But
The
McGillis
court found flexibility, not in the “shall” language of
Congress used the same phrase in BAPCPA to amend immediately precedingSection 1325(b)(2) when it excepted from current monthly income support payments received for a dependent child “made in accordance with applicable non bankruptcy law to the extent reasonably necessary to be expended for each child ... ”. It is unlikely that anyone would suggest that “in accordance” as used in [section 1325(b)(2) ] means that the applicable bankruptcy laws ordering the support are to override the bankruptcy court’s independent consideration of whether the expenditure of the same is required. Otherwise, the additional reference to the reasonable necessity of the payments in that clause would be superfluous. Instead, the phrases “applicable nonbankruptcy laws” and “to the extent reasonably necessary to be extended [sic]” must be interpreted as being conjoined by “in accordance with” so as to compliment each other. In other words, a debtor may exempt from his current monthly income only those child support payments that are made in conformance with applicable nonbankruptcy law. Stipends from an indulgent uncle will not be excepted. However, even court-ordered child support is not automatically excluded because the debtor must also establish to the bankruptcy court’s own satisfaction that the expenditure of that support is reasonably necessary for the child.
Applying this analysis to Congress’ use of the phrase in
Section 1325(b)(3) should not be interpreted as categorically substituting theSection 707(b)(2) expense restrictions for the “reasonably necessary” expense requirement already imposed bySection 1325(b)(2) . Rather, it should be interpreted as offering a further guideline for ensuring that the expenses claimed by an above-median-income debtor are reasonably necessary. Put differently,Section 1325(b)(3) imposes the same requirement upon an above-median-income debtor as it does upon all other debtors: amounts claimed as expenses underSection 1325(b)(3) must in fact be ultimately expended---- However,Section 1325(b)(3) imposes upon an above-median-income debtor the further requirement that all planned expenditures must also agree with the expense limitations ofSections 707(b)(2)(A) and (B). If that debtor’s planned expenses exceed what is permitted, then the debtor must conform hisSection 1325(b) deductions by reducing them to the amounts allowed by those subsections. On the other hand, the converse is not true, for if the debtor’s planned expenses are less, then hisSection 1325(b) deductions must still be that lesser amount because that is all he in fact plans to expend.
Id. at 730 (internal citation omitted).
The problem this Court has with the
McGillis
court’s interpretation of “in accordance with” is that the phrase appears in a different context in
In marked contrast, the term “in accordance” occurs in
Accordingly, the Court next must look at
3. The Language of 707(b)(2)(A) Lists As “Amounts Reasonably Necessary” Any Payments on Secured Debts That Are “Scheduled As Contractually Due” To The Secured Creditors In Each Of The 60 Months Of the Plan.
With regard to secured debts,
(iii) The debtor’s average monthly payments on account of secured debts shall be calculated as the sum of—
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition ...
divided by 60.
Mortgages debts are secured debts.
a. “Scheduled As Contractually Due” In The Chapter 7 Context Means Due Under the Mortgage Contract As Of The Petition Date.
This Court’s colleague answered that question in the Chapter 7 context. In
In re Nockerts,
Other courts have agreed with Judge Kelley’s reading of the phrase. In
In re Burmeister,
Ordinarily one would think that if “scheduled as contractually due” means “due under the contract” in the Chapter 7 context, it should mean exactly the same thing in any other context in which it appears. But Judge Kelley hinted in
Nockerts
that she may have reached a different conclusion had she been called upon to interpret the phrase in the Chapter 13 context.
In re Nockerts,
In
In re McPherson,
the bankruptcy court for the Western District of Virginia held that “[t]he term ‘contractually due’ ... does not carry the same meaning in a chapter 13 case as in a chapter 7 case.”
In re McPherson,
How can the provisions of a Chapter 13 plan take the place of a debtor’s contractual obligations under, say, a mortgage contract? The McPherson court explained:
This Court has previously recognized that once a plan is confirmed, and the property of the estate has vested in the debtor, the secured creditor’s rights and interests are then defined strictly by the provisions of the plan. In re Johnson,63 B.R. 550 (Bankr.D.Colo.1986). That holding is clearly in accordance with the explicit provisions of11 U.S.C. § 1327(a) . In other words, the plan itself has the effect of making a new agreement between the debtor and the creditor with a new obligation to be paid in the manner provided for by the terms of the plan. See, Matter of Winterfeldt,28 B.R. 486 (Bankr.E.D.Wis.1983); In re Tucker,35 B.R. 35 (Bankr.M.D.Tenn.1983) and cases cited therein; In re Hebert,61 B.R. 44 (Bankr.W.D.La.1986).
Id. at 46-47 (emphasis in the original).
Other courts have reached the conclusion that the debtor’s Chapter 13 plan has the effect of creating a new contract between the debtor and the secured creditor.
