In re Mcallister

• Decision Date: 03 April 2014
• Docket Number: No. 11–40606–PWB.,11–40606–PWB.
• Citation: 510 B.R. 409
• Parties: In re Charles Daniel McALLISTER and Francis Diane McAllister, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

510 B.R. 409

In re Charles Daniel McALLISTER and Francis Diane McAllister, Debtors.

No. 11–40606–PWB.

United States Bankruptcy Court,

N.D. Georgia,

Rome Division.

Signed April 3, 2014.

Michael D. Hurtt, The Hurtt Law Firm, LLC, Dalton, GA, for Debtors.

Vivieon E. Kelley, Office of the United States Trustee Atlanta, GA, for Donald F. Walton, United States Trustee.

Brandi L. Kirkland, Atlanta, GA, for Mary Ida Townson, Trustee.

ORDER ON PROPOSED MODIFICATIONS OF PLANS

PAUL W. BONAPFEL, Bankruptcy Judge.

I. Introduction and Statement of Issues

Charles and Diane McAllister filed their joint chapter 13 case in February 2011. In April 2012, the Court confirmed their chapter 13 plan [27, 33] that does not provide for any payments to unsecured creditors. The McAllisters could have resolved their unsecured debts by filing under chapter 7, but they needed chapter 13 relief to deal with a mortgage on their residence and to pay secured and nondischargeable priority tax claims.

Mrs. McAllister died on March 2, 2013, about two years after the filing of their case. [49]. Mr. McAllister received $250,000 in life insurance proceeds that he disclosed on an amendment to his schedules and claimed as exempt. [50].

In response to Mr. McAllister's unanticipated receipt of life insurance proceeds due to the untimely death of his wife, both Mr. McAllister and the Chapter 13 Trustee have proposed postconfirmation modifications to the chapter 13 plan under 11 U.S.C. § 1329. Each objects to the Court's approval of the other's modification.

Mr. McAllister's proposed modification, as amended, provides for an increase in monthly plan payments to accelerate the completion of payments under the plan and for a distribution of $15,000 to holders of unsecured claims from the life insurance proceeds. [59, 69]. The Trustee's modification proposes that $ 104,023.31 of the life insurance proceeds be paid to the Chapter 13 trustee to pay all allowed unsecured claims in full and the Trustee's statutory fee. Mr. McAllister's attorney is holding these funds in escrow pending further order. [67].

11 U.S.C. § 1329 governs postconfirmation modification of a chapter 13 plan. Section 1329 provides that, if a proposed modification meets its requirements, the plan may be modified.

Application of § 1329 thus involves a two-step process. The Court must first determine whether a proposed modification meets the mandatory requirements for confirmation that § 1329 prescribes. If it does, the Court must then exercise its discretion to determine whether to approve the modification.

Subsection (a) of § 1329 permits modification upon request of the debtor, the chapter 13 trustee, or the holder of an allowed unsecured claim for one of four purposes. Paragraph (a)(1) states the permissible purpose that applies here: “to increase or reduce the amount of payments on claims of a particular class of claims provided for by the plan.” 11 U.S.C. § 1329(a)(1). Both modifications meet this requirement.

A modification must also comply with subsections (b) and (c) of § 1329. Paragraph (b)(1) states that the requirements of 11 U.S.C. §§ 1322(a), 1322(b), 1322(c), and 1325(a) apply to a modification. Paragraph (c) of § 1329 imposes limitations on the length of the modified plan.

Neither modification raises any issues with regard to compliance with the three subsections of § 1322 that state mandatory and permissive provisions of a plan or with § 1329(c)'s limits on the length of the modified plan. The modifications do, however, require consideration of whether they met the confirmation requirements of § 1325(a).

The confirmation requirements applicable here are the so-called “best interest of creditors test” of § 1325(a)(4), the good faith requirement of § 1325(a)(3), and the requirement of § 1325(a)(1) that a plan comply with the provisions of chapter 13 and other applicable provisions of the Bankruptcy Code. The Trustee contends that the projected disposable income test of § 1325(b) also applies to a modification. Although the modification provision in § 1329(b) does not list § 1325(b) as one of the confirmation requirements applicable to a modification, the Trustee asserts that it applies under § 1325(a)(1), which § 1329(b) does list.

The parties raise several questions that underlie their positions concerning application of the confirmation requirements to the competing modifications: (1) whether the life insurance proceeds are property of the estate; (2) whether Mr. McAllister can exempt them if they are; (3) whether the proceeds are “disposable income”; and (4) whether a modification may require the use of the proceeds to pay creditors even if they are proceeds from property that is not property of the estate or is exempt.

