In re Garza

Decision Date15 August 2017
Docket NumberCASE NO: 16–70534
Citation575 B.R. 736
Parties IN RE: Gilbert Longoria GARZA; aka Longoria; aka Garza, et al, Debtors
CourtU.S. Bankruptcy Court — Southern District of Texas

Marcos Demetrio Oliva, Marcos D. Oliva, PC, McAllen, TX, for Debtor.

Cindy Boudloche, Corpus Christi, TX, for Trustee.


Resolving ECF Nos. 19, 28

Eduardo V. Rodriguez, United States Bankruptcy Judge


It is well known that bankruptcy has two primary public policy objectives. The first is to promote equality of distribution among similarly situated creditors. The second is to afford the debtor a fresh economic start. These goals of distribution and a fresh start are sometimes referred to as the twin pillars of bankruptcy.1 Theoretically, the twin pillars should be co-equal. When confirming a debtor's chapter 13 plan, bankruptcy courts must remain vigilant and be prepared to steady the pillars—thereby, ensuring a fair ratable return to creditors while simultaneously promoting the debtor's fresh financial start.

In the case sub judice , this Court must determine whether it should confirm above-median income Debtors' chapter 13 plan wherein they have included a $424.522 monthly voluntary 401(k) contribution in their Statement of Current Monthly Income and Calculation of Commitment Period as a "Change in Income or Expenses" and Schedule I deduction despite failing to contribute to the 401(k) prior to filing their bankruptcy petition and if so, whether such allowance would topple the twin pillars.


This Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Bankr. P. 7052, which incorporates Fed. R. Civ. P. 52, and 9014. To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such. To the extent that this Court made any oral findings and conclusions on the record, this Memorandum Opinion controls.

On December 14, 2016, Gilbert Longoria Garza and Santos Mesa (collectively, the "Debtors " or individually, respectively, "Mr. Garza " and "Mrs. Mesa ") filed their petition under chapter 13 of title 11 of the Bankruptcy Code.3 ECF No. 1. Debtors listed on Schedule I monthly income of $8,609.34, and monthly deductions of, among other items, $424.52 as a voluntary contribution to Mr. Garza's 401(k) plan. Debtors listed on Schedule J a monthly net income of $1,100.00. ECF No. 1 Along with their petition and Plan, Debtors filed Official Form 122C–1—Chapter 13 Statement of Monthly Income and Calculation of Commitment Period and Official Form 122C–2—Calculation of Your Disposable Income (the "Means Test ") listing a six-month averaged monthly income, or current monthly income, of $8,576.21. Because Debtors' annualized income of $102,914.52 is more than the median family income for a household of six in Texas ($89,498.00), Debtors are "above-median debtors." That designation requires a minimum applicable commitment period of five years under 11 U.S.C. § 1325(b)(4) and the use of standard IRS expense deductions4 on their form 122C. But see In re Nowlin , 576 F.3d 258, 267 (5th Cir. 2009) (explaining that "a bankruptcy court may consider reasonably certain future events when evaluating a Chapter 13 plan for confirmation under § 1325" when determining a debtor's projected disposable income). After taking allowed deductions, the Means Test listed Debtors' monthly disposable income as $530.41 per month over sixty months, resulting in payments to unsecured creditors in the amount of $31,824.60. ECF No. 3 at 13. However, Debtors also documented a change in income or expenses5 as authorized by Line No. 46 of the Means Test asserting increased expenses of $424.51, commencing on December 30, 2016, to account for a voluntary 401(k) contribution on Schedule I. Id. Simultaneously, Debtors filed their chapter 13 plan which included, inter alia , a $100.00 monthly deposit into the chapter 13 Trustee ("Trustee ") Administered Savings Fund6 ("Savings Fund ") and a forecasted 40% dividend to general unsecured creditors.7 ECF No. 2 at 11 (including as amended, the "Plan "); see also ECF No. 28 at 11 (amending ECF No. 2).

On December 19, 2016, the first Meeting of Creditors was noticed for January 19, 2017, and April 19, 2017, was designated as the bar date for the filing of claims other than claims from governmental units. ECF No. 13. Simultaneously, Trustee filed her Notice of Confirmation Hearing and Plan Summary, which scheduled the confirmation hearing on February 23, 2017. ECF No. 14. On January 3, 2017, Crest Financial, LLC ("Crest ") filed an unsecured proof of claim based on a lease for a seven piece dining table and two chairs in the amount of $1,809.53 and attached a copy of the Rental Purchase Agreement between Crest and Mr. Garza. Claim No. 2–1. No objections have been filed to the Crest claim. Debtors initially scheduled the Crest claim to be paid in Section 5 of the Plan, which provisions for the full payment of secured debts that were incurred, inter alia , within 1 year of the petition date. ECF No. 2 at 6. However, Debtors amended the Plan to now treat the Crest claim in Section No. 7 of the Plan, which provisions for secured debts with no default in payments that are to be paid in accordance with the pre-petition contract. ECF No. 28 at 6–7.