See, e.g., In re Nicholson,
The fact that “scheduled as contractually due” has a different meaning in the Chapter 13 context than it does in the Chapter 7 realm also impacts the timing of when one looks at whether payments are “scheduled as contractually due.” In the context of a Chapter 7 proceeding, courts in both the Eastern and Western Districts of Wisconsin have found that the time for determining whether payments are “scheduled as contractually due” is at the time the debtors filed their petition. In
In re Nockerts,
Judge Kelley determined that if the payments were “scheduled as contractually due” on the date the debtor filed the petition, then they appropriately were deducted from the current monthly income on the means test calculations.
In re Nockerts,
In the context of calculating disposable income for Chapter 13 purposes, however, the timing is different.
One bankruptcy court has disagreed with the
Crittendon
analysis, but this Court does not find its reasoning persuasive. In
In re Burmeister,
the bankruptcy court for the Northern District of Illinois held that, in the Chapter 13 context, amounts “scheduled as contractually due” “are determined as of the petition date.”
[sjection 1325(b)(3) .. commands the determination of disposable income for a chapter 13 debtor undersections 707(b)(2)(A) and (B), and a decision about the meaning of [that section] is therefore as relevant as one addressing the issue in a chapter 13 case. The trustee has given no reason whysection 707(b)(2)(A)(iii)(I) should be interpreted differently in chapter 7 and chapter 13 cases.
Burmeister,
The
Burmeister
court also acknowledged, but disagreed with, the reasoning supporting the
Crittendon
court’s conclusion that the determination of whether a mortgage payment is “scheduled as contractually due” is made as of the effective date of the plan. The
Burmeister
court did not read the phrase “as of the effective date of the plan” in
Thus, this Court agrees with Crittendon that one looks at whether mortgage payments are “scheduled as contractually due” as of the effective date of the plan, and not as of the date the petition was filed, in determining whether those payments can be subtracted from current monthly income to obtain projected disposable income.
c. Applying The Holdings Of McPherson/Crittendon In This District Results In The Conclusion That Mortgage Payments On Collateral Which The Chapter 13 Plan Proposes To Surrender Are Not “Scheduled As Contractually Due.”
The confirmed plan controls in this district, in cases where the plan gives creditors clear notice of their treatment.
See, e.g., Matter of Winterfeldt,
The plan in this case has not been confirmed, however, due to the trustee’s objection. The
Crittendon
court held that a court must look at the question of whether the payments were “scheduled as contractually due” “according to the pertinent circumstances existing on the date of the confirmation hearing.”
Crittendon,
If a plan has been filed, a copy is enclosed, if not, you will receive it at a later date. If there is no written objection to the plan, the Court may confirm the plan. If a written objection to confirmation of the proposed plan is filed no later than ten days after the completion of the Meeting of Creditors, a hearing will be scheduled by the Court. The only persons who will be notified of the hearing date will be the trustee, counsel for the debtor ..., the Office of the United States Trustee, the objectingparty, and all other persons who specifically request in writing to receive notice.
If no one files a written objection to confirmation within the ten days after the conclusion of the meeting of creditors, the trustee submits a proposed confirmation order to the court for approval. At that point, the plan becomes binding on all parties.
The trustee argues that because the debtors’ plan proposes to surrender the real property and does not propose to pay the mortgage creditors, that proposed plan will create a new agreement between the debtors and the secured creditor. He argues that at that point, the mortgage payments no longer will be “scheduled as contractually due.” But at this point, the debtors have only proposed a plan. No party other than the trustee objected to confirmation within the ten days If no creditor timely objects, but the plan is not yet confirmed, does a new “agreement” exist? Does the mortgage creditors’ failure to object within the prescribed period of time indicate the creation, at the time that the objection period lapses, of a new agreement between the debtors and the mortgage creditors, even in the absence of confirmation?
One certainly could argue that the answer to these questions is “yes” in the case at bar. The debtors’ Chapter 13 plan clearly states how the debtors plan to treat their mortgage creditors. The plan states that they will surrender the collateral. The plan does not make any provision for the debtors to make the mortgage payments. Indeed, on February 14, 2008, the Court granted one of the mortgage creditors relief from the stay. It appears that, even absent confirmation of the debtors’ plan, there is now a new contractual arrangement between the debtors and the mortgage creditors, and there are no payments “scheduled as contractually due” under that contractual arrangement. Accordingly, because there are no mortgage payments “scheduled as contractually due” under the new arrangement, the debtors cannot deduct those mortgage payments from their current monthly income in the disposable income calculations.
4.
The Language of
a. “Projected Disposable Income” Is Different From “Disposable Income.”
