McKinney v. McKinney (In re Mckinney)

• Decision Date: 18 March 2014
• Docket Number: No. 11–27770–TPA.,11–27770–TPA.
• Parties: In re Robert R. McKINNEY, Debtor. Wendy L. McKinney, Movant v. Robert R. McKinney, Respondent.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania

507 B.R. 534

In re Robert R. McKINNEY, Debtor.

Wendy L. McKinney, Movant

v.Robert R. McKinney, Respondent.

No. 11–27770–TPA.

United States Bankruptcy Court,

W.D. Pennsylvania.

Signed March 18, 2014.

Mary Bower Sheats, Esq., Pittsburgh, PA, for Movant.

Dai Rosenblum, Esq., Butler, PA, for Respondent.

MEMORANDUM OPINION

THOMAS P. AGRESTI, Bankruptcy Judge.

Presently before the Court for decision is the Objection to Confirmation of Amended Chapter 13 Plan Dated March 5, 2013 filed by Wendy L. McKinney (“Wife”), the former spouse of the Debtor, at Document No. 72 (“Plan Objection”) and the related matter involving the Debtor's Objection to Proof of Claim No. 3–3 of Wendy L. McKinney filed by the Debtor at Document No. 79 (“Debtor's Objection”).

An evidentiary hearing affecting these matters was held on November 21, 2013. Prior to the hearing, the Parties agreed that the only evidentiary issue to be determined by the Court at that time was whether the Debtor's mortgage payment for his “second office” located at 399 Pittsburgh Road, Butler, PA 16003 (“Pgh. Rd. Property” or “Property”) was necessary for the continuation, preservation and operation of the Debtor's business, and thus properly deductible in computing his “projected disposable income,” or alternatively, was a proper secured claim reducing the Debtor's disposable income. All other matters that the Parties believed to be of an evidentiary concern were stipulated to by them.

There are three issues to be determined in connection with the Plan Objection: (1) does the Second Amended Plan of March 5, 2013 (“2nd Amd. Plan”) meet the requirements of 11 U.S.C. § 1325(a)(4), otherwise known as the “Best Interests of Creditors Test” or alternatively, the “Liquidation Alternative Test;” (2) does the 2nd Amd. Plan meet the requirements of 11 U.S.C. § 1325(b)(1)(B), otherwise known as the “Best Efforts Test;” and, (3) was the 2nd Amd. Plan filed in good faith under 11 U.S.C. § 1325(a)(3). Regarding the Debtor's Objection, the Debtor disputes Wife's calculation of the alimony arrears she claims must be paid through the 2nd Amd. Plan.

For the reasons explained below, the Plan Objection is granted in part and denied in part, and the Debtor's Objection is granted. Confirmation of the 2nd Amd. Plan is denied.¹

STATEMENT OF FACTS

Shortly after the divorce between the Parties became final, the Debtor filed for relief under Chapter 13 of the Bankruptcy Code. The Debtor's impetus for the filing appears to have been an equitable distribution order (“State Court Order”) entered in the divorce proceeding. The State Court Order required the Debtor to turn over to Wife certain retirement and life insurance assets as well as the marital residence. The Debtor was also directed, in the form of an equitable distribution award, to pay Wife $161,422.42 within thirty days of the State Court Order, $2,500 per month in modifiable alimony, plus an additional $300 per month in alimony arrears for 24 months, and $10,000 for Wife's attorney's fees.

According to the Debtor's Bankruptcy Petition, the Debtor has current aggregate monthly income of $8,964.31 from his financial planning business and rental properties. The Debtor's Schedules and claims filed also indicate the Pgh. Rd. Property had a fair market value of $157,000 as of the filing date, subject to a first mortgage lien of $82,593.75. On Schedule C, the Debtor claimed an exemption of $11,972 in the Pgh. Rd. Property. The Debtor's Schedules A, B, and C reflect that he proposes to retain nonexempt property, including the Pgh. Rd. Property, with a total gross value of $175,429.54. Form B22C, used to support the Debtor's 2nd Amd. Plan, includes a monthly deduction of $1,038.90 for payments on the Pgh. Rd. Property.

On February 10, 2012, Wife filed her Objection to the Debtor's original Plan at Document No. 19 asserting that the Plan should not be confirmed, because it was not filed in good faith, it failed to meet the 11 U.S.C. § 1325(a)(4) Liquidation Alternative Test, and it proposed to allow the Debtor to retain substantial, nonexempt assets that rightfully should go to unsecured creditors. On the same day, Wife also filed a Motion for Relief from the Automatic Stay at Document No. 20 (“Stay Motion”) and a Complaint to Determine Dischargeability at Case No. 12–2059 (“Adversary Proceeding”) to preserve her rights under the State Court Order.

