Opinion
CASE NO: 02-35038.
September 4, 2007
MEMORANDUM OPINION
Carol Hendrick asks this Court to exercise its equitable powers to allow her to obtain a chapter 13 discharge by extending the date for completion of her chapter 13 plan payments. 11 U.S.C. § 1328(a) provides that the Court shall grant a debtor a chapter 13 discharge as "soon as practicable after completion by the debtor of all payments under the plan." Section 1322(d) limits the term of a chapter 13 plan to a maximum of five years. Section 1329(c) requires that any modification of a confirmed plan not extend the term of the original plan beyond five years from the date on which the first payment was due under the original plan.
All statutory references are to Title 11 as in effect on May 6, 2002. Subsequent amendments to Title 11 are not applicable to this case.
Background
This bankruptcy case was filed as a joint case by Carol and Keith Hendrick on May 6, 2002. At the time of the filing, Keith Hendrick was not eligible to be a chapter 13 debtor because his debts exceeded the statutory debt limits for a chapter 13 debtor. Carol Hendrick was not jointly liable on certain of the debts. Accordingly, Keith Hendrick's case was converted to a chapter 7 bankruptcy case and Carol Hendrick remained as the sole debtor in the chapter 13 case.
On May 21, 2002, Carol Hendrick filed her proposed chapter 13 plan. Her first plan payment was due not later than June 20, 2002. 11 U.S.C. § 1326(a)(1). The proposed plan was amended and eventually confirmed by the Court on May 13, 2003. The confirmed plan required Carol Hendrick to make 60 monthly payments starting June 6, 2002. Accordingly, the terms of the confirmed plan were consistent with the statutory requirement of § 1322(d) and required that payments be made between June 6, 2002 and May 6, 2007. The monthly payments were set at $750 per month for the first 24 months of the plan, at $1,750 for the next 12 months of the plan and at $2,500 per month for the last 24 months of the plan. In total, $99,000 was due to the chapter 13 trustee.
The first 24 payments were completed in May 2004. The second 12 payments were completed in May 2005. Hendrick missed her payment due in November 2005. She remained one month in default through March of 2006. She made 2 payments in April 2006, curing the November 2005 default. She made a payment in May 2006, but defaulted on her June 2006 payment. She remained one month in default trough November 2006. She made no payments between December 2006 and July 2007. On July 10, 2007, she paid $2,750. Her total payments made during the first 60 months were $81,500 of the $99,000 that were due. Her total payments through July 2007 were $84,250.
Hendrick's chapter 13 plan estimated that her distributions to her unsecured creditors would total $1,594.90 on total estimated unsecured debts of $286,551.28. This was a forecast distribution of less than 1% to her unsecured creditors. The plan provided for the application of the $99,000 as follows: Creditor Purpose Amount
Cramer Financial Group To cure arrearages on second $2,685.44 lien on homestead Ford Credit To pay the value of a Ford $22,158.98 Mustang ($17,850) plus interest and obtain a cramdown of $1,208.06 of the total amount owed to Ford Credit GMAC To cure the arrearages $54,727.77 on the first lien on homestead Crown and Lucas To pay bankruptcy attorneys $7,932.91 fees Unsecured creditor pool To obtain discharge of an $1,594.90 estimated $286,551.28 by payment of an estimated $1,594.90, resulting in a writedown of $284,956.38. Chapter 13 trustee fee To pay the statutory fee $9,900.00 TOTAL $99,000.00Default
As set forth above, Hendrick defaulted in her payments to the chapter 13 trustee. Hendrick has not proposed to modify her plan. Because of the strictures of § 1329(c), no modification could be approved.Hendrick alleges that the Court should exercise its equitable power to excuse her payment defaults because the circumstances that caused the defaults were outside of her control. Although the Court was initially sympathetic to the circumstances described by Hendrick, the Court has ultimately concluded that equity commands more exacting compliance than requested by Hendrick.
On May 17, 2007 the chapter 13 trustee filed his motion to dismiss this chapter 13 bankruptcy case. The chapter 13 trustee alleged that Ms. Hendrick was $15,000 in arrears on her payments.
