In re Hockenberry

• Decision Date: 16 September 2011
• Docket Number: No. 09–59064.,09–59064.
• Citation: 457 B.R. 646
• Parties: In re James E. HOCKENBERRY, Jr., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

457 B.R. 646

In re James E. HOCKENBERRY, Jr., Debtor.

No. 09–59064.

United States Bankruptcy Court, S.D. Ohio, Eastern Division,

Sept. 16, 2011.

James E. Nobile, Nobile & Thompson Co., L.P.A., Hilliard, OH, for Debtor.

MEMORANDUM OPINION AND ORDER DENYING CONFIRMATION OF DEBTOR'S PLAN OF REORGANIZATION

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

I. Introduction

James E. Hockenberry, Jr. (“Hockenberry” or “Debtor”) has proposed a Chapter 11 plan under which the only general unsecured creditor in his case—a creditor holding a claim of nearly one million dollars—would receive a mere $10,000 over eight years. The creditor, Cadles of Grassy Meadows II, LLC (“Cadles”), would like to receive more and, not surprisingly, has rejected the plan and objected to confirmation. Paying a creditor cents on the dollar over time rather than immediately on the effective date of the plan is commonplace and, in and of itself, would not lead to a denial of confirmation. But here the delay in payment causes the plan to violate 11 U.S.C. § 1129(a)(7) because the proposed payments have a present value that is less than the amount Cadles would receive in a Chapter 7 liquidation. And the Debtor has not established the feasibility of his paying the amount he proposes—let alone the higher amount he would need to pay in order to satisfy § 1129(a)(7). For those reasons, the Court must deny confirmation of the Debtor's plan.

II. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2).

III. Background

A. Factual Background

The facts set forth below are not in dispute.¹ Sometime in the 1980s, Hockenberry became a limited partner in a window company, Thermal Guard, Inc., an Ohio corporation (“Thermal Guard”). The company's limited partners, including Hockenberry, personally guaranteed a $250,000 business loan that Thermal Guard obtained from TransOhio Savings Bank (“TransOhio”). Thermal Guard defaulted on its payments under the loan and, on October 13, 1989, TransOhio obtained a joint and several judgment against the company and its partners from the Summit County, Ohio Court of Common Pleas (“State Court”) in the amount of $289,000 plus accrued interest of $24,356.97 through August 29, 1989 and post-judgment interest at the rate of 12% per annum. The judgment eventually became dormant. After acquiring the judgment in 2006, Cadles obtained an order from the State Court reviving it and then garnished Hockenberry's wages and certain bank accounts he owned jointly with his wife, Elsie Hockenberry (“Mrs. Hockenberry”), collecting between $5,000 and $6,000 through those efforts. In 2008, Hockenberry moved the State Court to vacate the revived judgment, but his motion was denied.

After a failed attempt to restructure the debt owed to Cadles in a Chapter 13 case,² Hockenberry filed a petition under Chapter 11 on August 7, 2009 (“Petition Date”). On Schedule F, he listed Cadles as holding a disputed general unsecured claim in the amount of $970,019.72. See Doc. 1. Cadles timely filed a proof of claim asserting a general unsecured claim in the amount of $989,121.51. The Debtor has not filed an objection to the proof of claim. Cadles is the only creditor in the Debtor's bankruptcy case with a scheduled or filed general unsecured claim.

B. The Amended Plan

After filing an original plan and disclosure statement, Hockenberry—in order to address concerns raised by the Court—filed an amended plan (“Am. Plan”) (Doc. 72) and an amended disclosure statement (“Am. Disclosure Statement”) (Doc. 73). No party objected to the Amended Disclosure Statement, which the Court approved as containing adequate information to solicit votes on the Amended Plan, but Cadles voted to reject, and filed an objection to confirmation of, the Amended Plan (“Objection”) (Doc. 83).

The Amended Plan is straightforward. Hockenberry proposes to continue paying his first and second mortgages monthly as required by the underlying mortgage documents.³ The claims of both mortgagees are unimpaired and the mortgages were current as of the Petition Date. Hockenberry proposes to pay the impaired claims secured by his automobiles in full at 5% interest. The claim of Ford Motor Credit secured by the Debtor's 2003 Ford Expedition will be paid $180.97 per month for 24 months; the claim of Ohio Central Savings Bank secured by the Debtor's 2003 Chevrolet Silverado will be satisfied by payments of $218.21 per month for 12 months. Am. Disclosure Statement at 20, 24–25. Hockenberry's only priority unsecured claims are attorney fees in the estimated total amount of $6,000 and United States Trustee fees.

