In re Hickey, Case No. 19-05061-TOM-13

• Decision Date: 25 June 2020
• Docket Number: Case No. 19-05061-TOM-13
• Citation: 618 B.R. 314
• Parties: IN RE: Thomas HICKEY, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

618 B.R. 314

IN RE: Thomas HICKEY, Debtor.

Case No. 19-05061-TOM-13

United States Bankruptcy Court, N.D. Alabama, Southern Division.

Signed June 25, 2020

Michael D. Brock, Brock & Stout, LLC, Enterprise, AL, for Debtor.

MEMORANDUM OPINION AND ORDER

TAMARA O. MITCHELL, United States Bankruptcy Judge

This case came before the Court on March 5, 2020, for a hearing on confirmation of the Debtor's proposed Chapter 13 plan and the Objection to Confirmation and Motion to Dismiss filed by the Chapter 13 Trustee. Appearing before the Court were Chad Cotant, attorney for Thomas Hickey (the "Debtor"), and Brad Caraway, Chapter 13 Trustee. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151, and 157(a) and the District Court's General Order of Reference Dated July 16, 1984, as Amended July 17, 1984.¹ This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(L).² This Court has considered the pleadings, the arguments of counsel, and the law, and finds and concludes as follows:³

FINDINGS OF FACT ⁴

Thomas Hickey, the Debtor, filed this chapter 13 bankruptcy case on December 10, 2019. In his schedules he lists only one secured debt, and that is a debt owed to SE Toyota Finance ("SE Toyota") secured by a 2015 Toyota Tundra. On Schedule D the Debtor listed the amount of the debt as $12,110; however, after claim number 4 was filed on December 20, 2019 as secured in the amount of $10,894.96,⁵ the amount of the debt in the Debtor's amended Chapter 13 plan was changed to match the amount in claim number 4.

In addition to the one secured claim, the Debtor has substantial unsecured debt totaling over $58,000 consisting primarily of loans, lines of credit, and credit cards. For example, claim number 3 of Arvest Bank is based on a note the Debtor signed on March 1, 2017. The loan, in the amount of $30,000, was to be repaid with interest accruing at a rate of 15.99% through monthly payments of $650.98 per month beginning on April 1, 2017. Based on the documents attached to the claim, it appears that the loan proceeds were used to pay two credit cards for a total of approximately $7,100.00. In addition, loan proceeds of over $23,000 were paid to the Debtor. However, the Debtor has provided no information about how these loan proceeds were spent.

Claim number 5 filed by OneMain Financial is for another loan received by the Debtor. Based on the attachments to the proof of claim, it appears that the Debtor received a check, presumably through the mail, in the amount of $7,000. On the face of the check is a notation stating "[t]his is a solicitation for a loan. Read the attached loan agreement before signing and cashing or depositing this check." The check, dated May 30, 2017, was apparently negotiated on June 12, 2017 – a little over three months from the date of the Arvest loan.⁶ The loan was to be repaid with 29.49% interest through monthly payments of $249.96 beginning on July 12, 2017.

According to claim number 10, the Debtor also negotiated a check sent to him from Mariner Finance just a few months later. The attachments to the proof of claim evidence that this check, in the amount of $2,550.00, similarly contained a disclosure instructing "this is a loan. Read the enclosed disclosures before signing this agreement." The check was dated August 28, 2017 and negotiated on September 20, 2017. This loan was to be repaid with interest at a rate of 30.30% with monthly payments of $116.79.⁷ Thus, in a period of a little more than six months in 2017, the Debtor incurred almost $40,000.00 of unsecured debt. The Debtor has provided no information regarding how or for what purpose the funds were used. In addition to the unsecured loans already discussed, there are multiple claims in the Debtor's case for varying credit cards including home improvement retailers Lowe's for $5,058.46 and Home Depot for $2,342.53.

