In re Murphy

• Decision Date: 12 January 2005
• Docket Number: No. 03-12055-SSM.,No. 03-15596-SSM.,03-15596-SSM.,03-12055-SSM.
• Citation: 327 B.R. 760
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re James Owen MURPHY, Jr. d/b/a Murphy's Golf Shop, Debtor. In re Stanley Joseph Goralski, Doris Ann Goralski, Debtors.

327 B.R. 760

In re James Owen MURPHY, Jr. d/b/a Murphy's Golf Shop, Debtor In re Stanley Joseph Goralski, Doris Ann Goralski, Debtors.

No. 03-15596-SSM.

No. 03-12055-SSM.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

January 12, 2005.

COPYRIGHT MATERIAL OMITTED

Bennett A. Brown, The Law Office of Bennett A. Brown, Timothy J. McGary, Fairfax, VA, for Debtor.

MEMORANDUM OPINION

STEPHEN S. MITCHELL, Bankruptcy Judge.

Before the court are motions by the chapter 13 trustee (a) for reconsideration of orders authorizing the sale and refinance of real estate owned by the debtors in these two cases and (b) for modification of their confirmed plans to increase the distribution to unsecured creditors to 100 cents on the dollar. The issue is whether debtors whose confirmed plans provide for less than full payment of unsecured claims, and who sell or refinance real property in order to pay off their plans early, must share any increase in the value of the property with their creditors or instead may simply pay the chapter 13 trustee an amount equal to the remaining payments due under the plan. In the original rulings, the court held (1) that a debtor selling real estate could be required to pay filed claims in full to the extent the sales proceeds were sufficient for that purpose, but (2) that a debtor refinancing rather than selling real estate could simply pay the remaining amount of the scheduled plan payments. The trustee seeks reconsideration of both rulings¹ as well as an order modifying the confirmed plans. The debtors, not surprisingly, oppose plan modification and insist they should not be required to pay any more than the remaining payments due under the plan.

Background

A. The current "hot" real estate market.

At the heart of the present dispute is the remarkable appreciation in the value of real estate over the last several years within the geographic area encompassed by the Eastern District of Virginia. Figures compiled by the federal Office of Federal Housing Enterprise Oversight reflect a one-year increase in the price of existing houses in Virginia of 18.14% for the recent year ending September 30, 2004, and a five-year increase of 60.75%. Office of Federal Housing Enterprise Oversight, OFHEO House Price Index: House Price Gains Continue to Accelerate 10, at www.ofheo.gov/media/pdf/3q04hpi.pdf (Dec. 1, 2004). This compares with 12.97% and 48.46%, respectively, for the United States as a whole. Id. Several areas within Virginia show even more dramatic appreciation. For example, the one-year appreciation for the Washington-Arlington-Alexandria DC-VA-MD-WV metropolitan statistical area (MSA), which covers a large portion of the Alexandria Division of this court, was a whopping 24.01%, and the five-year appreciation was 86.02%. Id. at 21. The Virginia Beach-Norfolk-Newport News VA-NC MSA, which similarly covers a large portion of the Norfolk and Newport News Divisions of this court, came in almost as high with a one-year appreciation of 22.82% and a five-year appreciation of 57.64%. Id. at 31. In the Richmond MSA, by contrast, gains were relatively modest at 13.37% and 41.46%, respectively. Id. at 29. Of course, real estate has not always appreciated so dramatically, and there have been times in the past twenty years in which housing values not only did not surge but actually fell.² Overall, in the 20 years from 3rd quarter 1984 through 3rd quarter 2004, the average annual increase for the state of Virginia was approximately 5.5%, although the variation in individual years could be quite large.

B. The motion in the Murphy case to approve sale of real property.

James Owen Murphy filed a voluntary chapter 13 petition in this court on December 15, 2003. On his schedules, he listed an ownership interest in a condominium located at 10125 Oakton Terrace Road, Oakton, Virginia, which he valued at $155,000, subject to a deed of trust having a balance of $121,000. His schedules listed $52,374.37 in unsecured debts. After the trustee filed an objection to his original plan, the debtor filed an amended plan on March 22, 2004. That plan, which was confirmed on April 29, 2004, required the debtor to pay the chapter 13 trustee $700.00 per month for 36 months and projected a dividend to unsecured creditors of 37 cents on the dollar.³ The debtor's mortgage was current, and the plan simply provided that the debtor would continue to make direct payment of the monthly installments as they became due.

