Lafferty v. E. Consolidation & Distribution Servs. (In re Lafferty)

In re: JOHN W. LAFFERTY, III, and

CONSTANCE A. LAFFERTY DebtorJOHN W. LAFFERTY, III, and CONSTANCE A. LAFFERTY Movant v. EASTERN CONSOLIDATION AND DISTRIBUTION SERVICES, INC. Respondent/Objector

Case No. 1:17-bk-02900-HWV

UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

December 16, 2019

Chapter 13

Confirmation of Plan 11 U.S.C. §1325

OPINION

In this case the court considers the request of John W. Lafferty, III and Constance A. Lafferty (the "Debtors") for confirmation of their Chapter 13 Plan (the "Plan") pursuant to § 1325 of Title 11, U.S.C.¹ Eastern Consolidation and Distribution Services, Inc. ("ECDS"), the holder of an allowed unsecured claim, has objected to confirmation of the Plan (the "Objection") on multiple grounds, including an assertion that it fails to commit all the Debtors' projected disposable income to the payment of unsecured claims as required by § 1325(b)(1). ECDS has also objected on grounds that the Plan was not proposed in good faith as required by § 1325(a)(3) and that it is not feasible under § 1325(a)(6).

I. Jurisdiction

This court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1), 157(b)(2)(A) and (b)(2)(L).

II. Facts and Procedural History

The Debtors filed a chapter 13 petition on July 13, 2017. They claim to have disclosed all their income on their Statement of Current Monthly Income and Calculation of Commitment Period ("Form 122C-1"). According to the calculations performed on Form 122C-1, the Debtors' disposable income is not determined under § 1325(b)(3) and the applicable commitment period is three years. Consistent with Form 122C-1, the Debtors have proposed a Third Amended Plan with a monthly payment of $1,600.00, which will pay approximately 3% of the value of the allowed unsecured non-priority claims.²

ECDS has objected to confirmation of the Plan on multiple grounds, including an assertion that the Plan fails to pay all allowed unsecured claims in full or to submit all the Debtors' projected disposable income received during the applicable commitment period as required by § 1325(b)(1). It is undisputed that the Plan does not pay all allowed unsecured claims in full. Thus, the true basis of this part of the Objection is the assertion that the Plan does not submit all the Debtors' projected disposable income received during the applicable commitment period as required by § 1325(b)(1). ECDS references the Debtors' failure to include certain distributions from a bankrupt entity named Calbat, LLC³ ("Calbat") in their calculation of projected disposable income as support for their Objection. These distributionsfrom Calbat, according to ECDS, were received by the Debtors during the 6-month period immediately preceding the month during which this case was filed (the "Sampling Period")⁴ and should therefore have been included in the calculation of the Debtors' current monthly income. Had this been done, argues ECDS, the Debtors' disposable income would be significantly higher and the applicable commitment period in this case would be five years instead of three years. This would significantly increase the monthly plan payment necessary to comply with § 1325(b)(1) and increase the distribution to unsecured creditors. Thus, ECDS argues that the Plan should not be confirmed because it fails to commit all the Debtors' projected disposable income to the payment of unsecured claims as required by § 1325(b)(1).

According to ECDS, the distributions from Calbat that should have been included in the Debtors' calculation of their current monthly income include: (1) a capital gain in the amount of $81,198.00 appearing on line 13 and in Schedule D of the Debtors' 2017 Joint Federal Income Tax Return (the "Capital Gain"); (2) eight distributions between January 27, 2017 and April 5, 2017 totaling $20,612.00 listed by Calbat in response to question four of the Statement of Financial Affairs in its bankruptcy case (the "Insider Distributions"); and (3) various disbursements to unknown payees for unknown purposes totaling $8,603.11 as reflected on Calbat's Belco Community Credit Union Checking Account Statements (the "Belco Statements") for the period beginning March 1, 2017 and ending on October 31, 2017 (the "Belco Distributions" and collectively with the Capital Gain and Insider Distributions, the "Calbat Distributions").

Because of the foregoing, ECDS also asserts that the Plan has not been proposed in good faith as required by § 1325(a)(3). Lastly, ECDS objects to confirmation of the Plan on groundsof feasibility, claiming that the Debtors will not be able to make all payments under the Plan as required by § 1325(a)(6). A hearing on the Objection was held on August 15, 2019 where arguments were heard. The matter is now ripe for a decision.