Ultimately, the Parties were able to resolve the Adversary Proceeding and the Stay Motion by Stipulation and entry of a Consent Order dated August 2, 2012, filed at Document No. 48. In resolving the Stay Motion, the Debtor agreed to transfer $286,761.95 in retirement and life insurance assets to Wife as well as the marital residence. The Debtor and Wife were also afforded relief from the stay to litigate in state court issues concerning the State Court Order and seek a modification of alimony.²

Upon obtaining relief to pursue further action in state court, Wife did seek a modification of the alimony award. On January 7, 2013, the state court extended the Debtor's $2,500 monthly alimony obligation by thirty-six months for a total of sixty months—the effect of which was to grant Wife an additional $90,000 in alimony.

The Debtor never appealed the increased alimony award and on March 6, 2013, he acquiesced in this determination by the state court by filing the 2nd Amd. Plan to account for this increased alimony obligation. Under, the 2nd Amd. Plan, the Debtor proposes to pay an estimated $6,550.79 to general unsecured creditors and $171,744.88 to priority unsecured creditors, including payment of Wife's modified alimony award in its entirety. Wife responded by filing the Plan Objection currently under consideration.

Wife has filed two proofs of claim in this case. Proof of Claim No. 3–3, is the sole subject of the Debtor's Objection and involves the alimony award, which under the Bankruptcy Code is a “domestic support obligation” entitled to priority. See11 U.S.C. § 101(14A) and § 507(a)(1). Wife indicates that as of May 1, 2013, her alimony claim in this regard totaled $18,549.21 in alimony arrears plus a claim of $2,800 per month toward a domestic support obligation. The Debtor's Objection disputes Wife's calculation of the alimony arrearage component. The other claim by Wife, Proof of Claim No. 4–2, relates to the remaining equitable distribution award of $161,422.42. The Debtor has not objected to this claim.

DISCUSSION

A. Plan Objection

The burden of proof for an objection to confirmation of a Chapter 13 Plan is a shifting one. The party objecting to confirmation, here Wife, bears the initial burden of presenting some evidence to support her position. In re McGilberry, 298 B.R. 258, 260 (Bankr.M.D.Pa.2003) (citing In re Fricker, 116 B.R. 431, 437 (Bankr.E.D.Pa.1990)); In re Fries, 68 B.R. 676, 685 (Bankr.E.D.Pa.1986); In re Navarro, 83 B.R. 348, 355 (Bankr.E.D.Pa.1988); In re Crompton, 73 B.R. 800, 808 (Bankr.E.D.Pa.1987); see also In re Jensen, 369 B.R. 210, 234 (Bankr.E.D.Pa.2007). Once the objecting party satisfies this initial burden, the burden shifts to the debtor, who always holds the ultimate burden of proof in the matter, to prove by a preponderance of the evidence that the plan complies with the requirements of 11 U.S.C. § 1325. McGilberry, supra.

(1) The Liquidation Alternative Test

Section 1325 of the Bankruptcy Codesets forth the specific requirements for confirmation of a debtor's Chapter 13 plan. One critical requirement is for the Court to determine that,

the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7....

11 U.S.C. § 1325(a)(4) (emphasis added). This is known as the “Bests Interests of Creditors Test” or more commonly referred to in this District as the “Liquidation Alternative Test” (“LAT”).

Two calculations are necessary to determine whether the Debtor meets the LAT: (1) an estimate of the value of the distribution available for unsecured creditors in the event of a Chapter 7 liquidation; and (2) the amount to which distributions must be discounted to reflect their present value as of the effective date of the plan. See, e.g., In re Hardy, 755 F.2d 75, 76 (6th Cir.1985). See also In re Dixon, 140 B.R. 945, 947 (Bankr.W.D.N.Y.1992). A component of Item 2, above, is the subtraction of the costs of liquidation, including the trustee's commission, when calculating the amount available for distribution to unsecured creditors. See In re Barth, 83 B.R. 204, 206 (Bankr.D.Conn.1988).

Although no direct evidence was offered by either Party regarding the net value of the Debtor's nonexempt assets if liquidated for the benefit of unsecured creditors, Wife argues that the 2nd Amd. Plan does not meet the LAT for two reasons: (1) the Debtor is only paying his general unsecured creditors $6,550.79 over the life of the 2nd Amd. Plan while retaining substantial nonexempt assets even the Debtor admits possess a net liquidation value approximating $109,000; and, (2) the Debtor improperly includes the projected value of his alimony payments going forward as priority unsecured debt to demonstrate his 2nd Amd. Plan satisfies the LAT.³ As previously noted, the Debtor admits the nonexempt assets have a gross value of at least $175,429.54. For the foregoing reasons, Wife has met her initial burden.

Not unexpectedly, in contrast, the Debtor argues that the 2nd Amd. Plan in fact meets the requirements of the LAT. The Debtor admits that in order to comply with 11 U.S.C. § 1325(a)(4), he must pay his general unsecured and priority unsecured creditors at least $109,029.54.⁴ CR Ex. 17. ⁵ In arguing that the 2nd Amd. Plan meets that threshold, the Debtor relies on $171,744.88 in payments to be made on priority unsecured claims, i.e., tax claims, the alimony and arrearages to be paid to Wife...