Michael S Eubanks and Alicia F Eubanks
This mаtter is before the Court on confirmation of the chapter 13 plan filed by Michael S. Eubanks and Alicia F. Eubanks (“Debtors“) and on the objection thereto filed by the Chapter 13 Trustee, Russell C. Simon (“Trustee“). The Debtors filed a chapter 13 plan with a proposed duration of five years. Pursuant to the terms of the plan, general unsecured creditors will be paid 100% of their claims. The Trustee objects to confirmation of the plan because the proposed monthly payments do not include all of the Debtors’ disposable income. He argues that as a condition of confirmation, the Debtors must agree to the following: If the plan is modified post confirmation to pay less than 100% to unsecured creditors, the Debtors will provide a minimum pool to those creditors in an amount equal to the difference between their disposable income at confirmation and their actual plan payment, multiplied by the number of months that passed as of the effective date of the modification. The Trustee further asserts that if the Debtors refuse such a pledge, their plan payment must be increased to include the full amount of their disposable income. Finally, the Trustee argues that if the Debtors do not contribute all disposable income to their plan, general unsecured creditors are entitled to interest on their allowed claims.
The Debtors disagree. They contend that the Trustee is attempting to impose an additional requirement for confirmation, i.e., that Debtors guarantee payment of excess disposable income in post confirmation modifications of the plаn. The Debtors further contend that because their plan proposes to pay 100% of unsecured claims, they are not obligated to increase their plan payments to include all disposable income in order for the plan to be confirmed. Debtors also dispute that unsecured creditors are entitled to interest on their claims.
I. Facts
On March 22, 2017, the Debtors filed a chapter 13 petition, along with schedules and statements, Official Forms 122C-1 and 122C-2, and a proposed plan. According to the calculations set forth in Form 122C-1, the Debtors have above-median income. Schedule I reflects a decrease in income going forward based on employment changes for Debtor Alicia Eubanks. Pursuant to a Joint Stipulation of Fact (document #54), the parties agree that the Debtors’ projected disposable income is $1,443.71 per month.1 The Debtors propose
II. Discussion and Analysis
(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.
A. Does the Plan Violate the Good Faith Requirement of § 1325(a)?
The Trustee argues that despite the Debtors’ technical compliance with
The Debtors rely on a Seventh Circuit decision, Matter of Smith, 848 F.2d 813 (7th Cir. 1988) in support of their argument that the plan has been proposed in good faith. Thе Trustee relies on a later Seventh Circuit case coincidentally entitled In re Smith, 286 F.3d 461 (7th Cir. 2002).5 For clarity, the Court will refer to the 1988 case as Matter of Smith and to the 2002 case as In re Smith.
In Matter of Smith, the court examined whether passage of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“BAFJA“) had any impact on the good faith test adopted by the Seventh Circuit in In re Rimgale, 669 F.2d 426 (7th Cir. 1982). Rimgale held that in a chapter 13 proceeding, good faith is determined on a case-by-case basis under a “totality of circumstances” test. Id. at 432-33. The court concluded in Matter of Smith that the “totality of circumstances” test still applied. Matter of Smith, 848 F.2d at 821. In reaching that conclusion, however, the court stated that “[t]he focus of Rimgale‘s test has been narrowed only by the few specific provisiоns of BAFJA which now cover situations which fell within Rimgale‘s analysis.” Id. at 820. Of particular significance, the court noted:
Another new section,
§ 1325(b) … shows that a plan proposed in good faith does not require any specific amount or percentage of payments to unsecured creditors. Before, bankruptcy courts, in determining “good faith,” looked at whether the plan proposed substantial or meaningful repayment to unsecured creditors. BAFJA changes that. Now,§ 1325(b) states that if an unsecured creditor objects to confirmation, the bankruptcy court may not approve the plan unless that creditor is to receive full payment,§1325(b)(1)(A) , or alternatively, the debtor meets the “ability to pay” test, that is, he commits all of his projected disposable income to the plan for three years,§ 1325(b)(1)(B) . A plan otherwise confirmable will be confirmed even if it provides for minimal (or no) payments if those payments meet the “ability to pay” test.