III. Discussion

The question presented here is whether the Plan satisfies the conditions of § 1325(b) and, if so, whether it also meets the conditions of § 1325(a). If the Plan does not satisfy the conditions of § 1325(b), then the court may not confirm the plan over the objection of ECDS and the Objection will be sustained. 11 U.S.C. § 1325(b)(1). Conversely, if the Plan satisfies the conditions of § 1325(b) and it also meets the conditions of § 1325(a), then the court must confirm the plan over the objection of ECDS and the Objection will be overruled. 11 U.S.C. § 1325(a). Finally, if the Plan complies with the conditions of § 1325(b) but does not satisfy each of the conditions of § 1325(a), then the court has discretion to deny confirmation of the Plan or to confirm the Plan over the objection of ECDS. See In re Szostek, 886 F.2d 1405, 1411-1412 (3d Cir. 1989). The court begins its analysis by defining and assessing the burden of proof.

A. The Burden of Proof - Confirmation Hearings

1. Defining the Burden of Proof

The term "burden of proof" is used to refer to two distinct burdens—the burden of production and the burden of persuasion. Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49, 56 (2005). The burden of production requires the burdened party to introduce enough evidence to make out a prima facie case or lose summarily. In re 150 N. St. Assocs. Ltd. P'ship, 184 B.R. 1, 7 (Bankr. D. Mass. 1995) (citations omitted). The burden of persuasion is the ultimate burden assigned to a party who must prove something to a specified degree of certainty (e.g. by a preponderance of the evidence) or lose the issue. Tech. Licensing Corp. v. Videotek, Inc., 545F.3d 1316, 1326-27 (Fed. Cir. 2008). The general rule is that the plaintiffs bear the risk of failing to prove their claims. Schaffer, 546 U.S. at 56.

2. Assessing the Burden of Proof

It is well settled that the chapter 13 debtor has the initial burden of production and the final burden of persuasion on all elements of plan confirmation. See In re Hill, 268 B.R. 548, 552 (B.A.P. 9th Cir. 2001). It is important to note, however, that Bankruptcy Courts may (and normally do) rely upon the report of the chapter 13 trustee at the confirmation hearing to determine whether the debtor has met those burdens. In re Hines, 723 F.2d 333, 334 (3d Cir. 1983). Consequently, if no objection is raised by a creditor at or before the confirmation hearing and the trustee is prepared to execute his report in favor of confirmation, then the court will typically confirm the plan as a matter of course.⁵ In re Fricker, 116 B.R. 431, 436-37 (Bankr. E.D. Pa. 1990).

On the other hand, if an objection is raised by a creditor at or before the confirmation hearing, then the initial burden of production regarding that objection naturally falls upon the objecting creditor. Id. at 438; see In re Ziegler, 88 B.R. 67, 69 (Bankr. E.D. Pa. 1988); In re Fries, 68 B.R. 676, 685 (Bankr. E.D. Pa. 1986). To satisfy its burden of production, the objecting creditor must articulate a "clear and cognizable objection" to confirmation of the plan or the objection may be overruled. Fricker, 116 B.R. at 438. The objecting creditor need not produce a witness to articulate a clear and cognizable objection. Id. at 437. To the contrary, the court will consider and may sustain an objection if it appears reasonable even if no factual evidence is produced by the objecting party. Id. Of course, the court may overrule such an objection without receiving any factual evidence if such an objection appears frivolous orunfounded. Id. If the objecting creditor meets its initial burden of production, then the debtor, who has the burden of persuasion, is required to make a record to persuade the court to overrule the objection and confirm the plan. Id.

B. The Standard of Proof

There is a presumption that the preponderance-of-the-evidence standard applies in civil actions between private litigants unless "particularly important individual interests or rights are at stake." Grogan v. Garner, 498 U.S. 279, 286 (1991). The language of § 1325 is silent as to the standard of proof required for confirmation of a plan. This silence is inconsistent with a view that Congress intended a heightened standard of proof to protect particularly important individual interests or rights. Id. at 286. It is thus fair to infer that Congress intended the ordinary preponderance standard to govern disputes involving plan confirmation. Id. at 288. To establish a fact by a preponderance of the evidence means to prove that the fact is more likely true than not true. Fischl v. Armitage, 128 F.3d 50, 55 (2d Cir. 1997). This is the standard of proof that applies here.

In the context of the above principals, the issues presented in this case include whether ECDS has articulated a clear and cognizable objection to confirmation of the Debtors' Plan pursuant to §§ 1325(b)(1), 1325(a)(3), and 1325(a)(6), and if so, whether the Debtors have nonetheless satisfied their burden of persuasion by a preponderance of the evidence. This court finds that ECDS has articulated a clear and cognizable objection to...