In re Hoss, 08-10365.

• Decision Date: 20 August 2008
• Docket Number: No. 07-12779.,No. 08-10365.,08-10365.,07-12779.
• Citation: 392 B.R. 463
• Parties: In re Carol J. HOSS and Terry L. Hoss, Debtors. In re Marcos Arroyo, Jennifer Renee Arroyo, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

392 B.R. 463

In re Carol J. HOSS and Terry L. Hoss, Debtors In re Marcos Arroyo, Jennifer Renee Arroyo, Debtors.

No. 08-10365.

No. 07-12779.

United States Bankruptcy Court, D. Kansas.

August 20, 2008.

Larry L. Livengood, Salina, KS, William H. Zimmerman, Jr., Case, Moses, Zimmerman & Wilson PA, Wichita, KS, for Debtors.

MEMORANDUM OPINION

ROBERT E. NUGENT, Chief Judge.

These two chapter 13 cases focus the Court squarely on a frequently litigated BAPCPA¹ issue, that being whether an above-median income debtor who seeks to cram-down or strip off a secured creditor in chapter 13 can deduct from current monthly income on Line 47 of Form B22C, the average future monthly payments to the secured creditor based upon the original, unmodified contract or only the amount equal to what debtor intends to actually pay under the plan. This calculation directly affects the amount of projected disposable income a debtor must pay to unsecured creditors under 11 U.S.C. § 1325(b)(1)(B) and requires the Court to interpret the phrase "amounts scheduled as contractually due" in 11 U.S.C. § 707(b)(2)(A)(iii) to determine a debtor's disposable income.²

These two cases come before the Court on the Trustee's objection to confirmation of the debtors' chapter 13 plans because the debtors propose to deduct as expenses the secured debt payment amount under their respective contracts.³ The Court has jurisdiction over these contested, core proceedings under 28 U.S.C. § 1334(b) and § 157(b)(2)(L). In both cases, the parties submitted the matter to the Court on stipulated facts⁴ and briefs.⁵ The chapter 13 trustee Laurie B. Williams appears by her attorney Christopher T. Micale. Debtors Arroyo appear by their attorney William H. Zimmerman. Debtors Hoss appear by their attorney Larry L. Livengood.

Factual Background

In both of these cases the debtors propose plan treatment of secured creditors involving the cram-down of loans or stripping off of liens. Under the debtors' plans, a portion of the affected creditors' claims would be treated as unsecured claims. The debtors are above-median income debtors requiring the calculation of disposable income under § 1325(b)(3).

Arroyo

In Arroyo, debtors seek to deduct from their disposable income their contract payments on a 2007 GMC Yukon truck secured to Wells Fargo under § 707(b)(2)(A)(iii) as it is made applicable to the projected disposable income test set out in § 1325(b)(1)(B).

Debtors filed a plan that provides for the cram-down of Wells Fargo's car loan that is secured by the Yukon under § 1325(a)(5). Wells Fargo's loan is not a purchase money loan and is therefore not eligible for 910-day car loan treatment under § 1325(a)(*)'s hanging paragraph. The Wells Fargo loan was refinanced in November of 2006 with monthly payments running for 72 months. The amount refinanced was $63,207. Debtors propose to cram this loan down to the current value of the Yukon which is stipulated to be $35,000. Under their plan, debtors propose to repay this amount, plus interest at the rate of 7.78 per cent per annum for a total payment over the life of the plan of $41,651. The parties stipulate that the average monthly payment on this amount over the life of the plan is $694.20.⁶ This is the amount that the trustee contends debtors are entitled to deduct on Line 47. The balance of Wells Fargo's loan would be treated as an unsecured claim.

Despite planning to cram Wells Fargo down, when debtors completed their Form B22C, they sought to deduct from current monthly income the contractual payment amount equal to one-sixtieth of $63,207 or $958 per month on Line 47.⁷ The trustee has objected to this deduction, arguing that allowing this deduction would serve to minimize debtors' disposable income to the detriment of the unsecured creditors. As filed, debtors' Form B22C posits monthly disposable income of $14.48. Were they only permitted to deduct on Line 47 what they actually propose to pay Wells Fargo, one-sixtieth of $41,651, their disposable income figure would increase by approximately $250 per month.