On June 12, 2006, the Federal Trade Commission sued Mr. Hendrick for injunctive and equitable relief. The FTC alleged that Mr. Hendrick and others had engaged in illegal telemarketing practices that resulted in unauthorized charges against consumer telephone accounts. Mr. Hendrick alleged that the FTC had obtained an order from the United States District Court freezing his assets, that he had not engaged in any wrongful activity and that the freeze was wholly unwarranted.
Ms. Hendrick's sole source of funds to make her payments was from her husband's income and assets. When he made his initial equitable plea to this Court, Mr. Hendrick had not had a full opportunity to provide a defense in District Court. The Court initially believed that it should exercise its equitable powers to allow Mr. Hendrick an opportunity to address his problems with the District Court. The Court was concerned about the allegations of an unwarranted asset freeze.
No response was filed to the motion. Nevertheless, Mr. Hendrick appeared with counsel on June 13, 2007. At that hearing, Mr. Hendrick or his attorney made the following statements and representations to the Court:
• That the FTC had obtained a freeze of the Hendricks' assets.
• The freeze continued in effect as of June 13, 2007.
• That, despite the freeze, Ms. Hendrick had managed to make multiple payments to the chapter 13 trustee by using savings, cash and reserves.
• That Mr. Hendrick and his former business partner had purchased a new business in May of 2007 that provided marketing services to sales forces.
• That Ms. Hendrick earned substantially no income.
• That Mr. Hendrick's new business paid him income of $25,000 per month.
• That the business would be able to continue to pay him the $25,000 and that the business was sufficiently capitalized.
At the conclusion of the June 13, 2007 hearing, the Court required the Hendricks to produce a budget. The dismissal hearing was continued until June 26, 2007. There were no significant events at the June 26 hearing. The matter was continued until July 24, 2007.
At the July 24 hearing, Mr. Hendrick's attorney made the following statements and representations to the Court:
• That the District Court's freeze had terminated and that his assets were now available.
• That he had agreed to a harsh injunction in the District Court.
• That Hendrick had been allowed to withdraw living expenses from the frozen funds.
The Court required Hendrick to file a statement, no later than August 28, 2007, of all assets that were frozen by the District Court along with all funds that were allowed to be withdrawn from the freeze. The hearing was continued to August 28, 2007.
Hendrick did not file the statement prior to the hearing. At the August 28, 2007 hearing, his counsel stated that there were sealed affidavits filed in the District Court, that counsel was reluctant to file the affidavits because of the sealing order, and that counsel believed that the sealed affidavits would best describe the freezing arrangement in the District Court. Copies of the sealed affidavits were submitted for review by this Court.
The Court has confirmed with Judge Hoyt that this Court may utilize the Sealed Affidavits without breaching Judge Hoyt's sealing order.
A review of the information leads the Court to conclude that many of the Hendricks' representations to this Court were seriously misleading.
Although the Hendricks' assets were frozen in June of 2006, they were allowed to withdraw the entirety of the funds over time. By March 2006, there were no remaining frozen funds. When the Court was informed on June 13, 2007 that the freeze remained in effect, the information was seriously misleading. Although the freeze order remained in place, there were no remaining frozen funds. If an equitable justification for an extension based on an allegedly unwarranted funds freeze existed, the justification was fully dissipated by the Hendrick's prior withdrawal of 100% of the funds.
The Hendricks argued that the Court should extend equitable relief because they had scrimped through limited earnings and unfrozen assets to make chapter 13 trustee payments between June 2006 and November 2006. In reality, the District Court has specifically provided for withdrawal of frozen funds in order to allow the payment to be made — and the funds were withdrawn for that stated purpose. Far from limiting Ms. Hendrick's ability to pay, the freeze explicitly enabled monthly payments to the chapter 13 trustee.
Mr. Hendrick's claim that the FTC allegations were unjustified is troubling in light of the agreed permanent injunction issued against him by the District Court. Among other things, the agreed permanent injunction mandates Mr. Hendrick to refrain from specified conduct and provides for a five year monitoring period, an 8 year record maintenance procedure, a restriction that mandates Mr. Hendrick to provide a copy of the injunction to future businesses and employers, and a possible $24,700,000 judgment for causing injury to consumer defendants.
