In re Melander, 13–43877–MER.

• Decision Date: 13 March 2014
• Docket Number: No. 13–43877–MER.,13–43877–MER.
• Parties: In re Steven John MELANDER and Debra Jean Melander, Debtors.
• Court: U.S. Bankruptcy Court — District of Minnesota

506 B.R. 855

In re Steven John MELANDER and Debra Jean Melander, Debtors.

No. 13–43877–MER.

United States Bankruptcy Court,

D. Minnesota.

Signed March 13, 2014.

Maureen L. Ventura, Ventura Law Office, LLC, Cottage Grove, MN, for Debtors.

MEMORANDUM DECISION

MICHAEL E. RIDGWAY, Bankruptcy Judge.

This voluntary chapter 13 case came on for evidentiary hearing before the Court on the verified motion of TCF National Bank (“TCF”), objecting to the Debtors' claim of exemptions, and TCF's verified objection to confirmation of the Debtors' chapter 13 plan dated August 5, 2013. Cameron A. Lallier appeared on behalf of TCF; Maureen L. Ventura appeared for the Debtors. The matter is now ready for resolution.

This is a core proceeding under 28 U.S.C. § 157(b)(2), and this Court has jurisdiction under 28 U.S.C. §§ 157(a) and 1334. The Court makes this memorandum decision based on all the files, records, and proceedings herein, and pursuant to Fed. R. Bankr. P. 7052, made applicable to this contested matter by Fed. R. Bankr. P. 9014(c). For the reasons set forth below, TCF's motion objecting to the Debtors' claim of exemptions will be granted in part, and denied in part, and TCF's objection to confirmation of the Debtors' chapter 13 plan is sustained, such that confirmation will be denied.

BACKGROUND

In 2006, the Debtors, Steven Melander (“Steven”) and Debra Melander (“Debra”), became indebted to TCF under a promissory note in the original principal amount of $236,000.00; the indebtedness was secured by a second mortgage on the Debtors' former homestead, located at 1028 241st Ave. NE, East Bethel, Minnesota 55055 (the “former homestead”). At the time TCF obtained the second mortgage on the former homestead, it valued the land at $503,500.00. This same property was also subject to a senior mortgage in favor of U.S. Bank. Later, the Debtors attempted to sell the former homestead, but were unsuccessful. Default and foreclosure proceedings by U.S. Bank followed. As a result of the foreclosure of the first mortgage by U.S. Bank, the balance due TCF became an unsecured debt. According to the Debtors' Schedule F, the amount now owed to TCF is $316,428.76; according to TCF, the amount is $325,182.44. See Claim # 1, claims register.

On the petition date of August 5, 2013, Steven was 70 years and Debra was 60 years old. Steven is a retired minister who receives a monthly pension of $2,085.00. He also receives $1,334.00 from Social Security. Debra works at the University of Minnesota as a manager. She commutes 76 miles round trip each workday. She earns $6,768.00 each month. TCF does not challenge the following deductions from that gross amount: $965.00 (payroll taxes), $382.00 (Social Security tax), $90.00 (Medicare), $545.00 (health insurance), $338.00 (mandatory retirement), and $98.00 (parking), for a total of $2,418.00. In addition, Debra also claimed these deductions: long term care insurance—$440.00, voluntary retirement contribution—$216.00, contributions to a health care account—$92.00, and life insurance—$132.00, for a total of $880.00.

Additionally, Steven and Debra have listed two adult daughters, ages 22 and 25,¹ as dependents; accordingly, the Debtors calculated their disposable income based on a household of four. The amounts listed by the Debtors on their Schedule J expenses, as well as on the Official Form 22C—Chapter 13 Statement of Monthly Income and Calculation of Commitment Period and Disposable Income (“Form 22C”), are based on a household of four. The Debtors have claimed virtually all their assets exempt under the federal exemptions.

TCF has objected to confirmation of the Debtors' plan on the following grounds:

a. The plan has not been filed in good faith;

b. The plan fails to meet the best interests test;

c. The Debtors have taken improper exemptions; and

d. The plan does not provide that all of the Debtors' disposable income to be received during the term of the plan will be applied to make payments to unsecured creditors.

TCF has also objected to the following property being claimed exempt at the values stated in Schedule C: ²

a. The Debtors' homestead, located at 19419 E Front Blvd, NE East Bethel, MN 55092;

b. 2005 Chrysler Sebring, 1/2 ownership interest of Steven;

c. 2003 Mercury Mountaineer, Steven and Debra;

d. 2001 Jeep Cherokee Laredo, Steven;

e. 1999 Buick Century, Steven;

f. 1998 Cadillac Deville, Steven;

g. 2000 Jet Ski;

h. 1973 12' Fishing Boat;

i. 8' Paddle boat;

j. John Deere Lawn Tractor; and

k. Dock.

