In re Khan

In re: NAZIR KHAN Debtor.

Case No. 14-13514 MER

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

February 19, 2015

The Honorable Michael E. Romero

Chapter 13

ORDER

This matter comes before the Court on the Debtor's request to confirm his current amended plan, and the objections thereto filed by John Berman ("Berman"), the Chapter 13 Trustee ("Trustee"), and Nuguest Shawl ("Shawl"). Based on the evidence and legal arguments presented by the parties, the Court makes the following findings of fact and conclusions of law.

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (L) as it involves the administration of the estate and confirmation of the Debtor's amended plan.

BACKGROUND FACTS

Debtor Nazir Khan ("Khan") filed his voluntary Chapter 13 petition on March 21, 2014 ("Petition Date"). Khan has filed four proposed plans during the pendency of this case.¹ His most recent amended plan (the "Plan") dated September 2, 2014, is currently before the Court.

The Plan provides for Class 4 unsecured creditors to receive approximately $25 over 60 months. The Plan estimates total attorney's fees of $12,000, with $2,100 paid prepetition and $9,900 to be paid through the Plan, plus estimated costs of $300. Further, the Plan proposes to pay $11,499 infederal priority taxes and $1,792 in state priority taxes. Plan payments are $438 per month.²

The Plan and Khan's schedules list a one-half equitable interest in a residence located at 22655 East Fremont Place in Aurora, Colorado (the "Property"). The parties stipulated to a total value for the Property of $430,000, less a lien in the amount of $283,773, less costs of sale of approximately 8%, or $34,400.³ Khan claims a $60,000 homestead exemption in the Property.⁴

Khan testified he and his sister, Roenna Khan, each obtained a one-half interest in the Property as the result of a probate action following the death of their mother.⁵ Since November of 2013, Khan's one-half interest in the Property has been held in the name of his wife, Zaibi Khan.⁶

On his Petition Date, Khan had no income and relied entirely on his wife's income. He subsequently amended Schedules I and J to reflect income from a restarted home-based daycare business. His amended Schedule J indicates joint monthly income for himself and his wife of $4,261, including an anticipated $1,550 per month from his restarted business, plus another $880 to be provided by an increase in net business income or occasional contributions from his wife's family to cover expenses.⁷

DISCUSSION

With respect to confirmation of a Chapter 13 plan, "[t]he controlling section of the Bankruptcy Code is § 1325."⁸ As the Debtor, Khan bears the burden of proof concerning the elements of 11 U.S.C. § 1325(a).^{9 10}

A. The Plan As Proposed Does Not Meet the Best Interests of Creditors Test

Section 1325(a)(4), known as the "best interests of creditors test," provides the Court shall confirm a plan if:

the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date. . . .¹¹

The Chapter 7 Reconciliation in Khan's Plan indicates no value would be available to pay unsecured creditors in Chapter 7 case following a sale of his interest in the Property. Under the Plan, the unsecured creditors would receive approximately $25. Therefore, in order to meet the best interests of creditors test, Khan must demonstrate a Chapter 7 liquidation would yield $25 or less to unsecured creditors.

At the outset, the Court expresses some concern as to whether the Property is actually property of the estate; but this issue is not before the Court at this time. Rather, the parties have stipulated Khan holds a one-half interest in the Property.¹² Accordingly, for the limited purposes of this opinion only, theCourt will accept the parties' stipulation that the Property is property of the estate.

Turning to § 1325(a)(4), the Court finds the creditors would receive more in a Chapter 7 case than would be received through the Plan. In a typical Chapter 7 case, a trustee would almost certainly sell the entire property free and clear of liens, and divide the proceeds between the estate and the non-debtor co-owner.¹³ Therefore, the relevant comparison is the proposed $25 unsecured creditor distribution under the Plan, versus what would be available in a Chapter 7 liquidation where the Property was sold and the proceeds divided between the estate and Roenna Khan.

