In re Edmunds

Decision Date18 September 2006
Docket NumberNo. CIV.A 06-01693-JW.,No. CIV.A 06-01602-JW,,CIV.A 06-01602-JW,,CIV.A 06-01693-JW.
Citation350 B.R. 636
CourtU.S. Bankruptcy Court — District of South Carolina
PartiesIn re Charles Leslie EDMUNDS, Jr., Debtor. ln re William Frederick Orris End Julia Pratt Orris, Debtors.

J. Steven Huggins, Columbia, SC, for Debtors.

ORDER RESOLVING OBJECTIONS OF TRUSTEE TO CONFIRMATION

JOHN E. WKTES, Bankruptcy Judge.

These matters come before the Court upon objections to plan confirmation filed by chapter 13 trustee William K. Stephenson, Jr. ("Trustee"). Pursuant to Fed. R. Bankr.P. 3015 and SC LBR 3015-1, the Court makes the following Findings of Fact and Conclusions of Law.1

FINDINGS OF FACT

1. Trustee is the chapter 13 trustee for Charles Leslie Edmunds, Jr. and William Frederick Orris and Julia Pratt Orris (collectively referred to as the "Debtors").

2. Debtors are each above the median income and filed for relief under chapter 13 of the Bankruptcy Code, as revised by the Bankruptcy Abuse and Consumer Protection Act of 2805 ("Reform Act"). See Pub L. No. 109-8 (2005) (codified in scattered sections of 11 U.S.C.).

3. Pursuant to Fed. R. Bankr.P. 1007, Debtors each completed Official Form B22C, used by chapter 13 debtors to calculate income and certain expenses allowed by 11 U.S.C. § 707(b)(2) (hereinafter the "Means Test").

4. Trustee opposes confirmation of Debtors' plans on grounds that Debtors are not committing their "projected disposable income" to their proposed plans and

that Debtors' plans were not proposed in good faith. Trustee's primary argument is that Debtors are improperly deducting from their disposable income payments for certain secured debts that will be treated as unsecured debts in their proposed plans and that Form B22C, filed in each of these cases, does not accurately reflect Debtors' actual expenses, reflected on Schedule J, and thus their available income for distribution to unsecured creditors.2 Debtors each contend that they are only required to pay to unsecured creditors the amount determined by 11 U.S.C. § 1325(b)(2) and (3),3 as calculated by strictly using Form B22C.

5. Debtors each reflect in their Form B22C that they have a minimum amount or no disposable income for payment to unsecured creditors. Trustee challenges Debtors' expenses by disallowing certain expenses claimed on Debtors' Forms B22C, which are neither applicable expenses allowed by the Means Test nor actual expenses with reference to Debtors' Schedules J.

6. The adjustments to Debtors' expenses proposed by Trustee would appear to result in projected disposable income sufficient to pay Debtors respective scheduled unsecured creditors in full.

CONCLUSIONS OF LAW

These - objections require the Court to interpret § 1325(b) and determine whether the statute mandates the use of Form B22C to determine "projected disposable income,"4 or whether debtors are required to devote more, or, in some cases, less payments to unsecured creditors under a plan than the mathematical calculation yielded by the form. The objections also raise the application of good faith as a condition for confirmation of the plans in these post Reform Act cases.

I. EXISTING AUTHORITY

Section 1325(b)(1)(B) requires Debtors to use all of their "projected disposable income" to pay unsecured creditors during the applicable commitment period. See In re Cushman, 350 B.R. 207, 213 (Bankr.D.S.C.2003) (interpreting "applicable commitment period" as a temporal requirement that requires debtors to perform in a plan for a period of time). That section provides in relevant part:

(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 ...

(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.

11 U.S.C. § 1325(b)(1)(B) (emphasis added).

[2, 3] "Disposable income," for above median income debtors,5 is defined as a debtor's "current monthly income," also a defined term under § 101(10A),6 less amounts reasonably necessary "to be expended" as determined by § 707(b)(2)(A) and (B). See 11 U.S.C. § 1325(b)(3). To achieve confirmation, Debtors are also required to propose their respective plans "in good faith and not by any means forbidden by law." See 1: U.S.C. § 1325(a)(3). This Court has previously questioned whether a debtor is in compliance with § 1325(a)(3) merely by complying with § 1325(b)(1). See Cushman, 350 B.R. at____n. 6, 2036 WL 2529575 at *6, fn. 6.

