In re Eubanks

581 B.R. 583

IN RE: Michael S. EUBANKS, Alicia F. Eubanks, Debtor(s).

Case No. 17–40227

United States Bankruptcy Court, S.D. Illinois.

Signed February 16, 2018

Jay B. Howd, Lyndon Guy Willms, Bankruptcy Clinic, Marion, IL, for Debtors.

OPINION

Laura K. Grandy, UNITED STATES BANKRUPTCY JUDGE

This matter is before the Court on confirmation of the chapter 13 plan filed by Michael S. Eubanks and Alicia F. Eubanks ("Debtors") and on the objection thereto filed by the Chapter 13 Trustee, Russell C. Simon ("Trustee"). The Debtors filed a chapter 13 plan with a proposed duration of five years. Pursuant to the terms of the plan, general unsecured creditors will be paid 100% of their claims. The Trustee objects to confirmation of the plan because the proposed monthly payments do not include all of the Debtors' disposable income. He argues that as a condition of confirmation, the Debtors must agree to the following: If the plan is modified post confirmation to pay less than 100% to unsecured creditors, the Debtors will provide a minimum pool to those creditors in an amount equal to the difference between their disposable income at confirmation and their actual plan payment, multiplied by the number of months that passed as of the effective date of the modification. The Trustee further asserts that if the Debtors refuse such a pledge, their plan payment must be increased to include the full amount of their disposable income. Finally, the Trustee argues that if the Debtors do not contribute all disposable income to their plan, general unsecured creditors are entitled to interest on their allowed claims.

The Debtors disagree. They contend that the Trustee is attempting to impose an additional requirement for confirmation, i.e. , that Debtors guarantee payment of excess disposable income in post confirmation modifications of the plan. The Debtors further contend that because their plan proposes to pay 100% of unsecured claims, they are not obligated to increase their plan payments to include all disposable income in order for the plan to be confirmed. Debtors also dispute that unsecured creditors are entitled to interest on their claims.

I. Facts

On March 22, 2017, the Debtors filed a chapter 13 petition, along with schedules and statements, Official Forms 122C–1 and 122C–2, and a proposed plan. According to the calculations set forth in Form 122C–1, the Debtors have above-median income. Schedule I reflects a decrease in income going forward based on employment changes for Debtor Alicia Eubanks. Pursuant to a Joint Stipulation of Fact (document # 54), the parties agree that the Debtors' projected disposable income is $1,443.71 per month.¹ The Debtors propose a chapter 13 plan that extends over five years² with payments of $1,220.00 per month. Under the plan as proposed, general unsecured creditors will be paid 100% of their claims.

II. Discussion and Analysis

Section 1325(b)(1) of the Bankruptcy Code sets forth the requirements for plan confirmation in the event of an objection. It reads:

(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—

(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or

(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.

11 U.S.C. § 1325(b)(1)(A) & (B). The statute is written in the disjunctive: Debtors must either pay unsecured creditors in full or must pay all projected disposable income over the duration of the plan. Hamilton v. Lanning , 560 U.S. 505, 130 S.Ct. 2464, 2469, 177 L.Ed.2d 23 (2010) ; In re Gillen , 568 B.R. 74, 77 (Bankr.C.D.Ill. 2017) ; In re Bailey , 2013 WL 6145819, at *6 (Bankr.E.D.Ky. Nov. 21, 2013) ; In re Richall , 470 B.R. 245, 249 (Bankr.D.N.H. 2012) ; In re Johnson , 2011 WL 1671536, at *3 (Bankr.N.D.Iowa May 3, 2011). Thus, in the instant case, the Debtors may pay less than their disposable income over five years if such payments will pay unsecured creditors in full, or they may pay all of their disposable income over five years.³ The Debtors have chosen the option set forth in § 1325(b)(1)(A), i.e. , their monthly plan payments will not include all disposable income, but unsecured creditors will be paid 100% of their claims over a five-year period.

A. Does the Plan Violate the Good Faith Requirement of § 1325(a) ?

The Trustee argues that despite the Debtors' technical compliance with § 1325(b)(1), they have not satisfied the Code's additional requirement that the plan be proposed in good faith.⁴ Specifically, the Trustee argues that the Debtors' lack of good faith is evidenced by their refusal to (1) guarantee payment of excess disposable income in post confirmation modifications of the plan, or (2) accelerate payment to unsecured creditors by including all disposable income in their monthly plan payment. The Debtors counter that the plan is filed in good faith because the proposed payments comply with § 1325(b)(1)(A). Assuming that compliance with § 1325(b)(1)(A) is not sufficient to satisfy the good faith test, the Debtors argue that their plan meets the good faith standard even under the broader "totality of circumstances" analysis.