Id. (citations omitted).6 The Debtors contend that under Matter of Smith, the amount of a debtor‘s plan payment is no longer a consideration in the good faith analysis. While the Debtors agree that the good faith test of
The Trustee argues that while the Seventh Circuit made passing reference to the “new”
The discussion of
Since Congress has now dealt with the issue [of a debtor‘s ability to pay] in the ability-to-pay provisions, there is no longer any reason for the amount of a debtor‘s payments to be considered as even a part of the good faith standard…. Only where there has been a showing of serious debtor misconduct or abuse should a chapter 13 plan be found lacking in good faith.
Matter of Smith, 848 F.2d at 820-21 (citing 5 Collier on Bankruptcy, ¶ 1325.04[3] at 1325-17 (15th ed. 1988)). See аlso In re Van Bodegom Smith, 383 B.R. 441, 456 (Bankr.E.D.Wis. 2008) (construes Seventh Circuit‘s decision in Matter of Smith as prohibiting courts from considering a chapter 13 debtor‘s ability to pay as an indication of bad faith). While the Seventh Circuit‘s subsequent decision in In re Smith may have expanded the good faith analysis to include additional criteria, nothing in that case specifically addresses whether failure to commit all disposable income to plan payments or failure to pledge excess disposable income to future plan modifications constitutes bad faith.
In the instant case, the Debtors’ plan complies with
Conversely, the Debtors’ compliance with
This Court agrees with the intermediate аpproach. Thus, the primary measure of whether the debtor has committed sufficient income to the plan is the [projected disposable income] analysis of
§ 1325(b) . This means that, in the majority of cases, a debtor need not commit any more funds to pay unsecured creditors than is required by§ 1325(b)(1) in order for the plan to be filed in good faith. But the passage of BAPCPA did not wholly eliminate consideration of a debtor‘s ability to pay in the context of a good faith analysis under§ 1325(a)(3) …. [T]his Court will continue to review plans to determine if the proposed plan constitutes “an abuse of the provisions, purpose or spirit of Chapter 13.” For example, a debtor who deducts substantial amounts of secured debt for luxury items on Form 22C may technically comply with
§1325(b) , but be unable to demonstrate that a plan offering only minimal or no payments to unsecured creditors was proposed in good faith. On the other hand, the Court would not expect to hear challenges to a debtor‘s good faith in proposing a plan merely because the debtor could pay an аdditional $50 in months 49 through 60 of the plan.
This Court agrees with the intermediate approach. If the proposed plan payment meets the requirements of
In the instant case, the Trustee has not alleged that thе Debtors engaged in any manipulative, deceitful or misleading conduct.
B. Can the Court Require Debtors to Pledge Excess Disposable Income to Future Plan Modifications under § 1325(a)(3) and/or under §105(a)?
The Court next turns to the Trustee‘s argument that the Debtors’ refusal to commit excess disposable income to future plan modifications demonstrates bad faith. Even if the Court finds that this is not a factor to consider in the good faith analysis under
The Trustee relies on In re Crawford, 2016 WL 4089241 (Bankr.W.D.Tx. Aug. 24, 2016). In Crawford, the debtors’ plan proposed 100% payment to unsecured creditors over five years, but because their plan payment did not include all of their disposable income, the trustee objected to confirmation. The trustee argued that as a condition of confirmation, the debtors must agree to provide for full payment of unsecured claims in any future plan modifications.9 In addition, the trustee argued that the debtors must pay all claims in full to receive a discharge. The court found that whilе it was not bad faith to pay creditors over five years when they could be paid sooner, conditioning confirmation on the debtors’ guarantee of a 100% pool to unsecured creditors in future plan modifications was permissible under
In Law v. Siegel, the chapter 7 trustee filed a motion to surcharge the debtor‘s $75,000.00 homestead exemption to compensate the trustee for litigation costs incurred in a lengthy, complicated and expensive lawsuit filed by the trustee against the debtor. The bankruptcy court granted the motion and its decision was eventually affirmed by the Ninth Circuit Court of Appeals. On appeal, the Supreme Court reversed, finding that the equitable powers of a bankruptcy court “must and can only be exercised within the confines of the Bankruptcy Code.” Id. at 1194. Bankruptcy courts cannot use the equitable powers granted by
The Crawford court found that its decision was consistent with Law v. Siegel because imposing conditions on confirmation did not contravene
The Court could confirm the plan with an [applicable commitment period] of 60 months with less than all disposable income being paid through the Plan. The conditions are that Debtors must pay all claims in full to receive a chapter 13 discharge and that Debtors cannot modify the Plan to pay less than 100% distribution to creditors…. [T]he debtors will receive precisely what they sought at their confirmation hearing—confirmation of their chapter 13 Plan with an ACP of 60 months—with the added condition that their Plan remain at a 100% distributiоn to all creditors.
