Opinion
No. 12–05844–8–RDD.
2013-02-21
In re Joe Henry PLILER, Katherine Marie Pliler, Debtors.
Robert R. Browning, Greenville, NC, for Trustee. John T. Orcutt, Robert Lee Roland, IV, Law Offices of John T. Orcutt, P.C., Raleigh, NC, for Debtors.
Robert R. Browning, Greenville, NC, for Trustee. John T. Orcutt, Robert Lee Roland, IV, Law Offices of John T. Orcutt, P.C., Raleigh, NC, for Debtors.
ORDER
RANDY D. DOUB, Bankruptcy Judge.
Pending before the Court is the Trustee's Objection to Confirmation and Motion to Dismiss filed by the Chapter 13 Trustee (the “Trustee”) on October 29, 2012, the Memorandum of Law in Support of Trustee's Objection to Debtors' Confirmation and Motion to Dismiss filed by the Trustee on November 27, 2012, the Amended Memorandum of Law in Support of Trustee's Objection to Debtors' Confirmation and Motion to Dismiss filed by the Trustee on December 21, 2012, the Response to Trustee's Objection to Confirmation and Motion to Dismiss filed by Joe Henry Pliler and Katherine Marie Pliler (the “Debtors”) on October 31, 2012, and the Memorandum in Opposition of Trustee's Objection to Debtors' Confirmation and Motion to Dismiss filed by the Debtor on December 5, 2012. The Court conducted a hearing on this matter on December 10, 2012 in Raleigh, North Carolina.
The Debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code on August 10, 2012. Robert R. Browning was duly appointed as the Trustee, and filed the Trustee's Objection to Confirmation and Motion to Dismiss for failure to file a plan in good faith and failure to pay an amount necessary during the applicable commitment period. The Debtors have filed the required Schedules A through J, a Statement of Financial Affairs, a master Mailing Matrix, and a Chapter 13 Statement of Income and Calculation of Commitment Period and Disposable Income (hereinafter the “B22C”). After completing Parts I and II of the B22C, the Debtors calculated their household income to be above the median family income in North Carolina for comparably sized households and listed disposable income of negative $291.20 on B22C.
The Debtors filed a proposed Chapter 13 plan pursuant to 11 U.S.C. § 1321 (the “Plan”). The Plan proposes to pay $1,784.00 for fifteen (15) months and then $1,547.00 for forty (40) months. The total of plan payments is $88,640.00 and consists of $3,335.00 in attorneys' fees.
Schedule F shows the Debtors have approximately $24,008.31 in unsecured claims. Schedule I shows a combined average monthly income of $4,292.34. Schedule J shows average monthly expenses of $2,759.33 leaving a monthly net income of $1,533.01.
The Debtors' Plan contains language commonly referred to as “early termination language,” and states:
This Chapter 13 Plan will be deemed complete and shall cease and a discharge shall be entered, upon payment to the Trustee of a sum sufficient to pay in full: (A) Allowed administrative priority claims, including specifically the Trustee's commissions and attorneys' fees and expenses ordered by the Court to be paid to the Debtor's Attorney, (B) allowed secured claims (including but not limited to arrearage claims), excepting those which are scheduled to be paid directly by the Debtor “outside” the plan, (C) Allowed unsecured priority claims, (D) Cosign protect consumer debt claims (only where the Debtor proposes such treatment), (E) Post-petition claims allowed under 11 U.S.C. § 1305, (F) The dividend, if any, required to be paid to non-priority general unsecured creditors (not including priority unsecured creditors) pursuant to 11 U.S.C. § 1325(b)(1)(B), and (G) Any extra amount necessary to satisfy the “liquidation test” as set forth in 11 U.S.C. § 1325(a)(4).
Because of the early termination language, the plan will likely last fifty-five (55) months or less.
DISCUSSION
The issue before the Court is whether these debtors, who have zero or less disposable income, as determined by Form B22C, may obtain confirmation of a Chapter 13 Plan, which in effect will terminate before the respective applicable commitment period when the plan proposes to discharge substantial amounts in unsecured debt and pay only the Trustee commission and the debtor's attorney fees.
The Court shall confirm a Chapter 13 plan if the provisions of 11 U.S.C. § 1325(a) are met. In cases where an objection to confirmation has been made by either the trustee or an unsecured creditor the court may not confirm a plan unless:
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
11 U.S.C. § 1325(b)(1)(B).
11 U.S.C. § 1325(b)(4) defines “applicable commitment period” as
(A) subject to paragraph (B), shall be
(i) 3 years; or
(ii) not less than 5 years, if the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12, is not less than
(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $625 per month for each individual in excess of 4; and
(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.
The phrase “projected disposable income” is not defined in the Bankruptcy Code. The Code defines “disposable income” as “current monthly income to be received by the debtor
... less amounts reasonably necessary to be expended....” 11 U.S.C. § 1325(b)(2). The phrase “amounts reasonably necessary to be expended” includes the full amount needed for “maintenance or support,” for a debtor whose income is below median for his or her state, but for an above-median-income debtor, only certain expenses are included. Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2470, 177 L.Ed.2d 23 (2010).
The term “current monthly income”—
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6–month period ending on—
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and
(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent)....
11 U.S.C. § 101(10A)
This Court has previously discussed “projected disposable income” and its interplay with § 1325(b)(2) in In re Musselman, 379 B.R. 583 (Bankr.E.D.N.C.2007)
and in In re Alexander, 344 B.R. 742, 749 (Bankr.E.D.N.C.2006) (finding that to calculate a Chapter 13 debtor's projected disposable income, “one simply takes the calculation mandated by § 1325(b)(2) and does the math,” while recognizing the debate and split of authority among bankruptcy courts).
In In re Musselman, the Chapter 13 debtor's Form B22C indicated that he was an above-median income debtor and had a monthly disposable income of negative $255.80. The debtor proposed plan payments for 55 months. eCast Settlement Corporation, the holder of two unsecured claims against the debtor, objected to the terms of the plan insisting the debtor's plan should be for five years or 60 months.
The Bankruptcy Court held that the length of the applicable commitment period is tied to the above or below-median current monthly income of the debtor, not to the projected disposable income of the debtor. The applicable commitment period must be three years for below-median income debtors or five years for above-median income debtors, unless debtors pay all allowed unsecured claims in full, prior to the expiration of the applicable commitment period. The above-median income debtor must propose a plan for payments over a period of five years, unless unsecured creditors are paid in full over a shorter period. Both the debtor and the creditor appealed the bankruptcy court's order to the District Court.
The District Court reversed the bankruptcy court's decision as to the length of the debtor's plan. The District Court held that the applicable commitment period time requirements do not apply to above-median debtors with zero or negative “projected disposable income.” Musselman v. eCast Settlement Corp., 394 B.R. 801, 814 (Bankr.E.D.N.C.2008). Further, after analyzing both the multiplicative approach, which finds “ ‘projected disposable income’ intimately related to ‘disposable income’ ” as identified in In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006), and the “forward-looking approach,” which “require[s] a forward looking inquiry to determine what a debtor's ‘projected disposable income’ will be during the pendency of the chapter 13 plan,” the District Court held that “projected disposable income” is equivalent to the debtor's “disposable income” as defined in 11 U.S.C. § 1325(b)(2). Id. at 808–13.
Subsequent to the decisions in Musselman v. eCast Settlement Corp., 394 B.R. 801, 814 (E.D.N.C.2008) and In re Alexander, 344 B.R. 742, 749 (Bankr.E.D.N.C.2006) the Supreme Court of the United States has interpreted the phrase “projected disposable income” in Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). There, the above-median-income Chapter 13 debtor, in the six months preceding the bankruptcy filing, received a “one-time buyout from her former employer” greatly increasing the debtor's average monthly income for the sixth month period preceding the filing date. Id. at 2470. Post-petition, however, the debtor's income was drastically reduced with her new job. Id. Her monthly expenses calculated pursuant to § 707(b)(2), were $4,228.71 and her “disposable income” as reported on Form B22C was $1,114.98. On her Schedule I, she reported an income below the state median of $1,922.00 per month and on her Schedule J she reported actual monthly expenses of $1,722.97, resulting in a monthly disposable income of $149.03. Id. The debtor filed a plan that required a $144.00 monthly payment for thirty-six (36) months. Id. The trustee objected to confirmation on the ground that the debtor was not committing all of her projected disposable income to the repayment of creditors. Id. The trustee advocated for a mechanical approach to calculating projected disposable income, which involves multiplying disposable income, as calculated on Form B22C, by the number of months in the commitment period. Id. The bankruptcy court endorsed the debtor's proposed monthly payment of $144.00 but required a sixty (60) month plan period. Id. at 2471. The trustee appealed the order to the Tenth Circuit Bankruptcy Appellate Panel, which affirmed. Id. The trustee then appealed to the Tenth Circuit Court of Appeals, which affirmed. Id. The Supreme Court granted certiorari. Id.
