Vega-Lara v. Viegelahn (In re Vega-Lara)

IN RE: CARLOS VEGA-LARA AND AURA CECILIA VEGA, DEBTORS

CARLOS VEGA-LARA AND AURA CECILIA VEGA, APPELLANTS v. MARY K. VIEGELAHN APPELLEE

IN RE: ANNETTE MARIE DIAZ DEBTOR

ANNETTE MARIE DIAZ APPELLANT v. MARY K. VIEGELAHN APPELLEE

Bankruptcy No. 17-52553-G

CIVIL ACTION NO: 5:18-CV-00796-RCL

Bankruptcy No. 17-52761-G

CIVIL ACTION NO: 5:18-cv-00798-RCL

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION

September 19, 2019

MEMORANDUM OPINION

This case raises the question of how tax refunds should be treated when calculating disposable monthly income under a Chapter 13 bankruptcy plan. The appeal stems from two consolidated cases involving the same trustee, Mary K. Viegelahn ("Trustee"). In both cases, the Bankruptcy Court agreed with Trustee that under Section 4.1 of the District Plan adopted by the Western District of Texas, the debtors were permitted to retain only the first $2,000 of their tax refunds and were required to turn over any excess to the Trustee as disposable income. Carlos Vega-Lara, Aura Cecilia Vega, and Annette Marie Diaz ("Debtors") claim that this is improper for two primary reasons. Debtors' first main argument is that Section 4.1 of the District Plan expressly contravenes provisions of the Bankruptcy Code, the Local Rules, and the Official Forms and thus should be stricken from Debtors' plans. Debtors' second main argument is that Section 4.1 of the District Plan impermissibly circumvents the motion, notice, and hearing requirements established in the Bankruptcy Code and Bankruptcy Rules. For the reasons set forth below, this Court affirms the ruling of the Bankruptcy Court and finds that Debtors must relinquish any tax refunds in excess of $2,000 to the Trustee in accordance with Section 4.1 of the District Plan.

JURISDICTION

This court has jurisdiction over appeals "from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges." 28 U.S.C. § 158(a). As explained in the separate order denying Appellee's Motion to Dismiss Appeal of Order Granting Trustee's Motion to Strike, appellate jurisdiction over all issues raised on appeal is proper. [Vega-Lara District Court ECF #17].¹

STANDARD OF REVIEW

Whether the District Plan expressly contravenes the Bankruptcy Code, Local Rules, or Official Forms and whether the District Plan impermissibly circumvents the motion, notice, and hearing requirements of the Bankruptcy Code and Bankruptcy Rules are both issues of law and thus are reviewed de novo. See Drive Fin. Services, LP v. Jordan, 521 F.3d 343, 346 (5th Cir.2008); In re Bass, 171 F.3d 1016, 1021 (5th Cir. 1999). It is important to bear in mind, however, that this Court owes considerable deference to the Bankruptcy Court's interpretation and application of its "own local rules adopted to promote efficiency." Matter of Adams, 734 F.2d 1094, 1102 (5th Cir. 1984).

BACKGROUND

I. Carlos Vega-Lara & Aura Cecilia Vega

The first of the two consolidated cases began on November 3, 2017 when Carlos Vega-Lara and Aura Cecilia Vega filed a Voluntary Joint Petition for relief under Chapter 13 of the Bankruptcy Code and filed their initial Chapter 13 Plan. [Vega-Lara Bankruptcy ECF #1 and #2]. On February 10, 2018 they filed their Schedule I (Official Form 106I) and Schedule J (Official Form 106J). [Vega-Lara Bankruptcy ECF #14, #15, #16, and #17]. Their Schedule I indicated that they expected to receive $6,034 in monthly net income, including $428 from "other monthly income." Id. This "other monthly income" was calculated by dividing their projected annual tax refund ($5,136) by twelve months. Brief of Appellants at 3 [Vega-Lara District Court ECF #13]. Their Schedule J indicated that they expected their monthly living expenses to be $5,109. [Vega-Lara Bankruptcy ECF #14, #15, #16, and #17]. Subtracting the monthly expenses on Schedule J from the monthly income on Schedule I, Debtors projected their monthly disposable income to be $925 for the applicable commitment period of three years. Brief of Appellants at 3-4 [Vega-Lara District Court ECF #13].

The Trustee, however, objected to this plan, so Debtors filed their First Amended Chapter 13 Plan providing for approximately a 24% dividend payable to general unsecured creditors. [Vega-Lara Bankruptcy ECF #17]. After the Bankruptcy Court held a hearing on the plan and the Trustee again objected to confirmation, Debtors filed their Second Amended Chapter 13 Plan.[Vega-Lara Bankruptcy ECF #21]. On April 4, 2018, The Trustee filed an objection to this plan as well. [Vega-Lara Bankruptcy ECF #24]. On May 4, 2018, the Bankruptcy Court issued a Memorandum Opinion and Order Granting Chapter 13 Trustee's Objection to Confirmation of First Amended Chapter 13 Plan. [Vega-Lara Bankruptcy ECF #28]. Debtors filed another Chapter 13 Plan on May 30, 2018, and the Bankruptcy Court confirmed it on May 18, 2018. [Vega-Lara Bankruptcy ECF #37 and #41]. This confirmation is the final order from which Debtors appeal.