Some courts have found that plans which use a "disposable income" figure calculated by using Form B22C meet the § 1325(b)(1)(B) requirements, and that a debtor meets the required elements of good faith by proposing a plan that commits such an amount to his unsecured creditors. Other courts have found that the definitional instructions in § 1325(b) modify the calculation of the Means Test and that debtors should use projected income and expenses to determine their projected disposable income. There are essentially three schools of thought adopted by cases in other jurisdictions that address the issue.

A. Mechanical Application of the Means Test

Some courts have found that the statutory language used by Congress dictates that a debtor is only required to repay unsecured creditors the amount determined by Form 3220, without regard to the actual ability of the debtor to pay. See In re Barr, 341 B.R. 181 (Bankr.M.D.N.C. 2006); In re Alexander, 344 B.R. 742 (Bank.r.E.D.N.C.2338); In re Guzman, 345 B.R. 640 (3anlu.E.3.ItVis.2036). In each of these cases, the debtors were above median income and each had ^,actual disposable income, according to their filed Schedules I and J, which they could have used for payment to unsecured creditors; however, the courts each found that the debtors satisfied § 1325(b) by applying the amount of disposable income reflected on their Form 3220, which in all cases was a lesser amount than the debtors' actual disposable income. These courts have also held that a debtor who devotes his "disposable income," determined by the form, to his plan also complies with the requirement of good faith by devoting sufficient income to his plan. See Barr, 341 B.R. at 184, Alexander, 344 B.R. at 752.

Within this approach, however, courts have differed on the acceptable methods of using the Means Test to calculate allowable expenses to be deducted from a debtor's income. Compare In re Crittendon, C/A No. 06-10322 C-13G, slip op., 2336 WL 2547102 (Bankr.M.D.N.C. Sept.1, 2006) (clarifying Barr and finding expenses must be determined on the effective date of the plan and therefore debtors could not deduct from income those payments that would not be made in the plan) with In re Oliver, C/A No. 06 — 30076RLD12, slip op., 2306 WL 2086691 (Bankr.D.Or. Jun.29, 2036). In Oliver, the court rejected the approach proposed by the Trustee and found that debtors are not required to add income back to their disposable income merely because the debtors were avoiding certain liens or were surrendering property in their plan and thus would not be paying the debts as secured debts over the term of the plan. See In re Oliver, 2336 WL 2086691 at *3 (citing In re Walker, C/A No. 05-15010 — WHD, slip op., 2336 WL 1314125 (Bankr. N.D.Ga. May 1, 2336)) (interpreted § 707(b) in a chapter 7 and finding debtors may deduct, from current monthly income, payment on debts for property that the debtors will surrender in their chapter 7). But see In re Grady, 343 B.R. 747, 751 (Bankr.N.D.Ga.2036) (finding, in the same District as Walker, that in a chapter 13 the court should give meaning to the word "projected" to determine a debtor's ability to make payments in a chapter 13). Alexander and Guzman did not address the issue of the applicability of certain expenses, thus Oliver, an unpublished opinion, appears to be the only court applying the strictest application of the mechanical approach.

B. Means Test is Presumptively Correct

In an effort to give meaning to the definition of "disposable income" and also recognize the economic reality that a debtor's current and future financial situation may be different from the income reflected in Form B22C, the court in Jass found that the Form B22C is a starting point to determine "projected disposable income." See In re Jass, 340 B.R. 411, 415 (Bankr.D.Utah 2006). The debtors in Jass experienced a decrease in income just prior to the filing of their chapter 13 bankruptcy. The court found that there is a presumption in favor of using Form B22C to determine projected disposable income; however, the debtors could rebut the presumption upon showing that this amount does not correctly represent the debtors' budget projected in the future. See id. at 416. In reaching this conclusion, the court allowed the debtors to rely upon Schedules I and J to demonstrate that their current financial situation was different than that reflected in their Form B22C.7 The court noted that rebutting the presumption in favor of using Form B22C is the exception to the general rule of using this form to determine disposable income. See id. at 419. The court determined that this interpretation provided meaning to the word "projected" and produced a result consistent with the policy of providing debtors with a fresh start. See id. at 417-418.

C. Mcdiffied Means Test8

The majority approach does not follow the strict interpretation of § 707(b)(2) set forth in Oliver but rather requires a debtor to calculate his actual expenses, allowed by the Means Test, within the context of the debtor's chapter 13 plan. See In re Love, 350 B.R. 611 (Bankr.M.D.Ala.2006) (disagreeing with Oliver and finding expenses must be determined according to debtor's...

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