In re Martin, Bankruptcy No. 96-17812-WCH.
| Decision Date | 17 March 1999 |
| Docket Number | Bankruptcy No. 96-17812-WCH. |
| Citation | 232 BR 29 |
| Parties | In re William R. MARTIN and Norma J. Martin, Debtors. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
COPYRIGHT MATERIAL OMITTED
William F. Markley, Wakefield, MA, for Debtor.
David G. Baker (on the brief with Gary Donahue), Boston, MA, for U.S. Trustee.
Richard Gottlieb, for National Consumer Law Foundation.
DECISION ON DEBTORS' MOTION TO MODIFY CHAPTER 13 PLAN
The matter before the Court is whether a debtor may, as a result of a mortgage refinancing, modify a plan post-confirmation to provide for a lump-sum payment to satisfy 10% of the filed claims, a sum less than 10% of the projected claims scheduled and provided for in the original plan. As explained herein, I conclude that (1) the Chapter 13 trustee may raise an objection to a post-confirmation modification under 11 U.S.C. § 1325(b); (2) upon objection, modification is appropriate only when an amended plan satisfies the requirements of 11 U.S.C. § 1325(b)(1) based upon the debtor's financial condition at the time of modification; (3) a lump sum payment to satisfy the remainder of a plan is appropriate so long as it includes any increased disposable income during the remainder of the plan; and (4) modification also requires satisfaction of the "best interests test" which will be applied based upon a liquidation analysis at the time of the modification. Because the Debtors' motion to modify does not satisfy these requirements, their motion is denied.
William and Norma Martin (the "Debtors") filed for relief under Chapter 13 of the United States Bankruptcy Code on October 11, 1996. In Schedule A of their petition, the Debtors listed an interest in a single family house (the "Property"). The Debtors listed the Property as having a value of $157,000 and encumbrances totaling $117,000. In Schedule C, the Debtors claimed an exemption of $16,450 in the Property. In Schedule J, the Debtors disclosed that their excess monthly income is $414 and that they would be making monthly payments of $272.
When they filed for relief, the Debtors filed a Chapter 13 Plan (the "Plan").1 The Plan provides for thirty-six monthly payments of $272 in order to pay 10% of the $87,965.64 projected unsecured claims and the Trustee's fees. The Plan also provides for the Debtors to pay their secured claims outside of the Plan. In the liquidation analysis, the Debtors value the Property at 85% of its fair market value or $133,450.2 The liquidation analysis reveals that there would be no equity available upon liquidation after the encumbrances and exemption are deducted from the discounted fair market value.
On December 2, 1996, I signed the Order of Confirmation (the "Order"). The Order provides that the Debtors will pay $272 per month until further order of the Court. It further provides that upon confirmation, all property of the estate vests in the Debtors. Lastly, the Order states that
On October 9, 1998, the Debtors filed a motion requesting authorization to refinance the Property. In paragraph 4 the Debtors disclose that In the motion, the Debtors explain that they were refinancing to lower their monthly payments and to use the proceeds to satisfy the remaining balance of the Plan. Receiving no objection, I granted the motion on October 21, 1998.
Also on October 9, 1998, the Debtors filed their "Motion to Approve Debtors' Post-Confirmation First Amended Chapter 13 Plan." In the proposed amended plan (the "Amended Plan"), the Debtors represent that the filed unsecured claims total $82,720 and the Amended Plan provides for a 10% payment of those claims or $8,270; that is, the Debtors propose to reduce their monthly payment from 10% of the claims as scheduled to 10% of the claims as timely filed. In the Addendum to the Amended Plan, the Debtors propose to apply the proceeds of the refinancing of their home to the balance due under the Plan thereby satisfying their obligations.3
The Chapter 13 Trustee (the "Trustee") filed an objection to the confirmation of the Amended Plan. The Trustee argues that unless the Debtors propose to pay 100% of their unsecured claims, they must continue to make payments for 36 months, citing 11 U.S.C. § 1325(b)(1)(B).
I held a hearing and took the matter under advisement. The Debtors and the Trustee filed briefs in support of their arguments. Additionally, the Court received an amicus curiae brief from the National Consumer Law Center (the "NCLC").
