In re Varner, Case No. 08-20806-TLM (Bankr.Idaho 5/22/2009)

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IN RE: SARA JEAN VARNER, Chapter 13, Debtor.

Case No. 08-20806-TLM.

United States Bankruptcy Court, D. Idaho.

May 22, 2009.

MEMORANDUM OF DECISION

TERRY L. MYERS, Chief Bankruptcy Judge

This Decision addresses the objections of C. Barry Zimmerman, the chapter 13 trustee ("Trustee"), to the proposed chapter 13 plan of debtor Sara Varner ("Debtor"). See Doc. Nos. 33, 35, 39 (Trustee's recommendation, objection, and memorandum). Though the parameters of his objections are not precisely drawn, the Court understands Trustee to level four basic challenges to the plan.

First, Trustee contends that under § 707(b)(2)(A)(iii)(I),¹ Debtor has improperly included mortgage payments for a condominium she no longer lives in and intends to surrender. Second, Trustee contends that, if the mortgage payments are proper expenses, Debtor cannot "double dip" by also claiming a standard rental allowance in addition to the mortgage expense. Third, Trustee challenges Debtor's good faith in filing her petition and in proposing her plan. Fourth, and finally, Trustee objects to the plan's "tax refund language."

For the reasons expressed below, the Court will reserve decision on the good-faith objection, pending supplementation of the record. The Court will overrule Trustee's remaining objections.

FACTS

The parties filed a stipulation of facts. See Doc. No. 40. The other factual matters discussed are simply matters of the pleading record. No evidence was submitted at hearing. The agreed facts are as follows.

Debtor filed her chapter 13 bankruptcy petition on November 21, 2008. Ten months earlier, in January, 2008, she signed a lease on an apartment in Lewiston, Idaho, and vacated her condominium in Moscow, Idaho. Prior to January, 2008, the condominium had been her residence. The Lewiston apartment she moved into cost her $500.00 per month in rent. Debtor had two mortgage obligations on the condominium, one for $490.00 per month to a creditor identified as Chase and a second for $434.00 per month to creditor Di-Tech. These total $924.00 per month, and Trustee and Debtor have agreed that "[a]s of the date of filing [the petition] . . . the two mortgages were still contractually due and owning [sic, owing]." Doc. No. 40.

Debtor's schedules I and J, filed with her petition, showed monthly income of $2,794.00 and expenses of $2,170.00, leaving a net $624.00 available to pay creditors. Doc. No. 1.

Debtor also filed her required Form 22C. Doc. No. 10. Because Debtor's annualized income is higher than the applicable median family income for the state of Idaho and her one-member household size, she is an above-median-income chapter 13 debtor. Id. at lines 12-17 and 18-23. Her Form 22C therefore sets forth Debtor's expenses in accordance with § 707(b)(2) and § 1325(b)(3). Id. at Part IV, lines 24A through 59.

Debtor's calculations and assertions of expenses left her with a negative $413.39 in disposable income. Id. at line 59.²

In reaching these results, Debtor's Form 22C claims a $650.00 standard mortgage/rent expense on line 25B³ and $924.00 in secured debts to Chase and DiTech on the Moscow condominium at lines 47(a) and (b).

Debtor's chapter 13 plan proposes to "surrender" the condominium securing Chase and Di-Tech. See Doc. No. 5 ("Plan") at § 6.2. Debtor has apparently ceased paying the creditors. See Doc. No. 1 at sched. J (showing $500.00 rent payment only); Doc. No. 19 (Chase stay relief motion, alleging lack of monthly payments May, 2008 through December, 2008).

Debtor's Plan proposes making payments over a three-year period, consisting of twelve monthly payments of $400.00 each and then twenty-four monthly payments at $91.00, for a total of $6,984.00 in "periodic plan payments" plus provision to Trustee of her "net" tax refunds. Doc No. 5 at § 1.1, § 1.2.1.⁴

DISCUSSION AND DISPOSITION

A. The relevant statutory framework⁵

Debtor's Plan does not propose to pay 100% of all creditors' claims, and Trustee has objected to the Plan. Consequently, this Court cannot confirm the Plan unless, as of the effective date of the Plan, Debtor commits all her "projected disposable income to be received in the applicable commitment period" to paying unsecured creditors. § 1325(b)(1).⁶

The Bankruptcy Code does not define "projected disposable income," but "disposable income" is defined as "current monthly income"⁷ minus "amounts reasonably necessary to be expended" for the support and maintenance of the debtor. § 1325(b)(2).