On January 19, 2017, the Meeting of Creditors was conducted and concluded after which Trustee did not recommend the Plan's confirmation. On February 16, 2017, Trustee filed an Objection to Confirmation of the Plan, which asserted that Debtors' Plan cannot be confirmed because (i) the Plan does not propose to pay all of Debtors' projected disposable income during the applicable commitment period and (ii) that due to errors on the Means Test, when corrected, would yield a higher disposable income and (iii) the Plan improperly treats Crest's unsecured claim as a secured claim under [Section] 5 of the Plan. ECF No. 19 (the "Objection ").

On February 23, 2017, the Court conducted a hearing on confirmation of Debtors' Plan. At that hearing, Trustee reiterated the concerns her Objection raised: namely, Mr. Garza's voluntary 401(k) contributions and whether he actually contributed to the 401(k) pre-petition, as well as the treatment of Crest's claim in the Plan. Although raised in her written objection, Trustee did not press the issue of errors she raised regarding the Means Test. In response, Debtors' Counsel confirmed that the voluntary 401(k) contributions did not begin prior to bankruptcy; however, Mr. Garza's employer would be matching a "large percentage" of the 401(k) contribution going forward. See ECF No. 5. Trustee countered that since Debtors are proposing such a large voluntary contribution—despite failing to contribute to the 401(k) pre-petition—the unsecured creditors, according to Trustee's calculations, would receive a 31% dividend. Debtors' Counsel requested additional time to respond to the Objection, and Plan confirmation was reset to March 23, 2017. ECF No. 20.

On March 23, 2017, the Court conducted its second hearing on plan confirmation. At that hearing, Trustee reiterated her objection to various errors contained in the Means Test. Additionally, Trustee reasserted her objection to Mr. Garza's post-petition voluntary 401(k) contributions and Debtors' exclusion of the voluntary 401(k) contribution from the disposable monthly income calculation in their initial Means Test. See also ECF No. 3 at 13. In response, Debtors' Counsel reasoned that contribution to the 401(k) is superior to contributing to the Savings Fund because not only will Mr. Garza's employer match up to 5% of Mr. Garza's salary—approximately $424.52 per month—the funds deposited into the 401(k), unlike the Savings Fund, will earn interest. As Debtors' only witness, Mr. Garza testified as follows:

i. He is the Director of Campus Dining for University of Texas—Rio Grande Valley through the independent contractor, Sodexo;
ii. His employment with Sodexo required him to move to seven different cities in the last ten years;iii. The [Debtors] have four sons ranging from nine to twenty-years-old;
iv. Mr. Garza's oldest son suffered a traumatic brain injury and requires significant care, and his youngest son has an "eating disorder" requiring special food preparation, which resulted in Mrs. Mesa remaining unemployed to care for the sons;
v. Debtors are seeking resources to assist their oldest son in his college studies, however, they are unclear on the cost of those resources;
vi. Mr. Garza did not contribute to the 401(k) prior to bankruptcy because of the expenses associated with frequent moves and four children;
vii. Sodexo will match the 401(k) contribution up to 5% of Mr. Garza's salary, although the percentage can change;
viii. Mr. Garza's 401(k) contribution will not be designated as earned income and Debtors will forgo the Savings Fund contribution and instead use the $100.00 previously designated as a Savings Fund as a portion of the 401(k) contribution.

On cross-examination, Mr. Garza testified as follows:

(i) He had never filed bankruptcy;
(ii) His salary would re-set with every move, due in part to a cost of living adjustment, therefore he was unable to set aside any savings;
(iii) He filed for bankruptcy because he was behind in his payments and wanted to provide a fresh start for his family.

The Court finds Mr. Garza's testimony to be, not only sincere, but credible.

Regarding Trustee's objections to the various Means Test calculations, Trustee noted that (i) the Plan is proposing to pay an average monthly payment of $270.00 for Vehicle 1 in comparison to the $421.73 average monthly payment listed on Line 13b, and (ii) Line 35 should be reserved for past-due priority claims and not ongoing priority claims. In...

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