The NCLC and the Debtors contend that the issue before the Court is whether it is permissible for Chapter 13 debtors to apply the exempt proceeds from a refinancing to satisfy the remaining balance under their Chapter 13 plan in satisfaction 11 U.S.C. 1325(a)(4) when that payment results in the unsecured creditors receiving less than 100%. They argue that such action is permissible because § 1325(b)(1)(B) requires only that a debtor pay into a plan the debtor's projected disposable income for a period of three years. Therefore, there is no prohibition against a debtor satisfying that amount prior to the expiration of the three years. The NCLC and the Debtors further contend that 11 U.S.C. § 1329 precludes the Chapter 13 Trustee from applying the "best efforts" test to a proposed modification.4
The Trustee contends that the Debtor and the NCLC have misstated the issues before the Court. The Trustee correctly points out that the Debtors are not proposing to use exempt equity to satisfy the balance of the Plan. The Trustee is also correct that the Amended Plan proposes not only to prepay the Debtors' obligations under the Plan but seeks as well to reduce those obligations due to the amount of the filed unsecured claims totaling less than the amount of such claims projected in the Plan.5 The Trustee states that the issue before the Court is whether the Court can confirm, over the Trustee's objection, the Amended Plan in which the Debtors do not commit their "excess income to payments under the plan, as modified, for a total of three years beginning on the date the first payment under the original plan was due . . ." Trustee's Brief, p. 10.
By their modification, the Debtors seek to use the equity in the Property which remains after subtracting the encumbrances and the exemption to satisfy 10% of the filed unsecured claims. As a result, the Debtors would pay less than was provided under the Order and would be entitled to retain for themselves their disposable income for what would have been the duration of the Plan.
The first issue before the Court is whether the Debtors can modify the Plan to reduce the amount which they will pay because filed unsecured claims totaled less than the Debtors projected. The second issue is whether the Debtors can make a lump sum payment to pay off the Plan and retain their income during what was to be the duration of the Plan.
The Order provides that the Debtors will pay $272.00 per month for thirty-six months, for a total of $9,720.00. The Order further states that the Plan provided for a 10% dividend for "the present indicated total of $87,965.64."6 The Order clarifies that this percentage may increase in accordance with Fed. R. Bankr.P. 3002(c).7
As is typical in Chapter 13, the Plan was confirmed before the exact amount of allowed claims had been determined. The total of the filed unsecured claims was $82,720.00, not the projected amount of $87,965.14. In the Amended Plan, the Debtors propose to reduce the total cost of the plan from $9,792.00 to $9,192.00.8 In other words, the Debtors seek to pay 10% to the actual allowed unsecured creditors rather than pay the monthly amount provided for in the Plan.
The Trustee argues that this is an inappropriate attempt on the part of the Debtors to "change a pot plan into a percentage plan." The Court of Appeals for the Seventh Circuit explained the difference:
A "percentage plan" is a plan which provides a set percentage of his claim each creditor will receive but leaves the exact amount the debtor will pay in flux until all claims are approved. A "pot plan" refers to a plan which provides that the debtor will pay a fixed amount or "pot" of money into the bankruptcy estate but the percentage creditors will receive ultimately depends on the total amount of claims that are approved.
In re Witkowski, 16 F.3d 739, 741 (7th Cir.1994).
It appears that a number of courts have treated Chapter 13 plans as "percentage plans."9 These courts take the view that "the substance of a plan looks to the nature of the debtor's obligation to his creditors, not to the number of payments proposed." In re Chancellor, 78 B.R. 529, 530 (Bankr.N.D.Ill.1987). I disagree.
The substance of a Chapter 13 plan is not found in the "arbitrary percentage allocations" to unsecured creditors. See In re Beasley, 34 B.R. 51, 54 (Bankr. S.D.N.Y.1983). "Nowhere . . . does the Code speak in terms of applicable percentages." Id. at 53. Rather, the substance of a Chapter 13 plan is found in its fulfillment of Congress' intent that the debtors repay their creditors to the extent of their ability during the Chapter 13 period. See Arnold v. Weast (In re Arnold), 869 F.2d 240, 242 (4th Cir.1989); Beasley, 34 B.R. at 54; see generally Arnold B. Cohen, Pot Plans Should be Replacing Percentage Plans in Chapter 13, 4 J. Bankr.L. & Pract. 305 (1995). This...
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