In re Kramer

495 B.R. 121

In re Ross KRAMER and Susan Kramer, Debtors.

No. 12–17674–FJB.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

July 12, 2013.

Robert W. Kovacs, Jr., Law Office of Robert W. Kovacs, Jr., Worcester, MA, for Debtors.

MEMORANDUM OF DECISION ON TRUSTEE'S OBJECTION TO CONFIRMATION OF DEBTORS' CHAPTER 13 PLAN

FRANK J. BAILEY, Bankruptcy Judge.

The chapter 13 trustee has objected to confirmation of the debtors' Chapter 13 Plan. The basis of the objection is that the debtors have deducted from their income scheduled payments on their second mortgage that they have no intention of paying under the plan, that without this deduction the debtors' projected disposable income exceeds the amount of the plan payment, and that consequently the plan fails to direct all available projected disposable income to payment of creditors. This presents the question of whether the Court should adopt a mechanical or a forward-looking approach to a chapter 13 debtor's projected disposable income deduction for contractually scheduled payments on a secured debt where the debtor's chapter 13 plan provides that no such payments will actually be made. For the reasons set forth below, the Court will adopt the forward-looking approach, disallow the debtors' deduction for payments on their second mortgage from calculation of their projected disposable income, and sustain the Trustee's objection.

I. FACTS AND PROCEDURAL HISTORY

On September 20, 2012, Ross Kramer and Susan Kramer (“the Debtors”) filed a bankruptcy petition and plan under chapter 13 of the Bankruptcy Code, thereby commencing the present case. The Debtors own real property at 33 Littlemore Road, Framingham, Massachusetts, which is valued at $230,500.00. This property is encumbered by a first-position mortgage to Everhome Mortgage Co. and a second, junior mortgage to Bank of America. The value of the property is less than the outstanding balance of $233,554.00 on the Everhome mortgage loan.

The Debtors' chapter 13 plan proposes a monthly payment of $1,200.00 for a term of 60 months. With these funds, the trustee would pay two priority claims totaling $15,000.00, an administrative claim for Debtors' counsel's fee of $2,431.00, the chapter 13 trustee's fee, and a 24.59% dividend to general unsecured creditors. The Debtors would continue making payments on the unmodified, secured claims of Everhome Mortgage Co., Fifth Third Bank (a secured car loan), and Eastern Bank (a secured car loan). The Debtors would strip off the junior, Bank of America mortgage lien, cease regular payments on the loan it secures, and treat Bank of America entirely as a general unsecured creditor.

With their bankruptcy petition, the Debtors filed a Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Form B22C) which stated their monthly disposable income as $653.29. The Debtors included in the calculation of their disposable income a deduction of $813.00 per month, representing scheduled payments on the Bank of America mortgage loan. On November 21, 2012, Carolyn Bankowski, the chapter 13 trustee (“the Trustee”), filed an Objection to Confirmation of Debtor's Chapter 13 Plan, arguing that the Debtors are not entitled to deduct scheduled payments on their second mortgage from their monthly disposable income if they do not actually intend to make such payments under their chapter 13 plan. The Trustee further argued that by claiming this impermissible deduction, the Debtors had understated their projected disposable income, and consequently the Plan did not satisfy the best efforts test of 11 U.S.C. § 1325(b)(1)(B). After a hearing, the parties briefed the issue, and the Trustee's objection is now ripe for disposition.

II. POSITIONS OF THE PARTIES

The Debtors claim that they may deduct payments on the Bank of America mortgage loan in the calculation of their projected disposable income under 11 U.S.C. § 707(b)(2)(A)(iii)(I), which provides for the deduction of payments scheduled as contractually due to secured creditors. While the Debtors intend to cease those payments under their chapter 13 plan, they cite to Morse v. Rudler (In re Rudler), 576 F.3d 37 (1st Cir.2009), where the First Circuit Court of Appeals held that the plain language of 11 U.S.C. § 707(b)(2)(A)(iii)(I) entitled a chapter 7 debtor to deduct mortgage payments on his home from his monthly income, despite his intent to surrender that home to the mortgagee. Id. at 52. The Debtors cite further to In re Marshall, 407 B.R. 1 (Bankr.D.Mass.2009), where the court applied the same reasoning developed in Rudler to facts similar to those of the instant case, holding that a chapter 13 debtor could deduct from his projected disposable income payments on a mortgage he intended to strip off. Id. at 8. The Debtors would have this Court follow Marshall and overrule the objection of the Trustee.

