In Re Timothy J. Mcdonald

• Decision Date: 30 September 2010
• Docket Number: No. 10-31313.,10-31313.
• Citation: 437 B.R. 278
• Parties: In re Timothy J. McDONALD, Jennifer D. McDonald, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

437 B.R. 278

In re Timothy J. McDONALD, Jennifer D. McDonald, Debtors.

No. 10-31313.

United States Bankruptcy Court,S.D. Ohio,Western Division,

Sept. 30, 2010.

Lester R. Thompson, Dayton, OH, for Debtors.

Decision Denying Confirmation of the Debtors' Chapter 13 Plan

GUY R. HUMPHREY, Bankruptcy Judge.

I. Introduction

The issue before the court is whether the debtors' Chapter 13 plan should be confirmed. For the reasons set forth below, the court finds that it should not be confirmed.

The following constitutes the court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. The findings of fact are derived from Mr. and Mrs. McDonald's (the “Debtors”) testimony and the record in this matter. In making its determination, the court also considered the arguments of counsel at the confirmation hearing held on June 3, 2010 (the “Hearing”), the Debtors' Schedules (A-J) and Statement of Financial Affairs (Doc. 1), the Debtors' amended Chapter 13 Plan (Docs. 6 and 16) (the “Plan”), the Chapter 13 Trustee's Objection to Confirmation of Plan and Request for Denial of Confirmation (Doc. 23) (the “Trustee” and the “Trustee Objection”), the Kettering Health Network Objection to Confirmation of Plan (“KHN” and the “KHN Objection”), the Ohio Department of Taxation Objection to Confirmation of Plan (Doc. 29) (“ODT” and the “ODT Objection”), and the post hearing memoranda submitted by the Debtors (Doc. 48) (the “Debtors' Brief”), the Trustee (Doc. 46) (the “Trustee's Brief”), and ODT (Doc. 49) (the “ODT Brief”).

II. Procedural Background, Findings of Fact, and Positions of the PartiesA. Procedural Background and Findings of Fact

Mr. McDonald is self-employed, owning a business called “Security Group of North America, Inc.” which provides security to businesses. Ms. McDonald is a physician employed by the Kettering Medical Center. According to their Schedule I, the Debtors' combined average monthly income, after deducting payroll taxes, child support, and other charges, is $12,939. The Debtors' Schedule J monthly expenses total $7,939, leaving a monthly net income of $5,000. According to the Trustee's Objection, the Debtors' “means test disposable monthly income” is a negative $1,239.14, as shown on line 59 of the Debtors' Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Official Form B22C, Doc. 1). The Debtors list four dependent sons on their Schedule I, ranging in age from 3 to 10 years old.

Mr. McDonald owns a four bedroom house purchased for $376,000 and appraised at $365,000 located at 450 Springhouse Drive, Springboro, Ohio which serves as the family residence for Mr. and Ms. McDonald and their four sons. The house is encumbered by two mortgages, a first mortgage held by National City Bank (now known as PNC Bank) and a second mortgage held by Fifth Third Bank. The combined outstanding principal amount of both mortgages is approximately $358,330. Monthly payments on the first mortgage are $2,325 and on the second mortgage $429.49. ¹ The combined monthly mortgage payments total $2,754.49.

Ms. McDonald owns a vacant lot purchased for $200,000, valued at $162,500 with a mortgage balance of $192,993, which the Debtors propose to surrender to the mortgagee.

Ms. McDonald also owns a 2007 GMC Denali (the “Denali”), purchased in September 2009 with a monthly payment of $834.90. Ms. McDonald acquired the Denali in October 2009 to replace a GMC Avalanche and a 2005 mini van that Ms. McDonald had purchased new, that had between 60,000 and 70,000 miles at the time of sale and was “worn.” The monthly payments on the Denali are less than what the combined payments were on the two traded vehicles. Ms. McDonald also owns a 2003 BMW 3.30 CI purchased in October 2007 with a monthly payment of $347.65. KHN and the Debtors agree that the value of the BMW exceeds the $13,459.42 owed on it at the time of the Hearing. The total of the monthly payments on the Debtors' two vehicles is $1182.55. The total of the monthly payments on the house and the two vehicles is $3,937.04. Ms. McDonald also owns a 2005 Harley Davidson motorcycle valued at $7,500, which is free and clear of liens. ²

The Debtors filed this Chapter 13 bankruptcy case on March 10, 2010 (Doc. 1). Also on March 10, 2010, the Debtors filed an initial plan (Doc. 6), which they amended on April 14, 2010 (Doc. 16). ³ As noted, the Trustee, KHN, and ODT filed objections to the Plan.