Hoss

In Hoss, the debtors occupy a homestead to which once attached four mortgages. During the pendency of their case, however, the Court has entered orders stripping off the second, third and fourth mortgages because no equity was shown to support any mortgages subordinate to the first lien.⁸ Debtors have made no mortgage payments on these three mortgages since filing their case. They intend to retain their homestead and pay the first mortgage according to the terms of the note. Like the Arroyos, they have included on Line 47 of their B22C form all of the payments they would have made on the stripped-off mortgages, $897 per month,⁹ as well as those they intend to make on the first mortgage. This results in their projected disposable income being a negative $494. Were these mortgage payment deductions omitted from Line 47, debtors monthly disposable income on Line 59 would amount to $402 per month.

Analysis and Conclusions of Law

The ability of above-median income debtors to deduct future average monthly secured debt payments on Line 47 from current monthly income to determine chapter 13 debtors' projected disposable income arises in a number of varying but related situations: where the debtors have surrendered the property to the creditor; where the debtors have stripped off liens on the property; and where the debtors have crammed down the lien to the value of the collateral. These companion cases involve only the latter two situations, but all of these scenarios share the common question whether this expense deduction is permitted when the debtors will have no future legal obligation to repay the debt under the terms of the plan and upon its completion. This Court has yet to rule on this issue and the bankruptcy courts that have ruled on the issue are divided. Some courts hold that debtors may deduct the entire contractual payments (as determined by the debt instrument) from current monthly income while others hold that debtors may only deduct the actual secured debt payments (as determined by the plan) they anticipate making as of the effective date of the plan.

This is yet another legal conundrum produced by Congress' injecting into the chapter 13 projected disposable income test certain aspects of the chapter 7 means test for determining abuse. Section 1325(b)(1)(B) provides that if the trustee objects to a chapter 13 plan's treatment of the unsecured creditors, the debtor must provide for the commitment of all his projected disposable income, as of the effective date of the plan, to the payment of those creditors pro rata. Section 1325(b)(2) defines disposable income as "current monthly income," a defined term under § 110(10A) and determined as of the date of filing, adjusted by an amount "reasonably necessary to be expended" for the maintenance and support of the debtor and his dependents. For above-median income debtors, the amount "reasonably necessary to be expended" is "determined in accordance with subparagraphs (A) and (B) of § 707(b)(2)."¹⁰ Section 707(b)(2), the heart of the chapter 7 means test, provides at subparagraph (A)(iii) that the debtor's average monthly payments on secured debt be calculated as the "total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months" following the petition date, plus any additional payments to be made to those secured creditors in order to retain possession of the property securing the debts. At issue here is what "amounts scheduled as contractually due" means in the context of a chapter 13 debtor's plan and the projected disposable income test of § 1325(b)(1)(B).

Many of the courts deciding this question in the same or similar contexts have concluded that this phrase refers to the amounts scheduled to be paid under the creditor's contract (i.e. the debt instrument) at the time of filing the bankruptcy petition, before that contract is modified by the plan's confirmation.¹¹ Among the cases so holding are two Kansas bankruptcy decisions, only one of which is a chapter 13 case, In re Allen.¹² The other, In re Palm, is a chapter 7 case and, as will be discussed below, is of limited application here.¹³ There are no Tenth Circuit Bankruptcy Appellate Panel or Court of Appeals decisions upon which to rely.¹⁴ Yet, a growing number of courts contend that the phrase, viewed in a chapter 13 context, really refers to the amounts the debtor intends to pay under the plan and is determined at confirmation.¹⁵ Both views hang their hats on "plain language" interpretation, though what is "plain" about this statutory language escapes this Court. Some review of each school of thought is worthwhile.

Secured Debt Payment Deduction Allowed in Full

The "Full Deduction Courts" hold that debtors are permitted to deduct on Line 47 the secured creditor payments they contracted to make, whether or not the debtors intend to retain the property securing those debts; however, these courts, led by In re Walker,¹⁶ generally express this view in the context of chapter 7 cases while applying the chapter 7 means test to determine whether certain debtors' filings are presumptively abusive.¹⁷ Judge Karlin's opinion in In re Allen provides a comprehensive survey of opinions reported. She comments that courts adopting this view begin their analysis by examining the plain meaning of § 707(b)(2)(A)(iii). She notes that these courts conclude that the "common meaning" of "as contractually due" is that the debtor is legally obligated under the contract, in this case, a promissory note, to make a payment in a certain amount, with a certain amount of interest, for a set number of months into the future.¹⁸ These courts further note that a debtor's contractual obligations to his creditors do not cease when he surrenders collateral or strips off a debt, rather these obligations only end at discharge and, until then, remain "contractually due." These...