Even if there has not been a new contractual agreement created between the debtors and the secured lenders, there is more language in
In the particular context considered here, other courts have concluded that the word “projected” requires them to look forward to whether the debtors will have to pay the mortgage expenses during the life of the plan. In
McPherson,
the Virginia court read the word “projected” to mean that “the amounts [of the mortgage payments] in question are amounts that will arise in the future.”
Referring again to§ 1325(b)(1)(B) , the debtor is required to pay over all of one’s “projected disposable income.” The term “projected” contemplates forward looking or future oriented approach. One would not project or anticipate that a payment would be made on a secured indebtedness where the collateral had been returned. Similarly, a Chapter 13 plan is necessarily a forward looking document. It is the debtor’s proposal as to what he will do in the future to deal with his debts.
Id. at 613.
Perhaps most relevant to this Court, another judge from this district has reached this conclusion. In
In re Kalata,
No. 07-21710,
Therefore, in order to give the word “projected” in
b. Income “To Be Received” In The Applicable Commitment Period Means Income Available In The Future.
As they say in infomercials, “But wait— there’s more!”
The South Carolina court in
Edmunds
found that this “to be received” language
5.
The Language of
When defining “disposable income” in
Other courts have found that in order to give the phrase “to be expended” meaning, they must determine whether the debtor will be required to make the mortgage payments going forward.
See Kalata,
This Court agrees—if a debtor intends to surrender collateral, then the payments on that debt are not amounts reasonably necessary “to be expended” in the future for the maintenance and support of the debtor. If they are not going to be expended in the future, they cannot be subtracted from the current monthly income to reach the “projected” disposable income.
6. The Court Concludes That Sections 1825 And 707(b) Do Not Allow The Debtors To Subtract From Their Disposable Income Calculations Secured Debt Payments For Collateral They Will Surrender
For all of the reasons discussed above,
6
this Court holds that
B. The Seventh Circuit Prohibits Courts From Considering A Chapter 13 Debtor’s Ability to Pay As An Indication Of Bad Faith.
As an alternative to the statutory interpretation argument, the trustee argued that even if
As this Court has stated, it finds that
Therefore, the question of whether the debtors committed all of their projected disposable income into the plan is a matter solely for review under
III. CONCLUSION
The Court concludes that
Notes
. The trustee argued that the debtors also deducted "back taxes” on their B22C Form. It is not clear that this actually occurred. The debtors’ amended Schedule J lists their expenses as $1,274 for the first mortgage, $476 for the second mortgage, and $375 for property taxes. (Amended Schedule J, Docket Number 16, lines 1, 12, and 13b.) Form B22C instructs the debtors that for "[m]ort-gage debts, [the debtors] should include payments of taxes and insurance required by the mortgage.” (Amended Form B22C, line 47, Docket Number 16.) The debtors’ B22C Form deducts only $1,274 for the debt owed to First Indiana Bank and $476 for the debt owed to CitiMortgage. That form does not appear to include the amount that would have been due for any real estate taxes on the Brookfield property, delinquent or otherwise. The Court is not convinced that the debtors deducted delinquent real estate taxes for the Brookfield property on their B22C Form. In any event, if they did deduct the delinquent taxes, this Court's decision as to the deduction of the expenses for the first and second mortgages applies with equal force to a deduction for those taxes.
. In full, this section says that "disposable income” is defined as current monthly income less amounts reasonably necessary to be expended “for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed.” This Court assumes that the last clause—“that first becomes payable after the date the petition is filed”—modifies only “a domestic support obligation,” because the verb "becomes” is in the singular form, and not in the plural form as it would be if it modified “amounts reasonably necessary to be expended.”
. The Court notes that its colleague in the Western District, Judge Utschig, has reached the same conclusion in the Chapter 7 context.
See In re Kogler,
. Other courts have concluded that the term "effective date of the plan” as used in
.
But see, Mancl v. Chatterton (In re Mancl),
. Chief Judge McGarity articulated a policy rationale supporting this Court's conclusion in her recent decision in Kalata—that of avoiding "vain procedural exercises.” In Ka-lata, Judge McGarity reasoned as follows:
[T]he trustee could move to modify the plan under11 U.S.C. § 1329(a)(1) [in cases where debtors subtract secured debt payments for collateral they plan to surrender] to increase the amount to be paid to unsecured creditors.... Sincesection 1325(b) is not one of the requirements for confirmation of a modified plan, andsection 1325(b) is the section that incorporated thatsection 707(b)(2)(A) expenses, the court could then look at the debtor’s actual ability to pay. See11 U.S.C. § 1329(b) . The motion for modification could come almost immediately after initial confirmation. This strikes me as an unnecessary step to achieve the fair and practical result.
In re Kalata,
This Court agrees. While this Court has, on numerous occasions, expressed a reluctance to speculate on what Congress intended when drafting the BAPCPA amendments, it does seem unlikely that Congress intended to allow debtors to subtract from their projected dis