GUY R. HUMPHREY, Bankruptcy Judge.
This decision concerns whether the debtors' Chapter 13 plan of reorganization should be confirmed. For the reasons set forth below, the court determines that it should not be confirmed.
The following constitutes the court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. The findings of fact are derived from Debtor Beverly J. Lofty's testimony at the confirmation hearing held on June 3, 2010 (the "Hearing") and the record in this matter. In making its determination, the court also considered the arguments of counsel at the Hearing, the debtors' Schedules (A-J) and Statement of Financial Affairs (Doc. 1) and Amended Schedules (Doc. 63), the debtors' amended Chapter 13 Plan (Docs. 9, 34, & 55) ("Plan"), the Chapter 13 Trustee's Objection to Confirmation of Plan and Request for Denial of Confirmation (Doc. 58) ("Trustee" and "Trustee Objection"), and the post-hearing memoranda submitted by the Trustee (Doc. 74) ("Trustee's Brief") and the debtors (Docs. 77 and 80) ("Debtors' Brief"),
The debtors, Bruce A. Lofty and Beverly J. Lofty ("Debtors"), live in a 2002 Safari Coach Motor Home (the "Motor Home"). Approximately five to six months a year, the Debtors park the Motor Home at one of the parcels of real estate they own, a property known as 3345 Powers Road, Jamestown, Ohio, where their daughter lives with her family ("Powers Road Property"). At least in part, due to Ms. Lofty's arthritis, the Debtors spend the winter months in the southern part of the United States, previously in Florida, but are more likely to spend the winter in Texas in the future. The Motor Home has the following expenses:
Overall, the evidence shows the Motor Home costs approximately $1,900.00 each month.
The Debtors purchased the Powers Road Property in 2004 because their daughter did not have sufficiently good credit to obtain a mortgage loan. However, the Powers Road Property adds no expense to the Debtors' budget. The mortgage is paid by the Debtors' daughter paying rent to the Debtors. The rent covers the mortgage, taxes and insurance. The daughter handles all the maintenance on the Powers Road Property. This arrangement has remained consistent since the Powers Road Property was purchased. The Trustee has not objected to the Debtors' retention of the Powers Road Property.
The Debtors also own a parcel of real estate known as 3855 N. Lakeshore Drive, Jamestown, Ohio ("Lakeshore Property"). The Lakeshore Property is occupied by the Debtors' adult son and adult grandson. The secured claim on the Lakeshore Property would require payments of over $800.00 per month ($43,500 / 60 months), plus interest.
According to their Amended Schedule I (Doc. 55), the Debtors' income is mostly fixed.
On November 17, 2009 the Debtors filed a Chapter 13 petition (Doc. 1) and a Chapter 13 plan (Doc. 9). Under the original plan, the Debtors proposed to pay to the Trustee $2,477 each month for 60 months to fund payments under the Plan. As originally filed, nonpriority unsecured creditors would not receive any payment on account of their allowed claims.
On March 3, 2010 in response to various objections, the Debtors amended the original plan (Doc. 34) to increase the monthly payment to $2,727 and to pay an 8 % dividend to nonpriority unsecured creditors. In addition, the Debtors proposed that funds used to maintain two other parcels of real property being surrendered be paid to the Trustee as additional plan payments. On April 19, 2010 the Debtors filed a further amendment, raising the monthly payment to $2,758 and lowering the dividend for nonpriority unsecured creditors to 7 %.
Under the Plan, the Debtors propose to retain a 2007 Dodge Dakota and pay $422 each month (including interest) on this secured claim. In addition, the Plan provides for the retention of the Motor Home, with the Debtors paying $59,000 (representing the value of the Motor Home on the Petition Date) plus interest over the life of the Plan as a secured claim and the balance, approximately $75,000, as an unsecured claim.
The Plan also provides for the Debtors' retention of the Powers Road Property, with the Debtors directly paying the monthly mortgage payments of $644.39 outside the Plan. The Plan indicates that the Debtor's daughter pays rent of $650 each month and the Debtors park the Motor Home there six months a year. The Debtors also intend to file an adversary proceeding post-confirmation to avoid a second mortgage on the Powers Road Property as wholly unsecured.
The Plan also contemplates the retention of the Lakeshore Property. The Plan states that the Debtors owe $59,736 on the mortgage loan for this property and, as amended, proposes to pay $43,500 on this loan as a secured claim and the remaining balance as unsecured.
All objections to confirmation of the Plan other than the Trustee's Objection were resolved by the date of the Hearing.
