In re Dugan

549 B.R. 790

In re: Daniel Joseph Dugan and Karen Marie Dresch, Debtors.

Case No. 15–21258

United States Bankruptcy Court, D. Kansas.

Signed May 3, 2016

Chris W. Steffens, Mack & Associates, LLC, Topeka, KS, for Debtors.

MEMORANDUM OPINION AND ORDER OVERRULING THE CHAPTER 13 TRUSTEE'S OBJECTION TO CONFIRMATION UNDER 11 U.S.C. §§ 1325(a)(3) AND (a)(7) AND DENYING THE MOTION TO DISMISS OR CONVERT DEBTORS' CASE TO CHAPTER 7

Robert D. Berger, United States Bankruptcy Judge

The Chapter 13 Trustee (the Trustee) objects to confirmation and moves to dismiss or convert Debtors' case to Chapter 7.¹ At issue is whether the Bankruptcy Code permits Debtors to file under Chapter 13 and propose confirmation of a plan that pays only the filing fee, the Debtors' attorney's fees, and the Trustee's commission.² The matters are submitted on the pleadings for this Court's consideration. Here, the Court finds that Debtors filed their case and Chapter 13 Plan in good faith, not by any means forbidden by law.

VENUE AND JURISDICTION

This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b) and the Amended Standing Order of Reference of the United States District Court for the District of Kansas that exercised authority conferred by 28 U.S.C. § 157(a) to refer to the District's bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective June 24, 2013.³ Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(D). The parties do not object to venue or jurisdiction.

FINDINGS OF FACT

On June 15, 2015, Debtors Daniel Joseph Dugan (Daniel) and Karen Marie Dresch (Karen) filed their bankruptcy petition⁴ and Chapter 13 Plan (the Plan).⁵ On June 16, 2015, the Court granted the Debtors' application to pay their filing fees in installments.⁶ Debtors are not repeat filers and certify they have completed pre-petition credit counseling.⁷ Debtors' income is below median. At the time of filing, Debtors' three dependent children were four, nine, and twelve years old. Debtors made no payments to insiders or creditors within 90 days of their petition.⁸

Debtors' Plan proposes at least 36 monthly payments of $80.⁹ Plan payments will pay $2,800 to attorney's fees,¹⁰ $310 to filing fees, and $0.00 to unsecured creditors.¹¹

Debtors' income from employment for 2013, 2014, and 2015 year to petition date was $17,742, $45,368, and $1,405, respectively.¹² Daniel works as a mixer driver at Kansas Sand and Concrete, Inc., in Topeka, Kansas, and Karen is unemployed.¹³ Daniel currently earns gross wages of $2,426.67 per month.¹⁴ From January 1, 2015, to April 18, 2015, Debtors received $4,200 in unemployment income.¹⁵ Debtors' combined monthly income, including $250 in food stamps and a prorated tax refund of $400, is $2,847.¹⁶ Debtors' monthly net income is $82 after subtracting their minimal monthly expenses for a household of five.¹⁷ Debtors estimate a 2015 tax refund of $3,100 of which $1,700 is from the earned income tax credit.¹⁸

Debtors do not own any real property.¹⁹ Debtors list only $6,125 of personal property²⁰ of which $5,250 is exempt.²¹ Debtors' nonexempt property is: (a) $20 cash; (b) $5 with Quest Credit Union; (c) $350 in bonds; and (d) an inoperable 2000 Dodge Ram with 175,000 miles valued at $500 that needs over $2,000 in repairs.²² 23 A Chapter 7 trustee would likely abandon these nonexempt assets in a Chapter 7 case because they are not worth liquidating. Debtors' exempt property is: (a) $850 deposit with their landlord; (b) $100 in miscellaneous household items; (c) $150 in miscellaneous clothing; (d) $500 in miscellaneous jewelry; (e) two dogs; and (f) two exempt vehicles consisting of a 2002 Ford Mustang valued at $2,900 with 106,000 miles in fair condition and an inoperable 1999 Nissan Quest valued at $750 with 156,000 miles.²³ Debtors' liabilities consist of an $836 secured claim by Quest Credit Union on the 1999 Nissan Quest and unsecured nonpriority claims of $10,138.²⁴ Outside the Plan, the Debtors are making direct payments of $30 per week on the 1999 Nissan Quest to Quest Credit Union. ²⁵

