In re Arrigo

Page 700

399 B.R. 700

In re Thomas G. ARRIGO, Joan B. Arrigo, Debtors.

No. 08-15852-MER.

United States Bankruptcy Court, D. Colorado.

December 4, 2008.

Lance J. Goff, Boulder, CO, for Debtors.

ORDER

MICHAEL E. ROMERO, Bankruptcy Judge.

THIS MATTER comes before the Court on confirmation of the Second Amended Chapter 13 Plan (the "Second Amended Plan") filed by Thomas G. Arrigo and Joan B. Arrigo (the "Arrigos" or the "Debtors"), and the objection thereto filed by the Standing Chapter 13 Trustee (the "Trustee"). The Court has considered the evidence and legal arguments presented by the parties, and hereby makes the following findings of fact and conclusions of law.

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b)(1). This is a core proceeding under 28 U.S.C. § 157(b)(2)(L), as it involves the confirmation of a plan.

BACKGROUND FACTS

The Arrigos filed their Chapter 13 bankruptcy petition on April 30, 2008. They have since filed three Chapter 13 plans: the original plan on April 30, 2008 ("the Original Plan"), an amended plan on July 3, 2008 (the "First Amended Plan"), and the Second Amended Plan dated August 28, 2008 (the "Second Amended Plan").

The Arrigos also filed on the petition date a Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (the "Original Form 22C"), as well as their Schedules I and J (the "Original Schedules"). An amended Form 22C (the "Amended Form 22C"), as well as amended Schedules I and J (the "Amended Schedules"), were filed on July 3, 2008. A brief, numerical summary of the amendments to the plan, Form 22C and schedules is attached as Attachment 1 to this Order.

On June 12, 2008, the Trustee filed an objection to the Debtor's Original Plan. The Trustee's objection included the following points: (1) the Debtors' Original Form 22C numbers on lines 27A and 29 were incorrect and (2) the Debtors' plan was not proposed in good faith, as evidenced by (a) Mr. Arrigo's income on Schedule I being understated, (b) Mr. Arrigo's excessive tax withholding of 31%, and (c) questionable expenditures on Schedule J.

The Trustee's objections with respect to income and expenses were resolved through subsequent amendments filed by the Debtors and by the parties' Stipulated List of Uncontested Background Facts (the "Stipulated Facts").¹ For the purpose of the confirmation hearing, the parties stipulate the amount of the Debtors' monthly disposable income is $714.63 per month, which amount is listed on the Debtors' Amended Form 22C (line 59). Stipulated Facts, ¶ 4.² The Trustee agrees Amended Schedule I resolves the Trustee's objection regarding Mr. Arrigo's gross income. Stipulated Facts, ¶ 5. The Trustee also stipulates to the reasonableness of the expenses set forth in Amended Schedule J. Stipulated Facts, ¶ 6.³

At the confirmation hearing on September 8, 2008, the parties agreed the remaining issues before the Court relate to the interpretation of "projected disposable income" as that term is used in 11 U.S.C. § 1325(b),⁴ and whether the Second Amended Plan has been proposed in good faith under § 1325(a)(3). It is also important to note what is not at issue in this case. There is no dispute as to the duration of the Debtors' plan (60 months), nor as to the accuracy of any line items (income or expenses) on either Amended Form 22C or Amended Schedules I and J.

DISCUSSION

"The burden of proof to obtain confirmation is on the proponent of the plan." In re Lincoln, 30 B.R. 905, 909 (Bankr. D.Colo.1983); see also In re Anderson, 173 B.R. 226, 229 (Bankr.D.Colo.1993). The controlling section of the Bankruptcy Code is § 1325.

Section 1325(b)(1)(B) provides a plan subject to an objection by the Trustee must provide all the debtor's projected disposable income to be received during the plan period will go towards the payment of unsecured creditors. 11 U.S.C. § 1325(b)(1)(B).⁵ In addition, § 1325(a)(3) of the Bankruptcy Code imposes a good faith requirement for confirmation. See Pioneer Bank of Longmont v. Rasmussen (In re Rasmussen), 888 F.2d 703, 704 (10th Cir.1989).

The Trustee's objection raises issues involving both disposable income under Form 22C and § 1325(b)(1)(B), as well as the good faith requirement of § 1325(a)(3). The two criteria are intertwined in this case, because the Trustee has questioned whether the Debtors have made a true effort to pay all their projected disposable income into the Second Amended Plan.

A. Projected Disposable Income.

The Court must first calculate "projected disposable income" required for confirmation of the Second Amended Plan pursuant to § 1325(b)(1). There are two general approaches to this task — the "plain meaning" or "mechanical" interpretation (using only the calculation on Form 22C) and the "starting point" or "forward-looking" interpretation (starting with the Form 22C, but taking into consideration other factors such as Schedules I and J). The Trustee supports the forward-looking interpretation and the Debtors support the plain meaning interpretation. However, the Debtors assert the Court can confirm the Debtors' Second Amended Plan under either interpretation.

