In re Johnson

614 B.R. 80

IN RE: Carol A. JOHNSON, Debtor.

Case No.: 19-00033-GS

United States Bankruptcy Court, D. Alaska.

Signed January 17, 2020

Robert P. Crowther, Anchorage, AK, for Debtor.

Erik LeRoy, Erik LeRoy, P.C., Anchorage, AK, for Trustee.

MEMORANDUM DECISION DENYING CONFIRMATION OF DEBTOR'S CHAPTER 13 PLAN

GARY SPRAKER, United States Bankruptcy Judge

Debtor Carol A. Johnson (Debtor) seeks confirmation of her chapter 13 plan (Plan), which proposes to apply any payments received from the Alaska Permanent Fund Dividend (PFD) over the term of her plan in excess of $1,000.00 per year as a "pre-payment" to her monthly plan payments.¹ The chapter 13 trustee (Trustee) has objected. In her supplemental brief, Debtor succinctly summarizes the dispute before the court: "Trustee wants the excess [PFD] proceeds to be used for increased distributions to creditors. Debtor wants to use the excess to reduce her future monthly payments."² However, Debtor's characterization of Trustee's position is not quite accurate. Trustee notes that the post-petition PFDs are property of the chapter 13 estate and argues that they must be turned over for distribution. This is currently required in the local chapter 13 plan form. Debtor has complied with the local plan and committed to turn over $1,000.00 annually from the post-petition PFD payments. But Debtor also seeks to require Trustee to apply any additional amounts received from the PFD beyond $1,000.00 as prepayment of her Plan obligation. For the reasons set forth below, the court will deny confirmation of the Plan with leave to amend.

A. BACKGROUND

1. The Alaska Permanent Fund Dividend

The Alaska Constitution created a "permanent fund" to receive a certain percentage of the proceeds of state oil royalty revenues which must be invested into approved income-producing investments.³ From the Alaska Permanent Fund, a portion of these investment earnings are distributed annually to qualified Alaska residents as the PFD.⁴ The amount of the PFD varies based on the amount of the Fund's realized investment earnings over a five-year period, and the number of resident applicants. Alaska residents have received a PFD every year since 1982, and the amount has varied from as low as $331.29 to as high as $2,072.00 in 2015.⁵ As noted in Debtor's briefing, Alaska has recently used a portion of the PFD to fund the state's operations, thereby decreasing the distributions in 2016 and 2017 to $1,022.00 and $1,100.00 respectively.⁶ The 2018 PFD, paid in October 2019, was $1,600.00.⁷ As also noted by Debtor, Alaska's current governor has undertaken to substantially increase the annual PFD payment.⁸ While the PFD is now well established, the actual amount of the annual payment may vary considerably, especially over a five-year period.

2. Debtor's Bankruptcy Case

On January 31, 2019, Debtor filed her voluntary chapter 13 bankruptcy petition. In her Schedule I, Debtor listed $7,082.42 in monthly income, comprised of $2,039.50 per month from Social Security and $4,876.25 per month from retirement/pension income. Debtor also included $166.67 in monthly income derived from PFDs, which translated into an annual PFD payment of $2,000.04.⁹

Debtor listed her monthly expenses at $6,409.47. This results in monthly net income of $672.95.¹⁰ Per Debtor's Official Form B 122C-1, her income is just above the median income for a single person household in Alaska, requiring her to commit to a five-year plan period.¹¹ Debtor's Official Form B 122C-2 calculates her monthly disposable income at $210.63.¹²

On February 14, 2019, Debtor filed her Plan. According to her liquidation analysis, she disclosed nonexempt assets worth $49,075.70 available for her unsecured creditors. She estimated that in a chapter 7 proceeding, administrative expenses would total $25,847.57, reducing the amount available to her unsecured creditors to $23,228.13. If Debtor contributed only the $210.63 per month projected disposable income calculated under Official Form B 122C-2 to her Plan, her unsecured creditors would not receive as much in the chapter 13 as they would under chapter 7 as required under § 1325(a)(5) for confirmation. Accordingly, under paragraph 2(a) of her Plan, Debtor has proposed to make 60 monthly payments of $500.00 to ensure that her unsecured creditors receive at least as much under a chapter 13 plan as they would in a chapter 7.¹³