No secured or priority debt is being paid through the Plan.²⁶

Debtors' Schedule F lists 44 nonpriority claims of which 27 are healthcare related.²⁷ Claims against the Debtors for healthcare services total $4,865, or 48 percent of Debtors' $10,138 unsecured nonpriority claims. Claims against the Debtors for utilities from Kansas Gas Service and Westar Energy are $2,115, or over 20 percent of Debtors' unsecured nonpriority claims.²⁸ Thus, 69 percent of Debtors' unsecured nonpriority claims relates to basic necessities. Debtors' remaining unsecured nonpriority claims balance consists of: (a) $1,920 to Ad Astra Recovery (Speedy Cash); (b) $215 on a charge account to Comenity Bank; (c) $380 to Eos Cca (Century Link); (d) $173 to Eos Cca (AT & T Mobility); (e) $205 to Virtuoso (AT & T Wireless); and (f) $265 to Unique National Collection.²⁹ Schedule F shows only a single charge account and very little consumer debt unrelated to basic or modest necessities for a household of five with minor children. Debtors do not have any gambling debts.³⁰ The instant bankruptcy filing is not the result of overindulgence.

Since 2010, Debtors have faced at least three garnishment cases in Shawnee County, Kansas, District Court.³¹ In 2015, American Medical Response sued Daniel to collect on their debt in Shawnee County District Court.³² These garnishments led to the shut off of Debtors' natural gas and electricity services.³³ Debtors' three minor children "had no hot water to take showers, no electricity to refrigerate food or any means to cook."³⁴ Debtors' circumstances were such that they "may never have been able to accumulate the attorney fees on their own" to fund a Chapter 7 filing.³⁵ "Debtors do not have a history of incurring debts with no reasonable hope of repaying them and then subsequently filing for bankruptcy."³⁶ Debtors' expenses of $850 for rent, $325 for utilities, $650 for food, $150 for clothing, and $300 for transportation and other miscellaneous expenses are modest, but not unrealistic.³⁷

On August 17, 2015, the Trustee objected to confirmation under 11 U.S.C. §§ 1325(a)(3) and (a)(7)³⁸ and moved to dismiss or convert Debtors' case to Chapter 7.³⁹ The Trustee admits "the debtors appear to need relief" but asserts that "this is an attorney fee only case that does not demonstrate ‘special circumstances' to justify a Chapter 13."⁴⁰ The Trustee urges the Court to find that the "inability to pay attorneys fees for the filing of a Chapter 7, does not constitute ‘special circumstances' permitting the case to proceed as a Chapter 13."⁴¹ Thus, the Trustee requests the Court deny confirmation, dismiss the case, or convert the case to Chapter 7.⁴²

Of note, the Trustee did not specifically object to feasibility or challenge the reasonableness of the Debtors' attorney's fees of $2,800.

LAW

Chapter 13 contains two good faith requirements. Debtors must propose plans and file petitions in good faith. Section 1325(a)(3) and (a)(7) provide:

(a) ... [T]he court shall confirm a plan if—

...

(3) the plan has been proposed in good faith and not by any means forbidden by law; ...

(7) the action of the debtor in filing the petition was in good faith.⁴³

Congress did not define good faith in subsections (a)(3) and (a)(7).⁴⁴ The Tenth Circuit has developed several non-exhaustive factors to examine good faith challenges. Included among those factors are:

(1) the amount of the proposed payments and the amount of the debtor's surplus;

(2) the debtor's employment history, ability to earn and likelihood of future increases in income;

(3) the probable or expected duration of the plan;

(4) the accuracy of the plan's statements of the debts, expenses, and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;

(5) the extent of preferential treatment between classes of creditors;

(6) the extent to which secured claims are modified;

(7) the type of debt sought to be discharged and whether any such debt is non-dischargeable in Chapter 7;

(8) the existence of special circumstances such as inordinate medical expenses;

(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;

(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and

(11) the burden which the plan's administration would place upon the trustee.⁴⁵

The Trustee relies on In re Puffer⁴⁶ to justify the Debtors' need to show special circumstances. However, as discussed infra,⁴⁷ this is not required under the Code. The Tenth Circuit and at least one Kansas Bankruptcy Court "look[ ] to the totality of the circumstances surrounding each debtor's filing to determine whether ... [they] have filed their Chapter 13 bankruptcy plan in good faith, as required by 11 U.S.C. § 1325(a)(3)."⁴⁸ "No one factor is determinative, but it is the totality of the various factors and the facts of the particular case that are considered."⁴⁹ Thus, Debtors need not show special circumstances justifying the filing of a Chapter 13 plan over a Chapter 7 liquidation. "Only if there has been a showing of serious debtor misconduct or abuse should a chapter 13 plan be found lacking in good faith."⁵⁰

The Court examines §§ 1325(a)(3) and (a)(7) simultaneously because the good faith analysis under each subsection is the same—the totality of the circumstances.⁵¹

ANALYSIS

A. Debtors Filed Their Chapter 13 Petition and Chapter 13 Plan in Good Faith.

"The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’ "⁵² However, the fresh start is not absolute. "The statutory provisions governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain...