Robert Crawford Shahan; Case No. 06-11638 (Nugent) (April 23, 2007)
MEMORANDUM OPINION
• 11 U.S.C. §101(10A)
•
11 U.S.C. §707(b)(2)
•
11 U.S.C. §1325
Facts:
Debtor filed his Chapter 13 case on August 31, 2006. His wife, Debra, did
not file a petition. Both debtor and Debra were employed, and debtor reported
Debra’s income on Form B22C, the means test form for Chapter 13 debtors.
The Trustee objected to confirmation of debtor’s plan on the grounds
that he did not offer to pay his unsecured creditors all of his projected disposable
income for five years. The Trustee based her objection on several deductions
and adjustments taken on Form B22C by debtor in respect of Debra’s income.
At issue were three questions about how the means test imposed by the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) treats the income
of the non-debtor spouse. The three questions were as follows. First, to what
extent was the debtor entitled to a “Marital Adjustment” (or the
non-filing spouse’s income “not regularly contributed” to
the household expenses)? Second, were future debt payments on secured claims
for which only the non filing spouse was liable deductible as “Deductions
for Debt Payment?” Third, would the non-filing spouse’s payments
for support of her college-aged daughter, for recreation and miscellaneous
personal expenses, and for loan repayments to her family be deducted as “Additional
Expense Claims?”
Holding:
The Court observed that in means test analyses and Form B22C, the process begins with current monthly income (“CMI”), which includes “any amount paid by any entity other than the debtor ... on a regular basis for the household expenses of the debtor or the debtor’s dependents....” For example, if a debtor’s non-filing spouse has income, that portion of the spouse’s income not dedicated to paying household expenses is deducted from CMI.
On the marital adjustment question: In debtor’s case, he took a $706.19 marital adjustment on Line 19. Debra testified that this figure represented her withholding from her paycheck.” Debra also testified that she was a salaried employee and her monthly income was stable. The Court found that Debra’s withholding was not dedicated to household expense and is justifiably deducted on Line 19 as a marital adjustment.
On the debt payment question: Line 47 provided for the deduction of future payments to be made on secured debts. The Trustee questioned debtor’s listing of two payments, one to Emprise Bank and the other to Wells Fargo. These related to debts of Debra’s alone, secured by the home Debra and debtor inhabited and Debra’s vehicle. Debtor was not a titled owner on either the home or vehicle. Based on the plain language of the statute, the Court concluded that future secured debt payments by a non-filing spouse were deductible on Line 47.
On the additional expense question: The Trustee’s final objection to debtor’s disposable income calculation arose out of his $415.00 deduction as “Additional Expense Claims,” Debra’s recreation and miscellaneous personal expenses, an unsecured loan Debra was repaying to her family members, a monthly stipend Debra paid to assist her college-aged daughter, and debtor’s tax preparation expenses. The Court noted that to qualify as other expenses those expenses must meet the necessary expense test, which essentially states, “they must provide for the health and welfare of the taxpayer and/or his or they must be for the production of income.” Based upon the types of “other necessary expenses” identified in the Internal Revenue Manual, the Court concluded that Debra’s recreation and loan payment expenses did not qualify as other necessary expenses as contemplated under 11 U.S.C. §707(b)(2).
The Court denied confirmation of debtor’s plan, but allowed debtor thirty days to revise his Form B22C and amend his plan.
William L. Howell and Donna L. Howell; Case No. 06-11652 (Nugent) (April 26, 2007)
MEMORANDUM OPINION
• 11 U.S.C. §1325(b)(1)(B)
•
11 U.S.C. §707(b)(2)
Facts:
This case came on for confirmation of the debtors’ amended Chapter 13 plan. Under that plan, the debtors proposed to dedicate their projected disposable income to the payment of their unsecured creditors for a period of 36 months. The Trustee objected that the debtors were not devoting all of their projected disposable income to payment of unsecured creditors as required by 11 U.S.C. §1325(b)(1)(B). Specifically, the Trustee contended that debtors’ projected disposable income was too low as a result of the debtors’ deduction from current monthly income of vehicle “ownership expense” even though the subject vehicle was unencumbered and fully paid.
The debtors owned two vehicles, one of which was secured by a lien. The other vehicle, a 1988 Chevrolet Blazer, was owned free and clear of any liens. On Form B22C, the debtors claimed the IRS local standard vehicle operating allowance as well as the IRS local standard ownership allowance for their unencumbered 1988 Chevrolet Blazer, an amount of $471.00. The Trustee objected to the allowance and argued that the debtors’ disposable income should be higher by $271.00 a month. The Trustee acknowledged that debtors may deduct $200.00 as additional operating expense due to the age of the Blazer.
