In re Engen

561 B.R. 523

In re: Mark H. Engen and Maureen E. Engen, Debtors.

Case No. 15–20184

United States Bankruptcy Court, D. Kansas.

Signed December 13, 2016

David A. Reed, Kansas City, KS, for Debtors.

MEMORANDUM OPINION AND ORDER APPROVING SEPARATE CLASSIFICATION AND DISCRIMINATION IN FAVOR OF STUDENT LOANS

ROBERT D. BERGER, U.S. BANKRUPTCY JUDGE, DISTRICT OF KANSAS

Confirmation of Debtors' Chapter 13 plan is pending before the Court.¹ William H. Griffin, the Chapter 13 trustee (Trustee), objects to confirmation and alleges Debtors' separate classification and favored treatment of presumptively nondischargeable student loans is unfairly discriminatory in violation of 11 U.S.C. § 1322(b)(1).² The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court's reference to "separate classification" includes this favorable treatment. The Court, having reviewed the pleadings and counsels' arguments, overrules the Trustee's objection. Debtors' proposed plan satisfies § 1322(b)(1) because Debtors' separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.³

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 § 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, 2013.⁴ 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)(L). The parties do not object to venue, jurisdiction or the Constitutional authority of this Court.

FINDINGS OF FACT

On February 4, 2015, husband and wife Mark Engen and Maureen Engen (Debtors) filed for Chapter 13 relief.⁵ Debtors are above median income. On February 4, 2015, Debtors filed a Chapter 13 Plan (the Initial Plan).⁶ On March 13, 2015, the Trustee filed an objection to confirmation of Debtors' Initial Plan because: (a) Debtors' original Form B22C reflected negative disposable income; (b) the Trustee requested documentation of Debtors' cell phone expenses; and (c) Debtors did not sufficiently address a mortgage balloon payment due to BMO Harris Bank (BMO).⁷ On April 27, 2015, Debtors amended their means test calculation.⁸ On May 4, 2015, Debtors filed an Amended Chapter 13 Plan (the Amended Plan).⁹ On May 5, 2015, the Trustee objected to confirmation of Debtors' Amended Plan.¹⁰ On January 23, 2016, David A. Reed entered his appearance as attorney of record for the Debtors.¹¹ On February 5, 2016, Debtors filed a Fourth Amended Chapter 13 Plan (the Proposed Plan).¹²

The Debtors' proposed monthly plan payment is $4,983 per month, which will pay BMO Harris Bank NA (the first mortgagee) $15,412.46 without interest on account of its prepetition arrearage claim, $1,415.25 on account of a post-petition arrearage, and the principal due on the note in the amount of $115,622.99, all of which will pay the first mortgage note in full during the five-year commitment period.¹³

Ocwen Financial's second mortgage position is stripped off under the Plan because it is wholly unsecured; Ocwen has not filed a proof of claim and the deadline has passed. The other secured debt paid under the Plan is to Hyundai Capital America for an auto loan in the amount of $34,646.87. The priority tax claims paid through the Plan for the Internal Revenue Service and the Kansas Dept. of Revenue aggregate $25,381.67; in addition, Debtors owe non-priority unsecured tax claims in the amount of $7,556.22. Nonpriority general unsecured debt on which proofs of claim have been filed total $91,120.30, of which $64,791.59 are student loans. The Debtors propose to pay various administrative expenses under the Plan, including the Trustee's fee and the unpaid balance on administrative priority attorney fee claims. A summary of the proposed Plan treatment and prepetition payments to unsecured creditors is set out below. On February 8, 2016, Debtors filed an updated Form 122C which shows that their average monthly income is $12,126.00 and their monthly disposable income is —$1,122.23.¹⁴ On February 24, 2016, the Trustee filed an objection to confirmation of Debtors' Proposed Plan as to the separate classification; there are no other objections to confirmation.¹⁵

Debtors' Proposed Plan treats student loan creditors Navient Solutions (Navient) and the U.S. Department of Education as separately classified creditors pursuant to § 1322(b)(1).¹⁶ The Proposed Plan provides that separately classified student loan creditors will be paid without post-petition interest before other general unsecured claims. Together, the debts to Navient and the U.S. Department of Education comprise the Student Loan Claims. Navient's $34,281.77 claim arises from Mark Engen's Direct PLUS Loan with the U.S. Department of Education.¹⁷ Mark is a parent borrower on behalf of his dependent son.¹⁸ The U.S. Department of Education's $30,509.82 claim arises from student loans originated by Maureen Engen.¹⁹ The total balance of the Student Loan Claims is $64,791.59.

