In re Melendez

597 B.R. 647

IN RE: Fidencio MELENDEZ, Debtor.

Bankruptcy Case No. 18-12485 TBM

United States Bankruptcy Court, D. Colorado.

Signed February 20, 2019

Steven W. Holland, Loveland, CO, for Debtor

Adam Goodman, Denver, CO, for Trustee

MEMORANDUM OPINION AND ORDER DENYING CONFIRMATION OF DEBTOR'S CHAPTER 13 PLAN

Thomas B. McNamara, United States Bankruptcy Judge

I. Introduction.

Bankruptcy is a bargain. Chapter 13 of the Bankruptcy Code¹ "affords individuals receiving regular income an opportunity to obtain some relief from their debts while retaining their property." Bullard v. Blue Hills Bank , ––– U.S. ––––, 135 S.Ct. 1686, 1690, 191 L.Ed.2d 621 (2015). The quid pro quo is the Chapter 13 plan. A debtor must propose and obtain Court approval of a "plan under which [the debtor] pay[s] creditors out of ... future income." Hamilton v. Lanning , 560 U.S. 505, 130 S.Ct. 2464, 2469, 177 L.Ed.2d 23 (2010). If the debtor makes "all payments under the plan," the debtor earns the right to a discharge and "fresh start" free from most prior financial burdens.

In this case, Fidencio Melendez (the "Debtor") filed for Chapter 13 bankruptcy protection and immediately proposed a plan. His plan was simple. He proposed to pay $ 142 per month for 60 months to the Chapter 13 Trustee. Such payments were to be used to pay only his lawyer, the Internal Revenue Service, and Chapter 13 Trustee fees. The plan contemplated that the Debtor would continue to make substantial voluntary retirement contributions (almost $ 1,000 a month) for his own benefit so that he could retire early. Meanwhile, the Debtor proposed that his general unsecured creditors — including credit card companies holding about $ 66,000 in debt racked up before the bankruptcy — receive nothing.

The Chapter 13 Trustee objected that the Debtor's plan lacked good faith. The Court agrees and concludes that the Debtor's plan is an abuse of the purpose and spirit of Chapter 13 as well as a manipulation of the bargain represented by the Bankruptcy Code. So, the Court denies confirmation.

II. Jurisdiction and Venue.

This Court has jurisdiction to enter final judgment on the issues presented in this bankruptcy case pursuant to 28 U.S.C. § 1334. The plan confirmation dispute is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning administration of the estate), (b)(2)(L) (confirmation of plans), and (b)(2)(O) (other proceedings affecting the liquidation of the assets of the estate). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. Procedural Background.

The Debtor filed for protection under Chapter 13 of the Bankruptcy Code on March 29, 2018.² The same day, he filed a proposed "Chapter 13 Plan Including Valuation of Collateral and Classification of Claims" (the "Plan").³ Standing Chapter 13 Trustee Adam M. Goodman (the "Chapter 13 Trustee") objected to confirmation of the Debtor's Plan on a number of grounds including "lack of good faith" under Section 1325(a)(3) (the "Objection").⁴ The Court conducted an initial Confirmation Hearing and directed the parties to submit legal briefing on confirmation issues.⁵ Thereafter, the Court presided over an evidentiary hearing on confirmation of the Debtor's Plan. During the evidentiary hearing, the Debtor testified as the only witness. In addition to the testimonial evidence, the Court admitted Exhibits A-H. Furthermore, the Debtor and the Chapter 13 Trustee introduced a "Statement of Stipulated Facts," which served to streamline the evidentiary hearing.⁶ At the conclusion of the evidence, the parties presented the Court with their oral closing arguments. Thereafter, the Court took the dispute under advisement and now issues its decision. The Court commends the parties and counsel for their professionalism and very capable legal work throughout the contested confirmation process.

IV. Findings of Fact.

A. The Debtor's Background and Employment.

When he filed for bankruptcy protection, the Debtor was about 55 years old.⁷ He lives alone and has no dependents. The Debtor graduated from high school and worked all his adult life, including work at a sheep farm, assembly plant, plastics plant, and his current long-term job. For the last 27 years, he labored at Carestream Health, Inc. (or its predecessors). The company provides imaging products and services for the health care industry. The Debtor is a production worker who prepares x-ray film. He operates and maintains machinery. Occasionally, his job requires physical labor, including cleaning machinery and pulling waste x-ray film sheets. The Debtor works 12-hour shifts rotating between days and nights. His employment is stable, although he worries about the general business prospects for the x-ray film industry.

The Debtor wants to retire in about five years at age 60. During his testimony, the Debtor was adamant that he desires to be "done working" in a few years. After his early retirement, the Debtor plans "to do nothing." He wishes to "just relax."