Holding:
The Court noted that whether the debtors may legitimately claim the applicable IRS deduction from current monthly income has been the subject of a number of reported cases decided under the BAPCPA and is unsettled in the law.
While several bankruptcy courts had concluded that a debtor may deduct the entire standard transportation ownership allowance even where the vehicle was no longer unencumbered, a like number of bankruptcy courts had held that the ownership allowance was not available. This Court took the side of the latter courts. As stated in In re McGuire:
. . the statute provides that a “debtor’s monthly expenses shall be the debtor's applicable monthly expense amounts” under the Standards. If a debtor does not own or lease a vehicle, the ownership expense is not “applicable” to that debtor. Thus, if a debtor is not incurring expenses for the purchase or lease of a vehicle, the debtor cannot claim a vehicle ownership expense under the IRS Standards. This conforms with the IRS's application of the Standards.
Even though the statute is unambiguous in its importing of the IRS standard
allowances, the Court commented that denying debtors the ownership allowance
when they had no ownership expense is entirely consistent with one of the
apparent objectives of BAPCPA: to ensure that debtors actually pay what they
were capable of-paying to unsecured creditors. The vehicle in question here
was nearly nine years old. Accordingly, the debtors may have recognized an
additional operating expense of $200.00 consistent with the Manual’s
guidance.
The Court sustained the Trustee’s objection to confirmation and temporarily denied confirmation. Debtors were granted 20 days in which to amend their Form B22C.
Larry Eugene Miner, et al v. Beneficial Mortgage Company of Kansas, Inc. (In re: Larry Eugene Miner and Clarice Anne Miner); Adv. Case No. 05-7119; Case No. 03-42802 (Karlin) (April 30, 2007)
MEMORANDUM OPINION AND ORDER GRANTING IN PART, AND DENYING IN PART,
BENEFICIAL MORTGAGE COMPANY OF KANSAS, INC.’S MOTION FOR SUMMARY JUDGMENT
• K.S.A. §16a-1-101,
et seq.
•
K.S.A. §50-623, et seq.
Facts:
The facts of this case are very detailed, and the reader is directed to the
opinion for a comprehensive review of the facts and holding of this opinion.
This adversary proceeding was before the Court on Defendant’s Motion
for Summary Judgment.
Larry and Clarice Miner (the “Miners”) initiated this adversary
proceeding bringing numerous claims against Beneficial Mortgage Company of
Kansas (“Beneficial”) concerning a series of consumer loan transactions
between the parties. The Miners refinanced several unsecured loans, including
loans with Beneficial, into one mortgage loan. The Miners alleged violations
of the Kansas Consumer Credit Code, Kan. Stat. Ann. §16a-1-101, the Real
Estate Settlement Procedures Act, and the Kansas Consumer Protection Act, Kan.
Stat. Ann. §50-623, and common law fraud. Miners asserted that Beneficial
engaged in improper lending practices by engaging in a series of loan transactions
with the Miners over a short period of time in an effort to generate fees through “loan
flipping.” Beneficial moved for summary judgment on each of the nine
claims asserted by the Miners in the pretrial order.
Holdings:
The Court granted Beneficial’s motion in part and denied it in part,
finding that Beneficial was not liable on the claimed violations of the Kansas
Consumer Credit Code, the Kansas Consumer Protection Act, the claimed violation
of Real Estate Settlement Procedures Act, and as to certain of the common law
fraud claims.
The Court held that the prepaid finance charges that Beneficial charged at closing did not exceed the amount allowed by Kan. Stat. Ann. §16a-2-401(6), due to the premiums paid for credit life and credit disability insurance because the creditor complied with the statutory requirements for excluding the premiums. The Court further held that the prohibition on loan flipping in K.S.A. §16a-2-401(9) was not applicable to this action because the initial loans from the creditor were personal loans, and the subsequent loan was secured by a mortgage. The Court also held that the claims under the Kansas Consumer Protection Act were not barred by the statute of limitations because the applicable statute of limitations was three years according to Kan. Stat. Ann. §60-512(2), rather than the one-year statute of limitations found in Kan. Stat. Ann. §60-514(c).