Mr. McAllister asserts that the life insurance proceeds are not property of the estate under 11 U.S.C. § 541(a)(5) because he became entitled to them more than 180 days after the filing of his petition. Alternatively, he contends that he is entitled to exempt the life insurance proceeds under O.C.G.A. § 44–13–100(a)(11)(C), which permits the exemption of life insurance proceeds arising from the death of a person on whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

The Trustee contends that any property a debtor receives after confirmation is property of the estate under 11 U.S.C. § 1306(a) and that the limitation in § 541(a)(5) that excludes life insurance proceeds to which a debtor becomes entitled more than 180 days after the filing of the case does not apply. The Trustee opposes Mr. McAllister's exemption of the proceeds on the ground that Mr. McAllister was not a dependent of his wife. Even if the proceeds are non-estate or exempt property, the Trustee continues, the proceeds are disposable income that Mr. McAllister must commit to the payment of his creditors.

Based on her position that the proceeds are non-exempt property of the estate, the Trustee opposes Mr. McAllister's modification on the ground that it does not comply with the best interest of creditors test of § 1325(a)(4). Her alternative position is that the proceeds are in any event disposable income and that Mr. McAllister's modification does not meet the projected disposable income test of § 1325(b).¹ The Trustee also contends that Mr. McAllister has not proposed his modification in good faith as 11 § 1325(a)(3) requires because it does not provide for payment of claims in full when the proceeds give him enough money to do so.

The Trustee asserts that her modification meets these requirements and that § 1329 permits postconfirmation modification of a plan in accordance with a debtor's ability to pay creditors, which the availability of the insurance proceeds establishes. Consideration of the Trustee's position involves questions of whether the proceeds are disposable income, whether the projected disposable income test of 11 U.S.C. § 1325(b) applies to a postconfirmation modification, and whether, if it does not, a modification may nevertheless require a debtor to pay creditors in accordance with her ability to pay.

Mr. McAllister objects to the Trustee's modification. His primary argument relies on the premise that the proceeds are not property of the estate or are exempt. Based on this premise, he concludes that the Trustee's modification does not meet the requirements of § 1325(a)(1) because it violates provisions of the Bankruptcy Code that exclude non-estate or exempt property from administration in a bankruptcy case. Alternatively, even if the Trustee prevails on these issues, Mr. McAllister asks the Court in the exercise of its discretion to deny approval of the Trustee's modification in the circumstances of this case, based primarily on his need to use the proceeds for the current and future support of himself and his family.

Although the case thus involves a number of issues, the Court must answer three general questions:

1. Whether Mr. McAllister's modification meets the requirements of § 1329;

2. Whether the Trustee's modification meets the requirements of § 1329; and

3. Whether, in the exercise of its discretion, the Court should approve either modification if it meets the requirements of § 1329. If both modifications comply with § 1329, the Court must determine which one to approve.

Part II summarizes the Court's conclusions that it will approve Mr. McAllister's modification and deny approval of the Trustee's. Parts III and IV explain, respectively, why the Court approves Mr. McAllister's modification and does not approve the Trustee's.

II. Summary

For reasons set forth below, the Court approves Mr. McAllister's modification and denies approval of the Trustee's modification.

Mr. McAllister's modification

Part III discusses whether Mr. McAllister's modification meets the best interest of creditors test of 11 U.S.C. § 1325(a)(4), the projected disposable income test of 11 U.S.C. § 1325(b), and the good faith test of 11 U.S.C. § 1325(a)(3).

With regard to the best interest of creditors test of § 1325(a)(4), the life insurance proceeds would not be available for distribution to creditors in a hypothetical liquidation in a chapter 7 case, even if the proceeds are property of the estate and are not exempt. The reason is that, if conversion to chapter 7 now occurred, 11 U.S.C. § 348(f) provides that property of the estate in the converted case includes only property that the debtor had at the time of the original filing of the petition. (Subpart III(A)).

Even if the projected disposable income test of 11 U.S.C. § 1325(b) applies to a modification, the life insurance proceeds cannot be disposable income under the statutory definition of the term. Section 1325(b)(2) defines “disposable income” as “current monthly income,” less certain exclusions and deductions for permissible expenditures. Section 101(10A) defines “current monthly income” as the monthly average of all of the income a debtor...