The claim held by Cadles is the only claim in Class F and would receive the following treatment under the Amended Plan:

CLASS F—ALLOWED CLAIMS OF NONPRIORITY UNSECURED CLAIMS

The Debtor owes one (1) claim that will be allowed and paid as a NONPRIORITY UNSECURED CLAIM.

That claimant is Cadles of Grassy Meadows II, LLC (“Cadles”). Cadles filed a timely proof of claim on September 2, 2009 in the amount of $989,121.51. The Debtor disputes this debt, as set forth in his Bankruptcy Schedules. However, in lieu of formally challenging the debt, the Debtor is offering to pay Cadles more than it would receive if the Debtor liquidated his assets in Chapter 7.

Based upon the Debtor's liquidation analysis of his non-exempt equity in his real and personal property, there appears to be net-value available to pay all priority and nonpriority unsecured creditors in the approximate amount of $15,519.00. After payment of administrative priority unsecured claims expected to be allowed in this Case, and currently estimated at $6,000.00, there will be $9,519.00 in net-value to pay the claim in CLASS F. However, to encourage CLASS F to accept the Plan, the Debtor will pay the Allowed Claim in CLASS F $10,000.00. The claim in CLASS F will be paid zero (0%) interest, and will be paid over eight (8) years.

The Debtor shall make payments in annual disbursements estimated at $1,250.00. The annual payment cycle will begin with the year following the year of confirmation of the Plan. Each payment will be disbursed on or before April 15th of each year.

Am. Plan at 8–9. The Amended Disclosure Statement reflects that the Debtor will set aside $104.16 per month to service the claim of Cadles. See Am. Disclosure Statement at 20. The Debtor's liquidation analysis estimates that Cadles would receive $9,519 in a Chapter 7 liquidation.

Hockenberry's ability to make payments to creditors under the Amended Plan will depend on his future earnings as a mortgage broker (paid on a commission basis) and his wife's income as a school teacher. According to the Amended Plan and the Amended Disclosure Statement, Hockenberry's net monthly average income since the Petition Date is $3,275,⁴ and he estimates his average monthly household expenses, including mortgage payments, utilities, food, medical expenses, transportation and the like are $2,700 per month. ⁵ Am. Plan at 11–12; Am. Disclosure Statement at 20.

C. The Hearing/Post–Hearing Briefing

During the Hearing, Hockenberry and John Benetis, team leader and account officer with Cadles, testified. Hockenberry filed a post-hearing brief in support of confirmation (Doc. 96), Cadles filed a brief in response (Doc. 99) and Hockenberry filed a reply brief (Doc. 102).

D. Mrs. Hockenberry's Income and Expenses

Mrs. Hockenberry earns between $2,279.72 (Form B22) and $2,350 (Schedule I) per month. Schedule I and the Amended Plan, see Am. Plan at 12, both report that Mrs. Hockenberry's take-home pay is $1,665 per month. Schedule J lists “Spousal Expenses/Marital Adjustment” of $600 per month. The Debtor testified that these “spousal expenses” include gasoline for Mrs. Hockenberry's car, her contribution toward insurance (presumably property and automobile insurance, given that she has a health insurance payroll deduction listed on Schedule I), life insurance premiums, food and household maintenance. Hr'g Tr. at 36. He further testified that he “tr[ies] to pay the major expenses, the mortgage, the utilities, cable, things of that nature. She handles the food and things of that nature. When my income is not sufficient, she assists me in making the other bills.” Id. at 35. He also testified that prior to the bankruptcy he and his wife had a joint bank account in which they deposited all of their money and from which they paid all of their bills, but that system ended when Cadles garnished the bank account. Id. According to Hockenberry, without his wife's income he would not be able to make his payments under the terms of the Amended Plan. Id. at 37. At the same time, he testified that his wife is 65 years old and would like to retire. Upon doing so, she will qualify for a Social Security retirement benefit. Id. at 34.

Mrs. Hockenberry did not testify, nor was any stipulation presented that would verify her expenses, her willingness to contribute to Mr. Hockenberry's plan payments or her intentions regarding retirement.

E. The Objection

Cadles contends that the Amended Plan has not been proposed in good faith and therefore violates § 1129(a)(3); does not satisfy the “best-interests-of-creditors” test of § 1129(a)(7); does not satisfy § 1129(a)(8) because each impaired class has not accepted the Amended Plan; does not meet the projected disposable income test set forth in § 1129(a)(15); violates § 1129(a)(1) and (a)(2) because it fails to satisfy the more specific provisions of the Bankruptcy Code referred to above; and unfairly discriminates against, and is not fair and equitable to, Cadles, as required by § 1129(b)(1). With respect to the fair and equitable standard, while Hockenberry argues that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) abrogated the “absolute priority rule” (which is a component of the fair and equitable...