The Supreme Court held that when a bankruptcy court calculates a Chapter 13 debtor's projected disposable income, the court may “account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Id. at 2478. In coming to this conclusion the Supreme Court discussed the phrase “projected disposable income.” In its discussion, the Court noted
the term ‘projected’ is not defined, and in ordinary usage future occurrences are not ‘projected’ based on the assumption that the past will necessarily repeat itself. For example, projections concerning a company's future sales or the future cash flow from a license take into account anticipated events that may change past trends.
Id. at 2471. The Court noted “[t]here is no dispute that [the debtor] would in fact receive far less than [the calculated amount] per month in disposable income during the plan period, so [the trustee's] projection does not accurately reflect ‘income to be received’ during that period.” Id. at 2474. The Court recognized that Congress rarely uses the term “projected” to refer to simple multiplication, and “when Congress wishes to mandate simple multiplication, it does so unambiguously—most commonly by using the term ‘multiplied.’ ” Id. at 2472. The Court reasoned that the mechanical approach “clashes repeatedly with the terms of 11 U.S.C. § 1325,” noting that the language of § 1325(b)(1)(B) “ ‘to be received during the applicable commitment period’ strongly favors the forward-looking approach,” and that the mechanical approach “effectively reads this phrase out of the statute when a debtor's current disposable income is substantially higher than the income that the debtor predictably will receive during the plan period.” Id. at 2474.
The Supreme Court's adoption of the forward-looking approach effectively reverses the holding of the United States District Court for the Eastern District of North Carolina in Musselman v. eCast Settlement Corp., which adopted the multiplication or mechanical approach, where disposable income and projected disposable income are the same. See supra note 5.
Further, the Court noted that § 1325(b)(1) directs bankruptcy courts to determine projected disposable income as of the effective date of the plan, rather than the filing date of the plan. The Court recognized that not considering the debtor's changed circumstances would be inconsistent with the language of 11 U.S.C. § 1325 and would produce “senseless results” such as creditors being denied “payments that the debtor could easily make,” or denying “the protection of Chapter 13 to debtors who meet the chapter's main eligibility requirements.” Id. at 2475–2476. The Court noted that “[i]n cases in which the debtor's disposable income is higher during the plan period, the mechanical approach would deny creditors payments that the debtor could easily make.” Id. at 2476. The Court endorsed a “forward-looking approach” allowing the bankruptcy court or the trustee to take into consideration changes in a debtor's income that are “known or virtually certain at the time of confirmation.” Id. at 2478.
Following Lanning, the Supreme Court in Ransom v. FIA Card Services, N.A., ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), held a debtor may not deduct on form B22C an IRS Local Standard deduction for an expense which the debtor will not incur during the life of the plan. Id. at 725. In making its determination the Court noted that an “expense amount is ‘applicable’ within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.” Id. at 724. The Court noted that “[i]f a debtor will not have a particular kind of expense during his plan, an allowance to cover that cost is not ‘reasonably necessary’ within the meaning of the statute.” Id. at 725. The Court cited Lanning, when commenting on Congress' intent in passing BAPCPA:
Congress designed the means test to measure debtors' disposable income and, in that way, ‘to ensure that [they] repay creditors the maximum they can afford.’ H.R. Rep., at 2. This purpose is best achieved by interpreting the means test, consistent with the statutory text, to reflect a debtor's ability to afford repayment. Cf. Hamilton, 560 U.S. at ––––, 130 S.Ct., at 2475–2476 (rejecting an interpretation of the Bankruptcy Code that ‘would produce [the] senseless resul[t] of ‘deny[ing] creditors payments that the debtor could easily make’). Requiring a debtor to incur the kind of expenses for which he claims a means-test deduction thus advances the BAPCPA's objectives.
Id.
Subsequent to the Supreme Court's decision in Lanning and Ransom, other courts have followed suit allowing for accounting of changes in both income and expenses when determining “projected disposable income.” The Fourth Circuit in Morris v. Quigley addressed the issue of “whether a debtor's ‘projected disposable income’ must be equal to the debtor's ‘disposable income’ for purposes of satisfying § 1325(b)(1)(B), or whether the projected disposable income should reflect changes that have occurred or that will occur and that are known as of the date of confirmation.” 673 F.3d 269, 272 (4th Cir.2012). Specifically, the court addressed whether “projected disposable income” should take into account the debtor's intention to surrender two vehicles to her secured creditors. Id. at 270. The Fourth Circuit relied on Lanning and noted the Supreme Court adopted a “forward-looking approach” and held that “when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Id. at 273 (citation omitted). The court found that “failing to account for [known decreases in a debtor's expenses] and thereby denying the unsecured creditors payments that the [d]ebtor clearly could make would be just the sort of ‘senseless result[ ]’ that the Lanning Court rejected.” Id. at 274 (citing Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2475, 177 L.Ed.2d 23 (2010)). The debtor in the case attempted to distinguish Lanning by arguing that Lanning involved a change in income while the debtor's case involved a change in expenses. Id. The court found that the principles articulated in Lanning applied equally to both situations. Id.
The Bankruptcy Court for the Eastern District of North Carolina has recently commented on the Lanning,Ransom, and Quigley opinions and noted that
taken together, this recent line of cases departs from the strict formulaic approach to the means test and takes into account what is likely to occur in the future. Applying this reasoning furthers the purpose of the means test, “which was intended to ‘ensure that those who can afford to repay some portion for their unsecured debts be required to do so.’ ”
In re Sterrenberg, Case No. 11–08543–8–RDD, 2012 WL 1835183, at *5 (Bankr.E.D.N.C. May 18, 2012) (citing In re Harris, 353 B.R. 304, 309 (Bankr.E.D.Okla. Oct. 13, 2006); In re Krawczyk, Case No. 11–09596–8–JRL, 2012 WL 3069437 at *5 (Bankr.E.D.N.C. July 27, 2012)).
The same principles laid out in Lanning, Ransom, and Quigley, have been applied when determining
whether the income that becomes available after the debtors have fully repaid their 401(k) loans (which is allowed by 11 U.S.C. § 1322(f)) is “projected disposable income” to be paid to the unsecured creditors or whether the income can be used to begin making voluntary contributions to the debtors' 401(k) plans and deemed excludable from both disposable income and property of the estate under 11 U.S.C. § 541(a)(1) and (b)(7).
Seafort v. Burden, 669 F.3d 662, 663 (6th Cir.2012). The Sixth Circuit held that “income made available once Debtors' 401(k) loan repayments are fully repaid is properly committed to the debtors' respective Chapter 13 plans for distribution to the unsecured creditors and may not be used to make voluntary retirement contributions.” Id. at 674. While the Sixth Circuit relied on an analysis of §§ 541(b)(7), 541(a)(1), and 1306(a) to reach its decision, the court did cite to the Congressional intent and purpose of BAPCPA “to ensure that debtors devote their full disposable income to repaying creditors and maximizing creditor recoveries.” Id. at 674 (citations omitted).
While the Supreme Court did not address the definition of the phrase “applicable commitment period” in Lanning, other courts have cited the Supreme Court decision to support a temporal interpretation of the “applicable commitment period.” The Eleventh Circuit in In re Tennyson, 611 F.3d 873 (11th Cir.2010), held that the applicable commitment period mandates a minimum duration for an above-median income debtor's Chapter 13 plan. Id. at 874. The facts of In re Tennyson involved an above-median income debtor whose Form B22C indicated that he had negative disposable income. Id. at 875. Using the multiplier approach, this debtor determined that he had no applicable commitment period since he had no projected disposable income. Id. The debtor proposed a three-year plan and the Chapter 13 Trustee objected. Id. The Eleventh Circuit relied on Lanning 's rationale to support its holding that the provisions of Title 11 setting out the applicable commitment period require an above-median income debtor to remain in a Chapter 13 bankruptcy for five (5) years. Id. at 878. The Circuit Court reasoned that “Lanning does not directly comment on the definition of ‘applicable commitment period’ but what it does indicate is that § 1325(b) is not a strict mechanical formula existing in a vacuum.” Id. With such a flexible approach, the Eleventh Circuit concluded that “in order for ‘applicable commitment period’ to have any definite meaning, its definition must be that of a temporal term derived from § 1325(b)(4).” Id. at 879. The Eleventh Circuit did not make a distinction between positive and negative disposable income and applied the temporal approach to all debtors. Id.
