In re Dement, Case No. 09-61582-13 (Bankr.Mont. 1/14/2010)

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In re: RICHARD D. DEMENT and MARY L. DEMENT, Debtors.

Case No. 09-61582-13.

United States Bankruptcy Court, D. Montana.

January 14, 2010.

MEMORANDUM OF DECISION

RALPH B. KIRSCHER, Bankruptcy Judge

Pending in this Chapter 13 case is confirmation of the Debtors' Plan and the Chapter 13 Trustee's objection thereto contending that the Plan fails to satisfy disposable income requirement of § 1325(b)(1)(B) by continuing payments of a secured debt for a trailer. The hearing on confirmation was held at Missoula on October 8, 2009. Debtors were represented by attorney Edward A. Murphy of Missoula, and Debtor Richard D. Dement ("Richard") testified. The Standing Chapter 13 Trustee Robert G. Drummond appeared. Exhibit ("Ex.") 1 was admitted into evidence. At the conclusion of the hearing the Court granted the parties time to file simultaneous briefs, after which the matter would be deemed submitted and taken under advisement. Briefing concluded on November 5, 2009. The parties' briefs have been filed and reviewed by the Court together with the record and applicable law. The matter is ready for decision. For the reasons set forth below the Trustee's objection is overruled and the Debtors' Plan will be confirmed.

This Court has jurisdiction in this case under 28 U.S.C. § 1334(a). Confirmation of Debtor's Plan is a core proceeding under 28 U.S.C. § 157(b)(2)(L). This Memorandum includes the Court's findings of fact and conclusions of law.

FACTS

The facts are not in dispute. The Debtors Richard and Mary Dement entered into a consumer personal loan agreement, Ex. 1, with Wells Fargo Bank, N.A. ("Wells Fargo") on May 22, 2007, in the principal amount of $5,075.00 payable in monthly payments of $114.35 for 60 months. As security for the loan the Debtors signed a security agreement granting Wells Fargo a security interest in their 1995 Prowler (the "trailer"). Richard testified that they use the trailer for recreational purposes only¹.

Richard testified that they fell behind in monthly payments and filed the instant case for relief. Debtors filed their Chapter 13 petition on August 11, 2009, with their Schedules, Plan and Form B22C. Schedule D lists Wells Fargo as a creditor with a claim in the amount of $3,554.89 secured by the Prowler trailer². No amounts for priority claims are listed on Schedule E³, and Schedule F lists unsecured claims in the total amount of $36,667.21. Schedule I lists total combined monthly income from the Debtors' employment and Richard's pension in the amount of $4,705.17. Schedule J lists Debtors' monthly expenses in the total amount of $3,874.08, including the $114.69 payment to Wells Fargo on the trailer loan, leaving the difference and monthly net income in the sum of $831.09.

Debtors' Plan (Docket No. 2) proposes monthly plan payments in the amount of $400 for 60 months, and lists Wells Fargo's secured claim at paragraph 2(c) as unimpaired. Richard testified that he has the ability to make the plan payments. Paragraph 2(f), the "Liquidation Analysis," states that allowed priority and unsecured claims will receive a distribution of at least $20,700.00. On cross examination by the Trustee Richard testified that he could pay his creditors in full if he paid the $831.09 net income per month shown by Schedule J, but the $400 plan payment does not pay creditors in full.

Form B22C, Docket No. 3, states Debtors' combined monthly income as $5,922.65 at Line 11, lists the applicable commitment period as 5 years at Line 17, and states at Line 23 that they are above-median income so their disposable income is determined under § 1325(b)(3). Part VI of Form B22C is the calculation of deductions from income, which total $5,575.78 on Line 52, including a monthly payment on Line 47c for debt payment to Wells Fargo Bank NA in the sum of $68.81⁴ in payment of a claim secured by the Prowler trailer. Part V of Form B22C calculates the difference, and the monthly disposable income under § 1325(b)(2), in the sum of $346.87 at Line 59, which is less than Debtors' proposed Plan payment of $400.00 per month.