The Trustee argues that the Debtors' deduction is impermissible in light of the United States Supreme Court's rulings in Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), and Ransom v. FIA Card Services, ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011). In Lanning, the Court held that changes in a chapter 13 debtor's income or expenses known at the time of confirmation should be taken into account when determining that debtor's projected disposable income. Lanning at 2478. In Ransom, the Court held that a chapter 13 debtor could not claim the statutory standard expense for car ownership expenses where the debtor had no such expenses in reality. Ransom at 721. Taken together, the Trustee claims that these cases indicate that the Debtors are not entitled to claim a deduction from their projected disposable income for payments scheduled as contractually due to secured creditors where the Debtors do not intend to actually make those payments under their chapter 13 plan.

III. DISCUSSION

A court may not approve a chapter 13 plan over the Trustee's objection unless the plan provides that all of the “debtor's projected disposable income to be received” during the term of the plan “will be applied to make payments to unsecured creditors under the plan.” 11 U.S.C. § 1325(b)(1)(B) (2012). Disposable income is defined by the Bankruptcy Code as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended.” 11 U.S.C. § 1325(b)(2) (2012). For debtors who, like the Kramers, earn an income greater than the state median income for a household of their size, “reasonably necessary” expenses are those allowable under 11 U.S.C. § 707(b)(2)(A)-(B), the chapter 7 means test. 11 U.S.C. § 1325(b)(3) (2012). Such expenses include a deduction for payments scheduled as contractually due to secured creditors. 11 U.S.C. § 707(b)(2)(A)(iii)(I) (2012). Whether the Trustee's objection should be sustained turns on whether Debtors may deduct from their income their monthly mortgage payments to Bank of America under § 707(b)(2)(A)(iii)(I) as incorporated by § 1325(b), notwithstanding the Debtors' intent to treat Bank of America as an unsecured creditor under their plan. Given the interrelation of § 1325 and § 707, the question of whether the Debtors should be permitted to claim this deduction implicates two distinct inquiries. The first is whether the claimed deduction is allowable under the § 707 means test. The second is whether the claimed deduction, even if so allowable, should be excluded from the Debtors' projected disposable income calculation under § 1325. This Court holds that although the Debtors' deduction survives § 707 analysis, it must nevertheless be excluded under the forward-looking calculation of § 1325.

With respect to whether 11 U.S.C. § 707(b)(2)(A)(iii)(I) permits the deduction, the First Circuit Court of Appeals' holding in Rudler controls. In that case, the First Circuit sided with the vast majority of bankruptcy courts and held that the “plain language of section 707(b)(2) permits a Chapter 7 debtor to deduct payments on a secured debt even when the debtor plans to surrender the collateral underlying that debt.” Id. at 45. While Rudler dealt with a planned surrender of collateral rather than the lien-stripping at issue in the instant case, “a determination that [a] claim is unsecured has the same practical effect as a surrender of property to a mortgagee. In both instances, debtors are no longer required to make monthly payments to secured creditors. Accordingly, the decisions involving surrender of secured property are apposite[.]” In re Marshall, 407 B.R. at 4. While the Debtors do not intend to make payments on their Bank of America mortgage loan under the plan, those payments remain scheduled as contractually due as of the bankruptcy filing. The statute unambiguously indicates “that the debtor may deduct all payments owed at the time of the bankruptcy filing,” Rudler, 576 F.3d at 48. The Debtors may therefore claim a deduction for scheduled payments on their Bank of America mortgage loan under 11 U.S.C. § 707(b)(2)(A)(iii)(I).

The Trustee argues that the Supreme Court's decisions in Lanning and Ransom require a forward-looking analysis of the Debtors' second mortgage payments under § 707, implicitly suggesting that the First Circuit's holding in Rudler was abrogated by subsequent United States Supreme Court jurisprudence. However, this Court concludes that neither Lanning nor Ransom compels a forward-looking approach to deductions for scheduled payments on secured debts under the § 707 means test. In Ransom, the Supreme Court held that a statutory standard expense for car ownership claimed by a debtor was not an “applicable” expense in the sense required by § 707(b)(2)(A)(ii)(I), because the debtor did not have a car payment—the expense did not correspond to the “individual debtor's financial circumstances.” Id. at 724. The Trustee argues that the expense at issue in the case at bar likewise fails to correspond...