In re Marshall

Page 1

407 B.R. 1

In re Paul V. MARSHALL and Kathleen Kenney-Marshall, Debtors.

No. 08-16022-JNF.

United States Bankruptcy Court, D. Massachusetts.

June 10, 2009.

Lee S. Kaplan, Stoughton, MA, for Debtors.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the "Trustee's Objection to Debtors' Amended Chapter 13 Plan." The Debtors, Paul V Marshall and Kathleen Kenney-Marshall (the "Debtors"), filed a Response to the Trustee's Objection to confirmation of their amended Chapter 13 plan, and the Court held a hearing on the contested matter on March 5, 2009. At the conclusion of the hearing, the Court directed and the parties agreed to file an Agreed Statement of Facts and briefs by April 24, 2009¹ on the issue of whether the above-median income Debtors in this case may deduct, on Official Form 22C, payments that are "contractually due" to a junior mortgagee pursuant to 11 U.S.C. §§ 1325(b)(3) and 707(b)(2)(A)(iii)(I) for purposes of calculating their monthly disposable income where they intend to seek a determination that the debt owed to the junior mortgagee is unsupported by any equity in their property and, thus, its lien is voidable and its claim unsecured pursuant to 11 U.S.C. § 506(a) and (d). See In re Pelosi, 382 B.R. 582 (Bankr.D.Mass. 2008).

There being no genuine issues of material fact, the matter is ripe for adjudication.

II. FACTS

The Debtors filed a Chapter 13 petition on August 12, 2008. The next day, the Court issued an "Order to Update," requiring the Debtors to file Schedules, a Statement of Financial Affairs, a Chapter 13 plan, Official Form 22C and other documents on or before August 28, 2008. The Debtors failed to file the requisite documents by the deadline imposed by the Court. Rather, on September 2, 2008, they filed a Motion to Extend Time to File Required Documents, seeking a two week extension of time to file documents. See 11 U.S.C. § 521(a); Fed. R. Bankr.P. 3015(b). The Debtors failed to file all required documents and their Chapter 13 plan within the requested time, although they filed some documents one day late. Accordingly, the Court, on September 24, 2008, dismissed the Debtors' Chapter 13 case, citing their failure to file evidence of current and sufficient liability insurance.

On October 6, 2008, the Debtors filed evidence that their property was properly insured, as well as a Motion to Vacate Order of Dismissal. The Court granted their Motion on October 6, 2008, but the Debtors' case was dismissed again on December 30, 2008 because they failed to produce other documents requested by the Chapter 13 Trustee and to comply with an order of the Court, dated December 15, 2008, requiring them to file an affidavit, on or before December 29, 2008, stating that they had produced or filed the documents sought by the Chapter 13 Trustee.

On January 9, 2009, the Debtors filed their second Motion to Vacate Order of Dismissal, as well as amended Schedules B, D, E, I, and J and an amended Official Form 22C. On January 12, 2009, the Court granted the Debtors' Motion to Vacate and reinstated their Chapter 13 case.

On Schedule A-Real Property, the Debtors listed their residence located at 88 Liberty Street, Randolph, Massachusetts (the "Property") with a value of $300,000. On Amended Schedule D-Creditors Holding Secured Claims, the Debtors listed "CitiMortgage" as the holder of a claim in the sum of $311,000 secured by a first mortgage on their Property and Chase Manhattan Bank as the holder of a claim in the sum of $64,561 based upon a home equity line of credit secured by a second mortgage on the Property.

On December 14, 2008, JP Morgan Chase Bank, N.A. timely filed a proof of claim in the sum of $65,028.21. It attached to its proof of claim a Home Equity Line of Credit Agreement and Disclosure Statement executed by the Debtors, as well as a Home Equity Line of Credit Mortgage executed by the Debtors. Accordingly, JP Morgan Chase Bank ("Chase"), not Chase Manhattan Bank, is the actual holder of the claim.

On January 14, 2009, the Debtors filed an amended, 60-month Chapter 13 plan to which the Chapter 13 Trustee filed the Objection which is now before the Court. Through their amended Chapter 13 plan, the Debtors proposed to make monthly plan payments in the sum of $1,018.² Specifically, they proposed to pay priority claims, totaling $10,019.13, in full and to pay a 26.72% dividend to unsecured creditors with claims totaling $168,236.33.³ According to the Debtors' amended Chapter 13 plan, the class of unsecured creditors is comprised of general unsecured creditors with claims totaling $103,675.33 and Chase with a claim in the sum of $64,561. The Debtors characterized Chase's claim as an unsecured claim arising after "lien avoidance/cramdown."