Under paragraph 2(b) of the Plan, Debtor adopted the standard language of Alaska's form chapter 13 plan, Alaska Local Bankruptcy Form (AK LBF) 5, which provides for the commitment of annual PFDs for the term of the Plan estimated at $1,000.00 each.¹⁴ Thus, between the total monthly Plan payments ($30,000.00) and the estimated annual PFD payments ($5,000.00), Debtor's total commitment under the five-year Plan is $35,000.00. Debtor proposes to use the Plan payments to fund the chapter 13 trustee's commission, Debtor's bankruptcy attorney fees, arrears on Debtor's secured debt, a priority unsecured tax claim, and proposed payments for Debtor's general unsecured creditors. Under her Plan, Debtor proposes to pay $25,368.00 of her total unsecured debt, which exceeds the chapter 7 liquidation analysis.¹⁵ Finally, under Plan paragraph (2)(a), Debtor has added the following nonstandard sentence: "Alaska Permanent Fund Dividend proceeds received in excess of $1,000.00 per year and tax refunds shall count as pre-payments of monthly payments due under this provision."¹⁶

The Plan drew a negative recommendation for confirmation from Trustee, constituting a timely objection (Objection).¹⁷ Trustee objected to the use of any PFD amounts over $1,000.00 as "pre-payment" funding. She argued that under Alaska Local Bankruptcy Rule (AK LBR) 3015-1(b)(1), PFD payments may not be included as part of a chapter 13 debtor's regular monthly plan payments. Instead, Trustee claims all of the PFD annual payments, regardless of the amount, must be committed to a chapter 13 plan in addition to the regularly-scheduled monthly payments.¹⁸

At the initial confirmation hearing, counsel for Debtor (Mr. Crowther) disclosed that in order to satisfy the liquidation analysis under § 1325(a)(4),¹⁹ Debtor was committing her Social Security income to her Plan payments, which she would otherwise not be required to commit pursuant to § 101(10A)(B). Counsel reasoned that Debtor's addition to the monthly Plan payment of excess PFDs and tax refunds above the estimates would alleviate, if not obviate, the need for Debtor to rely on her Social Security income to satisfy her monthly Plan payments over the five-year Plan term. The court requested supplemental briefing to permit the court to review Mr. Crowther's calculations and arguments in greater detail, and to give Trustee an opportunity to respond.

Debtor filed her supplemental brief in response to the Objection.²⁰ She argues that "there is absolutely nothing in the statutory language of Chapter 13" that would require her to pay excess PFDs in addition to her ongoing monthly Plan payments.²¹ Debtor further contends that AK LBR 3015-1(b) "establish[es] plan confirmation requirements or procedures that are not grounded in either the Bankruptcy Code or in the Federal Rules of Bankruptcy Procedure[.]"²²

In her response, Trustee argues that the proposed Plan does not comply with the AK LBR and is contrary to public policy.²³ Trustee also maintains that the Plan is inconsistent with § 1306(a), which expands the definition of property of the estate as provided in § 541 to include post-petition property acquired while a debtor is in chapter 13. Trustee analogizes the PFD to an inheritance, and contends that § 1306(a) "brings into the chapter 13 estate windfalls received after confirmation."²⁴ In support of her argument, Trustee cites the Fourth Circuit Court of Appeals' decision in Carroll v. Logan .²⁵ In that case, the Fourth Circuit held that a debtor's post-confirmation inheritance was part of the chapter 13 bankruptcy estate to be distributed to the debtor's creditors via the debtor's chapter 13 plan.

In her supplemental reply brief, Debtor reiterated that AK LBR 3015-1(b) and AK LBF 5 do not "implement underlying provisions of the Bankruptcy Code."²⁶ Moreover, while Debtor concedes that § 1306 incorporates her PFD into her bankruptcy estate, she argues that it does not mandate how those funds are allocated.²⁷ She further argues that if Congress intended a debtor's creditors to receive "windfall" income in addition to "projected disposable income," it would have so provided in the "extremely elaborate statutory mechanism" used to calculate what creditors should receive under a confirmed chapter 13 plan.²⁸ Debtor concludes that her Plan satisfies § 1325(b), and to the extent AK LBR 3015-1(b) and AK LBF 5 attempt to modify that confirmation standard, they are invalid.²⁹

B. LEGAL ANALYSIS

The dispute before the court is exceedingly narrow in scope. Consistent with Alaska's local rules and form chapter 13 plan, Debtor has committed to her Plan the future PFDs received within the five-year term. Per the applicable local rule, she has estimated those payments at $1,000.00 annually. The dispute centers upon application of any future amounts above the $1,000.00 estimates. Debtor seeks to contribute any future annual amounts above $1,000.00 to pay down her total Plan payments of $35,000.00. Trustee has objected to confirmation and argues that the entire PFD must be contributed to the Plan, whatever the actual payment may turn out to be.

1. The Local Rule and Form Chapter 13 Plan Are Valid

Trustee contends that AK LBR 3015-1(b) and AK LBF 5 require chapter 13 debtors to contribute the entirety of the PFDs they receive during the term of their plans. In 2002, the Local Rules Committee for the United States Bankruptcy Court, District of Alaska, revised AK LBR 3015-1 and AK LBF 5 to account for the inability to determine in advance the amount of annual PFD payments a debtor would receive during a chapter 13 plan...