The Sixth Circuit in Baud v. Carroll noted that in Lanning, the Supreme Court relied on the “lack of explicit multiplier language in § 1325(b)(1)” to adopt a forward-looking approach and that a similar lack of multiplier language supports a temporal reading of § 1325(b). Baud v. Carroll, 634 F.3d 327, 339 (6th Cir.2011). There, the Sixth Circuit relied on the language in Lanning and Ransom to require a five (5) year applicable commitment period upon the debtor whose disposable income was less than zero. The court stated:
This brings us to the issue of whether there is an exception to the temporal requirement set forth in § 1325(b) for debtors with zero or negative projected disposable income....
In addressing this difficult issue, we begin once again with the language of the statute itself.... Under the express language of § 1325(b)(4), the applicable commitment period does not depend on the amount of the debtor's projected disposable income. To the contrary, the applicable commitment period depends on the current monthly income of the debtor and the debtor's spouse combined.... Accordingly, we conclude that the better reading of § 1325(b) is that the temporal requirement of the applicable commitment period applies to debtors facing a confirmation objection even if they have zero or negative disposable income.
Id. at 350–351 (emphasis added).
Relying on Lanning and Ransom, the Sixth Circuit stated:
[A]s the Supreme Court recognized in both Ransom and Lanning, the legislative history makes clear that the focus of Congress in enacting BAPCPA was on maximizing the amount of disposable income that debtors would pay to creditors. And there are numerous circumstances in which disposable income might become available to the Appellees and to other debtors after confirmation, even those who have zero or negative projected disposable income as of confirmation....
Id. at 356.
Courts that have applied the mandatory applicable commitment period to debtors with zero or negative projected disposable income have concluded that this approach would best serve BAPCPA's goal of ensuring that debtors repay creditors the maximum amount they can afford. See, e.g., In re Tennyson, 611 F.3d 873, 879 (11th Cir.2010); In re Moose, 419 B.R. 632, 635 (Bankr.E.D.Va.2009). Even pre-BAPCPA case law points in favor of a forward-looking approach. In Hamilton v. Lanning, the Supreme Court looked to pre-BAPCPA practice and concluded that “we ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’ ” Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2473, 177 L.Ed.2d 23 (2010) (quoting Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Electric Co., 549 U.S. 443, 454, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007)). If the Court allowed above and below-median income debtors to exit bankruptcy upon payment of their secured claims, unsecured creditors would not be able to capitalize on any subsequent increase in the debtors' income. See In re King, 439 B.R. 129, 139 (Bankr.S.D.Ill.2010).
Prior to BAPCPA, the Bankruptcy Code required that in order to be confirmed, a Chapter 13 plan had to be proposed for a minimum duration of three (3) years unless unsecured claims were paid in full in a shorter period of time. 11 U.S.C. § 1325(b)(1) (2004). Before BAPCPA, the three (3) year period announced in § 1325(b)(1) operated as a temporal requirement. See Fridley v. Forsythe (In re Fridley), 380 B.R. 538, 544 (9th Cir. BAP 2007). After BAPCPA, the applicable commitment period in § 1325(b)(1) operates as a temporal requirement. See Baud v. Carroll, 634 F.3d 327, 341 (6th Cir.2011). The addition of the phrase “to unsecured creditors” in § 1325(b) does not show a clear indication that Congress intended the courts to depart from their pre-BAPCPA practice of declining to confirm plans of less than the required length. Id. at 342.
BAPCPA's core purpose is to ensure that debtors devote their full disposable income to repaying creditors and maximizing creditor recoveries. See Ransom v. FIA Card Services, ––– U.S. ––––, 131 S.Ct. 716, 725, 178 L.Ed.2d 603 (2011); see Seafort v. Burden, 669 F.3d 662, 674 (6th Cir.2012); Baud v. Carroll, 634 F.3d 327, 343 (6th Cir.2011).
Congress intended to require higher income debtors to pay 100% of unsecured claims or make payments for five (5) years. Coop v. Frederickson, 375 B.R. 829, 837 (8th Cir. BAP 2007) (Federman, J., dissenting). Looking at legislative history, the House Report on § 1325(b) shows that the applicable commitment period is a durational requirement. Id. There are numerous circumstances in which disposable income might become available to the debtors after confirmation, even for those who have zero or negative projected disposable income.
The Bankruptcy Court for the District of Kansas noted:
[A] negative disposable income number on Form B22C does not conclusively establish the debtor has no disposable income to be received in the Applicable Commitment Period. Indeed, a feasible plan payment proposal rebuts the presumption that Form B22C alone determines disposable income. A negative number on Form B22C indicates a plan is not feasible. However, if the debtor can propose a feasible plan payment, then the debtor has shown there is, in fact, disposable income, and the plan must last for five years if his income is above median. Debtors cannot have it both ways. If they want to rely exclusively on Form B22C with a negative disposable income number, then they cannot propose a feasible plan. On the other hand, a feasible plan payment commits debtors to a certain plan length, for the above-median income debtor, of no less than five years.
In re Beckerle, 367 B.R. 718, 721 (Bankr.D.Kan.2007) (citations omitted) (emphasis added).
Additionally, the debtor's “disposable income” may not be the same as the debtor's actual “projected disposable income.” See In re Frederickson, 545 F.3d 652, 659 (8th Cir.2008). The debtor's actual expenses may be far less than the regional averages that are assumed in the calculation. Id. Thus, a debtor's “projected disposable income” is a forward-looking number and courts should look at things that are likely to occur in the future instead of relying on historical information. Id. Clearly, the Supreme Court and a majority of other courts are emphasizing a debtor's actual ability to pay in the future, rather than being tied to the mechanical formula, which often produces senseless results.
The United States District Court for the Eastern District of North Carolina addressed the applicable commitment period in Musselman v. eCast Settlement Corp., 394 B.R. 801 (E.D.N.C.2008). In Musselman, the court addressed the issue of whether the applicable commitment period as defined in § 1325(b)(4) determined the length of the plan regardless of the debtor's projected disposable income. The Musselman Court held that debtors who have no projected disposable income also have no applicable commitment period for purposes of § 1325(b). Id. at 814. While Musselman speaks directly to the issue at hand, it was decided pre-Lanning. Based on the Supreme Court decisions in Lanning, Ransom, and lower court's interpretations of these decisions, this Court is compelled to adopt a forward-looking approach to determine projected disposable income and holds that the Applicable Commitment Period is a temporal requirement for all debtors. Had Lanning, Ransom, Quigley, Sterrenberg,Baud and Tennyson been decided prior to the District Court's holding in Musselman regarding the applicable commitment period, this Court concludes the District Court would not have reversed this Court's holding in In re Musselman. Surely if Congress intended for plans to contain these early termination provisions, Congress would have certainly said so.
Therefore, if unsecured claims are not paid in full prior to thirty-six (36) months, the applicable commitment period of the plan must be thirty-six (36) months for below median income debtors and sixty (60) months for above median income debtors. 11 U.S.C. § 1325(b)(4)(B).
For instance, § 1325(b)(4)(B), is the only statutorily permitted termination of the applicable commitment period prior to the expiration of the applicable commitment period, which provides unsecured creditors must be paid in full.
The adoption by the Supreme Court in Lanning of the “forward-looking” approach is totally contradictory to the concept of a plan which includes an early termination provision. “Forward-looking” clearly sanctions and requires a debtor to commit projected disposable income to be received during the applicable commitment period, which means thirty-six (36) months for a below median income debtor, or sixty (60) months for an above median income debtor. Lanning proscribes that courts must account for changes in a debtor's income or expenses that are known or virtually certain at the time of confirmation. It is known or virtually certain at the time of confirmation that a debtor proposes to terminate the plan early after payment of attorney's fees and other designated claims. At that point in time, it is known or virtually certain that the debtor will continue to have the income to continue making payments for the duration of the thirty-six (36) or sixty (60) month period and will have the income available after attorney's fees are paid. This court has adopted the forward-looking approach which is the majority view of courts across the nation, which requires a debtor to commit all projected disposable income for thirty-six (36) or sixty (60) months. If disposable income is zero or less, the court must look to projected disposable income based on income minus expenses from Schedules I and J to determine what actual income or expenses are known or virtually certain at the time of confirmation.