Debtor's current monthly income, reported as $4,868.80 on Form 22C, is not at issue here. Rather, this dispute involves the expense side of the calculation — the "amounts reasonably necessary to be expended" for Debtor's maintenance and support. Because Debtor is an above-median-income chapter 13 debtor, her expenses must be determined in accordance with the means test set forth in § 707(b)(2)(A) and (B), incorporated by § 1325(b)(3).

Broadly speaking, there are three basic categories of allowed expenses under the means test: living expenses, secured-debt payments, and priority debt payments. See § 707(b)(2)(A)(ii), (iii), (iv). See generally In re Meek, 370 B.R. at 308-11 (summarizing the means test in more detail).

B. Trustee's objection relating to Debtor's claimed mortgage expense for the condominium she intends to surrender

In his first objection, Trustee contends Debtor cannot properly deduct mortgage payments for collateral she intends to surrender.

Secured-debt expenses are addressed in § 707(b)(2)(A)(iii), which provides:

The debtor's average monthly payments on account of secured debts shall be calculated as the sum of—

(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and

(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts;

divided by 60.

This section requires the debtor to total all debt payments that are "scheduled as contractually due to secured creditors[.]" Trustee contends that this phrase includes only those amounts that will be owing to secured creditors as of the effective date of the plan. See Doc. No. 39 (memorandum) at 3. This argument relies on the following, italicized language in § 1325(b)(1):

If Trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan — . . .

(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to making payments to unsecured creditors under the plan.

(emphasis added).

Trustee argues that the plan creates a new contract between debtors and their pre-confirmation creditors. And under this new contract (i.e., the plan), Debtor will owe nothing to secured creditors Di-Tech and Chase "as of the effective date of the plan" because she is surrendering the condominium. Thus, Trustee argues that Debtor cannot properly include the $924.00 of monthly condominium mortgage expense.⁸

Courts have split on this issue: some refuse to allow chapter 13 debtors to include secured-debt expenses for collateral that will be surrendered,⁹ while others hold that these secured-debt expenses should be included in the debtor's expenses.¹⁰ See generally Hon. Ray C. Mullins & Elizabeth B. Rose, Perfectly Clear or Clear as Mud? A Review of Selected BAPCPA Consumer Issues, 2008 Norton Annual Survey of Bankruptcy Law Part II, § 1 n.23 (citing cases).

In In re Kelvie, 372 B.R. 56 (Bankr. D. Idaho 2007), this Court held that chapter 7 debtors may deduct mortgage payments under § 707(b)(2)(A)(iii) despite a stated intention under § 521 to surrender the collateral. Kelvie, though, clearly spoke to the function and operation of the means test in a chapter 7 environment as a "switching device." Id. at 61 (citation omitted). This Court has not yet decided the issue in the chapter 13 setting.

Trustee argues that Kelvie should be inapplicable to chapter 13 debtors because "[t]he view of a Chapter 13 is more forward looking . . . ." Doc. No. 39 at 3. The "forward-looking" analysis echoes that of this Court in Meek, 370 B.R. 294. However, viewing the means test — as incorporated in chapter 13 via § 1325 — through such a forward-looking lens is conceptually at odds with the Ninth Circuit's decision in Kagenveama. Kagenveama held that a chapter 13 debtors' "projected disposable income" is not determined based upon such a forward-looking view of the debtor's finances, but rather, should be mechanically calculated based upon the debtor's historical income. Id. at 874-75. In so holding Kagenveama firmly instructed courts to apply the literal language of BAPCPA, leaving Congress to correct unintended consequences. Id. at 875 ("If the changes imposed by BAPCPA arose from poor policy choices that produced undesirable results, it is up to Congress, not the courts, to amend the statute.") (citing Lamie v. United States Trustee, 540 U.S. 526, 542 (2004)).

With this instruction in mind, the Court turns to § 707(b)(2)(A)(iii)(I). As noted, this section specifically states that the secured payments are those scheduled as contractually due "following the date of the petition." (emphasis added). Consequently, measuring a debtor's secured-debt expenses beginning on the date the plan is confirmed (and not on the date the petition is filed) would render the specific language of § 707(b)(2)(A)(iii)(I) meaningless. See, e.g., In re Smith, 401 B.R. 469, 475 (Bankr. D. Wash. 2008).

Further, Trustee's reliance on the "as of the effective date" language in § 1325(b)(1...