Milk Palace Dairy, LLC, v. L&K Grain Producers, Inc. (In re: Milk Palace Dairy, LLC); Adv. Case No. 05-5867; Case No. 03-16743 (Nugent) (May 7, 2007)
MEMORANDUM OPINION
• 11 U.S.C. §547(b)
•
11 U.S.C. §547(c)(2)
Facts:
Debtor Milk Palace Dairy, LLC filed for Chapter 11 relief on December 15, 2003. LK Grain Producers, Inc. was an insider of Milk Palace pursuant to §101(31). LK Grain had sold hay to Milk Palace since 1998. Milk Palace filed this adversary proceeding to avoid and recover two alleged preferential transfers it made to L&K Grain Producers Inc. (“LK Grain”) under 11 U.S.C. §547(b). LK Grain asserted the “ordinary course” affirmative defense under 11 U.S.C §547(c)(2).
Holding:
By stipulating to the elements of 11 U.S.C. §547(b), LK Grain conceded that the payments were preferences, but relied on the “ordinary course” exception provided for under 11 U.S.C. §547(c)(2) as a defense to each.
The Court reviewed 11 U.S.C §547(c)(2), which provides that the trustee may not avoid a transfer to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was —
(A) made in the ordinary course of business or financial affairs of the debtor
and transferee; and
(B) made according to ordinary business terms.
LK Grain, as the recipient of the payments, had the burden of proving by
a preponderance of the evidence, that the payments fell within §547(c)(2).
The Court discussed that many courts have recognized that the ordinary course
defense has both a subjective and an objective test. The Tenth Circuit Bankruptcy
Appellate Panel had held that the subjective test examined whether the transfers
at issue were “ordinary as between the parties” and the objective
test examined whether the transfers were “ordinary in the industry.”
The Court also noted that many courts consider four primary factors to determine
if payments are ordinary between the parties as required under the subjective
test: (1) the length of time the parties were engaged in the transaction in
issue; (2) whether the amount or form of tender differed from past practices;
(3) whether the debtor or creditor engaged in any unusual collection or payment
activity; and (4) the circumstances under which the payment was made.” Late
payments are typically not “ordinary,” unless the creditor establishes
that a pattern of late payments are ordinary between the parties. The Court
further noted that determining what the “ordinary course” was in
the farming industry is particularly subjective.
Applying the four factors of the subjective test, the Court held that both
payments were made in the ordinary course of business.
Lori Ann Vierthaler and Aaron Lee Vierthaler; Case No. 05-12279 (Somers) (May 8, 2007)
MEMORANDUM OPINION AND ORDER DENYING TRUSTEE’S MOTION TO COMPEL
TURNOVER OF FUNDS
• 11 U.S.C. §553
Facts:
Debtors filed for relief under Chapter 7 on April 20, 2005. At the time they filed, debtors owed federal and state income taxes for 2002. Debtors’ 2005 income tax returns were filed post-petition in July 2006 and reflected that debtors were entitled to a refund of $4,055.00 for over payment of federal taxes and $566.00 for over payment of state taxes. The estate’s share of the 2005 federal refund was $1,222.05 and its share of the 2005 state refund is $170.58, for a total of $1,392.63.
The Trustee moved for an order compelling the debtors to turnover the estate’s share of the debtors’ 2005 federal and state income tax refunds, which were applied post-petition by the IRS and the State of Kansas in partial satisfaction of Debtors’ 2002 income tax liabilities. Trustee relied upon the doctrine of marshaling, as was applied in In re Steele.
Holding:
The Court held the Trustee’s motion should be denied. The Court further held that the doctrine of marshaling did not apply as a basis to compel the debtors to turnover to the Trustee the estate’s portions of the tax refunds which were setoff by the IRS and the State of Kansas.
The Trustee had contended in her motion that she was entitled to turnover of the estate’s portion of the 2005 federal and state income tax refunds under the doctrine of marshaling of assets, as applied in In re Steele and In re Oliver. Debtors contended that the doctrine of marshaling did not apply. They argued the doctrine of marshaling required that there be two creditors with liens on two funds in the hands of the debtors; that the two funds existed at the time of assertion of marshaling; and that there be one creditor who can satisfy his claim from either fund. They argued these conditions were not satisfied.
The Court examined the doctrine of marshaling of assets and held the Trustee’s Motion against the debtors to turnover funds which had been offset by the IRS could not be granted under the traditional application of the doctrine of marshaling of assets. The Court also declined to follow Steele and Oliver and declined to expand marshaling to compel the debtors to restore to the Trustee tax refunds which had been set off by the IRS. The Court reasoned that to do so would upset the Code priority given to taxing authorities to offset pre-petition tax liabilities with refunds attributable to pre-petition tax overpayments.