II. Annette Marie Diaz

The second of the two consolidated cases began on December 1, 2017 when Annette Marie Diaz filed a Voluntary Petition for relief under Chapter 13 of the Bankruptcy Code and filed her initial Chapter 13 Plan. [Diaz Bankruptcy ECF #1 and #2]. On February 13, 2018, she filed her Amended Schedule I (Official Form 106I) and Amended Schedule J (Official Form 106J). [Diaz Bankruptcy ECF #14, #15 and #16]. Her Schedule I indicated that she expected to receive $3,201 in monthly net income, including $792 from "other monthly income." Id. This "other monthly income" was calculated by dividing her projected annual tax refund ($9,504) by twelve months. Brief of Appellant at 3 [Diaz District Court ECF #12]. Debtor's Schedule J indicated that she expected her monthly living expenses to be $1,696. [Diaz Bankruptcy ECF #14]. Subtracting the monthly expenses on Schedule J from the monthly income on Schedule I, Debtor projected her monthly disposable income to be $1,505 for the applicable commitment period of three years. [Diaz Bankruptcy ECF #14 and #16].

Also on February 13, 2018, Debtor filed her First Amended Chapter 13 Plan providing for approximately a 12% dividend payable to general unsecured creditors. [Diaz Bankruptcy ECF #16]. The Bankruptcy Court then held a hearing regarding the plan, and the Trustee filed anobjection. Memorandum Opinion Denying Confirmation of Debtor's First Amended Plan [Diaz Bankruptcy ECF #33]. On March 7, 2018, Debtor filed her Second Amended Chapter 13 Plan; she also filed amended Schedules I and J indicating that she actually expected to receive $2,681 in monthly net income, including $272 from "other monthly income" based on a projected annual tax refund of $3,264 divided by twelve months. [Diaz Bankruptcy ECF #35 and #37]. Her projected monthly disposable income remained unchanged. Id. The Trustee filed an objection to this amended plan, which the Bankruptcy Court granted, prompting Debtor to file a new Chapter 13 Plan on May 30, 2018. [Diaz Bankruptcy ECF #40]. The Bankruptcy Court confirmed this new Plan on July 18, 2018. [Diaz Bankruptcy ECF #43]. This confirmation is the final order from which Debtor appeals.

III. Chapter 13 of the Bankruptcy Code

Chapter 13 of the Bankruptcy Code is a kinder alternative to Chapter 7. The benefits of proceeding under Chapter 13 instead of under Chapter 7 include staving off foreclosure or seizure of property, retaining possession of nonexempt assets, obtaining discharge of debts not otherwise dischargeable under Chapter 7, and staving off collections activities from non-dischargeable obligations such as student loans and tax liabilities. See 11 U.S.C. § 707(b). In exchange for these numerous benefits, however, debtors electing to proceed under Chapter 13 must pay creditors the maximum amount that they can afford. See H.R. Rep. 109-31(I), p. 2, 2005 U.S.C.A.N.N. 88, 89.

IV. Western District of Texas' District Plan

Bankruptcy Courts have the statutory and rulemaking authority to promulgate and enforce local bankruptcy rules. The United States Supreme Court has "the power to prescribe bygeneral rules the forms of process, writs, pleadings, and motions, and the practice and procedure in cases under title 11. Such rules shall not abridge, enlarge, or modify any substantive right." 28 U.S.C. § 2075 (2018). Pursuant to Fed. R. Bank. P. 9029(a), Bankruptcy Courts may mandate local rules governing practice and procedure. Pursuant to Rule 3015.1, the Western District of Texas issued its Consolidated Standing Order for the Adoption of a District Form Chapter 13 Plan on October 16, 2017, thereby adopting a form Chapter 13 plan to be used throughout the Western District of Texas. Order #17-02. The District Form Chapter 13 Plan went into effect on November 1, 2017.

The first of the two provisions of the District Plan at issue on appeal is Section 4.1, which reads as follows:

4.1 Tax Refunds.

All tax refunds received by Debtor (or either Debtor if a joint case) while the chapter 13 case is pending shall be allocated as set forth below:

1) The total amount of the aggregate tax refund(s) received for any tax period that exceeds $2,000.00 shall, upon receipt, be paid and turned over to the Trustee as additional disposable income and such amount shall increase the base amount of the Plan. The Plan shall be deemed modified accordingly, and the Trustee will file a notice of plan modification within 21 days of receipt of the tax refund;

2) This $2,000.00 annual limit shall apply to both joint-debtor and single-debtor cases;

3) The $2,000.00 otherwise retained by Debtor must first be applied to any Plan arrearages;

4) Notwithstanding subparagraph (1) above, Debtor may file a notice to retain the portion of the tax refund otherwise payable to the Plan under subparagraph (1) with twenty-one (21) day negative notice as set forth in Local Rule 9014(a) if, at the time of receipt of a refund, Debtor's Plan provides for the payment of

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