In re Doyl Eugene Moore Trudy Lynne Moore, Case No. 15-12254

IN RE: DOYL EUGENE MOORE TRUDY LYNNE MOORE Debtors.

Case No. 15-12254

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS

August 5, 2016

DESIGNATED FOR ONLINE PUBLICATION

Chapter 13

ORDER CONFIRMING CHAPTER 13 PLAN

"Fee-only" chapter 13 cases are not per se impermissible, but, as with any other chapter 13 case, the debtor must have filed the case and proposed the plan in good faith within the totality of the circumstances.¹ Doyl and Trudy Moore are septuagenarians with bad health history. They live on social security--which isentirely exempt from garnishment and excluded from the current monthly income calculation—and their very limited savings.² Because they could not afford to pay their lawyer a chapter 7 retainer in advance, they instead filed for chapter 13 relief and proposed a plan that will pay their attorney fees and expenses of $3,350 along with a small dividend to their unsecured creditors over 36 months. They proposed this dividend even though none of their income can be reached by a general unsecured creditor, and the Bankruptcy Code does not require them to pay a dividend in any amount under their circumstances. Nothing in the Code prevents them or debtors like them from filing and confirming a chapter 13 plan if they have otherwise proceeded in good faith. These debtors filed their case and proposed their plan in good faith and the plan should be confirmed.³

Facts

When Doyl and Trudy Moore filed this case on October 15, 2015, both were in their 70s. Each of them has had bad health problems. Trudy has suffered two brain aneurysms. While in surgery for the second one, she suffered a stroke. She has mostly rehabilitated, but cannot work. Doyl had a heart attack in 2008 after he retired and has had a heart valve replacement. Mr. Moore could work, but he has also been encouraged to minimize stress. Ms. Moore was a paralegal before she retired when she had her stroke in 2005; Mr. Moore was in industrial sales before he retired at age66 in 2007 to help care for Ms. Moore. Ms. Moore's adult daughter was badly hurt in a car accident several years before she retired and Ms. Moore was responsible for supporting her. Between them, the Moores receive Social Security benefits that total $3,461 per month. All of their income is fully exempt income, and expressly excluded from the disposable income calculation under the Bankruptcy Code.⁴ As such they have no "current monthly income" and are well below the median income in Kansas.⁵ Their Schedule B discloses Ms. Moore's participation in a TVM (transvaginal mesh) class action lawsuit that has been pending for two years. Both acknowledged at trial that any recovery Ms. Moore receives should be turned over to the chapter 13 trustee. The Moores drive two unencumbered cars that are at least 13 years old and have more than 100,000 miles on them. On the date of trial in May of 2016, one car was inoperable because the rear brakes needed to be replaced. The Moores have lived in their home for over 30 years, but after a series of refinances most recently concluded in May of 2015, they still owe over $93,000 against it. These assets are also exempt. The Moores are judgment proof.

Of necessity, the Moores live frugally. On their monthly social security income of $3,461, the Moores' Schedule J expenses total $2,728, leaving them with an exempt surplus, on paper, of about $732. Mr. Moore thought that he had underestimatedsome of their expenses and that unexpected costs (like the failed rear brakes on Ms. Moore's car) keep cropping up. Both of them testified that they never have a month in which they have $732 "left over." Indeed, their expenses appear to be understated. For instance, their scheduled monthly home maintenance and repair expense of $15 is unlikely to be sufficient. Their house payment has gone up twice since the case was filed. Their combined food and personal items allotment of $600 also seems low.

Before the Moores filed this case, they had become reliant on credit cards to supplement their income. While they do not appear to have debt that is directly related to their medical problems, both testified that their debt problems became acute when Ms. Moore got sick and couldn't work. Expenses went up and income went down. Mr. Moore took over the family's finances and candidly testified that he isn't particularly "good with money." They established a very unwise (but apparently very necessary) course of practice of making minimum credit card payments and then paying utilities and other current bills with whatever credit availability they had, continually robbing Peter to pay Paul. Shortly before they filed, they took out an additional $1,000 loan, refinancing a previous obligation to One Main Financial. That sufficed to get them through a few months, but when they filed, both debtors testified that they were about to descend into default.