Robert Keon Blagg and Kimberly Ann Blagg; Case No.05-18541 (Somers) (May 8, 2007)
MEMORANDUM AND ORDER DENYING TRUSTEE’S MOTION TO COMPEL TURNOVER
OF FUNDS
• 11 U.S.C. §542(b)
•
11 U.S.C. §521(3)
Facts:
Debtors filed for relief under Chapter 7 on October 13, 2005. At the time they filed, debtors owed federal income taxes for year 2003 in the amount of $5,761.97. The IRS did not have a lien to secure payment of those taxes. Debtors’ 2004 federal income tax return was filed post-petition on March 6, 2005 and reflected that debtors were entitled to a refund of $2,663.00.
The Trustee moved for an order pursuant to 11 U.S.C. §542(b) compelling the debtors to turnover the estate’s share of the debtors’ 2004 federal income tax refund, which was applied post-petition by the IRS in partial satisfaction of Debtors’ 2003 income tax liability. The Trustee relied upon the doctrine of marshaling, as applied by In re Steele.
Holding:
Debtors took the same position as was asserted by debtors Vierthaler above.
The Court noted that marshaling of assets is an equitable doctrine designed to promote fair dealing and justice. The Court further noted that, “Its purpose is to prevent the arbitrary action of a senior lien or from destroying the rights of a junior lienor or a creditor having less security.”
The situation before this Court, as the situations before the Court in the
Steele and Oliver cases, did not satisfy the elements of traditional marshaling.
First, this case did not involve the rights of a senior secured creditor with
lien rights in two or more funds or properties of the debtors or the estate.
The IRS was not a senior secured creditor. It was stipulated that the IRS had
no lien on any property of the debtors or the estate. The IRS merely held an
unsecured, non dischargeable claim for pre-petition taxes. Second, there was
no common debtor with an interest in the two funds from which the senior secured
creditor could satisfy its claim. Third, there was no junior lien creditor
with a security interest in only one of the two funds from which the senior
secured creditor call satisfy its claim.
For the foregoing reasons, the Court denied the Trustee’s motion.
Valerie Elaine Kinsey; Case No. 06-20921 (Berger) (May 9, 2007)
Benjamin Dwight Walters and Jamie Michael Walters; Case No. 06-21113 (Berger)
(May 9, 2007)
Jeffrey Thompson; Case No. 06-21083 (Berger) (May 9, 2007)
Faron L. Prince and Parrish K. Prince (Berger) (May 9, 2007)
MEMORANDUM OPINION AND ORDER CONFIRMING CHAPTER 13 PLANS
• 11 U.S.C. §1325(a)
•
11 U.S.C. §506
Facts:
Confirmation of the above debtors’ respective Chapter 13 plans was pending
before the
Court.
The subject creditors had loaned their respective debtors money to purchase automobiles for the debtors’ personal use within the 910 days preceding the filing of the above-captioned proceedings. The automobiles served as collateral for the loans. As a result, the creditors asserted that 11 U.S.C. §1325(a) required their allowed claims be paid in full at the contract rate of interest over the duration of the debtors’ Chapter 13 plans.
Holding:
The Court noted that before and after In re Wampler, 354 B.R. 730 (Bankr. D. Kan. 2006), most courts had interpreted the Hanging Paragraph of 11 U.S.C. §1325(a) to mean merely that the debtor was prohibited from bifurcating a creditor’s claim and cramming down the value of the secured claim to the collateral’s value leaving an unsecured claim for any deficiency. However, the Hanging Paragraph does not state that it only prohibits the bifurcation of certain claims, even though such limitation and effect could have been easily and succinctly drafted. The Court noted that the Hanging Paragraph prohibits the use of 11 U.S.C. §506 to determine the value of the collateral. The Court also discussed that even though 11 U.S.C. §506 is no longer applicable, a creditor whose claim falls under the Hanging Paragraph may still have an allowed claim under 11 U.S.C. §502 which is secured by a lien.
The Court determined that since the Hanging Paragraph of 11 U.S.C. §1325(a) did not allow the creditors payment as an allowed secured claim of present value interest on the “910” car claims, the debtors in the cases at bar provided for appropriate treatment because their plans provided for retention of the collateral and payment in full of the creditor’s claims over the length of the plan without post-petition interest.
Harold George Pohl and Alice May Pohl; Case No. 06-41236 (Karlin) (May 15, 2007)
MEMORANDUM AND OPINION
• 11 U.S.C. §1325(b)(2)
Facts:
The issue was whether the Court could confirm a Chapter 13 plan when debtors
have zero disposable income, as that income is determined in accordance with
11 U.S.C.
§
1325(b)(2), and whether it can confirm a Chapter 13 plan that runs less than
three years.