The Chapter 13 Trustee filed objections to confirmation on the grounds the Plan is not filed in good faith because of the payments on the Prowler, which is for recreational purposes, and which he described as egregious behavior under this Court's pre-BAPCPA decision In re Opper, 20 Mont. B.R. 123, 132 (Bankr. D. Mont. 2002), and because Debtors could pay unsecured creditors in full without the trailer payments but have chosen not to⁵. The Trustee urged the Court to reconsider its reasoning In re Chavez, Case No. 07-60567-13 (October 11, 2007⁶) and In re O'Connor, Case No. 08-60641-13 (September 30, 2008⁷) that overruled good faith objections because the adequacy of plan payments is determined by Form 22C. The Trustee supplemented his objection to contend that the Plan fails to meet the disposable income requirement of § 1325(b)(2) because the trailer expense is neither reasonable nor necessary, citing In re Smith, 418 B.R. 359 (9^th Cir. BAP 2009).

The Debtors responded that their only error in Form B22C was omitting the Trustee's 10% fee which would have further reduced their disposable income. The Debtors cite Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868, 874 (9^th Cir. 2008), as support for the formula approach and elimination of discretion in determining disposable income for an above-median debtor in this circuit. Debtors argue that In re Stitt, 2008 WL 5685381 (Bankr. D. Idaho) does not support the Trustee's good faith objection because those debtors did not act in good faith in preparing Form 22C and by deviating from the IRS standards, which is not alleged in the instant case. Debtors distinguish Opper because almost all the plan payments in this case go to unsecured creditors, and because 11 U.S.C. § 702(b)(2)(A)(iii) plainly allows monthly payments to secured debts without differentiating between luxury or recreational collateral or non-luxury or non-recreational collateral. Debtors distinguish Smith on the facts, since there the collateral had been surrendered, and because the Ninth Circuit's decision in Kagenveama is controlling rather than dicta.

DISCUSSION

It is well established law in this Circuit that for a bankruptcy court to confirm a plan, "each of the requirements of section 1325 must be present and the debtor has the burden of proving that each element has been met." In re Barnes, 32 F.3d 405, 407 (9^th Cir. 1994); In re Andrews, 49 F.3d 1404, 1408 (9th Cir. 1995); In re McSparran, 410 B.R. 664, 668 (Bankr. D. Mont. 2009); In re Tuss, 360 B.R. 684, 690 (Bankr. D. Mont. 2007); In re Tranmer, 355 B.R. 234, 241 (Bankr. D. Mont. 2006). Section 1325(a)(1) requires confirmation of a plan if "the plan complies with the provisions of this chapter and with the other applicable provisions of this title." Therefore, the Debtor has the burden of proof on all elements of confirmation. Meyer v. Hill (In re Hill), 268 B.R. 548, 552 (9^th Cir. BAP 2001).

The Trustee bases his objection to confirmation on the "disposable income" test under § 1325(b)(1)(B) which provides:

(b)(1) If the trustee . . . objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan —

* * * * (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.

McSparran, 410 B.R. at 668; Tuss, 360 B.R. at 690; Tranmer, 355 B.R. at 241. The Ninth Circuit explained: "If a trustee or holder of an allowed unsecured claim objects to the confirmation of a plan that does not propose to pay unsecured claims in full, the court may confirm the plan only if the plan provides that all of the debtor's `projected disposable income' received during the `applicable commitment period' is applied to make payments under the plan. 11 U.S.C. § 1325(b)(1)." Kagenveama, 541 F.3d at 872.

The Trustee cites the BAP's decision in Smith⁸, 418 B.R. at 368-69, for the proposition that the panel reads §§ 1325(b)(2) and (b)(3) in sequence, first looking at whether an expense is reasonably necessary for support and maintenance, and then looking at whether § 1325(b)(3) requires the court to determine the amount in accordance with § 1325(b)(3). This Court notes that Smith is factually distinguishable from the instant case. In Smith the debtors sought to continue deducting secured debt payments not being paid because the collateral had been surrendered. In the instant case the Debtors have not surrendered the trailer, and are still making the monthly payments which they deducted on their Form B22C. With respect to Smith's two-step analysis under § 1325(b)(2) and (b)(3), with all due respect this Court considers that analysis inconsistent with the plain language of § 1325(b)(3) and with binding Ninth Circuit precedent in Kagenveama, which the BAP recognized must be followed. Smith, 418 B.R. at 366.

"Disposable income," as defined at § 1325(b)(2), was significantly changed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub. L. 109-8) ("BAPCPA"). Kagenveama, 541 F.3d at 873 n.2. Section 1325(b)(2) now provides, in pertinent part:

For purposes of this subsection, "disposable income" means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended —

(A)(I) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and

(ii) for charitable contributions (that meet the definition of "Charitable...