According to Schedule I, the Debtor is self-employed⁸ with a monthly gross income of $2,000. His spouse, who is not a debtor in this case, is a nurse practitioner in a law firm with a monthly gross income of $10,000. The Debtor's spouse is by far the bigger earner of the two and presumably pays the mortgage payments of approximately $2,200 per month.⁹ Although the Debtor signed the mortgage, and thus has some contractual obligations to the mortgage company, his amended plan fails to reference or provide for the mortgage at all.¹⁰

According to the Debtor's proposed amended Chapter 13 plan he intends to pay the automobile debt directly to SE Toyota through payments of $456.00 per month as opposed to making payments to SE Toyota through the Chapter 13 Trustee. This provision served as a basis for the Chapter 13 Trustee's objection to the proposed plan.¹¹

At the hearing on confirmation, counsel for the Debtor argued that the "unique circumstances" of this case warrant a direct payment. According to counsel, the contract rate of interest is lower than the Till rate of interest¹² typically used in Chapter 13 plans; thus, by paying the debt direct the Debtor would save on interest. In addition, the Debtor would save the fees that the Trustee would otherwise collect for administering the claim.¹³ Counsel also argued that the debtor would receive additional savings by making the payment direct because less than two years remain on the original contract term. Further, counsel asserted that no creditor would be negatively impacted by the Debtor paying the SE Toyota debt direct since the Debtor has proposed to pay all unsecured claims in full, and that unsecured creditors may actually benefit because payments to them would start more quickly than if the secured automobile debt was paid through the Trustee. Counsel represented that the Debtor is current on the payments to SE Toyota, and that the plan has been proposed in good faith.

At the confirmation hearing the Chapter 13 Trustee acknowledged that the Debtor has proposed to pay the unsecured claims at 100% but argued that the Trustee is nonetheless the best disbursing agent for claims. He noted that he would not object if the Debtor proposed to pay the debt through the Trustee at the contract rate of interest as opposed to the Till rate of interest.

CONCLUSIONS OF LAW

A. Most debt should be paid through the Chapter 13 Trustee.

It has long been this Court's procedure based on the Bankruptcy Code and case law that, absent some special circumstance, payments to secured creditors must be made through the Chapter 13 trustee.¹⁴ Another court in the Northern District of Alabama, Southern Division, took the same approach and wrote an instructive order that this Court has relied on since its issuance in 2003. In In re Langham , Judge Cohen addressed an objection by the United States to a debtor's plan wherein the debtor proposed a direct payment on a student loan debt owed to the U.S. Department of Education. In re Langham , Case No. 02-10081-BGC-13 at 4 (Bankr. N.D. Ala. Aug. 28, 2003) (Cohen, J.). In that case, Judge Cohen ultimately concluded that "absent a showing by the debtor of an exception, the Court should apply the general rule that the Chapter 13 trustee is the one who should make payments under the plan to creditors" and held that the objection to confirmation by the U.S. Department of Education was due to be sustained. Langham , Case No. 02-10081-BGC-13 at 5 (footnote omitted).

In In re Burkhart , a case relied upon by Judge Cohen in Langham , the debtor sought to make direct payments to his mortgage creditors to avoid paying the Chapter 13 trustee's fees. In re Burkhart , 94 B.R. 724, 725 (Bankr. M.D. Fla. 1988) (Killian, J.). Judge Killian determined that, while the debtor could make the on-going mortgage payments direct to the creditors, the arrears had to be paid through the trustee. Id. at 728. According to Judge Killian:

The first question is whether or not and to what extent the debtor may act as disbursing agent for payments under the plan. Section 1322(a)(1) of the Bankruptcy Code provides that, "The plan shall provide for the submission of all or such portion of future earnings or other income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan." Section 1326(c) provides that, "[e]xcept as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan." The Bankruptcy Code thus contemplates that the trustee will act as the disbursing agent in most instances. It nonetheless clearly envisions that there will be exceptions.

....

[A]bsent any exception, the trustee should act as disbursing agent for payments under the plan. While there are sound reasons to except the current [mortgage] payment from the trustee's control, the debtor in this case has not advanced, nor has the Court found, any reason to create an exception for the arrearage payments. The debtor's ability to cure the default on a home mortgage is frequently the heart of a Chapter 13 plan. The arrearage payments are temporary and catch-up in nature, and they typically are accounted for separately by the secured creditor. The trustee can disburse the arrearage payment without interfering with the established debtor-creditor relationship, and, furthermore, in so doing the trustee is thereby able to continue to monitor the debtor's compliance with the plan.

Id. at 725, 726.¹⁵

Like the courts in Langham and Burkhart , this Court concludes that, pursuant to §§ 1322(a)(1) and 1326(c), the Bankruptcy Code contemplates that debts shall be paid through the Chapter 13 trustee unless an exception from the general rule exists. The Burkhart court drew distinctions between on-going monthly mortgage payments – an "exception" to the general rule so to speak – and catching up or curing mortgage arrearage payments. Similarly, this Court has typically confirmed debtors' plans proposing to make regular monthly mortgage payments direct, thereby leaving the debtors...