In re Fleshman, Bankruptcy No. 87-01684-SJ-12.
| Decision Date | 04 December 1990 |
| Docket Number | Bankruptcy No. 87-01684-SJ-12. |
| Parties | In re Robert Lee FLESHMAN, and Carol Fleshman, Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
David C. Stover, Gunn, Jones, Shank & Harman, Gladstone, Mo., for Farm Credit Bank.
Stephen B. Strayer, Liberty, Mo., for debtors.
ORDER DENYING DEBTORS' MOTION TO AMEND ORDER DIRECTING PAYMENT OF DISPOSABLE INCOME AND DENYING FARM CREDIT BANK'S MOTION TO AMEND PLAN
The matter before the Court is the motion seeking amendment of this Court's order directing payment of disposable income, filed by debtors on October 29, 1990, and the related motion to amend the debtors' Chapter 12 plan, filed by Farm Credit Bank on November 9, 1990. The Court previously found that the debtors have accumulated disposable income. Debtors now ask the Court to find that the Plan does not require payment of such disposable income to unsecured creditors, but that debtors should instead be allowed to use such disposable income to prepay their future obligations to secured creditors. In response, Farm Credit seeks to have the Plan amended to clarify that disposable income must be paid to unsecured creditors, and to appoint a Chapter 12 Trustee to receive and distribute such income. The Court finds that the existing Plan must be interpreted to require payment of disposable income to unsecured creditors, that a Chapter 12 Trustee was included in the debtor's original plan, and that disposable income must therefore be paid to the Chapter 12 Trustee for distribution to unsecured creditors. As a result, the amendment proposed by Farm Credit is unnecessary. Therefore, both motions will be denied. The Court has jurisdiction over these matters pursuant to 28 U.S.C. § 1334(b), and may enter final orders pursuant to 28 U.S.C. § 157(b)(2).
Debtors filed their Chapter 12 case on April 17, 1987, their schedules on June 17, 1987, and their original Chapter 12 plan on July 15, 1987. After receipt of several objections to the plan, including the objection of the Farm Credit Bank ("FCB"), the late Judge Dennis Stewart submitted this case to arbitration, pursuant to the process then in place for handling of Chapter 12 cases. Following the arbitration process, Judge Stewart conditionally confirmed debtors' Chapter 12 plan on October 12, 1987, which resulted in several more objections to the plan, including one raised by FCB. Judge Stewart held a hearing on confirmation of debtor's Chapter 12 plan, as amended, on November 30, 1987, after which the plan, as amended, was conditionally confirmed on December 15, 1987.
Section 1225 of the Bankruptcy Code (11 U.S.C. § 1225) sets out various requirements for confirmation of a Chapter 12 Plan. Two of these requirements specifically protect unsecured creditors. Section 1225(a)(4), known as the "best interest of creditors" test, requires that in all cases each unsecured claim receive under the Plan not less than it would receive in a Chapter 12 liquidation. Section 1225(a)(4) reads as follows:
11 U.S.C. Section 1225(a)(4)
Section 1225(b)(1) contains the "disposable income" test. This requirement is only applicable in cases where the trustee or an unsecured creditor objects to confirmation. This section reads as follows:
11 U.S.C. § 1225(b)(1).
The leading bankruptcy treatise interprets such provision as follows:
Section 1225(b)(1) sets forth an additional confirmation requirement that must be met only if the trustee or the holder of an unsecured claim objects to confirmation of the plan. If an objection is raised, the court cannot confirm the plan unless the court finds that either the plan provides for full payment of the allowed amount of each unsecured claim or the plan provides that the debtor must contribute all of the debtor\'s net disposable income during the plan period towards payment of unsecured claims.
5 Collier on Bankruptcy ¶ 1225.04 (15th Ed.).
Courts have interpreted § 1225(b)(1) to require that the plan commit all disposable income to unsecured creditors, and to further require that disposable income be computed after the fact, based on actual income and expenses incurred, rather than asking the debtor at the beginning of the plan to project the income it hopes to receive. Matter of Schwarz, 85 B.R. 829 (Bkrtcy.S.D.Iowa 1988).
The debtor's plan, as confirmed by Judge Stewart, contains two provisions concerning unsecured claims, each of which is directed toward one of the two confirmation requirements.
Section III, Paragraph 12 provides as follows:
All allowed claims shall receive, upon confirmation of the plan, that amount that would be paid on said claim if the estate of the debtor\'s was liquidated under Chapter 7 of the Bankruptcy Code on the date of confirmation.
This requirement is consistent with Section 1225(a)(4), the "best interests of creditors" test.
As to disposable income, the plan provides as follows in Section IV:
All the debtors (sic) projected disposable income to be received in the three-year period beginning on the date the first payment is due under the plan, will be applied to make payments under the plan.
This provision is consistent with Section 1225(b)(1) and is required where, as here, an unsecured creditor objects to a plan calling for less than full payment.
Section 1225(b)(2) defines disposable income for these purposes. It reads as follows:
11 U.S.C. § 1225(b)(2).
On June 1, 1989, Judge Stewart entered his order directing debtors to show cause why disposable income of $8,567 accumulated during 1987 should not be distributed to unsecured creditors. Upon a showing that debtors needed the funds to make plan payments for the Fall of 1989, Judge Koger entered his order setting aside the show cause order on June 28, 1989.
On May 9, 1990, FCB filed its motion to compel payment of disposable income. On June 5, 1990, pursuant to Federal Bankruptcy Rule 7012, debtors responded to FCB's motion by requesting a dismissal of all or part of FCB's motion. This motion was granted by the Court only with respect to calendar year 1987, which had been the subject of the prior orders. A hearing was held on FCB's motion on October 2, 1990, at which time counsel for debtors, FCB and the Farmers Home Administration appeared, and evidence was presented.
The evidence showed that debtors do not operate a substantial farming operation, but rent a portion of their farm land to others, and have enrolled another portion in the federal government's CRP program. This rental and CRP income form the primary basis for payments under debtor's Chapter 12 Plan. Therefore, debtors do not incur the expenses for seed, fertilizer, and other inputs which would be incurred if they actually farmed the land. Debtors do not live on their farm, but rather rent the house and the farm to someone else and live in Liberty, Missouri.
The evidence further showed that the Monthly Operating Reports submitted to the Bankruptcy Court, which would ordinarily be used to compute disposable income, had failed to disclose certain income received by the debtors in 1988 and 1989. This included interest of $2,975.00 on bank Certificates of Deposit, as well as wages of $2,532.00, both of which were included in tax returns filed by the debtor for those years. Also, the evidence showed that at the time their plan was confirmed, the debtors projected annual household expenses of $25,000. However, in 1988 their actual living expenses were $48,115.00, and in 1989 such expenses were $38,614; thus, in those two years the debtors spent $36,729 more for living expenses than had been projected at the time their plan was confirmed. Since the confirmation of their Chapter 12 Plan, debtors have purchased a new car for $9,500 cash. They did not attempt to obtain bank financing for such purchase. They also have built a cabin on their farm at a cost in excess of $10,000. The debtors will continue to benefit from such a cabin long after their current debts have been discharged. In 1988 and 1989 debtors also donated a total of $9,500 to charity. At the time of the hearing, the debtors had cash in the bank in excess of $62,000. The government payments they will receive by the end of 1990 are roughly equal to the payments they will be required to make to secured creditors this year.
In evaluating the evidence, the Court recognized that the calculation of disposable income includes a subjective analysis of what expenses are "reasonably necessary" for the maintenance or support of a debtor and his family or the continuation, preservation, and operation of his business. In re Kuhlman, 118...
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