Opinion
Case No. 02-30336-H2-13
September 30, 2002
MEMORANDUM OPINION AND REASONS FOR DENIAL OF PLAN CONFIRMATION AND FOR DISMISSAL OF CASE
The Debtors in this case have proposed two chapter 13 plans. For reasons set forth orally on the record at the first hearing, the Court denied confirmation of the Debtors' proposed plan and allowed the Debtors to file an amended plan. At the conclusion of the hearing on the amended plan, the Court concluded that the amended plan had not been proposed in good faith, and the Court denied confirmation of the amended plan. In addition, since the Debtors had failed to propose a confirmable plan after two opportunities to do so, the Court determined to dismiss the case for delay that is prejudicial to creditors. The Courts' reasons and analysis are set forth below.
FACTS
The Debtor filed this chapter 13 case on January 11, 2002. The Debtor's schedules show 3 principal assets: a residence valued at $235,000 and two cars valued at about $70,000. The cars are a 2000 Land Rover Discovery and a 2001 Mercedes Benz ML 320. (There is also $30,000 of miscellaneous personal property, which the chapter 13 trustee indicates is all exempt from creditors' claims.) The Debtors' schedules show a third vehicle, a 2002 Volkswagen Golf that the Debtors had signed a contract to lease for $387 per month with an $11,000 balloon payment. The Debtors' original chapter 13 plan rejected that lease. Mrs. Samadi testified that she concluded that it was in the Debtors' long-term financial best interests to purchase the Land Rover and the Mercedes rather than to lease the Volkswagen.
The lease payment on the Volkswagen was $387 per month. The note payments on the Land Rover are over $1,080 per month. The lease includes an $11,000 balloon payment in month 47 that makes the total payments relatively equal. However, there is no indication that either of the Debtors ever considered basic transportation in lieu of new, upscale vehicles.
The schedules show debt of about $524,440. Debt secured by the homestead is about $227,000. In addition, there are tax liens against the homestead (for real property taxes) for about $6,000. Secured claims against the vehicles totaled about $78,034, but the Debtor asserted that the value of the vehicles was less than the amount due. Therefore, in the first chapter 13 plan the Debtor proposed to cram down the car lenders and pay only the value of the vehicles. Even so, the debt to be paid on the vehicles was about $68,000. The Land Rover was to be paid in the first 33 months of the plan.
$26,000 on the Land Rover and $42,000 (scheduled debt) for the Mercedes.
The Debtor lists unsecured claims amounting to about $197,000. However, according to the chapter 13 trustee's latest summary and analysis, claims have only been filed in the amount of $77,114. The deadline for filing proofs of claim has passed.
Both Debtors are employed outside the home. Their schedule of current income shows gross income of about $11,250 per month, or about $135,000 annually. After deduction for payroll taxes and medical insurance premiums, the Debtors schedule shows take-home income of about $7,985 per month, or about $95,820 per year. The Debtors have one dependent, a child about two years old. They expect another child in January.
This calculation treats car payments as expenditures. See attached schedule.
The Debtors Schedule J (Current Expenses) shows a a proposed monthly budget of $6,415 per month. But if one adds the two car notes into the calculation the Debtors' monthly payment for all of the goods and service they enjoy amounts to about $7,859 per month or about $94,300 per year.
The Land Rover note was paid by the trustee and the proposed car lease payment is shown on Schedule I as a deduction from gross income rather than as a monthly living expense. The Court is not suggesting that this was an improper treatment in the schedules, but is adding these to monthly living expenses to show that the goods and benefits that the Debtors propose to enjoy during the course of this bankruptcy case are truly substantial.
At the first confirmation hearing, the Debtors proposed to keep all of their property and to pay $1,256 per month to the trustee. Notwithstanding the trustee's recommendation in favor of plan confirmation, the Court could not make a finding that the plan was proposed in good faith. A number of factors were especially important in the Court's determination.
1. The budget of alleged reasonable and necessary living expenses included such items as $220 per month for a housekeeper, $115 per month for recreation and clubs, and very generous proposed expenditures for other living expenses (such as $225 per month for telephone expense.) Mrs. Samadi testified that the housekeeper also provides childcare services that supplement the $720 per month budget for childcare. There was no substantial testimony concerning efforts of the parties to provide childcare themselves outside normal working hours. Mrs. Samadi testified that both she and her husband need cell phones for their business. There was no breakdown of the $225 monthly telephone expense. It is the Court's experience that nationwide roaming and long distance service can be obtained for two telephones for much less than $225 per month.
2. The Debtors proposed to keep two very expensive vehicles — a Land Rover and a Mercedes Benz SUV. Mrs. Samadi testified that the Debtors need two vehicles because both are employed at jobs requiring long hours outside the home. However, her testimony concerning the need for a Mercedes Benz SUV was not convincing. She testified that she needed that vehicle so that she could transport her infant child. The Court could not conclude that an expenditure of the proposed magnitude was necessary to transport a single two year old child. The Debtors provided no testimony to justify Mr. Samadi's need for a vehicle with extraordinary off-road capability. While the Court is aware that many people purchase Land Rovers and Mercedes SUV's for the pleasure and prestige of driving them (and therefore presumably the additional cost is justified in the minds of these purchasers), the Court could determine no need for these Debtors to pay substantially more than they would have had to pay for basic transportation.
The additional cost of these vehicles over the cost of basic transportation goes beyond their purchase price. Although the Debtors offered no evidence concerning the total cost of keeping and operating these vehicles, the Court takes judicial notice that the cost of insurance and the cost of operation of luxury sport utility vehicles is greater than the cost of basic transportation. The Debtors' bankruptcy schedules list $325 per month for automobile insurance and $250 per month for fuel and other operating expenses. The Debtors offered no testimony concerning alternative costs of basic transportation, or indeed, even any indication that the Debtors had considered such questions in formulating their chapter 13 plan.
3. Debtors argued that because they were in bankruptcy, they could not obtain credit to purchase other, less costly, vehicles. However, this testimony was simply insubstantial and not convincing. The Debtors had rejected the lease of a Volkswagen that was cheaper on a monthly basis. The Debtors offered no testimony concerning the cost of even more basic transportation. There was no convincing testimony that a substantial effort had been made to investigate carpooling, public transportation, driving each other to work, or other possibilities. The Court was left with the impression that the Debtors were trying to justify maintenance of their lifestyle rather than making a real effort to repay debt. After hearing the testimony, the Court is simply not convinced that the Debtors had put substantial effort into reducing their transportation or other expenses. The Court could not conclude that the Debtors had made a good faith examination and evaluation of their spending habits to propose a reasonable plan for repayment of creditors.
For example, Mrs. Samadi testified that she needed the Mercedes Benz SUV to transport her child to various activities. The Debtors only have one child, an infant. There was no indication why a much smaller, less expensive vehicle would not suffice. Mrs. Samadi testified that she had considered a smaller vehicle, and in fact had leased one, a 2002 Volkswagen Golf GTI. But Mrs. Samadi testified that after comparing the lease cost of that vehicle with the purchase price of the Mercedes, she determined that the long-term financial benefits of the Mercedes purchase were better than the long-term consequences of the Volvo lease. But Mrs. Samadi did not testify that she had ever considered the purchase of a truly inexpensive vehicle to provide basic transportation. It is this kind of failure to consider material changes in lifestyle that has caused the Court to conclude that the plan was not proposed with a good faith intent and effort to pay creditors.
4. The payout proposed for the plan contemplated payments to creditors in the following schedule:
a. Debtor's counsel was paid in the first 2 months;
b. Virtually all payments for the next 25 months would go to automobile loans; a very small amount would go to delinquent taxes that created liens against the residence.
c. Only after the cars, attorneys, and delinquent taxes were paid was there anything available for unsecured creditors.
5. The anticipated distribution to unsecured creditors at the initial confirmation hearing was 13%. Because most creditors did not file proofs of claim, the distributors to creditors is likely to be 60%.
The essence of the Debtors' plan is that they would keep a valuable residence and two luxury vehicles while maintaining a very comfortable lifestyle (according to the Court's interpretation of their proposed $75,000+ annual budget for living expenses). The Court, therefore, denied confirmation on the date initially set, but continued the hearing to another date and allowed the Debtors to propose another plan.