1. Plain Meaning or Mechanical Interpretation.

Under the plain meaning or mechanical interpretation, projected disposable income is nothing more than "Monthly Disposable Income Under § 1325(b)(2)" as calculated on the Form 22C (line 59), multiplied out over the life of the plan. The term "projected" is simply a modifier of the phrase "disposable income." The Debtors favor this interpretation, relying on Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir.2008), In re Petro, 381 B.R. 233 (Bankr.M.D.Tenn.2008), and In re Waters, 384 B.R. 432 (Bankr.N.D.W.Va. 2008). Under these cases, the Debtors argue the Court must use only the formulaic process driven by the Form 22C in determining projected disposable income. Using this interpretation, Schedules I and J are not relevant to the determination of projected disposable income.

Since the hearing on this matter, the In re Petro case was reversed and remanded by the Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeals. See In re Petro, 395 B.R. 369 (6th Cir. BAP 2008). However, a number of other Courts have followed the plain meaning approach, including In re Cox, 393 B.R. 681 (Bankr. W.D.Mo.2008), In re Hedge, 394 B.R. 463 (Bankr.S.D.Ind.2008), In re Neclerio, 393 B.R. 784 (Bankr.S.D.Fla.2008), In re Austin, 372 B.R. 668 (Bankr.D.Vt.2007); In re Kolb, 366 B.R. 802 (Bankr.S.D.Ohio 2007); In re Tranmer, 355 B.R. 234 (Bankr. D.Mont.2006); In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006); and In re Barr, 341 B.R. 181 (Bankr.M.D.N.C.2006).

Under the plain meaning view, the Debtors contend they are only required to commit their "Monthly Disposable Income" calculated as $714.63 per month on the Form 22C for 60 months ($714.63 × 60 = $42,877.80). See Amended Form 22C, line 59. The Debtors' Second Amended Plan proposes two (2) payments of $137.56, followed by two (2) payments of $803.00, followed by fifty-six (56) payments of $882.56. This results in a total payment of $43,174.00 to Class Four unsecured creditors. See Second Amended Plan, pp. 1 and 2.

2. Starting Point or Forward-Looking Interpretation.

Under the "forward-looking" interpretation, the calculation on Form 22C is just the starting point for the analysis of projected disposable income. Courts adopting this interpretation view the meaning of projected disposable income as a "forward-looking" concept. The Court may still consider Schedules I and J, as well as changes in a debtor's post-petition income and expenses. At the time of the hearing, the Trustee relied upon the decision of the Bankruptcy Appellate Panel for the Tenth Circuit Court of Appeals (the "10th BAP") in In re Lanning, 380 B.R. 17 (10th Cir. BAP 2007) which was then on appeal to the Tenth Circuit Court of Appeals (appeal docketed, No. 08-3009 (10th Cir. January 14, 2008)).⁶ The Trustee also relies on pre-BAPCPA case law such as Flygare v. Boulden, 709 F.2d 1344 (10th Cir.1983), Rasmussen, 888 F.2d 703 (10th Cir.1989) and Mason v. Young (In re Young), 237 F.3d 1168 (10th Cir.2001).

Under the forward-looking view, the Trustee argues the Debtors should be required to commit monthly payments of $1,718.15, as reflected by Debtors' Amended Schedules I and J. Over 60 months, these payments would total $103,089.00. Using the Trustee's figures, the Debtors would repay nearly all their unsecured debt over the 60-month life of the plan.⁷

3. The Tenth Circuit Addresses Projected Disposable Income.

On November 13, 2008, the Tenth Circuit adopted the forward-looking interpretation in In re Lanning, 545 F.3d 1269 (10th Cir.2008). As a result, In re Lanning now controls this Court's decision in the instant case.

The Tenth Circuit recognized "each interpretation of the statutory language is not without problems." Lanning, 545 F.3d at 1278. However, the Court found the forward-looking interpretation to be more compatible with § 1325(b)(1)(B) and Form 22C. As noted by the Court:

[U]nder the forward-looking approach, "projected" links "disposable income" and "to be received in the applicable commitment period," requiring the debtor to commit all "disposable income" (as defined by § 1325(b)(2) and its reliance on the definition of "current monthly income") that is "projected ... to be received in the applicable commitment period." Under this reading, the debtor's actual circumstances at the time of plan confirmation are taken into account in order to "project" (in other words, to "forecast") how much income the debtor will actually receive during the commitment period, which, after deducting permitted expenses, then "will be applied to make payments" to the unsecured creditors, as the statute requires.

Lanning, 545 F.3d at 1279.

The Court limited the holding as follows:

[A]s to the income...