In re Reyes

401 B.R. 910

In re Thomas Ruben REYES and Denise Marie Reyes, Debtors.

No. 6:08-bk-28740-PC.

United States Bankruptcy Court, C.D. California, Riverside Division.

February 26, 2009.

Pamela Lacey, Esq., Price Law Group, APC, Encino, CA, for Debtors.

Elizabeth A. Schneider, Esq., Riverside, CA, for Rod Danielson, Chapter 13 Trustee.

AMENDED MEMORANDUM DECISION

PETER H. CARROLL, Bankruptcy Judge.

Thomas Ruben Reyes and Denise Maries Reyes ("Debtors") seek confirmation of their proposed chapter 13 plan. Rod Danielson, chapter 13 trustee ("Danielson") objects to confirmation. At the hearing, Pam Lacey appeared for the Debtors and Elizabeth Schneider appeared for Danielson. The court, having considered the pleadings, evidentiary record, and arguments of counsel, makes the following findings of fact and conclusions of law¹ pursuant to F.R.Civ.P. 52, as incorporated into FRBP 7052 and applied to contested matters by FRBP 9014(c).²

I. STATEMENT OF FACTS

On December 31, 2008, Debtors filed their voluntary chapter 13 petition. In the schedules filed with the petition, Debtors disclosed real and personal property valued at $385,720. Debtors' statement of financial affairs reveals that Debtors had gross income of $108,684 and $104,755 in 2008 and 2007, respectively. Debtors' residence valued at $350,000 is encumbered by a first deed of trust lien held by Community Mortgage Funding securing a debt of $395,000 and a second deed of trust lien held by Water & Power Community Credit Union ("W & P") attributable to a debt of $113,256. W & P's second deed of trust lien appears to be wholly unsecured. Debtors also owe approximately $15,000 on the lease of a 2006 Jeep Liberty. Debtors list 8 creditors in Schedule F holding unsecured nonpriority claims totaling $53,898 consisting primarily of credit card debt. There are no unsecured priority claims according to Schedule E.

Debtors' income is "above median" according to their Form B22C, Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income ("Form B22C") filed under penalty of perjury with the petition. As a result, Debtors were required by § 1325(b)(3) to calculate their expenses pursuant to § 707(b)(2), which resulted in monthly disposable income under § 1325(b)(2) as a negative number: -$938.25. Debtors' Schedules I and J tell a different story. Schedules I and J reflected monthly income and expenses of $6,671 and $6,071, respectively, with monthly net income of $600. In their plan, Debtors proposed to pay to Danielson the sum of $600 per month for a period of 60 months, which was estimated to pay 9% of allowed unsecured nonpriority claims.

Prior to confirmation, Danielson attacked the following deductions taken by the Debtors in Form B22C in calculating their current monthly income under the means test:

a. Line # 47(c)—A deduction of $1,124.04 payable to W & P in conjunction with "Future Payments on Secured Claims;"

b. Line # 48(b)—A deduction of $80.00 payable to W & P in conjunction with "Other Payments on Secured Claims;" and

c. Line #28—A deduction of the full vehicle ownership allowance under the IRS's Local Standards.

Danielson objects to confirmation, asserting that Debtors' proposed plan does not provide for the payment of all of the Debtors' projected disposable income during the five-year term of the plan as required by § 1325(b). Specifically, Danielson objects to Debtors' calculation under § 707(b)(2)(A)(iii) of (1) a secured debt deduction attributable to a junior lien on the Debtors' principal residence which the Debtors intend to value, treat as wholly unsecured, and strip in conjunction with confirmation of their plan; and (2) the amount of a vehicle ownership allowance claimed by the Debtors under the Local Standards. According to Danielson, the Debtors must commit to plan payments of $1,336 per month for a period of 60 months to satisfy the confirmation requirements of § 1325. Such a plan would pay 33% of allowed unsecured nonpriority claims in the case.

II. DISCUSSION

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(b) and 1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L) and (O). Venue is appropriate in this court. 28 U.S.C. § 1409(a).

A. Deduction of Secured Debt Payments Attributable to a Stripped Junior Lien.

Danielson argues that the Debtors have no intention of paying W & P's debt as a secured claim under their plan, pointing out that Debtors did not list the monthly payment due to W & P in Schedule J and that Debtors have filed an adversary proceeding against W & P seeking to "strip" its lien and determine its claim to be wholly unsecured.³ In response, Debtors argue that the deductions at Lines # 47(c) and 48(b) are proper because the amounts owing to W & P were "contractually due" on the petition date, citing In re Wilkins, 370 B.R. 815 (Bankr.C.D.Cal. 2007).

