IN RE BASS

MEMORANDUM ON OBJECTIONS TO CONFIRMATION

J. VINCENT AUG, Jr., and JEFFERY P. HOPKINS, Bankruptcy Judges.

The four cases captioned above are before the Court on objections to confirmation filed by the Chapter 13 Trustee, Margaret A. Burks ("Trustee").1 The plans at issue are percentage plans that propose to pay less than a 100% dividend on allowed unsecured claims. The issue presented is whether the plans satisfy the disposable income requirement of 11 U.S.C. § 1325(b)(1).2 This is a core proceeding. 28 U.S.C. § 157(b)(2)(L).

All four plans propose a monthly plan payment that is equal to the difference between Total Combined Monthly Income reflected on Schedule I and Total Monthly Expenses reflected on Schedule J. The Trustee does not challenge the necessity of the Debtors' expenses pursuant to § 1325(b)(2)(A). Moreover, the Trustee does not dispute that all projected disposable income will be applied to the plans if the assumptions used by the Debtors to draft the plans prove to be correct over the first thirty-six months of the plan. However, the Trustee's experience leads her to believe that this does not always happen. A debtor might receive unanticipated income over the first thirty-six months of the plan that is not reasonably necessary for maintenance or support (e.g., wage increases, tax refunds, inheritances, gifts, lottery proceeds, insurance proceeds, proceeds from causes of action, or proceeds from the sale of property). Additionally, claims actually paid through the plan may differ from a debtor's preconfirmation assumptions (e.g., debtor overestimates claims, creditors fail to file timely proofs of claim, court sustains objection to a claim, or secured creditor obtains relief from the automatic stay and the secured claim is no longer paid through the plan).3 If, within the first thirty-six months, an event occurs that proves incorrect a preconfirmation assumption that is related to the calculation of disposable income, the Trustee believes that § 1325(b)(1)(B) entitles her to any resulting increase in disposable income. Consequently, the Trustee encourages the use of a form plan that contains the following certification:

If a debtor chooses not to include a similar certification in the plan, the Trustee seeks a verbal certification of the same effect at the first meeting of creditors. The Debtors presently before the Court refused to make a similar certification, either written or oral. The instant objections followed.

The practical effect of the Trustee's objections is to raise two issues under § 1325(b)(1)(B). The first issue is whether a percentage plan of less than 100% violates § 1325(b)(1)(B). The second issue is whether § 1325(b)(1)(B) requires actual or projected disposable income.4

PERCENTAGE PLANS VS. BASE PLANS

Traditionally, Chapter 13 debtors have filed percentage plans in this Court.5 Because payments are complete under a percentage plan "when allowed unsecured claim holders have been paid the stated percentage and all other payments required by the plan have been made," 2 Keith M. Lundin, Chapter 13 Bankruptcy § 170.1 (3rd ed.2000), the percentage plan creates a potential conflict with the disposable income requirement. Notwithstanding a plan's apparent compliance with § 1325(b)(1) at the time of confirmation, it may later be discovered that a debtor is on schedule to complete payment of the relevant percentage before submitting all projected disposable income because claims actually paid through the plan turned out to be different from the debtor's preconfirmation assumptions.6

The Austens' plan provides a good illustration of this potential conflict.7 The plan requires a monthly payment of $1,000. This figure represents the difference between Total Combined Monthly Income reflected on Schedule I and Total Monthly Expenses reflected on Schedule J. Thus, the Austens' projected disposable income under § 1325(b)(1)(B) is $36,000 ($1,000 × 36). Consequently, the plan can be confirmed over a § 1325(b) objection so long as $36,000 is committed to the Trustee. The plan, however, does not commit $36,000 to the Trustee.

Because the proposed length of the plan is "estimated," nothing in the plan requires the Debtors to make the $1,000 payments for thirty-six months. To the contrary, the plan only requires monthly payments to the Trustee until she pays a 70% dividend on allowed unsecured claims. If enough creditors scheduled as holding unsecured claims fail to file a timely proof of claim, the 70% dividend will be paid prior to the thirty-sixth month. Moreover, if one or more of the Debtors' secured creditors obtains relief from the automatic stay, then the corresponding monthly plan payment on account of the secured claims (being $250 and $400) will be applied to the payment of allowed unsecured claims and the 70% dividend will be paid even earlier. Finally, there is the additional possibility that a timely filed claim will be disallowed or reduced as a result of a successful objection, thereby causing the plan to be completed earlier still. The Austens, along with the other subject Debtors, contend they should be able to benefit from these "windfall" situations.