In response, the Debtors maintain that their plan is confirmable and that it was filed in good faith. The Debtors also assert that based on the condition of the assets, and the values ascribed to them, their exemptions are proper.

The Debtors' chapter 13 plan proposes to pay $130.00 per month for sixty months. The total amount to be distributed to unsecured creditors is $7,020.00; this amounts to a dividend of approximately 2.5%. See ECF No. 2.

DISCUSSION

A. Burdens of Proof

TCF, as the party objecting to the Debtors' claimed exemptions, bears the burden of proving that the exemptions are not properly claimed. SeeFed. R. Bankr.P. 4003(c) (“In any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.”). TCF also has the burden of proving that the Debtors have not applied all disposable income to plan payments. Education Assistance Corp. v. Zellner, 827 F.2d 1222, 1226 (8th Cir.1987) (“Since a Chapter 13 plan that meets the requirements of section 1325(a) would be confirmed absent the objections of the creditor, the creditor has, at minimum, ‘the initial burden of producing satisfactory evidence to support the contention that the debtor is not applying all of his disposable income’ to the plan payments.” (quoting In re Fries, 68 B.R. 676, 685 (Bankr.E.D.Pa.1986))). It is the debtor, however, “who has the ultimate burden of proving that a plan should be confirmed.” In re Carey, 402 B.R. 327, 331 (Bankr.W.D.Mo.2009). See also In re Vantiger–Witte, 2008 WL 4493426, at *3 (Bankr.N.D.Iowa Sept. 29, 2008) (“Generally, the debtor has the ultimate burden to prove a Chapter 13 plan meets all the requirements for confirmation....”); In re Coleman, 373 B.R. 907, 911 (Bankr.W.D.Mo.2007) ( “The burden of proof in an objection to confirmation in a Chapter 13 case is on the objecting creditor. The debtor then has the burden of coming forward with evidence to rebut any evidence introduced by the objecting creditor.”); In re Maronde, 332 B.R. 593, 597 (Bankr.D.Minn.2005) (“Debtor has the burden of proving that the conditions for confirmation have been satisfied.”). When a debtor fails to carry that ultimate burden, confirmation must be denied.

B. Steven's Social Security Income

In this case, Steven receives $1,334.00 from Social Security, $575.00 of which he is contributing to the Debtors' chapter 13 plan. TCF argues that, “[w]here the debtor voluntarily contributes Social Security Income into the plan to make the plan feasible, he cannot then exclude a portion of the income.” See Hr'g Br. of Objector TCF National Bank, at 6, ECF No. 22. The Court disagrees.

The Eighth Circuit, in a chapter 7 case, recently determined that the Social Security Act “acts as a complete bar to the forced inclusion of past and future social security proceeds in [a chapter 7] bankruptcy estate.” In re Carpenter, 614 F.3d 930, 936 (8th Cir.2010). And, citing Carpenter, the Eighth Circuit Bankruptcy Appellate Panel (“BAP”) recently held that the debtor's retention of Social Security income, in and of itself, is insufficient to find bad faith under 11 U.S.C. § 1325(a)(3). See Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP 2010).³ However, in a footnote, the BAP in Thompson noted that “[t]his Court does not need to decide whether Social Security income could ever be included in a debtor's projected disposable income.” 439 B.R. at 143, n. 3. So, while Thompson found Carpenter applicable, Thompson appears to have left open the question of whether Social Security income could ever be included in a debtor's projected disposable income (“PDI”).

In support of its argument regarding Steven's Social Security income, TCF cites to In re Bottelberghe, 253 B.R. 256, 261–62 (Bankr.D.Minn.2000) (O'Brien, J.). This case, however, is a pre-BAPCPA ⁴ case, and such a proposition would likely be at odds with the spirit of Carpenter.

At this point, a few conclusions become apparent: 1) the Debtors probably could not be forced to include all of their Social Security income in their PDI under Carpenter; 2) the Debtors are essentially in control of the amount of Social Security that they are voluntarily willing to contribute to their plan; and 3) while Thompson found that the debtors' retention of their Social Security income, in and of itself, is insufficient to find bad faith under § 1325(a)(3), it can still be considered in a totality of the circumstances analysis, but there had better be other indicia of bad faith, e.g., misrepresentations or a failure to accurately state their expenses.

The BAP in Thompson summed up the inquiry facing the Court, under somewhat similar facts:

To be confirmed, a Chapter 13 plan must be “proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1325(a)(3). This Court believes that the plain language of the Bankruptcy Code precludes the Trustee from objecting to the Debtors' plan based on an alleged lack of good faith.

The plain language of the Bankruptcy Code specifically excludes Social Security income from a debtor's required payments in a Chapter 13 plan. Section 101(10A) defines “current monthly income.” 11 U.S.C. § 101(10A). In subsection (B), it explains that current monthly income “excludes benefits received under the Social Security Act.” 11 U.S.C. § 101(10A)(B). Section 1325(b)(2)'s definition of “disposable income”...