The sole issue raised in the Trustee's Objection is whether the Plan was proposed in good faith. See 11 U.S.C. § 1325(a)(3)
4) The payment of the secured claims frees up equity in the corresponding collateral and provides the Debtors with a "head start versus a fresh start" in light of the small dividend to be paid to nonpriority unsecured creditors, raising issues with the Debtors' sincerity in proposing the Plan and their "abusing the spirit of the Bankruptcy Code."
The Debtors respond that: a) the Powers Road Property does not cost the unsecured creditors anything because the Debtors' daughter pays all of the costs related to that property; b) the Debtors have a moral obligation to take care of their son and grandson living at the Lakeshore Property "who are basically their dependants" by paying any of their expenses or costs associated with the Lakeshore Property that do not get paid by the son or governmental or social agencies; and c) if the Plan is not confirmed, the Debtors will "have no incentive to continue in the Chapter 13" because all of their income is exempt from execution.
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L).
The objecting party has the initial burden to produce evidence in support of an objection. In re Henry, 328 B.R. 529, 538 (Bankr.S.D.Ohio 2004). The Debtors have the ultimate burden of proof to show the requirements of 11 U.S.C. § 1325 have been met. Id.; In re Hogue, 78 B.R. 867, 872 (Bankr.S.D.Ohio 1987); and In re Carver, 110 B.R. 305, 311 (Bankr.S.D.Ohio 1990) (Cole, J.). See also Hardin v. Caldwell (In re Caldwell), 895 F.2d 1123, 1126 (6th Cir.1990) ("Caldwell II"); Ed Schory & Sons, Inc. v. Francis (In re Francis), 273 B.R. 87, 91 (6th Cir. BAP 2002).
The Debtors' Plan cannot be confirmed because it does not commit all of their projected disposable income to be received during the life of their Plan to payment of unsecured creditors as required by § 1325(b)(1)(B). Section 1325(b)(2)(A)(i) only allows reasonably necessary expenses for the maintenance and support of the Debtors and a "dependent of the debtor" in arriving at what would be "projected disposable income." See generally Keith M. Lundin, Chapter 13 Bankruptcy, 3d, Vol. 2, § 165.2 (2000 and Supp. 2004).
Section 1325(b) provides in pertinent part as follows:
11 U.S.C. § 1325(b) (emphasis added). Thus, all of the Debtors' projected disposable income during the life of the Plan must be applied to make payments to the unsecured creditors under the Plan and in computing projected disposable income, only expenses for the Debtors and their dependents may be deducted.
The Debtors are retaining two parcels of real property and the Motor Home, which is the Debtors' home. The Powers Road Property "cash flows" and is not maintained at the expense of the Debtors' nonpriority unsecured creditors because the Debtors' daughter pays all of the costs associated with that property. Thus, no projected disposable income will be used in relationship to that property. The same is not true for the Lakeshore Property occupied by the Debtors' son and grandson.
The expenses of the Lakeshore Property are not reasonably necessary for the Debtors or their dependents. The Debtors'
The evidence established that the Lakeshore Property was purchased for the Debtors' son and grandson, but not that they were "dependents" of the Debtors as that term is used in § 1325(b). Ms. Lofty testified that the grandson was a "fire starter" when he was younger and therefore it was difficult for the son to find a place to rent. The son suffers from depression and Krohn's disease. Ms. Lofty also testified that the son and grandson had no other place to live. The Debtors refer to the son and grandson in their post-hearing brief as "basically their dependents." Doc. 77, p. 6.
The evidence does not support a finding that the Debtors' adult son and grandson are dependents as that term is used in § 1325(b). The Bankruptcy Code does not define the term "dependent." However, more than a purely moral obligation is required to qualify as a dependent as that term is used in § 1325(b). See In re Clements, 185 B.R. 903 (Bankr. M.D.Fla.1995) (Debtors could not spend funds to help a 32 year old daughter, who was a recovering alcoholic and the sister of one of the debtors, who had cerebral palsy and lived in a nursing home. Debtors had no legal obligation to provide such support). Moreover, the record does not show any legal requirement to support the son and the grandson nor are these relatives listed as dependents on the Debtors' schedules. See Doc. 55, Amended Schedule I. The record also lacks any evidence that the Debtors claim these relatives as dependents for tax purposes or any other objective standard this court could apply. Cf. In re Tracey, 66 B.R. 63, 66-67 (Bankr. D.Md.1986) (Debtors claimed mother as a dependent on their tax return and the court used the definitions of dependent in the I.R.S. Code as a guide, considered the purpose of § 1325(b) and allowed the mother to live in a home rent-free. The home had a rental value of $175.00 each month and a mortgage payment of $342 each month). Further, Ms. Lofty's testimony that no other housing options for the son and the grandson were available and that they relied on this housing was not persuasive. Cf. Leslie Womack Real Estate, Inc. v. Dunbar (In re Dunbar), 99 B.R. 320, 324 (Bankr.M.D.La.1989) ("[T]his Court interprets the reference to `dependents'... to mean a person who reasonably relies on the debtor for support and whom the debtor has reason to and does support financially.").