The Seventh Circuit, in dicta, has recognized the inherent problem with percentage plans:

In re Witkowski, 16 F.3d 739, 746 n. 11 (7th Cir.1994) (affirming plan modification to increase percentage paid on allowed unsecured claims after certain scheduled unsecured creditors did not file timely proofs of claim). The foregoing language from Witkowski is particularly significant given that the Sixth Circuit, also by dicta, deemed it worth repeating:

In re Welch, No. 97-5080, 1998 WL 773999, at *3 n. 6 (6th Cir. Oct. 11, 1998) (affirming discharge of debtors where creditor appealed discharge order when debtors prepaid percentage plan through lump-sum payment).

This Court is aware of one published decision that has addressed this issue. See In re Peterson, 53 B.R. 339 (Bankr.D.Or. 1985). In Peterson the debtor filed a percentage plan proposing to pay $270 per month until the trustee paid a 25% dividend on allowed unsecured claims. Assuming all scheduled claims would be allowed and paid without default, the plan would take thirty-six months to complete. Upon objection to confirmation by an unsecured creditor, the court denied confirmation under § 1325(b) where the failure of scheduled creditors to file timely claims would result in the debtor paying less than $9,720 ($270 × 36) into the plan. Id. at 341.

Pursuant to the foregoing authority, particularly the Sixth Circuit's footnote in Welch, this Court concludes that a percentage plan cannot be confirmed over a timely objection pursuant to § 1325(b). In the event that a debtor cannot propose a percentage plan that pays a 100% dividend on allowed unsecured claims, a debtor must propose a "base" or "pot" payment to obtain confirmation over a § 1325(b) objection. See Arnold B. Cohen, Pot Plans Should Be Replacing Percentage Plans in Chapter 13, 4 J.Bankr.L. & Prac. 305 (1995); 2 Keith M. Lundin, Chapter 13 Bankruptcy § 166.1 (3rd ed.2000). Three out of four of the more commonly used plans incorporate such a "base" payment.8

2 Keith M. Lundin, Chapter 13 Bankruptcy § 170.1 (3rd ed.2000). To obtain confirmation in the face of a § 1325(b) objection, the base amount cannot be less than the amount of the debtor's projected disposable income under § 1325(b)(1)(B). In the Austen case, for example, the Debtors must propose a base that is no less than $36,000 ($1,000 × 36).9

Although the base plan takes care of disposable income objections, it creates a problem concerning the best interest test under 11 U.S.C. § 1325(a)(4) because the base plan does not bind the debtor to the repayment of a minimum percentage of debt. This problem is solved through the use of a "base or percentage, whichever is greater" plan, which "is now the predominant form of Chapter 13 plan." 2 Keith M. Lundin, Chapter 13 Bankruptcy § 170.1 (3rd ed.2000). Under this plan, total payments into the plan are stated as "a base of [projected disposable income] or [percentage paid on unsecured claims under hypothetical liquidation], whichever is greater." See id. Payments under the plan are complete when the disjunctive condition is satisfied. Id. Using the Austen case as an example, assume that a hypothetical liquidation would yield a 25% dividend to unsecured creditors. To obtain confirmation over a § 1325(b) objection, the Austens would have to commit to the plan the following payment: "a base of $36,000 or 25%, whichever is greater."10

ACTUAL VS. PROJECTED INCOME

The Trustee's objections also raise the issue of whether § 1325(b)(1)(B) requires actual or projected disposable income. This issue was decided by the Ninth Circuit on substantially similar facts. In re Anderson, 21 F.3d 355 (9th Cir.1994) involved a Chapter 13 trustee who asked the debtors to sign a "Best Efforts Certification" that would require them to pay all of their actual disposable income over the first thirty-six months of the plan.11 The debtors refused to sign the certification and the trustee objected to confirmation. The Ninth Circuit agreed with the debtors:

Id. at 358; see also In re Killough, 900 F.2d 61 (5th Cir.1990) (potential for overtime was not definite enough to be characterized as projected income).