The plan — which conformed to the standard form of plan required by the local bankruptcy rules in this district⁴ — provided that property of the estate would revest in the debtor on confirmation but nevertheless required that the debtor obtain court approval to sell real property. Plan § B-9 & B-10. On November 8, 2004, the debtor filed a motion for authority to sell his residence for $235,000.00, explaining that he had obtained a new job in Pennsylvania and needed to move. The trustee did not object to the sale, but stated at the hearing that he needed $29,000 from the sale to pay the filed claims in full. The debtor objected to paying the trustee anything more than the approximately $12,000.00 still owed on the plan. The court ruled that the sales proceeds constituted disposable income that had to be applied to the plan and directed that $30,000 be turned over to the trustee. Because debtor's counsel stated that he intended to appeal the ruling, and so that there could be a final order to allow the contract to go to settlement, the order entered on November 12, 2004, simply approved the sale and stated that disposition of the $30,000 would be the subject of a further order. The court's bench ruling allowed the trustee to disburse up to $11,973.86 of the proceeds (the amount needed to complete the scheduled plan payments) but required the trustee to hold the balance of the $30,000 pending further order of the court. Although the ruling technically favored the trustee, it was the trustee rather than the debtor who on November 17, 2004, filed a motion for reconsideration (presumably because the ruling did not allow immediate payment of the filed claims in full). Contemporaneously with the motion for reconsideration, the trustee filed a motion to modify plan payments to require that the funding of the plan be increased to the $5,990.00 that had already been paid, plus a lump sum payment of $30,000.00 from the sale of the debtor's principal residence to allow for payment of all filed claims at 100%.

C. The motion in the Goralski case to approve refinance of real property.

Stanley Joseph Goralski and Doris Ann Goralski filed a joint voluntary chapter 13 petition in this court on April 29, 2003. The schedules filed with the petition reflected that they owned real property located at 13617 Chevy Chase Lane, Chantilly, Virginia, which they valued at $223,000. The schedules further reflected that the property was subject to liens in the total amount of $192,400.09. The plan filed by the debtors with their petition was confirmed without objection on September 18, 2003. It requires the debtors to pay the chapter 13 trustee $1,100.00 per month for 36 months and estimates a 28 percent dividend to unsecured creditors. Like the plan in the Murphy case, it provided for property of the estate to revest in the debtors upon confirmation. Plan § B-9.

On October 21, 2004 — approximately eighteen months after the petition was filed and seventeen months into the plan — the debtors filed a motion for permission to refinance their property in order to pay off the existing liens as well as their chapter 13 plan. The reason given for seeking to refinance was that Mr. Goralski's earned income had been reduced by approximately one-half, and that having to make plan payments would create an undue hardship on the debtors because their current monthly income was insufficient to both make the plan payments and pay their ordinary and necessary business expenses.⁵ A hearing on the motion to borrow was held on November 10, 2004. Although the chapter 13 trustee had not filed an objection to the motion, he took the position at the hearing that to the extent the proceeds from the refinance were sufficient to pay filed claims in full rather than at the 28% compromise amount in the confirmed plan, any refinance should be contingent upon the debtors turning over an amount sufficient to pay the filed claims in full. Based on the court's prior unpublished opinion in In re Michael James Davis and Gina Andre W. Davis, No. 98-15363-SSM (April 25, 2003), which had rejected a similar argument by the trustee, the court overruled the trustee's objection and granted the motion to borrow. An order reflecting that ruling was entered on November 16, 2004.⁶ The next day, the trustee filed a motion to reconsider, as well as a "motion to modify plan" asking that the debtor's plan be modified to require payment to the trustee of "$19,800.00 paid to date plus a lump sum payment in the amount of $64,365.00 from the refinance of the Debtors' principal residence to allow for payment of all filed claims at 100%."

Discussion

I.

The purpose of chapter 13 is to enable a financially strapped debtor to repay creditors to the best of his or her ability under court protection and court supervision. Although secured and priority claims must be paid in full, unsecured debts may be paid in a compromise amount so long as the plan is proposed in good faith, the present value of what creditors receive is at least as much as they would receive in a chapter 7 liquidation, and the debtor pays into the plan his or her disposable income for at least 36 months. §§ 1325(a)(3), (4), & (b)(1)(B), Bankruptcy Code; Deans v. O'Donnell, 692 F.2d 968 (4th Cir.1982) (adopting totality of circumstances test for good faith where debtor proposes no or only minimal payment of unsecured claims).

Once confirmed, a chapter 13 plan binds the debtor and each creditor. § 1327(a), Bankruptcy...