§ 1114 - Termination of Retirement Benefits

In re SAI Holdings Limited, Case No. 06-33227 (Bankr. N.D. Ohio March 26, 2007) (J. Whipple). The debtors moved to terminate the retirement benefits provided for under collective bargaining agreements pursuant to 11 U.S.C. § 1114. The union objected.

To determine the appropriateness of termination, the Court had to determine whether § 1114 was applicable in a liquidating Chapter 11 case. The Court determined that there was plenty of authority supporting the applicability of § 1114 in a liquidating Chapter 11 case, and the Court went on to further find that the debtors’ motion to terminate the retiree benefits must be denied.

§§ 109(h)(1) and 521(b) - Credit Counseling Certification

In re Lewis, Case No. 06-32459 (Bankr. N.D. Ohio March 7, 2007) (J. Whipple). Husband participated in a credit counseling briefing session outside of the 180-day statutory period required by 11 U.S.C. § 109(h)(1). Subsequently, wife participated in a counseling session, within the 180-day statutory period, during which she asserted that husband, who was 74 years old and hard of hearing, also participated. The credit counseling agency, however, did not issue another certification for his participation but rather issued a certification only for wife. During the debtors’ joint bankruptcy filing, the debtor submitted an affidavit of wife and of a credit counseling agency representative supporting their assertion that husband had participated in the second credit counseling session and, therefore, had completed the requirements of § 109(h)(1). The United States Trustee’s Office filed a motion to dismiss, arguing that husband had not met the requirements of § 109(h)(1) and further, that the two affidavits submitted did not constitute a proper certification of participation that consumer debtors are required to file under 11 U.S.C. § 521(b).

In addressing whether the debtors had complied with § 109(h)(1), the Court determined that no evidence controverted the debtors’ affidavits supporting the husband’s participation in the second credit counseling session, and therefore, the Court concluded that husband had met the statutory requirements of § 109(h)(1). In determining whether the affidavits submitted by the debtors could be found to comply with the certificate requirement of § 521(b), the Court noted that neither the Federal Rules of Bankruptcy Procedure nor the Official Forms approved by the Judicial Conference of the United States addressed the required form of the certificate. The Court found that there is minimum information that must be contained in a certificate in order to comply with § 521(b), and the Court found that the two affidavits, taken together, could not assist husband with meeting this minimum information requirement. Given that, the Court turned its direction to the affect of non-compliance with § 521(b). Since neither § 109(h) nor § 521(b) specify the consequence of non-compliance with § 521(b), the Court found that the operative statutory authority as to general Chapter 7 dismissal, located in § 707(a), was applicable. The specific enumerated causes for dismissal set forth in the statute were inapplicable, thus, the Court looked to case law for guidance and found that a court has substantial discretion in evaluating other circumstances for dismissal under § 707(a), including weighing the benefits and prejudices of a dismissal. Ultimately, the Court found that no prejudice to any creditor or party in interest had been shown by husband’s failure to file a certificate of credit counseling evidencing his participation in the credit counseling within the 180-day period prior to his bankruptcy filing. Thus, the Court denied the United States Trustee’s motion to dismiss.

COMMENT: This decision correctly confirms that courts do not have to be entirely inflexible when it comes to the credit counseling requirement under BAPCPA. The credit counseling requirement, in this author's experience, does not do much in the way of helping debtors. In light of this, courts should not strive to make the hurdle any higher than what the language of the statute requires.

§ 1325(b) - Projected disposable income

In re Upton, --- B.R. ----, 2007 WL 809784 (Bankr. S.D. Ohio March 14, 2007) (J. Preston). The Chapter 13 Trustee objected to the confirmation of the debtors’ proposed Chapter 13 Plan based upon the debtors’ exclusion of income received from Social Security for determining their projected disposable income. When the debtors filed their statement of current monthly income on Official Form 22C, the form indicated that their household income was above the median income. The calculation of the debtors’ current monthly income on Form 22 did not include any of the SSI income received by one of the debtors, however. Schedule I, on the other hand, did include the SSI income, and when compared to Schedule J, resulted in monthly net income which was much higher than the proposed monthly plan payment of the debtors. The trustee objected to the debtors’ plan on the basis that it did not satisfy the good faith and disposable income tests of 11 U.S.C. § 1325(a)(3) and § 1325(b).