In addition, it is known or virtually certain that attorney's fees will be paid prior to the expiration of the applicable commitment period, which frees up additional projected disposable income to be received during the applicable commitment period for the benefit of unsecured creditors.
In Hamilton v. Lanning, the debtor's payment of $144.00 per month was not the recalculated disposable income of B22C, but was the projected disposable income determined by taking income from Schedule I minus expenses of Schedule J. This is further confirmation that Schedule I and J may be used by the court to determine projected disposable income.
The Debtors' plan proposes to pay $1,784.00 for fifteen (15) months, then $1,547.00 for forty (40) months. With the early termination language, if the Debtors complete their plan as proposed, this will result in an 0% dividend paid to the unsecured creditors. The Court finds the early termination language included in the Debtors' plan is void. The Debtors' plan provides for payments of $1,784.00 for fifteen (15) months and then, after Debtors' attorney's fees are paid, reduces payments to $1,574.00 for forty (40) months. If the Debtors are capable of paying $1,784.00 for fifteen (15) months it would seem they are capable of paying the additional $210.00 for the applicable commitment period of sixty (60) months. By proposing $1,784.00 per month, the Debtors have projected their disposable income they can make available for plan payments. Such treatment would provide an 84% dividend to unsecured creditors.
Unless the Debtors provide evidence that it is known or virtually certain they are unable to continue payments of $1,784.00 for sixty (60) months, the plan may be confirmed with a payment of their projected disposable income of $1,784.00 per month for sixty (60) months.
$1,784.00 times 60 equals $107,040.00 less attorney fees of $3,335.00, less $78,595.00 for secured creditors; less $4,816.80 for the Trustee commission, leaving $20,293.20 for unsecured creditors, which is an 84% dividend.
CONCLUSION
Therefore, the Trustee's Motion to Dismiss is DENIED. The Trustee shall file his motion for confirmation for a plan of $1,784.00.00 per month for sixty (60) months with no early termination language.
Since the minimum payment of $1,533.01, initially proposed by the Debtors, does not appear to be available after subtracting Schedule J expenses from Schedule I income, the issue of feasibility pursuant to 11 U.S.C. § 1325(a)(6) may be an issue at a confirmation hearing, if an objection to the Trustee's Motion for Confirmation is filed. The Trustee may also want to examine the expenses claimed by debtor in Schedule J and B22C to determine if all claimed expenses are reasonably necessary to be expended pursuant to 11 U.S.C. § 1325(b)(3) to determine if any additional projected disposable income may be available. At a minimum, the Debtors have projected their disposable income to be $1,784.00 per month.
SO ORDERED.
ORDER
This matter came before the Court on the Notice of Appeal and Motion for Leave to Appeal Interlocutory Order filed by Joe Henry Pliler and Katherine Marie Pliler (the “Debtors”) on January 29, 2013, the Request for Certification of Issue for Direct Appeal filed by Robert R. Browning, the Chapter 13 Trustee (the “Trustee”) on February 1, 2013, the Answer in Opposition to Motion for Leave to Appeal filed by the Trustee on February 4, 2013, and the Response in Opposition to Request for Certification of Issue for Direct Appeal filed by the Debtors on February 14, 2013.
BACKGROUND
The Debtors filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on August 10, 2012. The Debtors filed the required Schedules A through J, a Statement of Financial Affairs, a master Mailing Matrix, and a Chapter 13 Statement of Income and Calculation of Commitment Period and Disposable Income (hereinafter the “B22C”). After completing Parts I and II of the B22C, the Debtors calculated their household income to be above the median family income in North Carolina for comparably sized households and listed disposable income of negative $291.20 on B22C.
On August 10, 2012, the Debtors filed a proposed Chapter 13 Plan pursuant to 11 U.S.C. § 1321 (the “Plan”). The Plan proposed to pay $1,784.00 for fifteen (15) months, and then $1,547.00 for forty (40) months. The total proposed Plan payments were $88,640.00, and consisted of $3,335.00 in attorneys' fees, $3,988.80 for the Trustee's commission, $78,595.00 to secured creditors, and $0.00 to unsecured creditors. The Debtors' Plan contained language commonly referred to as “early termination language,” stating:
This Chapter 13 Plan will be deemed complete and shall cease and a discharge shall be entered, upon payment to the Trustee of a sum sufficient to pay in full: (A) Allowed administrative priority claims, including specifically the Trustee's commissions and attorneys' fees and expenses ordered by the Court to be paid to the Debtor's Attorney, (B) allowed secured claims (including but not limited to arrearage claims), excepting those which are scheduled to be paid directly by the Debtor “outside” the plan, (C) Allowed unsecured priority claims, (D) Cosign protect consumer debt claims (only where the Debtor proposes such treatment), (E) Postpetition claims allowed under 11 U.S.C. § 1305, (F) The dividend, if any, required to be paid to non-priority general unsecured creditors (not including priority unsecured creditors) pursuant to 11 U.S.C. § 1325(b)(1)(B), and (G) Any extra amount necessary to satisfy the “liquidation test” as set forth in 11 U.S.C. § 1325(a)(4).
Because of the early termination language, the Debtors' Plan would likely last fifty-five (55) months or less.
On October 29, 2012, the Trustee filed the Trustee's Objection to Confirmation and Motion to Dismiss (the “Motion to Dismiss”) for the Debtors' failure to file a plan in good faith and failure to pay an amount necessary during the applicable commitment period. The Court conducted a hearing on the Trustee's Motion to Dismiss on December 10, 2012 in Raleigh, North Carolina. On January 15, 2013, the Court entered an order denying the Trustee's Objection to Confirmation and Motion to Dismiss. In re Pliler, No. 12–5844–8–RDD, 2013 WL 153846, *1 (Bankr.E.D.N.C. Jan. 15, 2013). In the order, the Court held that the “Applicable Commitment Period” of 11 U.S.C. § 1325(b) is a temporal requirement, which requires an above-median-income debtor to commit to a sixty (60) month plan period; and that projected disposable income is calculated using a “forward-looking approach” and is not one in the same as disposable income as determined on Form B22C. The Court directed the Trustee to file a motion for confirmation for a plan of $1,784.00 per month for sixty (60) months, with no early termination language.
In the Notice of Appeal and Motion for Leave to Appeal Interlocutory Order, the Debtors appeal the January 15, 2013 order to the United States District Court for the Eastern District of North Carolina. The Debtors seek leave to appeal the order that directs the Trustee to file a motion to confirm a plan of $1,784.00 per month for sixty (60) months with no early termination language, as the direction is contrary to the Debtors' plan filed pursuant to 11 U.S.C. § 1321 and contrary to the requirements of 11 U.S.C. §§ 1322, 1325. In the Answer in Opposition to Motion for Leave to Appeal, the Trustee opposes the Debtors' Motion for Leave to Appeal Interlocutory Order and requests that the issue on appeal be certified to the United States Court of Appeals for the Fourth Circuit for direct appeal. In the Response in Opposition to Request for Certification of Issue for Direct Appeal, the Debtors ask the Court to deny the Trustee's request for certification and set the matter for hearing.
The Debtors assert that the Trustee's request is not effective because the Trustee failed to file “a timely appeal” pursuant to Fed. Rule Bankr.P. 8001(a)-(b). Fed. Rule Bankr.P. 8001(f)(1). However, the Court finds no requirement that the party making the request for certification file the notice of appeal in Rule 8001. The rule only requires that a timely appeal be filed. The Debtors filed the timely Notice of Appeal on January 29, 2013.
DISCUSSION
I. The Court has Authority to Certify the Appeal to the United States Court of Appeals for the Fourth Circuit Pursuant to Federal Rule of Bankruptcy Procedure 8001(f)(2)(A)
Pursuant to Rule 8001(f) of the Federal Rules of Bankruptcy Procedure, the bankruptcy court, upon request or on its own initiative, may certify an order for direct appeal to a court of appeals provided that the bankruptcy court certifies that one of the requirements of 28 U.S.C. § 158(d)(2)(A) is met. Fed. R. Bankr.P. 8001(f). Section 158(d)(2)(A) allows for direct appeal to the court of appeals from a final order or judgment provided that the bankruptcy court certifies one of the following circumstances exists:
(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;
(ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or
(iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding in which the appeal was taken; and if the court of appeals authorizes the direct appeal of the judgment, order, or decree.