First, the Court must address the homestead issues raised by the parties. COLO. REV. STAT. § 38-41-201 provides for a $60,000 homestead exemption "for a homestead occupied as a home by an owner thereof." As noted by the Colorado Court of Appeals, a co-tenant who is not capable of occupying the residence cannot claim the homestead exemption.¹⁴ In addition, as previously noted by the United States Court of Appeals for the Tenth Circuit and this Bankruptcy Court, only one homestead exemption exists for each piece of real property, and the exemption attaches to the real property and not to the individual debtor.¹⁵ In other words, the homestead exemption may not be claimed by a joint owner to the exclusion of the other joint owners.¹⁶

Khan argues he is entitled to take the full $60,000 homestead exemption available under COLO. REV. STAT. § 38-41-201, because the co-owner of the property, his sister Roenna Khan, cannot occupy the property as she is a resident of the United Arab Emirates. For the limited purposes of evaluating the confirmability of the Plan, the allocation of the claimed homestead exemption between Khan's estate and Roenna Khan is irrelevant.¹⁷

Second, the Court must consider the potential proceeds for the estate in a liquidation scenario. Although the Dickinson case discussed by the parties is factually distinguishable from this case, Dickinson provides the correct framework for calculating the equity remaining after a trustee's sale.¹⁸ Specifically, the appropriate calculation is as follows:

Stipulated Value of Property

Less Stipulated 8% Costs of Sale

$430,000.00

- 34,400.00

Less Mortgage Payoff

$395,600.00

- 283,773.00

Less Claimed Homestead Exemption

$111,827.00

- 60,000.00

Proceeds to be divided between co-owners

$51,827.00

Thus, deducting the full $60,000 homestead exemption from the proceeds of the sale following the payment of the costs of sale and the mortgage lien results in proceeds of $51,827.¹⁹ Assuming Khan is entitled to one-half of such proceeds, dividing $51,827 by two equals $25,913.50. Thus, a Chapter 7 liquidation would result in potential distribution of approximately $25,913.50 to unsecured creditors, far in excess of the $25 provided in the Plan.

Accordingly, the Plan does not meet the best interests of creditors test and confirmation must be denied under § 1325(a)(4).

B. Khan Has Not Demonstrated the Plan is Feasible

Section 1325(a)(6) requires a debtor to demonstrate he will "be able to make all payments under the plan and to comply with the plan."²⁰ This requirement is frequently described as the "feasibility" requirement.²¹ As the United States District Court for the District of Massachusetts has recently noted:

To satisfy the feasibility requirement, "a debtor's plan must have a reasonable likelihood of success," and the debtor must be able to demonstrate that she has both the present and future capacity to meet the requirements of the proposed plan. [In re Fantasia, 211 B.R. 420, 423 (1^st Cir. BAP 1997)]; see also In re Lundahl, 307 B.R. 233, 244-45 (Bankr. D. Utah 2003) (concluding that a proposed Chapter 13 plan was not feasible where the debtor's proposed budget was unrealistically lean, rendering the debtor's future ability to satisfy the terms of the plan unlikely); In re Heck, 355 B.R. 813, 823-25 (Bankr. D. Kan. 2006) (holding that the debtor's plan was not feasible because she did not have sufficient income to make all payments under the plan). In a situation where a debtor's ability to make payments under the proposed Chapter 13 plan is contingent on the refinancing of assets or the selling of properties, a bankruptcy court will deny confirmation where it considers the contingency to be too speculative. Cf., e.g., In re Gavia, 24 B.R. 216, 218 (Bankr. E.D. Cal. 1982) (denying confirmation of a Chapter 13 plan which proposed the sale of the debtor's home to generate funds to pay creditors), aff'd, 24 B.R. 573 (9^th Cir. BAP 1982).²²

Here, Khan's most recent Schedules I and J show Khan has no current income. Rather, he has only speculative income in connection with his recently-restarted daycare business, and undocumented "occasional contributions" from his wife's family. He has provided no documentation or evidence in the form of proof of enrollment, pricing, etc. for his prediction his gross monthly business income will increase to $2,532.²³ Further, neither Khan's wife nor any other member of her family presented testimony or documentation to demonstrate they would actually provide any "contributions." He also lists income from food stamps in the monthly amount of $610, but there is no indication such funds could be used to assist in making Plan payments. Khan testified he has been making his monthly Plan payments, but no other information was provided to suggest his Plan is feasible.

For these reasons, the Court finds Khan has failed to demonstrate the Plan is feasible and as independent grounds under § 1325(a)(6), confirmation must be denied.

C. Khan Has Not Shown the Plan Is Proposed in Good Faith

Section 1325(a)(3) requires a plan to be proposed in good faith.²⁴ Determination on this issue must be made on a case by case basis, looking at the totality of the circumstances.²⁵ In order to determine whether a Chapter 13 plan...