Id. In the instant case, the Trustee urges this Court to follow the reasoning in Crawford and condition confirmation of the plan on the Debtors’ promise to pay excess disposable income in future plan modifications.
The Court finds that the Debtors’ refusal to guarantee excess disposable income in the future does not demonstrate bad faith. Nothing in the Code requires Debtors to make that pledge. Furthermore, the Court finds that it cannot use its equitable powers under
Moreover, a post confirmation plan modification is not before the Court at this time. The Court is not inclined at this stage to speculate about future plan modifications, if any, or possible future changes in income or expenses. If, however, the Debtors do propose a post confirmation plan that pays less than 100% to unsecured creditors, the Court will take a very close look at the reasons for doing so and if the facts warrant, the question of good faith will be examined at that time.10
C. Does § 1325(b)(1)(A) Require the Debtors to Pay Interest to Unsecured Creditors?
The Trustee‘s final argument is that if the Debtors do not contribute all disposable income to their plan, general unsecured creditors are entitled to interest on their allowed claims. Or, stated another way, the Trustee argues that “when a debtor elects to delay payments to creditors under
The Trustee focuses on the language of
The Trustee acknowledges that the language of
plan“] into (b)(1) it was able to say that once rather than twice.” Id. at 465. Other cases adopting this view and holding that
The court in In re Gillen, 568 B.R. 74 (Bankr.C.D.Ill. 2017) reached a contrary result. The court found the placement of the phrase “as of the effective date of the plan” to be an important distinction, explaining:
As used in section[s]
1325(a)(4) and(a)(5)(B)(ii) , “value, as of the effective date of the plan,” is uniformly recognized to mean “present value” …. The differing juxtaposition of the phrasе “as of the effective date of the plan” [in§ 1325(b)(1) ] must be considered to be a purposeful placement by Congress that conveys a distinction from the similar but not identical phrasing of sections1325(a)(4) and(a)(5)(B)(ii) …. [I]f Congress had intended to require a debtor to pay interest on allowed unsecuredclaims under section 1325(b)(1)(A) , Congress would have maintained statutory consistency by placing the phrase “as of the effective date of the plan” immediately after the word “value.” The different placement is best construed as conveying a different meaning.
This Court agrees that the language of
[T]his subsection requires only payment of such clаims in full, and not payment of property having a “value as of the effective date of the plan” equal to full payment. It does not require payment of the present value of the claim, though such payment may be independently required under the best interests of the creditors standard…. Although the words “as of the effective date of the plan” appear earlier in subsection 1325(b), their presence does not appear to indicate a requirement of plan payments having a present value equal to thе full amount of unsecured claims. If this had been Congress‘s intent, Congress would presumably have used the same language as it used elsewhere to indicate a present value test, “value, as of the effective date of the plan….” It seems more likely that the words “as of the effective date of the plan” in subsection 1325(b) refer only to the timing of the court‘s analysis under that subsection.
8 Collier on Bankruptcy, ¶ 1325.11[3] at 1325-57 (16th ed. 2017).
The Court also agrees with the reasoning of In re Gillen as to why payment of interest is required under
For the reasons set forth above, the Court finds that the Debtors’ chapter 13 plan complies with the requirements set forth in
See Order entered this date.
ENTERED: February 16, 2018
/s/ Laura K. Grandy
UNITED STATES BANKRUPTCY JUDGE
Notes
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title
providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
Although the Court need not address a post confirmation plan at this juncture, the Court wonders how a proposed plan modification paying less than 100% without accounting for failing to pay all disposable income in prior plans will be resolved…but that is for another day.