Without adopting a specific test for dependents, it is sufficient to note that the record only shows a moral obligation of the Debtors to support their son and grandson. The evidence did not establish that the Debtors' son and grandson were dependents of the Debtors under any recognized legal definition of "dependent." Accordingly, the use of projected disposable income to support them violates § 1325(b)(1)(B) and the court cannot confirm the Plan.
The Bankruptcy Appellate Panel for the United States Court of Appeals for the Sixth Circuit summarized the Sixth Circuit's good faith decisions in In re Francis, 273 B.R. 87 (6th Cir. BAP 2002).
Caldwell II, 895 F.2d at 1126-27. The Caldwell II factors merely serve as guidelines for determining good faith. In re Sharon, 200 B.R. 181, 196 (Bankr.S.D.Ohio 1996). Good faith does not necessarily require a substantial payment to unsecured creditors. Francis, 273 B.R. at 92. Further, the good faith determination is not simply a matter of counting the factors favoring good faith and numerically weighing them against those factors indicating a lack of good faith. In re Gelvin, 1994 Bankr.LEXIS 1978 (Bankr.S.D.Ohio Nov. 23, 1994). "[C]lose proximity in time between a debtor's purchase of collateral and the filing of a Chapter 13 may evidence a lack of good faith." Henry, 328 B.R. at 539 (internal citations omitted). In summarizing the § 1325(a)(3) good faith analysis, the Sixth Circuit stated that:
Okoreeh-Baah, 836 F.2d at 1033.
The totality of the circumstances test set forth in Caldwell II and expounded upon in Okoreeh-Baah, Francis and their progeny require analysis of both the subjective good faith and the objective good faith of debtors. Thus, factors 4, 7, 9, 10, and 12 listed above have at least some element of scienter relating to assessing
In several different decisions the Northern District of Illinois has recognized the distinction between "subjective" and "objective" good faith relating to Chapter 11 and Chapter 13 cases. Thus, in In re Mandalay Shores Coop. Hous. Assoc., Inc., 63 B.R. 842, 847-48 (N.D.Ill.1986), United States District Judge Milton I. Shadur stated:
This distinction was further expounded upon in In re McCormick Road Assocs., 127 B.R. 410, 415 (N.D.Ill.1991):
See also Elmwood Dev't Co. v. General Elec. Pension Trust (In re Elmwood Dev't Co.), 964 F.2d 508, 512 (5th Cir.1992) ("Because the good faith standard is an objective one, the court was not constrained to entertain and give dispositive weight to
The concept of a Chapter 13 case and a Chapter 13 plan being filed in "objective good faith" has been more recently discussed in the context of motions to extend the automatic stay under § 362(c)(3)(B) and to impose a stay under § 362(c)(4).
Accordingly, determination of the Debtors' good faith in proposing the Plan
The Trustee admits that the Plan satisfies many of the Caldwell II factors. See Trustee's Brief, pp. 8 and 11. The commitment period of the Plan is the maximum 60 months; there is no suggestion that the Debtors have not been honest in representing their financial circumstances; the secured claims are not modified except to the extent permitted under the Bankruptcy Code; the Debtors have not filed for bankruptcy protection previously; and the administration of the Plan will not impose any unusual burden on the Trustee.
The focus of the Trustee's good faith argument is essentially that the Debtors are paying a substantial portion of their income to secured creditors to either create equity in collateral for the benefit of themselves or their family or, with respect to the Motor Home, that income is being foolishly frittered away on the depreciating Motor Home. The Trustee posits that by surrendering the Motor Home and moving into one of their parcels of real estate, the Debtors could pay a significantly higher dividend to nonpriority unsecured creditors.
The court finds that the Trustee met his burden of producing evidence in support of his objection. The evidence as to the Debtors' retention of several parcels of real estate and the Motor Home, their payment of costs related to their son and grandson, Ms. Lofty's testimony, and the court's taking judicial notice of the Debtors' Schedules (A-J), as amended, and the Statement of Financial Affairs (Docs. 1, 34, 55 & 63) support the Trustee Objection and constitute sufficient evidence to raise a good faith issue under § 1325(a)(3). Accordingly, the Debtors bore the ultimate burden of proving their good faith. Caldwell II, 895 F.2d at 1126; Francis, 273 B.R. at 91.
