In re Fries
| Decision Date | 29 December 1986 |
| Docket Number | Bankruptcy No. 86-01193G. |
| Citation | 68 BR 676 |
| Parties | In re Kevin J. FRIES and Diane L. Fries, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Thomas Turner and James J. Gannon, Philadelphia, Pa., for debtors.
Jonathan P. Andrews, Jon C. Sirlin and Associates, Philadelphia, Pa., for objector, Philadelphia Nat. Bank.
James J. O'Connell, Philadelphia, Pa., Trustee.
The debtors, Kevin J. Fries and Diane L. Fries, filed this chapter 13 bankruptcy case on March 12, 1986. On October 21, 1986, the court held a confirmation hearing. Prior to the confirmation hearing, Philadelphia National Bank (PNB), which holds both secured and unsecured claims, filed objections to confirmation on three grounds. PNB asserts that: (1) the debtors have not shown cause for extending the plan to 60 months as required by 11 U.S.C. § 1322(c); (2) the plan does not provide for full payment of PNB's allowed secured claim; and (3) the plan fails to satisfy the "disposable income test" under 11 U.S.C. § 1325(b)(1)(B).
At the confirmation hearing, debtors' counsel represented that amendments to the income and expense disclosures of their chapter 13 statement and an amended chapter 13 plan had been or would be filed imminently. After counsel disclosed the substance of the amendments, the parties agreed to proceed with the confirmation hearing. Neither side called any witnesses. Instead, the parties agreed that the court could rule upon the objections based solely upon the papers filed of record in the bankruptcy case.1 On October 22, 1986, the debtors filed the amendments to their chapter 13 statement and an amended chapter 13 plan.
For the reasons set forth below, PNB's first and second objections to the debtors' chapter 13 plan2 will be denied. However, because the record is insufficient for a fair determination of the objection under section 1325(b)(1)(B), I will exercise my discretion to schedule a hearing so that the parties can supplement the current record.
In order to understand the issues in the case, it is helpful to begin with a description the debtors' chapter 13 plan.
The plan provides for submission to the trustee of $383.89 for the first 2 months of the plan followed by submission of $1,470.00 per month for the final 58 months of the plan. The plan payments total $86,027.78. While the plan does not expressly make this distinction, it is clearly the debtors' intent to cure the prepetition delinquencies on two secured claims (the claims held by PNB and Horizon Financial) and to pay, in its entirety, a third secured claim (held by Meridian Bank). Compare 11 U.S.C. § 1322(b)(5) with id. § 1325(a)(5). In connection with the cure of the two secured claims, the plan expressly provides that, commencing in the third month of the plan, the trustee shall send to PNB and Horizon Financial the regular postpetition mortgage payments falling due each month. The plan also provides for payment of all administrative expenses (including an attorney's fee of $750.00), a trustee's commission of 3.2% and a distribution to unsecured creditors of not less than 10%.3
Perhaps a more conventional way of describing this plan is that it proposes to maintain the post-petition mortgage payments of $1,000.00 per month falling due on the two residential mortgages and to pay $28,028.00 (or, an average of $467.00 per month) to creditors and administrative expenses over five years. See generally In re Foster, 670 F.2d 478, 488-90 (5th Cir.1980) (); In re Evans, 66 B.R. 506, 509 (Bankr.E.D.Pa.1986).
In the debtors' initial chapter 13 statement, they disclosed net monthly income of $2,600.00 derived from Mr. Fries' employment. Mrs. Fries listed her occupation as a "student" due to graduate in May 1986. The debtors listed monthly living expenses totalling $1,164.00 for themselves and their three children ages 9, 6 and 3, not counting the $1,000.00 falling due on the PNB and Horizon mortgages. In their initial plan, the debtors proposed to pay $1,428.00 monthly to the trustee, anticipating that $1,436.00 would be available from their income after deducting their living expenses.
The amended chapter 13 statement notes a number of significant changes which have occurred since the petition was filed. Mrs. Fries is now working with an estimated net monthly income of $1,200.00 and Mr. Fries' monthly income has increased $500.00. Thus, the debtors' net monthly income increased to $4,300.00. However, the debtors have also noted significant increases in their monthly living expenses. The amended chapter 13 statement lists their monthly expenses now as $2,780.00, not counting the $1,000.00 falling due on the PNB and Horizon mortgages. Debtors propose to pay $1,427.84 to the trustee monthly of the $1,520.00 left after their estimated monthly expenses.
