In re Cormier

478 B.R. 88

In re Allan CORMIER, Deborah Cormier, Debtors.

No. 09–44865–HJB.

United States Bankruptcy Court,

D. Massachusetts,

Central Division.

Sept. 27, 2012.

Walter Oney, Attorney at Law, Fitchburg, MA, for Debtor.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a request by the debtors in this Chapter 13 case to modify their confirmed plan. The Chapter 13 trustee (the “Trustee”) has objected to the proposed modification on the grounds that the debtors have not provided for payment of all of their projected disposable income into the proposed amended plan. To resolve the issues in this case, the Court must determine whether the disposable income requirement of § 1322(b) of the United States Bankruptcy Code¹ applies to Chapter 13 plan modifications under § 1329 and, if so, whether a plan proposed by a below-median debtor must provide for the commitment of all of the debtor's disposable income during the portion of a Chapter 13 plan that extends beyond three years.

I. FACTS AND TRAVEL OF THE CASE

Allan and Deborah Cormier (the “Debtors”) filed a petition for relief under Chapter 13 of the Bankruptcy Code on November 13, 2009. As part of the required financial schedules and statements (the “Schedules”) filed with the case, the Debtors reported income less than the applicable median for a household of the same size in Massachusetts; thus, the Debtors are “below-median” debtors, thereby obviating application of the so-called “means test” set forth in § 707(b). In their later-amended Schedules, the Debtors reported $5,715.07 in monthly net income on Schedule I and $5,368.02 in monthly expenses on Schedule J, leaving a monthly surplus of $347.05.

On June 23, 2011, the Court confirmed the Debtors' Chapter 13 plan of reorganization (the “Plan”). The Plan required the Debtors to pay $407 per month for 36 months, to be paid toward prepetition mortgage loan arrears in the amount of $1,628.17 and attorney's fees in the amount of $1,874. The remainder would provide an estimated 4.26% dividend to general unsecured creditors. The Plan further provided for the avoidance of both a wholly unsecured second mortgage and a judicial lien on the Debtors' residence. A second piece of real property would be surrendered to a mortgagee.

The Plan also included several “miscellaneous provisions.” Miscellaneous Provision 7 explained that the Debtors' Plan was a “pot plan,”

in which the total of all payments in respect of non-priority unsecured claims (including the unsecured portion of undersecured claims) is a constant amount. The percentage dividend stated in this plan is an estimate based on claims currently known to the Debtor(s) and does not govern the amount of payments to non-priority unsecured creditors. Non-priority unsecured creditors are advised that they may receive more or less than the percentage dividend stated in this plan.

Third Amended Chapter 13 Plan 6, Dec. 27, 2010, ECF No. 84.² In addition to the monthly payments to be made from the Debtors' surplus monthly income, the Plan also required the Debtors to pay over any bonuses and tax refunds received during the term of the Plan (the “Excess Funds”), with the exception of a portion of the 2009 Excess Funds retained by the Debtors to repair one of their vehicles.

On March 22, 2012, the Debtors moved to modify the Plan and filed the proposed postconfirmation modified plan (the “Amended Plan”). On the same day, the Debtors' attorney also filed an application for approval of additional attorney's fees (the “Fee Application”). According to the Fee Application, the outstanding fees (if approved) totaled $2,820.58 after deduction of the prepetition retainer and amounts previously received from the Chapter 13 trustee (the “Trustee”). The Fee Application anticipated that those remaining fees would be paid “out of performance bonuses and tax refunds received during the remainder of the case, or following the case.” Fee Application 1, March 22, 2012, ECF No. 122.

The Trustee objected to the Fee Application in part, arguing that, pursuant to the confirmed Plan, the Excess Funds could not be used to pay additional attorney's fees, since those funds were required to be turned over to the Trustee for distribution. In response, the Debtors argued that the “applicable commitment period” under § 1322(b)(4) would end on November 13, 2012, and they would have no obligation to commit all of their disposable income to a Chapter 13 plan after that date. Accordingly, the Debtors said, they could retain the Excess Funds and use them to pay their attorney's fees.