B. The Debtor's Assets and Liabilities.

When he filed for bankruptcy protection, the Debtor listed $ 500,750 in assets and $ 253,288 in liabilities.⁸ His largest asset is a 401(k) retirement account (the "Retirement Account") worth $ 254,222.⁹ His other significant asset is his home in Fort Collins, Colorado: a two-bedroom condominium that he has owned for 16 years.

The real property is worth $ 242,678 but is encumbered by a $ 179,880 mortgage. So, the Debtor has some equity in the condominium. His other assets are quite modest in value and consist of: an older model car worth $ 500; household appliances, furnishings, electronics, and clothes valued at $ 875; and some financial assets (two small bank accounts, unpaid wages, and an anticipated tax refund) worth $ 2,475. The Debtor claims all his assets (except $ 1,002 in property) are exempt.¹⁰

On the liabilities side of his balance sheet, the Debtor's largest debt is his mortgage loan. The mortgage debt was substantially current as of the bankruptcy filing. The Debtor has continued to make monthly mortgage payments during the bankruptcy case, so the balance is declining. A few months after the bankruptcy filing, his mortgage lender filed a proof of claim for $ 177,801.¹¹ In addition to his mortgage loan, the Debtor listed $ 5,658 in priority taxes owed to the Internal Revenue Service.¹² The IRS' proof of claim is slightly less.¹³ All of the Debtor's other liabilities (except a small loan against the Retirement Account) consist of credit card obligations. According to his Schedule F, the Debtor ran up credit card bills of $ 64,992 prior to the bankruptcy filing.¹⁴ But, creditors holding credit card claims filed proofs of claim totalling slightly more: $ 66,130.¹⁵

C. The Debtor's Income and Expenses.

Consistent with his long-term employment, the Debtor has steady income. On his Schedule I, he estimated $ 5,017 in monthly gross wages from his job at Carestream Health, Inc.¹⁶ His "Chapter 13 Calculation of Disposable Income" Form 122C-2 lists the same amount of income.¹⁷ The Debtor's pre-bankruptcy paystubs confirm $ 5,017 of gross monthly wages.¹⁸ Since the Debtor's Schedule I and Form 122C-2 income calculations match, the Debtor has, in effect, disclosed that his average monthly income in the six months before his bankruptcy filing is the same as his estimated monthly income as of the petition date. Furthermore, the Debtor's income is "above-median" for a one-person household in Colorado.¹⁹

For the six months before he filed bankruptcy, the Debtor made voluntary contributions of $ 995 per month to his Retirement Account.²⁰ In addition, he repaid $ 146 per month to his Retirement Account for a loan he made himself from his Retirement Account three years ago. The Debtor anticipates that the Retirement Account loan will be repaid by November 2019 if he continues to repay at the current rate. The Debtor testified that he made regular voluntary contributions to his Retirement Account for about two decades. The size of his Retirement Account — $ 254,222 — corroborates the Debtor's testimony about his long-term contributions. The Debtor's other payroll deductions (for taxes and insurance), as identified on his Schedule I, appear standard. After subtracting all the Debtor's payroll deductions from his gross monthly wages, the Debtor estimated $ 2,472 in "combined monthly income" on his Schedule I.

The Debtor's expenses are modest. He pays $ 1,042 per month on the mortgage loan for his home.²¹ According to his Schedule J, after subtracting the costs of food, utilities, transportation, and clothing, the Debtor estimates "monthly net income" of just $ 143. The Form 122C-2 means test calculation presented by the Debtor is slightly less and shows "monthly disposable income" of $ -81.²² Both calculations — one "forward-looking" and the other "backward-looking" — were made on the basis of the Debtor "deducting" the $ 995 monthly contribution the Debtor has made and proposes to continue making to his Retirement Account.

D. The Debtor's Chapter 13 Plan.

The Debtor's Plan is exceedingly simple. The Debtor proposes to pay the Chapter 13 Trustee $ 142.03 per month for sixty (60) months resulting in total payments of $ 8,521.80.²³ The proposed monthly payments to the Chapter 13 Trustee mirror the Debtor's Schedule J estimate of "monthly net income." The Debtor states that such payments will be used as follows:

$ 2,011.00     To be paid to Debtor's Counsel (for legal fees)
$ 5,658.28     To be paid to IRS (for satisfaction of priority debt)
$   852.52     To be paid to Chapter 13 Trustee (for trustee compensation)
__________
$ 8,521.80     Total

In addition, the Debtor proposes to make direct monthly payments of $ 1,042 on his mortgage loan. Further, he desires to continue paying back $ 68 to himself for the loan from the Retirement Account. And, implicit in the proposal is the Debtor's intention to continue his voluntary $ 995 per month 401(k) contribution to his Retirement Account. The rub comes on...