To the contrary, the Eighth Circuit has held that § 1225(b) (the same language as § 1325(b) incorporated under Chapter 12) requires debtors to contribute actual disposable income for thirty-six months. See Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994). Although the Eight Circuit conceded that the plain language of § 1225(b) supports the interpretation that a debtor is required to commit only projected disposable income, the court concluded that such a construction "yields an absurd result" that "would reduce § 1225(b) to a nullity." Id. at 192. The Court feared that a projected income standard would enable debtors "to reject the debt without consulting the lender," id. at 193, "if they simply `predict' that disposable income will be zero." Id. at 192. This concern is allayed by a debtor's duty to complete and file accurate schedules and the potential consequences of a failure to do so. Moreover, even under circumstances like Rowley where it may be more difficult to project income (e.g. family farmers or salespeople on commission), the trustee or an unsecured creditor can always seek to capture actual, unprojected income through the process of plan modification.12

This Court respectfully concludes that Anderson reflects the better statutory analysis. This conclusion is shared by Judge Lundin in his highly-respected treatise. See 2 Keith M. Lundin, Chapter 13 Bankruptcy § 164.1 (3rd ed.2000) (referring to Anderson as a "good model for other courts" and "the better-reasoned decision" in comparison to Rowley).

Judge Lundin notes the following problems if § 1325(b) is construed as requiring actual disposable income:

Id. By contrast, the Anderson standard "leaves the bankruptcy courts with discretion to assess the reality of each debtor's projections of income." Id. On a case-by-case basis, the party objecting under § 1325(b) must at least provide some evidentiary support for the contention that a particular source of income can be projected at the time of confirmation. See e.g., In re Heath, 182 B.R. 557 (9th Cir. BAP 1995); In re Abner, 234 B.R. 825 (Bankr. M.D.Ala.1999); In re Kuehn, 177 B.R. 671 (Bankr.D.Ariz.1995).

Although the Sixth Circuit has not addressed this issue in the context of a § 1325(b) confirmation objection, In re Freeman, 86 F.3d 478 (6th Cir.1996) suggests that § 1325(b) requires only projected disposable income. Freeman involved the issue of whether a debtor's motion to modify a confirmed plan violates § 1325(b) when the proposed modification seeks to retain a portion of a tax refund received postconfirmation. According to the court's analysis, the answer depends upon whether the refund in question was projected at the time of confirmation. This Court believes that the Sixth Circuit, if confronted with the issue of whether § 1325(b)(1)(B) precludes confirmation of a plan that does not commit all actual disposable income, would follow the projected disposable income standard set forth in Anderson.

For the foregoing reasons, this Court holds that § 1325(b)(1)(B) does not require a debtor to commit all actual disposable income to obtain confirmation over a timely objection. But see e.g., In re Riggleman, 76 B.R. 111 (Bankr.S.D.Ohio 1987) (Clark, J.) ("In this case debtor has not provided for increases in disposable earnings which are too uncertain to project as of the effective date of the plan. But an amendment providing for semi-annual earning and expense statements and appropriate increase in contributions will make the plan confirmable."); In re Krull, 54 B.R. 375 (Bankr.D.Colo.1985) (although future wage increases "are too speculative at this point as to be regarded as `projected' income," plan would not be confirmed unless debtor amended plan to commit 50% of any net increases); In re Akin, 54 B.R. 700 (Bankr.D.Neb.1985) (confirmation denied under § 1325(b) where "[t]here is no statement in the plan that as the debtor's disposable income increases it will automatically be applied to the plan.").

CONCLUSION

For the foregoing reasons, the Trustee's objections to confirmation will be sustained on the basis that, upon timely objection, § 1325(b)(1)(B) precludes confirmation of a percentage plan of less than 100%. The Trustee's objections to confirmation will be overruled to the extent that the Debtors need not incorporate the Trustee's certification language into their plan. Separate orders to this effect will be entered.