The question for the Court was whether the Court should resort to Form 22 or Schedule J in determining “projected disposable income.” The Court found that if a debtor’s current monthly income is below the median income, the reasonable and necessary expenses are to be determined by what is listed on Schedule J. Conversely, the Court noted that if a debtor has current monthly income that is greater than the median income, § 1325(b)(3) dictates that the debtor’s reasonably necessary expenses are calculated pursuant to 11 U.S.C. § 707(b)(2), the “Means Test,” which utilizes national standards and local standards set by the Internal Revenue Service.

The Court agreed with the trustee that reference to Schedules I and J is the appropriate method for analyzing and computing “projected disposable income” under § 1325(b)(1)(B), however, it is limited by the directive that certain income is specifically excluded from the calculation of “current monthly income.” 11 U.S.C. § 101(10)(A). The Court recognized the fact that the information contained in Form 22 is not always an accurate reflection of a debtor’s current circumstances and can lead to anomalous or even absurd results if it is the only information used in determining a debtor’s “projected disposable income.” Similar difficulties can arise when analyzing a debtor’s expenses when the debtor is above-median income. Further, the statutory language of § 1325(b)(1) mandates the use of Schedules I and J in determining “projected disposable income.” Section 1325(b)(1) indicates that the court is supposed to make a determination of “projected disposable income” as of the effective date of the plan. The Court found that the language “as of the effective date of the plan” directs the timing of the Court’s inquiry. Form 22 contains historical data and reflects circumstances that occurred prior to the date of filing. Schedules I and J reflect the debtor’s circumstances as of the petition date. The Court noted that if a debtor has any change in income or expenses prior to confirmation, he or she is under a duty to amend Schedules I and J. Thus, Schedules I and J, as filed on the petition date, subject to amendments, reflect the debtor’s circumstances as of the effective date of the plan. Therefore, the Court found that consideration of Schedules I and J in determining “projected disposable income” under § 1325(b)(1)(B) is appropriate. However, the Court concluded that the consideration of benefits received from SSI is inappropriate for determining “projected disposable income.” The Court recognized that this “hybrid” approach to analysis of the debtors’ disposable income was a bit cumbersome, but it presented the only conclusion that the Court could derive given the language of the statute, the practicalities of its application, and the intent behind Chapter 13.

Even so, the Court found that the debtors still were required to propose a plan in good faith pursuant to § 1325(a)(3). The Court found that in the Sixth Circuit, one factor to consider in determining good faith is the amount of the proposed payment and the amount of the debtor’s surplus. The Court found that the debtors had a surplus of monthly net income that was not being committed to the plan. This fact weighed heavily against a finding that the debtors’ plan was proposed in good faith pursuant to § 1325(a)(3). However, the debtors had not presented any evidence at the hearing regarding good faith, and therefore, the Court allowed the debtors an opportunity to present evidence in the future regarding the issue. The Court overruled the trustee’s objection to confirmation for the debtors’ failure to commit all their projected disposable income to the plan, however, it reserved judgment on the issue of good faith until a further hearing.

COMMENT: The Court's decision to look to Schedules I and J to help determine debtor's disposable monthly income is troubling as it ignores the plain language of the statute. The Court states that the figures chosen by Congress do not reflect the reality of a debtor's situation and, therefore, Schedules I and J must be consulted to avoid absurd results. This is not a valid reason for ignoring clear statutory text. Congress defined "disposable income," and the Court is not suggesting that the definition used by Congress is ambiguous. The Court is essentially saying that it disagrees with the definition chosen by Congress and believes it to be absurd. Therefore the Court is substituting its own definition of disposable income. A Court does not have this luxury.

Instead of contorting itself to find that Schedules I and J should be considered in the disposable income calculation, the Court might have been better off to focus on good faith and whether good faith requires all extra money to be put into the plan.