28 U.S.C. § 158(d)(2)(A).
Rule 8001(f) further provides that before the grant of leave to appeal by the district court, “[o]nly the bankruptcy court may make a certification on request or on its own initiative while the matter is pending in the bankruptcy court.” Fed. R. Bankr.P. 8001(f)(2)(A)(i). In the present case, the Debtors filed the Motion for Leave to Appeal Interlocutory Order on January 31, 2013. As of the date of this order, the United States District Court for the Eastern District of North Carolina has not granted the Debtors' motion. Therefore, the matter is still pending in the bankruptcy court and this Court has authority to certify the appeal to the court of appeals.
The Court finds all the requirements of 28 U.S.C. § 158(d)(2)(A) are met and certifies this direct appeal to the United States Court of Appeals for the Fourth Circuit.
II. Projected Disposable Income
A. The Judgment, Order, or Decree Involves a Question of Law to Which There is No Controlling Decision of the Court of Appeals for the Circuit or of the Supreme Court of the United States, or Involves a Matter of Public Importance Pursuant to 28 U.S.C. § 158(d)(2)(A)(i)
In the Order, which denied the Trustee's Motion to Dismiss, the Court discussed “projected disposable income” and concluded the Supreme Court holding in Hamilton v. Lanning, 506 U.S. ––––, 130 S.Ct. 2464, 177 L.Ed.2d 23, (2010) allowed a bankruptcy court to consider income or expenses that are known or virtually certain at the time of confirmation when calculating projected disposable income. Based on Lanning, the Court held determining a debtor's projected disposable income requires considering income and expenses under the “forward-looking approach” rather than the mechanical approach, which involves multiplying a debtor's disposable income under Form B22C to reach a set value the debtor must pay into the plan.
As noted by many courts, the phrase “projected disposable income” is not defined in the Bankruptcy Code. The Code defines “disposable income” as “current monthly income to be received by the debtor
... less amounts reasonably necessary to be expended....”
The term “current monthly income”—
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6–month period ending on—
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and
(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent)....
11 U.S.C. § 101(10A)
The phrase “amounts reasonably necessary to be expended” includes the full amount needed for “maintenance or support,” for a debtor whose income is below median for his or her state, but for an above-median-income debtor, only certain expenses are included. Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2470, 177 L.Ed.2d 23 (2010).
This Court has previously discussed “projected disposable income” and its interplay with § 1325(b)(2) in In re Musselman, 379 B.R. 583 (Bankr.E.D.N.C.2008) (finding projected disposable income and disposable income have the same meaning for above-median income debtors, which is used to determine the monthly amount to be paid to unsecured creditors through the plan and that the applicable commitment period is tied to the above or below-median current monthly income of a debtor) rev'd Musselman v. eCast Settlement Corp., 394 B.R. 801 (E.D.N.C.2009) and in In re Alexander, 344 B.R. 742, 749 (Bankr.E.D.N.C.2006) (finding that to calculate a Chapter 13 debtor's projected disposable income, “one simply takes the calculation mandated by § 1325(b)(2) and does the math,” while recognizing the debate and split of authority among bankruptcy courts).
Subsequent to the decisions in Musselman v. eCast Settlement Corp., 394 B.R. 801 (E.D.N.C.2008) and In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) the Supreme Court of the United States interpreted the phrase “projected disposable income” in Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). There, the Supreme Court held that when a bankruptcy court calculates a Chapter 13 debtor's projected disposable income, the court may “account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Hamilton v. Lanning, 130 S.Ct. at 2478.
Following Lanning, the Supreme Court in Ransom v. FIA Card Services, N.A., ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), held a debtor may not deduct on form B22C an IRS Local Standard deduction for an expense that the debtor will not incur during the life of the plan. Id. at 725. In making its determination, the Court noted that an “expense amount is ‘applicable’ within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.” Id. at 724
Subsequent to the Supreme Court's decision in Lanning and Ransom, other courts have followed suit, allowing for accounting of changes in both income and expenses when determining “projected disposable income.” The Fourth Circuit, in Morris v. Quigley, addressed the issue of “whether a debtor's ‘projected disposable income’ must be equal to the debtor's ‘disposable income’ for purposes of satisfying § 1325(b)(1)(B), or whether the projected disposable income should reflect changes that have occurred or that will occur and that are known as of the date of confirmation.” 673 F.3d 269, 272 (4th Cir.2012). Specifically, the court addressed whether “projected disposable income” should take into account the debtor's intention to surrender two vehicles to her secured creditors. Id. at 270. The Fourth Circuit relied on Lanning and noted the Supreme Court adopted a “forward-looking approach” and held that “when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Id. at 273 (citation omitted). The court found that “failing to account for [known decreases in a debtor's expenses] and thereby denying the unsecured creditors payments that the [d]ebtor clearly could make would be just the sort of ‘senseless result[ ]’ that the Lanning Court rejected.” Id. at 274 (citing Hamilton v. Lanning, ––– U.S. ––––, ––––, 130 S.Ct. 2464, 2475, 177 L.Ed.2d 23 (2010)).
Amidst this analysis, a majority of courts do not focus on strict construction of § 1325(b)(2) but on the debtor's actual ability to pay and known congressional intent. This shift aligns with the practice of multiplying a debtor's net monthly income by the length of the plan established prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) and adjusting for any known or virtually certain changes in income. Hamilton v. Lanning, 130 S.Ct. at 2467 (explaining under pre-BAPCPA case law, courts generally multiplied a debtor's current monthly income by the number of months in the commitment period, but had discretion in accounting for known changes); see also In re Quigley, 673 F.3d 269 (4th Cir.2012); In re Johnson, 382 Fed.Appx. 503, 507 (7th Cir.2010) (Lanning leaves no doubt that a bankruptcy court has discretion to account for changes in a debtor's income that have either occurred at the time of confirmation or are virtually certain to occur). In Lanning, the Supreme Court condones this practice as it stated “the Court ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure,’ and Congress did not amend the term ‘projected disposable income’ in 2005.” Hamilton v. Lanning, 130 S.Ct. at 2467 (citation omitted). Therefore, by looking at a debtor's actual ability to pay, courts are adopting the purposeful intent of the statute in order to avoid senseless results and to accomplish the stated Congressional intent of requiring debtors who can afford to make payment to creditors do so. See Ransom v. FIA Card Servs. N.A., ––– U.S. ––––, 131 S.Ct. 716, 725, 178 L.Ed.2d 603 (“Congress designed the means test to measure debtors' disposable income and, in that way, ‘to ensure that [they] repay creditors the maximum they can afford.’ ”) (quoting H.R.Rep No. 109–31, pt. 1 p. 2 (2005)). In Pliler, it is known or virtually certain that the Debtors attorneys' fees will be paid after fifteen (15) months. Completion of payments on the attorneys' fees makes additional disposable income available for payment to unsecured creditors.
B. The Judgment, Order, or Decree Involves a Question of Law Requiring Resolution of Conflicting Decisions Pursuant to 28 U.S.C. § 158(d)(2)(A)(ii)
In light of the emerging case law, the issue before this Bankruptcy Court in Pliler was whether “projected disposable income” is calculated under the statutory definition of disposable income or whether the Supreme Court's decision in Lanning shifts the calculation of projected disposable income away from reliance on the statutory definition of disposable income to a more forward-looking approach. See In re Alexander, 344 B.R. 742, 750 (Bankr.E.D.N.C.2006); Hamilton v. Lanning, 130 S.Ct. at 2475;see also In re Tedder, No. 12–06232–8–RDD, 2013 WL 145416 (Bankr.E.D.N.C. Jan. 14, 2013); In re Boyd, 487 B.R. 669 (Bankr.E.D.N.C.2013); In re Mathis, No. 12–05618–8–RDD, 2013 WL 153833 (Bankr.E.D.N.C. Jan. 15, 2013); In re Barnes, No. 12–06613–8–RDD, 2013 WL 153848 (Bankr.E.D.N.C. Jan. 15, 2013). As noted by the Trustee, the order in Pliler is in direct conflict with the decisions of the two other Bankruptcy Courts in the Eastern District of North Carolina. See In re Ballew, 487 B.R. 657 (Bankr.E.D.N.C.2013); In re Temple, No. 12–4049–8–SWH, 2013 WL 308971 (Bankr.E.D.N.C. Jan. 23, 2013). In Ballew, relying on current precedent in the Eastern District of North Carolina, the Honorable J. Rich Leonard, held that where a debtor has zero or no disposable income based on Form B22C, the debtor is not required to comply with the “applicable commitment period” pursuant to § 1325(b)(4).