On April 24, 2012, the Court held a hearing on the Fee Application (the “Fee Hearing”). The reasonableness and propriety of the requested fee amount was not disputed, leaving only the issue of how those fees were to be paid. During the Fee Hearing, the Court ruled that since the Excess Funds remained property of the Debtors' bankruptcy estate, they must be turned over to the Trustee. The Court further stated that, although payments to secured creditors may sometimes be made “outside” of a Chapter 13 plan, payment to an administrative creditor outside the plan is inconsistent with the Chapter 13 trustee program and would be improper in this case. Thus, the Court ordered the Debtors to further amend their plan to provide for the turnover of Excess Funds to the Trustee and payment of the attorney's fees through the plan.³ Because the Debtor's proposed Amended Plan and the Trustee's objection thereto (the “Plan Objection”) remained outstanding, the Court extended the deadline for the Debtors to file the further amended plan until resolution of the Plan Objection.

Postconfirmation modification of the Debtors' Plan has been necessitated by the incurrence of substantial postpetition tax claims arising from the foreclosure of the real property surrendered under the confirmed Plan.⁴ Through the Amended Plan, the Debtors propose to pay $15,000 now owed to the Internal Revenue Service (the “IRS Claim”), while a postpetition liability to the Massachusetts Department of Revenue (the “MDOR Claim”) is to be paid outside of the Amended Plan.⁵ The Amended Plan extends the term of the plan from 36 to 60 months, and the plan payment has been increased to $555 per month.⁶ Any further distribution to general unsecured creditors ceases under the Amended Plan, thus fixing the dividend at 5.65% based on the proofs of claim actually filed in the case; all payments under the Amended Plan are dedicated to the payment of postpetition priority and administrative claims.

Furthermore, as in the Fee Application, the Amended Plan provides for payment of the additional attorney's fees from the Excess Funds. It also states that the Debtors will retain a $3,318.54 bonus received in 2011 in order to pay $2,995 on the MDOR Claim ⁷ and $323.54 for “unscheduledexpenses.” And finally, in Miscellaneous Provision 9, the Amended Plan allows the Debtors to “prepay their obligations under the plan at any time after the third anniversary of this case, provided that all disposable income attributable to the applicable commitment period has been devoted to plan payments as required by law.” Fourth Amended Post–Confirmation Chapter 13 Plan 6, March 22, 2012, ECF No. 120.

The Trustee has objected to the Amended Plan on the grounds that it does not provide for turnover of all the Debtors' disposable income during the extended term of the plan. She objects to any prepayment of the Amended Plan to the extent a prepayment is to be accomplished through the use of the Excess Funds, which, under the confirmed Plan, are already required to be turned over to the Trustee. The Debtors assert in response that the disposable income requirement does not apply to postconfirmation plan modifications and, as below-median debtors, they are not required to submit all of their disposable income to the Amended Plan beyond the first 36 months. After a hearing on the Trustee's Plan Objection and the Debtors' response, the Court took the matter under advisement.

II. POSITIONS OF THE PARTIES

The Trustee's Plan Objection largely centers on the Debtors' attempt to retain the Excess Funds either for personal use or to make payments on postpetition priority debts outside the Amended Plan. The Trustee maintains that the Debtors are required by § 1325(b)(1)(B) to submit all of their disposable income to the Chapter 13 plan during the life of the plan. The Debtors argue, however, that this Court should adopt the majority view that postconfirmation modification of a plan pursuant to § 1329 does not require compliance with § 1325(b), and the Amended Plan is thus not subject to the disposable income requirement of subsection (b)(1)(B). The Debtors ask the Court to consider a debtor's disposable income as only one factor among others in determining whether, under the totality of the circumstances, the modification has been proposed in good faith.

And the Debtors further maintain that even if the Court determines that § 1325(b) applies to postconfirmation plan modifications, the Amended Plan meets § 1325(b)'s disposable income test. Because the Debtors are below-median debtors, they say that the “applicable commitment period” is only three years and will end in November 2012. The Debtors interpret the 2005 amendments to the Bankruptcy Code (“BAPCPA”) ⁸ as having altered the meaning of § 1325(b)(1), now requiring below-median debtors to pay all of their disposable income only during the statutorily-defined, three-year “applicable commitment period.” Thus, the Debtors argue, below-median debtors are required to devote all of their disposable income to a Chapter 13 plan only during the first three years of the plan, even if the plan extends for more than those three years. A contrary reading of the statute, the Debtors say, would “trap” them “into paying all of their monthly net income for sixty months,” and would create a “ ‘gotcha’ rule ... contrary to the plain language of ...