R.C. § 2329.66(A)(10)(c) - Whether assets are deposited in an Individual Retirement Account for the purpose of evading the payment of a debt

In re Dailey, Case No. 06-54893 (Bankr. S.D. Ohio February 7, 2007) (J. Preston). The debtor owned a 2002 Honda jointly with his non-filing spouse that was free and clear of liens. His interest in the vehicle totaled $4,800.00. Within 10 to 14 days prior to filing his bankruptcy petition, the debtor first met with his attorney to discuss his options. At that time, he had 7 or 8 judgments against him totaling approximately $65,000.00. One of the judgment creditors had garnished his wages, and thus, the debtor sought bankruptcy protection to stop that garnishment. The debtor decided, shortly before filing bankruptcy, to borrow $3,500.00, using the vehicle as collateral for the loan. On the morning of the day that his bankruptcy petition was filed, he established an Individual Retirement Account (IRA), depositing the funds he obtained from the vehicle loan, plus $500.00 of other funds that he had on hand, to take advantage of the IRA exemption under R.C. § 2329.66(A)(10)(c). During his bankruptcy, the debtor admitted that he had converted non-exempt assets into exempt assets in order to protect his vehicle and the funds that he had placed in the IRA.

The trustee objected to the debtor’s claim of an exemption in the IRA, asserting that the debtor had established the IRA for the purpose of evading payment of his debts in contravention of R.C. § 2329.66(A)(10)(c), wherein it provides an exemption for money deposited in an IRA “[e]xcept for any portion of the assets that were deposited for the purpose of evading the payment of any debt . . . .” Based on that, the trustee argued that she need not show bad faith or fraudulent intent but merely a desire on the part of the debtor to shield assets from the liquidation process of Chapter 7 in order to prevail on her objection. The debtor, however, countered that he simply engaged in prudent pre-bankruptcy planning and took full advantage of exemptions allowed by law.

The Court noted that the legislative history, together with the Bankruptcy Code’s policy of enabling a fresh start, has led many courts to conclude that the conversion of non-exempt assets into exempt assets does not, in and of itself, constitute fraud. The Court further noted, however, that an exception may be made where there exists evidence of fraud beyond the mere conversion of assets. The exception examines factors, including: (1) whether the transfer occurred immediately prior to the bankruptcy; (2) whether the debtor converted a large amount of assets or where the assets were of high value; (3) whether the transfer was a reaction to a judgment entered against the debtor; (4) whether the debtor received inadequate consideration for the transfer; (5) whether the debtor continued to use the property transferred; (6) whether the debtor was rendered insolvent by the transfer; and (7) whether the debtor attempted to conceal the conversion or attempted to mislead creditors or other parties in interest.

The Court agreed with the trustee that the Court need not find fraud or bad faith in light of the opening clause of § 2329.66(A)(10)(c). The Court, however, disagreed with the trustee’s argument that the debtor’s purpose was to evade payment of debt because the debtor had stipulated that his intent was to take advantage of the exemptions authorized by the Bankruptcy Code and Ohio law. The Court found that the debtor had not intended to avoid payment of his debt when investing funds in the IRA but had only intended to protect his assets. The Court found that while there might be a fine line between investing in an exempt asset to avoid payment of a debt and engaging in prudent pre-bankruptcy planning, a fine line still existed. Further, the Court recognized that a debtor may not readily confess his intentions related to pre-bankruptcy activities, thus, the Court stated that it could consider the facts surrounding the debtor’s activities and the totality of the circumstances. These include: (A) the debtor’s understanding of the effect of his transfer or conversion of assets; (B) the debtor’s intended or anticipated use or disposition of the exempt assets; (C) the use or disposition of the exempt assets after the commencement of the bankruptcy case; (D) the debtor’s knowledge or understanding of the purpose of the exempt asset; and (E) whether any collection activities were underway at the time of the conversion of the assets. When applying these factors, the Court must find that the trustee presented evidence illustrating the debtor’s true purpose in converting non-exempt assets into exempt assets. The trustee had failed, so her objection was overruled.

COMMENT: This decision makes it quite difficult to ever find that debtors are not entitled to an exemption under § 2329.66(a)(10)(c). Virtually every act ever done by debtors to avoid making a payment to creditors was also done to preserve assets of the debtors. That's what avoiding paying creditors does-- preserve assets. Thus, the fine line articulated by Judge Preston becomes blurred beyond distinction.