Wilkins is not dispositive. Wilkins addressed the issue of whether a chapter 7 debtor can include mortgage payments in the debtor's means test calculation, notwithstanding the debtor's intention to surrender the property immediately after bankruptcy. Id. at 816. The court in Wilkins denied the United States trustee's motion to dismiss under § 707(b)(2), holding that the mortgage payments were still "scheduled as contractually due" on the date of the petition and properly deductible from the debtor's current monthly income in performing the means test calculation. Id. at 819. The result is different in the context of a chapter 13 case.⁴

The majority of courts addressing this issue have concluded that, in calculating projected disposable income, a chapter 13 debtor may not deduct from current monthly income secured debt payments on real property which the debtor intends to surrender. See, e.g., In re Suess, 387 B.R. 243, 247 (Bankr.W.D.Mo.2008); In re Van Bodegom Smith, 383 B.R. 441, 451 (Bankr. E.D.Wis.2008); Spurgeon, 378 B.R. at 201; In re Sackett, 374 B.R. 70, 72-73 (Bankr. W.D.N.Y.2007); In re McPherson, 350 B.R. 38, 47 (Bankr.W.D.Va.2006); In re Crittendon, 2006 WL 2547102, *3 (Bankr. M.D.N.C.2006). First, the timing of the application of § 707(b)(2)(A) and (B) is different in a chapter 13 case. Crittendon, 2006 WL 2547102, *3. While the chapter 7 calculation to determine whether a presumption of abuse arises under § 707(b)(2) is made as of the date of the petition, § 1325(b)(1) specifically requires the court, upon objection, to make the determination whether the chapter 13 debtor is committing all projected disposable income "as of the effective date of the plan." 11 U.S.C. 1325(b)(1); see, e.g., Suess, 387 B.R. at 247; Van Bodegom Smith, 383 B.R. at 451; Sackett, 374 B.R. at 72-73. Second, the chapter 13 plan effectively creates a new contract between the debtor and secured creditor, so no payments are scheduled as contractually due to a secured creditor if the plan proposes a surrender of collateral. Suess, 387 B.R. at 248; Van Bodegom Smith, 383 B.R. at 450; Spurgeon, 378 B.R. at 201; McPherson, 350 B.R. at 46. Third, the majority's interpretation promotes the policies underlying chapter 13 bankruptcy. See In re Holmes, 395 B.R. 149, 153 (Bankr.M.D.Fla.2008) ("As one of the main requirements in Chapter 13 is that a plan be funded with all of the debtor's disposable income, it would go against the very essence of Chapter 13 to allow a debtor to deduct an expense that is non-existent at the time of confirmation."). Finally, a contrary interpretation might result in disparate treatment between below median and above median debtors when surrendering real property under a plan, i.e., a below median debtor, whose plan payments are determined by the actual income and expenses stated in Schedules I and J as of the effective date of the plan, could pay more that an above median debtor, whose projected disposable income is calculated under the means test. See In re Fager, 2008 WL 2497694, *2 (Bankr. D.Neb.2008); In re Marciniak, 2008 WL 2497690, *2 (Bankr.D.Neb.2008).

Courts have applied the same rule where debtors intend to strip a junior lien on a principal residence they intend to retain. See, e.g., Hoss, 392 B.R. at 473-74 ("Only a secured debt payment deduction for the first mortgage is permitted; that is all that is `reasonably necessary to be expended' under the plan in order for the debtors to retain their home."); McPherson, 350 B.R. at 45 (stating that where "a secured claim is bifurcated for purposes of treatment under the chapter 13 plan[,] . . . [a]ny deduction from income based on a secured claim that no longer exists may not be allowed.").

Accordingly, the court will sustain Danielson's objection. In calculating projected disposable income, Debtors will not be permitted to deduct from current monthly income secured debt payments attributable to a junior lien on the Debtors' principal residence which the Debtors intend to value, treat as wholly unsecured, and strip in conjunction with confirmation of their plan.

B. Deduction of Vehicle Ownership Expense.

Section 1325(b)(3) provides, in pertinent part that "amounts reasonably necessary to be expended under [§ 1325(b)(2)] shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)." 11 U.S.C. § 1325(b)(3). Under § 707(b)(2)(A)(ii)(I), a debtor's monthly expenses under the means test "shall be the debtor's applicable monthly expense amounts specified under the National Standards and the Local Standards, and the debtors' actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief. . . ." 11 U.S.C. § 707(b)(2)(A)(ii)(I). This court has followed consistently the line of cases holding that a debtor may not take a vehicle ownership allowance under the Local Standards for a vehicle that is owned free and clear of liens. See,...