Payment of the $24,700,000 is suspended so long as Mr. Hendrick complies with certain other portions of the judgment. Assuming compliance, the $24,700,000 will never be paid.
Part of the District Court's judgment provides that the FTC relied upon the accuracy of the affidavits in determining whether to enter into an agreed permanent injunction. The affidavits submitted by Mr. Hendrick contain information that is troubling in light of this bankruptcy case. Several of the statements in the affidavits concerning Mr. Hendrick's budget, conflict with sworn statements made in his bankruptcy case as to his Schedule J-Current Expenditures.
The affidavits reflect the following:
• Bank deposits frozen in June 2006 totaled $253,125.08. Bank deposits as of March 2007 were $239.00.
• The Hendricks' initial monthly expense budget was $26,528, including the $2,500 payment to the trustee, or $24,028 excluding the $2,500 payment to the trustee. The $24,028 in the District Court affidavit compares to the $8,679 submitted to this Court on the Hendricks' jointly filed 2002-03 schedule J.
On August 28, 2007, Mr. Hendrick informed the Court that the Hendricks were allowed to withdraw the $26,000 each month.
• The monthly expense budget included $3,600 per month for food. This compares to $800 on the Hendricks' schedule J.
• The monthly expense budget included $1,800 per month for clothing. This compares to $300 on the Hendricks' schedule J.
Taken as a whole, even the inflated budget submitted by the Hendricks provided for sufficient funds for approximately 10 months. Nevertheless, the Hendricks only made five payments to the chapter 13 trustee after the freeze order was entered and before the funds were exhausted. When the Court inquired as to why the balance of the funds were not paid to the chapter 13 trustee, the Court was informed that the Hendricks were allowed to withdraw additional frozen funds beyond their budgeted amount. The Hendricks were unable to make payment to the trustee because they had exhausted the funds in only five months. Hendrick was unable to explain the disposition of the frozen funds. He could only state that the funds were exhausted. Hendrick did testify that at least some of the funds were not spent in accordance with the budget.
The Hendricks' story changed dramatically on August 28, 2007. The Court learned that the frozen funds — the centerpiece of the request for equitable relief — had been received as a payment for the Hendricks' business only a few days before the funds were frozen. Although the Hendricks claim that their inability to pay the trustee was based on the freeze, the funds were not routine assets normally available for use. And, as set forth above, the funds had been exhausted before the time that Ms. Hendrick first sought equitable relief based on the freeze.
Application of Law to Facts
Although § 1322(d) mandates a maximum plan term of 5 years, most authorities hold that a debtor may still obtain a chapter 13 discharge if the debtor makes all payments in a manner that substantially complies with the terms of the plan. COLLIER ON BANKRUPTCY, ¶ 1322.17[2] (15th ed. Rev. 2007). Courts that have allowed completion of payments after the five-year period have generally viewed such relief as equitable in nature. For example, Judge Bernstein allowed a debtor to complete payments on a plan that provided a 100% distribution to unsecured creditors where the debtor had escrowed 100% of the funds for completion and where the single opposing creditor had waited until the last minute to seek to enforce a junior lien. The Court described the equities as follows:
The debtor's counsel's main argument in support of reinstatement is based upon a plea for justice. The debtor struggled for five years to save her home from foreclosure by the first mortgagee and to pay unsecured creditors 100% of their allowed claims. Only after the debtor was a few months short of completing the full payment of the prepetition arrearage owed to GreenPoint-which she soon completed-did LaSalle filed its very belated motion to lift the stay. For want of a payment of less than $3,000, which the debtor's counsel has held on deposit in his client escrow account for the past nine months, it would be grossly unfair to deny the debtor this last opportunity to cure this modest monetary default in her modified plan. The debtor's counsel pleads with the Court that it recognize how severe a struggle it is for any chapter 13 debtor to complete the payment of a plan premised on curing a substantial prepetition arrearage on a first mortgage.
. . .