Debtors filed for bankruptcy on December 4, 2006. Their only income as of the
date of filing, and for the six months prior to filing, was the receipt of
$776.00 and of $562.00, respectively, in monthly social security benefits.
Their total monthly benefit of $1,338.00 equated to an annualized income of
$16,056.00.
Debtors’ Schedules I and J reflected that when their expenses were deducted
from their social security income, $153.00 remained available for a plan payment.
Debtors’ plan then proposed to pay $100.00 per month for 20 months, which
would provide no dividend to unsecured creditors. The plan provided to pay
only debtors’ attorney fees, credit counseling fees and the Chapter 13
Trustee’s statutory fees, essentially making this a “fee only” case.
The Trustee filed an objection to confirmation based on the fact that the plan
failed to run at least 36 months or, alternatively, to pay all unsecured creditors
in full, as he claims is required under 11 U.S.C. §1325(b)(4).
Holding:
The Court noted that it may not confirm a Chapter 13 plan unless the conditions
of 11 U.S.C §1325(b)(1)(A) or (B) are satisfied. The plan here presented
to the Court did not provide to pay all claims in full, so the Court must determine
if the plan complied with 11 U.S.C. §1325(b)(1)(B).
The Court noted that prior to enactment of BAPCPA, a debtor was required to
devote all of his disposable income to the plan for at least three years. That
3-year fixed commitment period previously required by pre-BAPCPA 11 U.S.C. §1325(b)(1)(B)
has been superseded with the “applicable commitment period” requirement
defined in 11 U.S.C. §1325(b)(4). If a below-median income debtor cannot
pay his unsecured debts in full, his applicable commitment period is three
years. The applicable commitment period for above-median debtors is five years.
The Court found that debtors with zero “CMI” (or a negative CMI
in the case of some above-median income debtors) can voluntarily agree to devote
part or all of their actual income, reported on Schedule I, as income they “project” to
receive during the lifetime of the proposed Chapter 13 plan, to fund a plan.
The Court noted that if it was bound to use the statutorily defined “CMI,” without
looking behind the type of income received for debtors whose sole, or majority,
of income was derived from social security or the like, those classes of potential
Chapter 13 debtors could by definition never propose a feasible Chapter 13
plan. The Court found nothing in the legislative history of BAPCPA to suggest
that Congress intended for these persons to be precluded from proceeding under
Chapter 13. Accordingly, this Court did not decline to confirm the debtors’ plan,
on the basis that it was inherently infeasible if one exclusively relies on
BAPCPA definitions of income. This Court did, however, deny confirmation in
this particular case.
Debtors’ plan could not be confirmed because it proposed a plan length
of less than 36 months, in violation of 11 U.S.C. §1325(b)(4).
Stephanie Kay Lanning; Case No. 06-41037 (Karlin) (May 15, 2007)
Jesus Marcario Avila; Case No. 06-41260 (Karlin) (May 15, 2007)
• 11 U.S.C. §1325
Facts:
The Chapter 13 Trustee objected to confirmation of the subject plans in these two cases on the basis that the plans failed to provide that all of the above-median income debtors projected disposable income to be received in the applicable commitment period would be applied to make payments to unsecured creditors under the plan as required by 11 U.S.C. §1325. In each case, the debtor’s actual income was considerably less than his or her historical income as a result of changes in employment that occurred in the six-month period prior to filing.
The Court was faced with the task of interpreting certain provisions of BAPCPA to decide whether the income shown on Form B22C is determinative as to the debtor’s disposable income, or whether circumstances exist under which the Court may use Schedule I to determine such debtors’ projected disposable income. The Trustee argued that 11 U.S.C. §1325(b)(3) required that the Court look only at dollar amount contained on form B22C regardless of any changed circumstances. The Court also reviewed the issue of determining over how many months an above-median income debtor must pay his or her creditors under the facts of these cases. The reader is directed to the facts of the two cases to thoroughly understand the factual background.
Holding:
The Court held that the net income number obtained Form B22C was the debtors’ projected disposable income under 11 U.S.C. §1325(b)(1)(B) unless the debtor could show that there had been a substantial change in circumstances such that the numbers in that Form B22C were not a fair projection of the debtors’ income in the future. The Court further held that the debtors had to deduct from income the expenses they itemized on Form B22C to arrive at the minimum amount that they had to pay to unsecured creditors. The Court held that the debtors had to make payments over 60 months to obtain a confirmable plan, unless unsecured creditors would be paid in full at an earlier time.
The Court ruled that the debtor’s plans could not be confirmed because they allowed for the possibility of discharge without making payment over five years, in violation of 11 U.S.C. §1325(b)(4).
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