Mr. McDonald owes a substantial amount of state and federal taxes related to the operation of his former and current companies. The State of Ohio has filed two proofs of claim (Claims 15-1 and 20-1) totaling almost $300,000. Mr. McDonald disputes that amount. According to Schedule E, Mr. McDonald's liability to the State of Ohio is approximately $130,000. However, at the Hearing, Mr. McDonald testified that he estimates his tax liability to the State of Ohio to be about $185,000. Mr. McDonald explained that the debt owed to the State of Ohio arises from his wholly owned businesses' failure to pay sales taxes from early 2003 to the end of 2009. ⁴ According to the Debtors' Schedule B, Mr. McDonald's business resumed paying sales taxes as of January 1, 2010. However, at the Hearing, Mr. McDonald testified that the business resumed paying sales taxes after the filing of the petition. The Internal Revenue Service has also filed a proof of claim in an amount of $60,467.70, including a priority claim in the amount of $32,840.62 (Claim 3-1).

The Debtors' scheduled unsecured debt exceeds $235,000 and is mostly comprised of credit card debt and Ms. McDonald's educational loan debt with the remaining being unsecured tax debt and some business debt.

The Plan proposes to pay $5,000 each month over a 60 month commitment period. However, in the Debtors' Brief, the Debtors propose that their Plan be confirmed “at $5,096.00 per month.” Approximately 21% of the Debtors' gross income ($3,940.14/$18,951.20) is dedicated to making the Debtors' house and car payments. Approximately 27% of the Debtors' gross income is to be paid to the Trustee pursuant to the Plan ($5,096/$18,951.20). In addition, the Debtors propose to turnover the non-exempt portion of their federal income tax refunds over the commitment period. The Plan provides a 0% dividend to nonpriority unsecured creditors; however, depending upon the claims filed and the Debtors' income and expenses over the life of the Plan, the nonpriority unsecured creditors may receive a minimal distribution. The amount of sales and other taxes to be paid by Mr. McDonald's business may also affect the Plan funding. ⁵ See Debtors' Brief.

The Debtors, counsel for the Debtors, counsel for ODT, counsel for KHN, and counsel for the Trustee attended the Hearing. Both Mr. and Ms. McDonald testified and the court finds that their testimony was credible. In accordance with the order entered on June 9, 2010 (Doc. 37), the Trustee, the Debtors, and ODT filed their post-hearing briefs (Docs. 46, 48, and 49).

B. Positions of the Parties

The Trustee Objection is based on the allegation that the Plan has not been proposed in good faith under 11 U.S.C. § 1325(a)(3), ⁶ and asserts that the “Debtors are proposing to keep their house valued at $365,000.00 at $2,325.00 per month in a 0% plan[,] ... have gross income of $18,951.00 per month and proposing a 0% plan [and] ... provide for payment of luxury personal property not necessary for the maintenance and support of Debtors' dependant(s): Debtors are proposing to keep and pay $38,000.00 for a 2007 Denali in a 0% plan.” In addition to the good faith issue, the Trustee also argues that the Debtors failed to comply with 11 U.S.C. §§ 1325(a)(9) ⁷ and 1308 concerning the filing of tax returns. See Trustee's Brief.

ODT objects to the Plan because it proposes to pay the sales taxes owed by Mr. McDonald and his businesses outside the Plan through “the Corporation.” As noted in the ODT Brief, the Debtors' counsel “verbally committed to an Agreed Order allowing the Department of Taxation's priority claims to be paid inside the Plan;” however, “Debtors' Brief now requests the Court overrule the Department of Taxation's objection to Debtors' Ch 13 Plan” and no agreed order concerning treatment of the Ohio Department of Taxation's claims has been submitted to the court. See ODT Brief, p. 2.

The KHN Objection relates to KHN's financing of Ms. McDonald's purchase of the BMW and appears to have been resolved through the agreement reached between KHN and the Debtors that the value of the vehicle exceeds the balance owed on the loan and, therefore, cannot be crammed down to some lower number. KHN did not file a post-hearing brief on the confirmation issues.

The Debtors maintain that their Plan has been proposed in good faith, pointing out that they traded in two vehicles and purchased the used Denali, resulting in a smaller monthly vehicle expense and that they entered into the mortgage modification with Fifth Third Bank, resulting in a lower monthly payment on that second mortgage loan during the life of the Plan. The Debtors posit that these measures reflect their sincere effort in “belt tightening” and allow more money to be paid to their unsecured creditors under the Plan. The Debtors also point out that they are a family of six, with four dependent minor children, and, therefore, the Denali is necessary for transportation of the family, in addition to Mr. McDonald's business uses, and sale or surrender of the family residence would negatively impact the minor children. Finally, the Debtors state that:

The Debtors' actual living budget by counsel's calculations is ,196.00 per month for a family of six. Even by the Trustee's own chart he would allow

,200.00 per month. However the Trustee's chart for families of this size appears to be inaccurate. If the internal Revenue Service standards were followed by counsel's calculations the Debtors would be permitted a living...