Under the totality of the facts and circumstances of this case, the debtor moved fairly expeditiously-within three weeks of the date of the entry of the order of dismissal-to reinstate her case. As discussed above, the debtor satisfactorily explained that she was unable to remit the last three chapter 13 plan payments for the months of June, July and August of 2002 due to a flare-up of her chronic illnesses. In addition, the debtor made extraordinary efforts to comply with her obligations under her confirmed plan despite a severely limited personal income, chronic poor health, and the challenges of raising two teen-age children in the United States while supporting a third child in Haiti.
In re Aubain, 296 B.R. 264 (Bankr. E.D.N.Y. 2003).
A recent district court decision considering an appeal from a bankruptcy court confirms that the decision to allow continued payments after the expiration of five years is committed to the Court's discretion. In re Henry, 368 B.R. 696 (N.D. Ill. 2007).
The Court recognizes a disagreement in the case law. Some courts have held that the Court has no discretion; dismissal is mandatory. Judge Moran describes these opinions as follows:
See In re Roberts, 279 B.R. 396 (1st Cir.BAP 2000) (debtor's failure to pay IRS tax claims in full within five years warranted dismissal under § 1307); In re Goude, 201 B.R. 275, 276 (Bankr.D.Or. 1996) ("Since the maximum time allowed to complete the payments under a Chapter 13 plan has expired, this case must be dismissed"); In re Jackson, 189 B.R. 213, 214 (Bankr.M.D.Ala. 1995) (pointing to the clear language of 11 U.S.C. § 1322(d)); In re White, 126 B.R. 542 (Bankr.N.D.Ill. 1991) (granting motion to dismiss pursuant to § 1307(c)(6)); In re Woodall, 81 B.R. 17 (Bankr.E.D.Ark. 1987) (granting motion to dismiss where claims for post-petition taxes extended the payments of a Chapter 13 plan beyond five years).
In re Henry, 368 B.R. 696 (N.D. Ill. 2007).
The Court need not resolve this matter. Assuming that the Court has discretion to extend the plan's term, the facts of this case cannot justify the exercise of that discretion.
There is a single factor that favors allowing the extended payments requested by the Hendricks. That single factor is that Ms. Hendrick made regular payments (with the exception of November 2005 and June 2006) between July of 2002 and November of 2006. However, given the nature of the chapter 13 plan, those payments resulted in little tangible benefit to anyone other than the Hendricks. The payments were applied to allow the Hendricks to retain property that secured certain obligations. With respect to their Ford Mustang, the payments would result in a cramdown of the amount owed to Ford. None of the payments made by the Hendricks resulted in a benefit to any creditor without a concomitant benefit resulting in a reduction of liens against the Hendricks' collateral. Moreover, if the case is dismissed, the Hendricks will receive full credit for all payments made to creditors. On balance, this equitable factor is minimal.
There are substantial factors weighing against the Hendricks. The most important of these is that the Hendricks missed 7 payments to the chapter 13 trustee. This Court is often confronted with debtors who miss payments to the chapter 13 trustee. Payments are often missed due to job losses, illnesses and other factors beyond the control of debtors. Often, debtors make heroic efforts to correct such deficiencies. Those efforts may require a spouse to return to work, working spouses to obtain second or third jobs, the sale of exempt assets and other extraordinary efforts. The Hendricks took no such actions. Instead, they argued that the existence of an unwarranted freeze of their assets should entitle them to equitable relief. The Court was sympathetic to the allegation of a wholly unwarranted action by the government. However, as the facts have developed, it does not appear that the government's action was wholly unwarranted. Mr. Hendrick has agreed to a severe permanent injunction. The Hendricks' funds are no longer frozen. Indeed, there were no frozen funds at the time that the Hendricks first requested equitable relief because the funds had already been spent. Even while the funds were frozen, the District Court allowed the Hendricks a very liberal budget. Ms. Hendrick has not chosen to obtain employment so that her creditors or the chapter 13 trustee could be paid. Mr. Hendrick did not work for much of the period in question. He describes himself as virtually unemployed for a year. The Hendricks have failed to account for the disposition of the $253,000 that was released by the District Court.
On balance, the Court declines to exercise its discretion to grant a chapter 13 discharge to Ms. Hendrick.
This case will be dismissed by separate order.