The claims register shows that credit card creditors have filed over $50,000 in claims in the case; taken with their $93,000-plus mortgage balance, the Moores owed over $145,000 on the date of the petition. They had $2,182 in their checking account and $785 in a custodial savings account for one of their grandchildren. At the firstmeeting of creditors, the trustee asked why this money could not be addressed to a chapter 7 attorney fee and the Moores responded that, among other things, they were trying to preserve some of it for Christmas presents for their extended family of 15 grandchildren, 9 great-grandchildren and one great great-grandchild. They also had life and health insurance premiums coming due, as well as utilities. Mr. Moore described their existence as a struggle to stay solvent each month until the next social security payment arrived. In those circumstances, it is unlikely that he and Ms. Moore could have saved a $2,000 retainer to pay a chapter 7 lawyer.

Concerning the attorney's fees, Mr. Moore testified that their attorney, Mr. Hodge, quoted a fee of $2,000 plus a filing fee deposit for a chapter 7 case, but that all of it was payable in advance. For a chapter 13, however, Mr. Hodge asked for a $3,000 attorney's fee plus a filing fee deposit of $310, all of which could be payable over the life of the plan. Because of their other impending obligations, the Moores preferred to husband their savings and file a chapter 13. Ms. Moore testified at trial that she had tried to get her husband to file for bankruptcy over a period of years because money had continually been a source of stress, and they were not making headway on the credit card debt.

Wichita bankruptcy attorney William H. Zimmerman, Jr., testified that a typical chapter 7 fee in this area is $1,500. Like Mr. Hodge, Zimmerman charges $3,000 plus a cost deposit for a chapter 13 case. He obtains a $250 "processing fee" when clients initially consult him, then recovers the balance of the fee during theplan's payment period. In closing argument, Hodge stated that his chapter 7 fee has dropped to $1,500 since the Moores filed their case.

The Moores proposed a 36-month chapter 13 plan that provided for monthly payments of $125, enough to pay their attorney's $3,350 fee⁶ plus the filing fee of $310 in full and leave a small sum for chapter 13 trustee's fees ($360) and unsecured creditors ($480).⁷ Their house payment is paid directly to the lender. It will soon increase to cover an escrow shortage according to a more recent Notice of Fees filed by their lender, Freedom Mortgage, on May 3, 2016. They currently pay a small escrow arrearage through an increased house payment, $727.01, and may need to extend their plan period or raise their plan payment to address the Notice of Fees. The Trustee objected that the plan was not filed in good faith.⁸ She notes that their plan is "slightly unfeasible," but stipulated that the feasibility problem can be resolved and should not be the basis for denying confirmation.⁹

The debtors' plan payments of $125 will pay Mr. Hodge's fee over 27 months. The 9 remaining payments will go to the unsecured creditors and the filing fee. The chapter 13 trustee's primary objection to the plan is that the debtors are not proceeding in good faith by filing a plan that pays only their attorney fees and a small dividend when they are eminently qualified for chapter 7 relief. The debtors respond that they could not afford to pay a flat fee for chapter 7 representation and that without access to chapter 13, they are effectively barred from bankruptcy relief. Theparties submitted a comprehensive stipulation of facts that was supplemented by testimony at a hearing conducted on May 17, 2016 as well as trial briefs.¹⁰

Analysis

The requirements for confirmation of a chapter 13 plan are listed in § 1325(a).¹¹ Broad discretion is left to the bankruptcy judge to determine whether the debtors have filed in good faith and whether their plan has been proposed in good faith. Several Tenth Circuit cases illuminate the good faith standard by providing a series of factors to consider and by directing bankruptcy judges to consider the "totality of the circumstances" in determining the presence or absence of good faith. Section 1325(a)(3) is a good place to start. The trustee suggests that the Moores proposed their plan in other than good faith for these reasons. They have zero current monthly income, hence zero disposable income, making them ideal candidates for chapter 7 relief. She argues that they could have saved the $2,000 they needed to pay their lawyer in advance for a chapter 7 filing. She also argues that their proposed contribution to their unsecured creditors is too small, making the case difficult to administer.

Nothing in the Bankruptcy Code prohibits the Moores from filing a chapter 13 case if they are eligible for that relief. Section 1325(a)(3) provides "Except as provided in subsection (b), the court shall confirm a plan if— ... the plan has been proposed in good faith and not by any means forbidden by law."¹² Section 1325(a)(7) provides...