Debtors' Proposed Plan states that the Student Loan Claims:

[W]ill NOT share pro rata in the amount to be paid to general unsecured creditors as determined by Official Form 22C or the liquidated value of the estate pursuant to the "Best Interest of Creditors" test. Special Class Creditors will be paid pro rata with other specially classed creditors, if any, following payment of administrative claims, secured claims and priority claims in the manner provided by this Plan.²⁰

Creditors have filed priority claims totaling $25,381.67, secured claims totaling $213,751.40, and general unsecured claims totaling $91,120.30. The Student Loan Claims of $64,791.59 comprise over 71 percent of the general unsecured claims.²¹ Debtors' Proposed Plan also states: "Pay available funds, if any, to filed and allowed student loan claims. No available funds are projected or anticipated."²² Paragraph 12, titled Student Loan Obligations, of Debtors' Proposed Plan does not list the Student Loan Claims or reference their listing as separately classified creditors in paragraph 11.²³ Debtors' Proposed Plan would have paid a zero percent dividend to Student Loan Claims and a zero percent dividend to other general unsecured creditors—based on circumstances that existed at the time the Proposed Plan was filed. However, since the filing of their case, Maureen has received a pre-tax distribution in the amount of $73,269.34 as the beneficiary of a parent's IRA.²⁴ Since Maureen became entitled to this distribution more than 180 days after the filing of the case, then to the extent applicable, it does not fall within the ambit of § 541(a)(5). Nevertheless, Debtors concede that the beneficial IRA distribution is property of the estate under § 1306, possibly freeing up assets or income for distribution to general unsecured claimants.²⁵ At this point, the distribution and use of the proceeds are not resolved. It is not necessary that it be resolved prior to this Court's ruling on separate classification. Regardless, even if there were not a pending issue with regard to the distribution, the issue as to separate classification is ripe for adjudication since Chapter 13 debtors' acquisition of post-petition property or material increase in income is a common occurrence.

The Trustee's May 5, 2015, objection to confirmation alleges Debtors' separate classification of the Student Loan Claims unfairly discriminates against general unsecured creditors in violation of § 1322(b)(1).²⁶ The Trustee asserts that under Knowles ,²⁷ the nondischargeable nature of Debtors' student loans, without more, is insufficient to discriminate in favor of the Student Loan Claims.²⁸

Debtors' initial brief asserts the separate classification of Student Loan Claims is fair under § 1322(b)(1).²⁹ Debtors voluntarily participated in a Debt Management Plan (DMP) through Money Management International (MMI) prior to seeking Chapter 13 relief.³⁰ Debtors deposited $79,445 with MMI from January 18, 2011, to November 17, 2014. MMI disbursed $78,629.98 to prepetition general unsecured creditors.³¹ Debtors' MMI Account Summary³² indicates that, prior to filing bankruptcy, and after interest and penalties charged by creditors during the repayment period, the Debtors paid down their non-student loan unsecured debts from $73,884.89 to $12,192.16—a net reduction of $61,692.73 over 47 months. All of Debtors' MMI payments went to unsecured creditors but "[a]bsolutely none of the $79,445 went to the student loan creditors."³³

Unfortunately, Debtors' participation in MMI's DMP was not all positive. Debtors did reduce their general unsecured debt, but fell into default on their home mortgage and note and Student Loan Claims.³⁴ Further, to help fund their DMP, Debtors reduced their income tax withholdings.³⁵ This reduction resulted in an Internal Revenue Service priority tax claim of $22,277.06³⁶ and a Kansas Department of Revenue priority tax claim of $3,104.61.³⁷

Debtors also rely on Knowles,³⁸ arguing that while "their plan appears to discriminate against the other general unsecured creditors, this treatment is not forbidden" because § 1322(b)(1) allows discriminatory treatment so long as a plan "does not discriminate unfairly."³⁹ Debtors contend the separate classification of the Student Loan Claims does not discriminate unfairly as "[n]early 80% of debtors [sic] unsecured debts [excluding student loans] were paid immediately prior to the filing of their bankruptcy case."⁴⁰ As noted, the Court's reference to "separate classification" contemplates the favorable treatment provided to the...