See, e.g. Musselman v. eCast Settlement Corp. (In re Musselman), 394 B.R. 801 (E.D.N.C.2008); In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006). The Court explained that “the term ‘applicable commitment period’ refers to the time in which the debtor must pay projected disposable income to the trustee, not a minimum plan duration.” In re Ballew, 487 B.R. at 668. Since the debtor did not “have any projected disposable income, nothing will be received in the applicable commitment period to make payments to unsecured creditors under the plan.” Id. In Temple, the Honorable Stephani W. Humrickhouse, also denied the Trustee's motion to dismiss in the Chapter 13 proceeding and incorporated Judge Leonard's reasoning in Ballew.
The facts in Ballew are similar to the facts in Pliler in that the proposed Chapter 13 plan would terminate early prior to payments of the debtor's projected disposable income for the full applicable commitment period.
In addition to Ballew and Temple, the two other Bankruptcy Courts entered identical orders finding there is no requirement for a debtor's projected disposable income to be devoted to unsecured creditors for the applicable commitment period where a debtor has zero or negative projected disposable income in a total of thirty-one (31) cases, including In re Ortega, Case No. 12–00315–8–JRL.In re Ballew, 487 B.R. at 668–69;In re Temple, at *1. In order to resolve the issue in the district, the Chapter 13 Trustee filed a similar Request for Certification of Issue for Appeal in In re Ortega, in which the trustee requests the Bankruptcy Court certify the following issue for appeal to the Fourth Circuit:
[w]hether, following the U.S. Supreme Court's decision in Hamilton v. Lanning and the line of cases following the Hamilton v. Lanning decision, when it is known or virtually certain at the time of confirmation that a debtor's regularly scheduled plan payments will pay allowed administrative, unsecured priority, and non-long-term secured claims proposed to be paid through the debtor's plan in full prior to the expiration of the applicable commitment period, it follows, absent a clear showing that it is now known or virtually certain that the debtor will not be able to continue making such monthly plan payments thereafter, that projected disposable income will exist and, therefore, is known or virtually certain at the time of confirmation to be available prospectively for the remainder of the uncompleted applicable commitment period, to be distributed as a pro rata dividend to allowed unsecured claim holders, and therefore, the continuation of such payments for the remainder of the applicable commitment period should be required as a condition of meeting the requirements for plan confirmation under 11 U.S.C. §§ 1322 and 1325?
Request for Cert. of Issue for Appeal, In re Ortega, No. 12–00315–8–JRL, at 3 (Bankr.E.D.N.C. Feb. 5, 2013).
Among the various bankruptcy courts within the Fourth Circuit, strict adherence to a mechanical means test is the minority view, as the majority of districts find projected disposable income should be calculated under the forward-looking or similar approach. In re Wilson, 397 B.R. 299, 312 (Bankr.M.D.N.C.2008) (Form B22C is only a starting point for determining a debtor's income for the purposes of 11 U.S.C. § 1325(b)(1)(B) because “the word ‘projected’ is forward looking.”); In re Houser, No. 07–50529, 2007 WL 6404340, at *4. (W.D.N.C. Dec. 14, 2007) (“If a debtor can demonstrate that his actual prospective disposable income differs from that elicited in the means test, we use the prospective income in calculating plan payments.”); In re Plumb, 373 B.R. 429, 430 (Bankr.W.D.N.C.2007) (Form B22C is the starting point for determining projected disposable income for above-median debtors, but projected disposable income is a forward-looking concept, Schedules I and J should be considered as well); In re Edmunds, 350 B.R. 636, 646 (Bankr.D.S.C.2006) (“the income component of projected disposable income is a forward-looking concept” not limited by the means test but allows consideration of actual income and expenses expected during the plan term); In re Anstett, 383 B.R. 380 (Bankr.D.S.C.2008) (finding disposable income as calculated by the means test establishes a floor for the dividend to unsecured creditors, not the plan payment itself); In re Herrmann, No. 10–06523–JW, 2011 WL 576753 (Bankr.D.S.C. Feb. 9, 2011); In re Kelly, 416 B.R. 232, 237 (Bankr.E.D.Va.2009) (when disposable income calculations lead to distorted results, the court should account for the distortion in determining projected disposable income); In re Minahan, 394 B.R. 116, 131 (Bankr.W.D.Va.2008) (following the line of cases that hold “B22C is the starting point, not both the starting and ending point, in determining” the minimum obligation under a plan); In re Watson, 366 B.R. 523, 531 (Bankr.D.Md.2007) (Form B22C calculations are a debtor's presumptive projected disposable income but a debtor may rebut the presumption by showing the calculations are not commensurate with projected earnings and expenses). Therefore, the holdings in Ballew and Temple do not just create conflict within the Eastern District of North Carolina, but directly conflict with other bankruptcy courts throughout the Fourth Circuit.
III. Applicable Commitment Period
A. The Judgment, Order, or Decree Involves a Question of Law to Which There is No Controlling Decision of the Court of Appeals for the Circuit or of the Supreme Court of the United States, or Involves a Matter of Public Importance Pursuant to 28 U.S.C. § 158(d)(2)(A)(i)
There is no controlling decision of the Fourth Circuit or the Supreme Court of the United States on the issue of whether the “applicable commitment period” provided by 11 U.S.C. § 1325(b)(4)
is a strictly temporal requirement for all debtors, including those with zero or negative projected disposable income as calculated by the means test, such that below-median income debtors must propose a plan of at least thirty-six (36) months in length and above-median debtors must propose a plan of at least sixty (60) months in length. While the Supreme Court did not address the definition of the phrase “applicable commitment period” in Lanning, other courts have cited the Supreme Court decision to support a temporal interpretation of the “applicable commitment period.” For instance, the Eleventh Circuit in In re Tennyson, 611 F.3d 873 (11th Cir.2010), held that the applicable commitment period mandates a minimum duration for an above-median income debtor's Chapter 13 plan. Id. at 874. The Circuit Court reasoned that “ Lanning does not directly comment on the definition of ‘applicable commitment period’ but what it does indicate is that § 1325(b) is not a strict mechanical formula existing in a vacuum.” Id. With such a flexible approach, the Eleventh Circuit concluded that “in order for ‘applicable commitment period’ to have any definite meaning, its definition must be that of a temporal term derived from § 1325(b)(4).” Id. at 879. The Eleventh Circuit did not make a distinction between positive and negative disposable income and applied the temporal approach to all debtors. Id.
.Section 1325(b)(4) provides that the term “applicable commitment period,”
(A) subject to subparagraphs (B), shall be—
(i) 3 years; or
(ii) not less than 5 years, if the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12, is not less than—
(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $625 per month for each individual in excess of 4; and
(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.
11 U.S.C. § 1325(b)(4).
The Sixth Circuit in Baud v. Carroll noted that in Lanning, the Supreme Court relied on the “lack of explicit multiplier language in § 1325(b)(1)” to adopt a forward-looking approach and that a similar lack of multiplier language supports a temporal reading of § 1325(b). Baud v. Carroll, 634 F.3d 327, 339 (6th Cir.2011). There, the Sixth Circuit relied on the language in Lanning and Ransom to require a five (5) year applicable commitment period upon the above-median income debtor whose disposable income was less than zero. Id. at 351. Adding to the confusion, the Ninth Circuit confirmed a thirty-six (36) month plan for above-median debtors with no projected disposable income but then ordered an en banc rehearing of the issues on appeal in Danielson v. Flores (In re Flores), 692 F.3d 1021 (9th Cir.2012), reh'g granted,704 F.3d 1067 (9th Cir.2012). The rehearing is set for March 18, 2013.