On Setember 16, 2002, the Debtors proposed an amended plan. The essential difference is that the amended plan proposes to surrender the Mercedes Benz to the secured lender, to replace it with the lease a 1999 Volkswagen Passat, and to pay an additional $300 per month to the chapter 13 trustee for 53 months. That is the only difference between the two plans, The Debtors maintain their proposed budget of about $75,000 per year for living expenses.
At a monthly payment of $385 per month which is shown in the Debtors' schedules as a reduction from take-home pay rather than as a budget item in Schedule J.
LEGAL ANALYSIS
Bankruptcy Code § 1325(a) sets out 6 requirements for plan confirmation. One of those is that the plan must be proposed in good faith. The standard recognized by the Fifth Circuit in determining whether a plan is proposed in good faith is the "totality of circumstances" test. See Ramirez v. Bracher, 204 F.3d 595, 600-01 (5th Cir. 2000); citing In the Matter of Chaffin, 816 F.2d 1070, 1073 (5th Cir. 1987). Generally, the totality of circumstances test is applied on a case-by-case basis and requires consideration of each cases' specific facts. See Id. While the Fifth Circuit has not delineated a list of specific factors to consider when using the totality of circumstances test, bankruptcy courts (following the lead of other circuits) have considered: (1) the amount of proposed payments; (2) the debtor's earning capacity; (3) the types of debt sought to be discharged; (4) the motivation and sincerity of the debtor; and (5) the degree of effort put forth by the debtor to pay creditors. See In re Aichler, 182 B.R. 19, 21 (Bankr. S.D. Tex. 1995); see also In re Jobe, 197 B.R. 823, 826, 828 (Bankr. W.D. Tex. 1996) (stating that lack of, or minimal, effort is a factor in determining good faith). Consequently, bankruptcy courts have scrutinized chapter 13 plans that have proposed to keep assets such as investments, luxury items, new cars, new houses and country club memberships. See e.g. In re Rice, 72 B.R. 311 (C.D. Del. 1987).
Bankruptcy Code § 1322(d) provides that the plan may not propose payments that extend beyond 3 years unless the court, for cause, permits a longer period. Although the standard for "cause" has not been addressed by either the Supreme Court or the Fifth Circuit, various bankruptcy court decisions provide the Court with some guidance. Specifically, like other bankruptcy courts, the Court does not find that cause exists to extend a plan beyond 3 years when the purpose is simply to pay a small amount to unsecured creditors in the final months of the plan. See In re Rogers, 65 B.R. 1018, 1022 (Bankr. E.D. Mich. 1986) (stating that cause did not exist when plan would pay nothing to unsecured creditors in first three years and the debtor proposed the plan extension merely to "lull unsecured creditors and the court into thinking that the debtor is making her best effort to pay,"); See also In re Lindsey, 122 B.R. 157, 159 (Bankr. M.D. Fla. 1991) (Stating that cause did not exist when debtor required additional time to provide payment to unsecured creditors because all payments during the first 34 months of the plan went to rescue an investment property from foreclosure).
CONCLUSIONS
The Debtors have presented no evidence to explain why Mr. Samadi needs a $28,000 Land Rover to drive to work every day. Their only justification is that it would cost just as much to lease a 2002 Volkswagon Golf. There was apparently no attempt to compare basic transportation. The Debtors' plan proposes to pay off the entire debt remaining on that vehicle in the first 26 months of the plan. Thus, of each payment to the trustee of $1,250 (which increases to $1,550), about $1,059 (about 68%) would go to pay for that vehicle. The Court sees no justification, and therefore cannot find good faith, in the proposal.
The Debtors have not presented evidence concerning whether using less expensive vehicles would also reduce the automobile insurance expense. But it stands to reason that it would cost less to insure a smaller, but nevertheless safe, vehicle, and therefore some of the $325 per month budget for automobile insurance expense might be made available for creditors.
A number of other budget items are (at best) generous and (at some level) questionable. The budget proposes $115 per month for recreation and clubs. It proposes $250 per month for transportation expense, in addition to note payments on the car. It proposes $220 per month for a housekeeper. House maintenance is shown at $290 per month, in addition to $46 per month for a home warranty. $104 per month is proposed for life insurance, without explanation of whether any part of that is a savings element in a whole life policy. Telephone expense is shown at $225 per month. The Debtors propose to spend $265 per month on clothing (presumably clothing purchases, since cleaning is listed as a separate item).