The Debtors did not sustain their burden of proving that their Plan was proposed in good faith. The primary area of dispute does not concern the Debtors' subjective good faith, but rather, the objective good faith of the Plan. The court finds that if the Plan is confirmed, "the purposes undergirding Chapter 13: a sincerely-intended repayment of pre-petition debt consistent with the debtor's available resources" will not be satisfied. Okoreeh-Baah, 836 F.2d at 1033.
By paying the costs related to the housing of their son and grandson from their projected disposable income, the Debtors are choosing to support family members at the expense of the nonpriority unsecured creditors. That support impacts the amount of the Debtors' payments to unsecured creditors and, therefore, implicates the first Caldwell II factor. Thus, that support is inconsistent with the requirement that a plan be proposed in objective good faith.
In addition, the overall structure of the Plan unfairly favors secured creditors in contravention of factor 5 set forth in Caldwell
Despite the Debtors' proclamation that they "have provided factual support and testimony that their plan is submitted in good faith [and] reflects a reasonable expenditure of income and expenses under the applicable provisions of the Bankruptcy Code" (Debtors' Brief, p. 2), evidence of the reasonableness of these expenditures was lacking at the Hearing. The Debtors' Brief, pp. 4-5, states that: "The Debtors' list monthly living expenses of $3905.78 leaving $2758.00 per month for their Chapter 13 payment. The monthly expenses are definitely higher than the norm for a Chapter 13 with household of two." The Debtors then list expenses that they assert should be excluded from those expenses and conclude that their actual personal monthly living expenses are $2,474.13 and that this amount "is slightly less than the Trustee's guide line of $2500.00 per month for a household of two." While the Debtors' testimony and briefing attempted to justify their retention of the Motor Home and the two parcels of real property, the Debtors did not introduce evidence as to the reasonableness of those costs, including as to the reasonableness of the total of their living expenses and the expenses associated with the Motor Home. Even though they mention the "Trustee's guide line" regarding expenses, the Debtors failed to introduce any such guidelines or standards such as the Internal Revenue Service's National Standards and Local Standards. See 11 U.S.C. § 707(b)(2)(A). For Chapter 7 cases applying those standards, see Voelkel v. Naylor (In re Voelkel), 322 B.R. 138, 147-48 (9th Cir. BAP 2005);
Factor 8 of the Caldwell II factors also does not support confirmation of the Debtors' Plan. The Debtors wish to retain the Motor Home, continue spending the winter months in a warmer climate and support their immediate family without considering other viable options. While Ms. Lofty provided limited testimony as to her arthritis justifying the retention of the Motor Home, that evidence did not rise to the level of providing "justifiable special circumstances" (factor 8 of Caldwell II) warranting the retention of a non-cash flowing parcel of real property and a separate Motor Home.
The court would be remiss if it did not note that some facts and evidence support the subjective good faith factors set forth in Caldwell II and evince a sincere effort on the Debtors' part to rehabilitate their financial affairs. Specifically, the Debtors' shedding of all but the two parcels of real property (the Powers Road Property and the Lakeshore Road Property) and cramming down of the Motor Home could potentially generate money for the nonpriority unsecured creditors. In addition, the obligation the Debtors feel to support their son and grandson, while violating § 1325(b)(1)(B) and running afoul of the objective good faith factors, displays subjective good faith. However, the Debtors' suggestion that they will stop payment to nonpriority unsecured creditors and use the funds paid to the Trustee pre-confirmation to negotiate with their secured creditors if the Plan is not confirmed since their income is exempt from execution under applicable non-bankruptcy law does not assist the Debtors. See Debtors' Brief, p. 7. First, no testimony or other evidence in support of this argument was introduced at the Hearing. Second, the pursuit of relief under Chapter 13 of the Bankruptcy Code is voluntary and generally the right to dismiss a Chapter 13 case (not previously converted) is unfettered. See 11 U.S.C. §§ 303(a) and 1307(b). The Debtors certainly may pursue such a course of action. However, such an alternative, if relevant at all, does not reflect the Debtors' "sincerely-intended repayment of pre-petition debt consistent with [their] available resources." Okoreeh-Baah, 836 F.2d at 1033. When alternative, feasible plans are possible that would increase the dividend to nonpriority unsecured
For the reasons set forth above, confirmation of the Plan is denied. The Debtors are granted forty-five (45) days from the date that the order on this decision is entered to file an amended plan. In the event an amended plan is not filed with that forty-five (45) day period, the case will be dismissed.
The court will enter a separate order on this decision denying confirmation with leave to file an amended plan within forty-five (45) days.
11 U.S.C. § 362(c)(3) (emphasis added). Section 362(c)(4), in pertinent part, states:
11 U.S.C. § 362(c)(4) (emphasis added).