The United States District Court for the Eastern District of North Carolina addressed the applicable commitment period in Musselman v. eCast Settlement Corp., 394 B.R. 801 (E.D.N.C.2008). In Musselman, the court addressed the issue of whether the applicable commitment period as defined in § 1325(b)(4) determined the length of the plan regardless of the debtor's projected disposable income. The Musselman Court held that debtors who have no projected disposable income also have no applicable commitment period for purposes of § 1325(b). Id. at 814. While Musselman speaks directly to the issue at hand, it was decided pre-Lanning. This Court discussed the Lanning, Ransom, and Quigley decisions as well as lower court interpretations of these decisions in In re Sterrenberg, explaining, “taken together, this recent line of cases departs from the strict formulaic approach to the means test and takes into account what is likely to occur in the future.” In re Sterrenberg, Case No. 11–08543–8–RDD, 2012 WL 1835183, at *5 (Bankr.E.D.N.C. May 18, 2012). Therefore, in Pliler, this Court was compelled to adopt a forward-looking approach to determine projected disposable income and hold that the applicable commitment period is a temporal requirement for all debtors. Additionally, in Pliler, the Court concluded that had Lanning, Ransom, Quigley, Sterrenberg, Baud, and Tennyson been decided prior to the District Court's holding in Musselman regarding the applicable commitment period, the District Court would not have reversed this Court's holding in In re Musselman. Surely if Congress intended for plans to contain these early termination provisions, Congress would have certainly said so.
Therefore, the Court is left with no controlling decision for guidance.
For instance, § 1325(b)(4)(B), is the only statutorily permitted termination of the applicable commitment period prior to the expiration of the applicable commitment period, which provides unsecured creditors must be paid in full.
B. The Judgment, Order, or Decree Involves a Question of Law Requiring Resolution of Conflicting Decisions Pursuant to 28 U.S.C. § 158(d)(2)(A)(ii)
In addition, Pliler, holding that the early termination language is contrary to the temporal applicable commitment period creates a conflict in the Eastern District of North Carolina with the decisions in In re Ballew and In re Temple. These issues are pressing in this district because without instruction from the Fourth Circuit, attorneys in the Eastern District of North Carolina, will continue to use In re Alexander and Musselman v. eCast Settlement Corporation as precedent to formulate plans that terminate prior to the applicable commitment period provided by § 1325(b)(4). In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) (holding the term applicable commitment period is relevant only in regard to projected disposable income to unsecured creditors and if a debtor has no projected disposable income the applicable commitment period does not come into play); Musselman v. eCast Settlement Corp. (In re Musselman), 394 B.R. 801 (E.D.N.C.2008) (finding debtors who have no projected disposable income also have no applicable commitment period for purposes of § 1325(b)). The inclusion of the early termination language in the Debtors' plan is in direct conflict with § 1325(b)(4)(B), unless unsecured creditors are paid in full. This Court's decision in Pliler all but prevents attorney's from filing plans that include the early termination language, while Ballew and Temple allow the practice to continue.
Additionally, the majority of courts which have addressed the issue of the applicable commitment period pursuant to § 1325(b)(4), have found that the applicable commitment period is a temporal requirement that applies to all debtors, and therefore, a plan must continue for either three (3) or five (5) years, depending on whether a debtor has above or below-median income. In re Girodes, 350 B.R. 31, 35 (Bankr.M.D.N.C.2006) (finding “the term ‘period’ implies time period rather than amount”); In re Crittendon, No. 06–10322 C–13G, 2006 WL 2547102, at *5 (Bankr.M.D.N.C.2006) (applicable commitment period is a temporal requirement); In re Houser, No. 07–50529, 2007 WL 6404340, at *3 (Bankr.W.D.N.C. Dec. 14, 2007) (explaining majority view is that the applicable commitment period is a temporal requirement but declining to decide the issue as it was not ripe); In re Cushman, 350 B.R. 207, 213 (Bankr.D.S.C.2006) (Congress intended the commitment period to be the length of time for a debtor to perform under the plan, not a multiplier); In re Moose, 419 B.R. 632 (Bankr.E.D.Va.2009); In re Hylton, 374 B.R. 579 (Bankr.W.D.Va.2007).
IV. Good Faith
A. The Judgment, Order, or Decree Involves a Question of Law to Which There is No Controlling Decision of the Court of Appeals for the Circuit or of the Supreme Court of the United States, or Involves a Matter of Public Importance Pursuant to 28 U.S.C. § 158(d)(2)(A)(i)
The practice of filing plans including language that allows payment to terminate after costs of administration and payments to secured debts are complete raises good faith issues pursuant to 11 U.S.C. § 1325(a)(3), (7) because the plans are proposed in direct violation of a provision of the Bankruptcy Code. Additionally, by using the early termination language, attorneys in this district have developed attorney fee only plans, which provide for payment of attorneys' fees and the trustee's commission without curing arrearages on secured debts or paying a dividend to unsecured creditors. See In re Tedder, No. 12–06232–8–RDD, 2013 WL 145416 (Bankr.E.D.N.C. Jan. 14, 2013); In re Mathis, No. 12–05618–8–RDD, 2013 WL 153833 (Bankr.E.D.N.C. Jan. 15, 2013); In re Barnes, No. 12–06613–8–RDD, 2013 WL 153848 (Bankr.E.D.N.C. Jan. 15, 2013). Such plans bring good faith issues to the forefront as they contravene the purpose and intent behind BAPCPA. See Ransom v. FIA Card Servs. N.A., ––– U.S. ––––, 131 S.Ct. 716, 725, 178 L.Ed.2d 603 (“Congress designed the means test to measure debtors' disposable income and, in that way, ‘to ensure that [they] repay creditors the maximum they can afford.’ ”) (quoting H.R.Rep No. 109–31, pt. 1 p. 2 (2005)). The Fourth Circuit requires courts to examine the totality of the circumstances to determine whether a plan has been proposed in good faith. Deans v. O'Donnell (In re Deans), 692 F.2d 968, 972 (4th Cir.1982).
In his request, the Trustee poses one of the issues as whether proposing a plan that terminates early after paying only attorneys' fees, priority claims, secured claims, and the trustee's commission and discharges significant portions of unsecured debt despite ability to pay, can be proposed in good faith pursuant to § 1325(a)(3) and whether the petition was filed in good faith pursuant to § 1325(a)(7).
In this case, the Debtors' plan included arrearage claims that would be paid through the plan in addition to attorneys' fees and the trustee's commission.
In the Request for Certification of Issue for Direct Appeal, the Trustee notes one of the issues on appeal is:
[w]hether a Chapter 13 plan with “early termination language” that proposes to terminate early after paying only attorneys' fees, priority claims, secured claims, and the trustee's commission and thereby discharges significant portions of unsecured debt despite a debtor's actual ability to pay something toward unsecured creditors can be proposed in good faith under 11 U.S.C. § 1325(a)(3) and 11 U.S.C. § 1325(a)(7).
Req. for Certification of Issue for Direct Appeal, 3, In re Pliler, No. 12–05844–8–RDD (Bankr.E.D.N.C. Feb. 1, 2013).
However, in other cases before this Court, the plans only included payment of attorneys' fees and the trustee's commission. See In re Tedder, 2013 WL 145416;In re Mathis, 2013 WL 153833;In re Barnes, 2013 WL 153848. These so called “attorney fee only” cases are highly indicative of bad faith if not per se bad faith. See e.g., In re Arlen, 461 B.R. 550 (Bankr.W.D.Mo.2011) (“[Attorney fee only Chapter 13] cases are little more than disguised Chapter 7 proceedings. Utilizing Chapter 13 in this fashion blurs the distinctions between the two chapters and the various differences in their scope and purpose as reflected by the different applicable statutory provisions.”); In re Jackson, 2012 WL 909782 (Bankr.N.D.Ala.2012) (finding a lack of good faith where only a small payment would be made to unsecured creditors, with the bulk of funds going to the Debtor's lawyer and noted that when a plan seeks to only make nominal payments, or no payments at all, to unsecured creditors, it is only seen as being proposed in good faith when some exceptional circumstances are present).
In Pliler, this Court did not specifically discuss the good faith issue as the Court found that the early termination language was contradictory to the requirements of calculating the projected disposable income and the applicable commitment period. However, the holding in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) would otherwise require a good faith analysis by the court.