PNB contends that the debtors have not shown cause, pursuant to 11 U.S.C. § 1322(c), so as to allow the period of plan payments to extend to 60 months. Section 1322(c) provides:
The plan may not provide for payments over a period that is longer than three years, unless the court, for cause approves a longer period, but the court may not approve a period that is longer than five years.
Section 1322(c) had no counterpart under chapter XIII of the former Bankruptcy Act. The legislative history explains why Congress limited the length of chapter 13 plan to five years and only for cause.
Under chapter XIII of the Act, in certain areas of the country, inadequate supervision of debtors attempting to perform under wage earner plans have made them a way of life for certain debtors. Extensions on plans, new cases and newly incurred debts put some debtors under court supervised repayment plans for seven to ten years. This has become the closest thing there is to indentured servitude; it lasts for an indentifiable sic period and does not provide the relief and fresh start for the debtor that is the essence of modern bankruptcy law.
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 117 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6078 (footnote omitted).
The Code contains no definition of the "cause" necessary for the extension of a plan to five years. Collier suggests that a debtor's inability to cure a default under section 1322(b)(5) or to pay priority or allowed secured claims in a shorter time should be grounds for approving plans longer than three years. 5 Collier on Bankruptcy ¶ 1322.15 (15th ed. 1986) ("Collier").
In a number of cases, where the proposed plan payments appeared to constitute the debtor's best effort, debtors have been permitted to extend the plan term beyond 36 months based on rationales akin to those enunciated in Collier. See In re Purdy, 16 B.R. 847 (N.D.Ga.1981), aff'g, 10 B.R. 902 (Bankr.N.D.Ga.1981); In re Powell, 15 B.R. 465 (Bankr.N.D.Ga.1981); In re Eury, 11 B.R. 397 (Bankr.N.D.Ga.1981). When courts have focused on the debtors' ability to pay, the underlying concern appears to be to prevent the debtor from "stretching out" to five years payments that could be made in three years. Cf. Matter of Minor, 16 B.R. 147, 148 (Bankr. S.D.Ohio 1981) ().
In a slightly different context, some courts have rejected creditor demands that a court require a debtor to extend the plan to 5 years in order to increase the dividend to unsecured creditors.
A more substantial payment to unsecured creditors . . . does not qualify as "cause" for a Chapter 13 plan to extend more than three years. Every three-year plan providing less than full repayment to unsecured creditors can be extended to provide more substantial payment to them. If such payment were to qualify as "cause," the chapter 13 trustee could routinely object to all such plans, and the three-year Chapter 13 plan would become the exception, rather than the rule. This is surely not a legitimate interpretation of section 1322(c). . . .
In re Greer, 60 B.R. 547, 555 (Bankr.C.D. Cal.1986). See also In re Moss, 5 B.R. 123 (Bankr.M.D.Tenn.1980). But see In re Fulghum, 22 B.R. 526 (Bankr.E.D.Ark. 1982).
At the other extreme, a few courts have refused to permit an extension of the plan period to 5 years unless the extension will result in a substantial dividend to creditors. See In re Price, 20 B.R. 253 (Bankr.W.D. Ky.1981); In re Poff, 7 B.R. 15 (Bankr.S.D. Ohio 1980). These decisions are highly questionable "in light of the rejection by nine federal courts of appeals of a substantial repayment requirement for chapter 13 plans," In re Goodavage, 41 B.R. 742 (Bankr.E.D.Va.1984); In re Hines, 723 F.2d 333 (3d Cir.1983), as well as the recent enactment of 11 U.S.C. § 1325(b)(1)(B). "If the Chapter 13 Trustee or a creditor contends that a debtor is not proposing a sufficient payment to unsecured creditors, such objector should examine carefully the income and expense projections of a debtor to assure that the debtor meets the best efforts requirement of section 1325(b)." In re Greer, 60 B.R. at 555.
After reviewing the caselaw, I conclude that the analysis of the "cause" requirement set forth in Collier's is most consistent with the policies which led Congress to enact section 1322(c). The purpose of that section is to protect debtors from involuntary participation in chapter 13. Confirmation issues relating to creditor dissatisfaction with the amount of the dividend on unsecured claims or doubts about the plan's feasibility4 involve determinations which are better made under other Code provisions, such as sections 1325(a)(5) and 1325(b)(1)(B). See in re Powell, 15 B.R. at 473 n. 18; cf. In re Gathright, 67 B.R. 384, 389-90 (Bankr.E.D. Pa.1986) (), appeal...
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