On the same day that the Debtors filed their amended Chapter 13 plan, they objected to the secured status, but not the amount, of Chase's claim, relying upon Domestic Bank v. Mann (In re Mann), 249 B.R. 831 (1st Cir. BAP 2000), and In re Pelosi, 382 B.R. 582 (Bankr.D.Mass.2008). On May 6, 2009, in the absence of a response from Chase, the Court sustained the Debtors' Objection to Chase's claim.

On amended Form 22C, the Debtors disclosed that they have a combined monthly income of $11,160.52. On Line 47 concerning future payments on secured claims,⁴ the Debtors listed payments to three creditors as follows:

-------------------------------------------------------------------------
                   Property          Average    Does Payment
    Name of        Securing          Monthly    Include taxes
    Creditor       the Debt          Payment    or insurance
-------------------------------------------------------------------------
a.  CitiMortgage   Residence        $2,299.00   No
-------------------------------------------------------------------------
b.  Chase          Single Family    $  301.00   No
    Manhattan      House
    Bank [sic]
-------------------------------------------------------------------------
c.  Toyota         Automobile (1)   $  394.23   No
    Motor
    Credit
-------------------------------------------------------------------------
    Total: Add                                                  $2,994.23
    lines a, b
    and c
-------------------------------------------------------------------------

On Line 59, the Debtors calculated their monthly disposable income under 11 U.S.C. § 1325(b) as $1,017.73, rounded to $1,018, the amount of their monthly plan payment. The parties agree that, if the Debtors were required to eliminate the $301 per month secured claim deduction on Form 22C attributable to Chase's claim, their monthly disposable income for plan purposes would be $1,318.73, rounded to $1,319.

III. POSITIONS OF THE PARTIES

A. The Chapter 13 Trustee

In her Objection, the Chapter 13 Trustee contends that the Debtors' amended Chapter 13 plan is miscalculated. Further, she maintains that, if the Debtors are paying Chase's claim as an unsecured claim, they should not be entitled to claim the expense deduction for secured claims on Form 22C for purposes of calculating their plan payment. She cites, inter alia, United States Trustee v. Rudler (In re Rudler), 388 B.R. 433, 438 n. 6 (1st Cir. BAP 2008), In re Hoss, 392 B.R. 463 (Bankr.D.Kan.2008), and In re Gonzalez, 388 B.R. 292 (Bankr.S.D.Tex.2008), in support of her position. The Chapter 13 Trustee also asserts that the Debtors' amended Chapter 13 plan was not filed in good faith, and extraordinary circumstances exist that require further inquiry into the Debtors' expense deduction for a wholly unsecured junior mortgage to Chase. Cf. In re Phillips, 382 B.R. 153, 172-73 (Bankr.D.Mass.2008).

B. The Debtors

The Debtors admit that their amended Chapter 13 plan is miscalculated and that they must file a further amended plan. With respect to the issue of the expense deduction, they also rely upon the decision in In re Rudler, 388 B.R. 433 (1st Cir. BAP 2008), as well as In re Willette, 395 B.R. 308, 325-28 (Bankr.D.Vt.2008), and In re Quigley, 391 B.R. 294 (Bankr. N.D.W.Va.2008). The Debtors also assert that their amended Chapter 13 plan was filed in good faith and that no extraordinary circumstances exist which would warrant disallowance of the deduction, particularly as their Schedules I and J mirror the disposable income calculation on Form 22C.

IV. DISCUSSION

For purposes of this decision, the Court finds that a determination that Chase's 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 to the issue before the Court.

Two recent decisions in this circuit, In re Rudler, and In re Burbank, 401 B.R. 67 (Bankr.D.R.I.2009), appeal docketed No. 09-1776 (1st Cir. June 3, 2009), contain comprehensive and thoughtful evaluations of the pressing issue before the Court, including detailed analyses of the relevant section of the Bankruptcy Code, namely 11 U.S.C. § 707(b)(2)(A)(iii);⁵ which is made applicable to Chapter 13 cases by § 1325(b)(3).⁶ Moreover, both decisions have been appealed to the United States Court of Appeals for the First Circuit. Indeed, as noted above, the First Circuit accepted direct review of the Burbank decision on June 3, 2009 pursuant to a Certification of Direct Appeal to Court of Appeals signed by Bankruptcy Judge Votolato. See also Morse v. Rudler (In re Rudler), No. 08-9007 (1st Cir. Jan. 5, 2009).

In Rudler, a decision involving two Chapter 7 cases which the U.S. trustee moved to dismiss for substantial abuse, see 11 U.S.C. § 707(b)(2), the United States Bankruptcy Appellate Panel for the First Circuit considered the issue of whether, in calculating "means test" eligibility, it is permissible to deduct payments due to secured creditors when the debtor intends to...