Except for the curing of arrearages and payment of secured claims, Pliler would be an attorney fee only case. The vast majority of case law nationally finds attorney fee only Chapter 13 cases do not, on their face, meet the good faith requirements of 11 U.S.C. § 1325. See In re Jackson, Nos. 11–42528–JJR13, 11–42825–JJR–13, 2012 WL 909782 (Bankr.N.D.Ala. Mar. 16, 2012); In re Ingram, No. 11–13216, 2012 WL 10812 (Bankr.N.D.Cal. Jan.3, 2012)aff'd sub nom. Brown v. Gore,; In re Arlen, 461 B.R. 550 (Bankr.W.D.Mo.2011); In re Buck, 432 B.R. 13 (D.Mass.2010); In re Sanchez, No. 13–09–10955 MA, 2009 WL 2913224 (Bankr.D.N.M. May 19, 2009); In re Lehnert, No. 07–55988, 2009 WL 1163401 (Bankr.E.D.Mich. Jan. 14, 2009); In re Montry, 393 B.R. 695 (Bankr.W.D.Mo.2008); In re Paley, 390 B.R. 53 (Bankr.N.D.N.Y.2008); In re Dicey, 312 B.R. 456 (Bankr.D.N.H.2004).
Neither the Fourth Circuit nor the Supreme Court have addressed the issue of whether a debtor with zero or negative projected disposable income acts in good faith by proposing a plan that terminates prior to the expiration of the debtor's applicable commitment period. The Fourth Circuit did address the issue of good faith in Deans v. O'Donnell (In re Deans), 692 F.2d 968, 972 (4th Cir.1982), where it found courts must examine whether a plan has been proposed in good faith based on the totality of the circumstances. In Deans, the Fourth Circuit addressed the issue of whether 11 U.S.C. § 1325(a)(3) requires that all plans must provide substantial and meaningful repayment to the debtor's unsecured creditors. Id. at 969. The Court concluded that the plain language of the statute does not impose a per se rule of substantial repayment into the “good faith” requirement in every case. Id. at 970. Therefore, no controlling precedent exists on the issues involved in Pliler.
B. The Judgment, Order, or Decree Involves a Question of Law Requiring Resolution of Conflicting Decisions Pursuant to 28 U.S.C. § 158(d)(2)(A)(ii)
In the present case, the Debtors' plan includes secured claims, so it is not a Chapter 13 case filed solely for the purpose of discharging unsecured debts and paying only attorneys' fees, but the plan does propose to terminate prior to payment of unsecured creditors and in direct contravention of § 1325(b)(4). Therefore, good faith issues pursuant to § 1325(a)(3), (7) arise in conjunction with the question of whether the applicable commitment period applies to debtors with zero or negative disposable income on Form B22C. As previously discussed, these plans that include early termination language allow debtors to seek a discharge while paying no dividend to unsecured creditors. In Ballew and Temple, the other two (2) courts in the Eastern District of North Carolina authorized the use of early termination language to end a plan with no payment to unsecured creditors. In re Ballew, 487 B.R. 657 (Bankr.E.D.N.C.2013); In re Temple, No. 12–4049–8–SWH, 2013 WL 308971 (Bankr.E.D.N.C. Jan. 23, 2013). The result creates greater conflict within the district as debtors who file cases in divisions where Ballew and Temple are controlling may choose to propose a plan that terminates early, while cases filed in the divisions where Pliler is controlling may not. Such conflicting decisions complicate the administration of Chapter 13 plans by the Chapter 13 trustees. Accordingly, the Court finds there is sufficient conflict within the district to warrant certification to the court of appeals pursuant to 28 U.S.C. § 158(d)(2)(A)(ii).
Further, similar to the Eastern District of North Carolina, the issue of whether a plan is filed in good faith also creates conflict in the bankruptcy court for the Eastern District of Virginia. In In re Kelly, the court held that meeting the disposable income test alone does not mean a debtor has satisfied the good faith requirement of § 1325(a)(3) if it is clear a debtor could reasonably afford a larger plan payment. In re Kelly, 416 B.R. 232, 238 (Bankr.E.D.Va.2009) (denying confirmation of a plan that proposed a plan payment of $1,805.00 when the debtor's schedules indicated he had income of $7,405.00 and expenses of $3,324.00, for a monthly surplus of $4,081.00); see also In re Degrosseilliers, No. 08–10942–SSM, 2008 WL 2725808 at *3 n. 7 (Bankr.E.D.Va. July 11, 2008). This is in direct conflict with the court in In re Winokur, which followed In re Alexander and found that if a “debtor proposes to pay the amount Congress requires by the mathematical formula, the debtor has complied with the good faith requirement.” In re Winokur, 364 B.R. 204, 206 (Bankr.E.D.Va.2007) (confirming an above-median debtor's plan that provided for payment greater than or equal to the amounts computed under § 1325(b)(2) but less than the debtor's actual net disposable income). Such conflict among districts is further cause to certify the appeal directly to the Fourth Circuit.
V. An Immediate Appeal from the Judgment, Order, or Decree May Materially Advance the Progress of the Case or Proceeding in Which the Appeal is Taken Pursuant to 28 U.S.C. § 158(d)(2)(A)(iii)
The order entered in Pliler instructed the Trustee to file a motion for confirmation for a plan of $1,784.00 per month for sixty (60) months with no early termination language. The Debtors filed a motion for leave to appeal to the district court for the Eastern District of North Carolina. Should the district court grant leave to appeal, the Trustee would be stayed from filing a motion for confirmation as directed by the Court's order. The bankruptcy proceeding would then be delayed until further order is entered by the district court. While the Debtors are required by 11 U.S.C. § 1326(a)(1) to commence making payments to the Trustee within thirty (30) days after the date of the filing of the petition, the payments made under § 1326(a)(1) “shall be retained by the trustee until confirmation or denial of confirmation.” 11 U.S.C. § 1326(a)(2). Thus, certifying the issue directly to the Fourth Circuit would reduce any longer delay of confirmation of the plan and distributions to creditors. Accordingly, direct appeal to the Fourth Circuit would materially advance the progress of the bankruptcy proceeding by allowing the Debtors to have a decision from only one appeal to the Fourth Circuit.
CONCLUSION
Accordingly, for the foregoing reasons, the Trustee's Request for Certification of Issue for Direct Appeal is GRANTED. Further, pursuant to 28 U.S.C. § 158(d)(2), the Court, on its own initiative, certifies the following issues for direct appeal to the United States Court of Appeals for the Fourth Circuit:
(1) Whether in calculating a debtor's “projected disposable income” pursuant to § 1325(b), the bankruptcy court should follow the “forward-looking” approach to reflect a debtor's actual ability to pay and consider changes in income and expenses that are known or virtually certain at the time of confirmation?
(2) Whether the term “applicable commitment period” refers to a temporal requirement such that an above-median debtor must propose a plan no shorter than sixty (60) months and a below-median debtor must propose a plan no shorter than thirty-six (36) months as provided by § 1325(b)(4)?
(3) Whether a plan that includes “early termination language” that ends after payments of administrative expense claims, the trustee's commission, and secured claims but provides no payment to unsecured creditors is proposed in good faith pursuant to 1325(a)(3), (7)?
SO ORDERED.
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Dividend ¦ ¦ ¦ ¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦ ¦Unsecured ¦Unsecured ¦Early ¦ ¦Sch. I– ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦Proposed Plan ¦Debt ¦Creditors ¦Termination ¦Form B22C ¦Sch. J ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦a. $1,784 x 15 ¦ ¦ ¦Yes–included¦-$291.20 ¦ ¦ ¦months, then $1,547 x¦$24,008.31¦0% ¦in proposed ¦(above- ¦$1,533.01¦ ¦40 months = $88,640 ¦ ¦ ¦plan ¦median) ¦ ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦b. Attorney's Fees = ¦ ¦ ¦ ¦ ¦ ¦ ¦$3,335 ¦ ¦ ¦ ¦ ¦ ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦c. Trustee's ¦ ¦ ¦ ¦ ¦ ¦ ¦Commission = ¦ ¦ ¦ ¦ ¦ ¦ ¦$3,988.80 ¦ ¦ ¦ ¦ ¦ ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦d. Payment to Secured¦ ¦ ¦ ¦ ¦ ¦ ¦Creditors = $1,429 x ¦ ¦ ¦ ¦ ¦ ¦ ¦55 = $78,595 ¦ ¦ ¦ ¦ ¦ ¦ +---------------------+----------+----------+------------+----------+---------¦ ¦e. Payment to ¦ ¦ ¦ ¦ ¦ ¦ ¦Unsecured Creditors ¦ ¦ ¦ ¦ ¦ ¦ ¦with early ¦ ¦ ¦ ¦ ¦ ¦ ¦termination language ¦ ¦ ¦ ¦ ¦ ¦ ¦= $0 ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+