Limitations and consideration of these expenditures is discussed above.
In summary, the Court computes that the Debtor's take-home pay is about $8,370 per month, over $100,000 per year. The Debtors proposed budget for necessary living expenses is about $7,859 per month, or $94,300 per year. The Court simply cannot find that this level of expenditures, on a $100,000 income, represents a good faith effort to pay creditors.
This includes an adjustment of the current schedule I to allow for the fact that the schedule proposes to withhold a monthly lease payment for an automobile. The Court believes that this is an item for monthly living expense, and not a true reduction of gross income. The adjustments are shown in the attached charts.
The Debtors propose to pay approximately 60% of the unsecured claims that have been filed in this case. (a much lesser percentage of the claims that they listed when they originally filed this case) but payments do not begin until month 28, and do not conclude until 5 years after the case was filed. Had the Debtors substantially reduced their expenditures, the Court believes that the Debtors could increase payments to the trustee substantially. If the Land Rover debt were eliminated, (or basic transportation substituted) the Debtors would have less than $6,000 of secured debt to pay through the plan. The Court believes that the principal need to extend payments over more than 36 months is to maintain a very comfortable lifestyle while discharging substantial unsecured debt. The Court cannot conclude that there is cause to allow payments for more than 36 months.
The unsecured claims listed in the Debtors' schedules amounted to approximately $195,000. Assuming that the schedules were correct, if all creditors had filed claims the payment to unsecured creditors would have been about 23%.
The home mortgage debt is to be paid directly by the Debtors, and this would not change.
Changes Between 8/27/02 Plan and 9/16/02 Plan
Original plan proposed to keep a 2001 Mercedes Benz ML 320 valued at $42,000, and subject to a lien in the amount of $43,337.24. Payments per month would have been XXX Current plan proposes to surrender the Mercedes, and to lease a 1999 Volkswagen Passat for a monthly payment of 385 Difference Plan payments increase from 1,256 to 1,570 314Analysis of Schedule J
Discretionary Expenses: Transportation: Expenses for Residence Items that seem exceptionally generous: Other Expenses: Reconciliation of this analysis with monthly budget shown in Schedule J Housekeeping 220 Recreation Clubs 115 Total 335 Car note (Land Rover) paid through plan — $28,585.22 paid in 27 installments 1,059 Car Lease (shown in Schedule I) 385 Auto Insurance 325 Other transportation 250 Total 2,019 First Mortgage 1,400 Second Mortgage 375 Electricity Fuel 350 Maintenance 290 Homeowners' Insurance 205 Home Warranty 46 Home Owners' Dues 200 Property Taxes 500 Total 3,366 Telephone 225 Food 625 Clothing 265 Laundry Dry Cleaning 25 Medical and Dental (in addition to 354.52 of medical insurance withheld) 175 Life Insurance 104 Daycare 720 Total 1,914 Total monthly budget 7,859 Monthly budget as shown above 7,859 Less — 1999 Passat payment shown in schedule I 385 Landrover car note paid through trustee 1,059 Total 1,444 Reconciled difference (i.e. monthly budget as shown in Schedule J) 6,415Analysis of Effect of Plan
Total payments in first 27 months (7 @ 1,250 + 20 @ 1,550) 39,750 Payments on Landrover 28,585 Payments to counsel 1,260 Trustee's charge 3,975 Delinquency in property taxes 6,522 Total 40,342Analysis of Proposed Distributions Under the Plan
Total payments (7 @ 1,250 plus 53 @ $1,550) 90,900 Payments to secured creditors 35,107 Payments to Debtors' counsel 1,260 Trustee's commission 9,090 Total 45,457 Amount available for unsecured creditors 45,443 Unsecured claims filed 77,115 Percentage distribution to unsecured creditors 59%ORDER DENYING PLAN CONFIRMATION AND DISMISSING CASE
For reasons separately set forth in writing this date, the Court denies confirmation of the Debtors' chapter 13 plan.It is further ordered that this case is dismissed for delay prejudicial to creditors.