The Debtors rely on a Seventh Circuit decision, Matter of Smith , 848 F.2d 813 (7th Cir. 1988) in support of their argument that the plan has been proposed in good faith. The Trustee relies on a later Seventh Circuit case coincidentally entitled In re Smith , 286 F.3d 461 (7th Cir. 2002).⁵ For clarity, the Court will refer to the 1988 case as Matter of Smith and to the 2002 case as In re Smith.

In Matter of Smith , the court examined whether passage of the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA") had any impact on the good faith test adopted by the Seventh Circuit in In re Rimgale , 669 F.2d 426 (7th Cir. 1982). Rimgale held that in a chapter 13 proceeding, good faith is determined on a case-by-case basis under a "totality of circumstances" test. Id. at 432–33. The court concluded in Matter of Smith that the "totality of circumstances" test still applied. Matter of Smith , 848 F.2d at 821. In reaching that conclusion, however, the court stated that "[t]he focus of Rimgale's test has been narrowed only by the few specific provisions of BAFJA which now cover situations which fell within Rimgale's analysis." Id. at 820. Of particular significance, the court noted:

Another new section, § 1325(b)... shows that a plan proposed in good faith does not require any specific amount or percentage of payments to unsecured creditors. Before, bankruptcy courts, in determining "good faith," looked at whether the plan proposed substantial or meaningful repayment to unsecured creditors. BAFJA changes that. Now, § 1325(b) states that if an unsecured creditor objects to confirmation, the bankruptcy court may not approve the plan unless that creditor is to receive full payment, § 1325(b)(1)(A), or alternatively, the debtor meets the "ability to pay" test, that is, he commits all of his projected disposable income to the plan for three years, § 1325(b)(1)(B). A plan otherwise confirmable will be confirmed even if it provides for minimal (or no) payments if those payments meet the "ability to pay" test.

Id. (citations omitted).⁶ The Debtors contend that under Matter of Smith , the amount of a debtor's plan payment is no longer a consideration in the good faith analysis. While the Debtors agree that the good faith test of § 1325(a)(3) still applies to plan confirmation, they contend that if their plan payment satisfies either § 1325(b)(1)(A) or (B), then any component of the good faith test concerning the amount of the plan payment is per se satisfied. Debtors' Response to Chapter 13 Trustee's Brief at pp. 5–6 (emphasis in original).

The Trustee argues that while the Seventh Circuit made passing reference to the "new" § 1325(b) in Matter of Smith , its comments on the statute were mere dicta. According to the Trustee, the Seventh Circuit later revised and expanded the good faith analysis by incorporating the following factors into the good faith inquiry: (1) whether the debtor is really trying to pay creditors to the reasonable limit of his ability or trying to thwart them; (2) whether the plan accurately reflects the debtor's financial condition and affords substantial protection to unsecured creditors; and (3) whether the plan, taken as a whole, indicates a fundamental fairness in dealing with one's creditors. In re Smith , 286 F.3d at 466 (citations omitted). The Trustee argues that requiring the Debtors to guarantee payment of disposable income not currently committed to the plan in the event of future modification, or to increase payments to include all disposable income "reflects the underlying theme of the tests articulated in In re Smith. " Chapter 13 Trustee's Reply Brief at p. 4.

The discussion of § 1325(b) in Matter of Smith may be dicta, as the Trustee suggests. Nevertheless, the clear implication is that the amount of a plan payment should not—in and of itself—determine whether the plan is proposed in good faith, as long as the plan complies with either § 1325(b)(1)(A) or (B). The Seventh Circuit quoted the following passage from Collier's with approval:

Since Congress has now dealt with the issue [of a debtor's ability to pay] in the ability-to-pay provisions, there is no longer any reason for the amount of a debtor's payments to be considered as even a part of the good faith standard.... Only where there has been a showing of serious debtor misconduct or abuse should a chapter 13 plan be found lacking in good faith.

Matter of Smith , 848 F.2d at 820–21 (citing 5 Collier on Bankruptcy , ¶ 1325.04[3] at 1325–17 (15^th...