IN RE WAATHIQ, (Bankr.N.D.Cal. 1999)

In re: MUJAAHID D. WAATHIQ and PAULINE E. WAATHIQ, Debtors.

No. 99-3-1530-BTC Chapter 13; No. 99-3-2548-BDMUnited States Bankruptcy Court, N.D. California
September 24, 1999

MEMORANDUM RE OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN
THOMAS E. CARLSON, United States Bankruptcy Judge.

The court held an evidentiary hearing on September 14, 1999 regarding the objection of John and Rosemary Nunzir (Nunzir) to confirmation of Debtors’ chapter 13 plan. David M. Herzog appeared for Nunzir. Dean Lloyd appeared for Debtors. Upon due consideration, and for the reasons set forth below, confirmation of Debtors’ plan is denied.

FACTS
Nunzir made substantial investments through Debtor Mujaahid Waathiq (Debtor). Nunzir later brought a state-court action alleging that the sums invested had not been repaid as a result of Debtor’s breach of contract, Debtor’s fraudulent misrepresentation of the nature of the investment, and Debtor’s unauthorized withdrawal of the invested funds. The parties entered into a settlement agreement, under which Debtor agreed to make certain payments. If those payments were not made, judgment would be entered against the Debtor “on all causes of action in the above-mentioned lawsuit.” Debtor did not make the payments required under the stipulation, and judgment was entered against Debtor on or about December 8, 1998 in the amount of $107,741.

Debtors filed a chapter 13 petition on March 10, 1999. That case was dismissed on May 5, 1999 for Debtors’ failure to make plan payments. Debtors filed the current chapter 13 case on May 7, 1999. Debtors filed a plan that provided for plan payments of $1,496.64 per month for 60 months, which the plan states would yield a dividend of seven percent to general unsecured creditors. Nunzir objected to confirmation of the plan, contending that the plan did not devote all of Debtors’ disposable income, and that the plan was not filed in good faith because it would enable Debtors to discharge a debt that would be nondischargeable in chapter 7 through the payment of a nominal dividend on that debt.See In re Warren, 89 B.R. 87, 95 (B.A.P. 9th Cir. 1988).

Shortly before the trial regarding confirmation of Debtors’ plan, Debtors filed a new chapter 13 case (case no. 99-3-2548-BDM), in which they filed a plan that called for payments of $1,804 per month for 36 months. This plan stated that it would produce a 12 percent dividend to general unsecured creditors.

Debtors contend that in calculating their monthly disposable income the court should deduct $1,500 Debtors pay for the support of their son. Debtor Mujaahid Waathiq testified that his son is 22 years old, is a senior at Cornell University, and needs the funds to pay for his school expenses. He also testified that the $1,500 figure represents one-twelfth of the amount Debtors provide their son each school year.

DISPOSABLE INCOME
I determine that Debtors’ monthly take home income is $7,800. I determine that Debtors’ claimed expenditures other than the payment to their son are reasonable. I determine that Debtors should not be permitted to deduct the payments made to their son in determining their disposable income, because the son is no longer a minor. It is reasonable, however, for Debtors to reduce plan payments for the next nine months so they can provide support to their son during his senior year in college, if they extend the term of the plan beyond 36 months to provide creditors the same total payment they would receive if no payments were made to the son.

To satisfy the requirements of 11 U.S.C. § 1325(b), Debtors’ total plan payments must equal $122,400.

Monthly take-home income $ 7,800

Less monthly expenditures — 3,400

Monthly disposable income = 3,400

$3,400 x 36 months = $122,400

Debtors may make the required payments through a plan that provides for payment of $1,400 per month from October 1999 through June 2000. Thereafter, the plan should provide for monthly payments of $3,400 until Debtors have made total payments of $122,400.[1]

GOOD FAITH
I determine that a plan satisfying the best-efforts test will also satisfy the requirement that the plan be in good faith. A plan providing for total payments of $122,400 will provide payments to general unsecured creditors totaling approximately $44,692.

Total plan payments $122,400

Less 5.8% trustees fees 7,100[2]

Less unpaid attorneys fees 1,500[3]

Less payments to secured creditors 33,696[4]
Less Payments to priority creditors 35,412[5]

Payments to unsecured creditors $ 44,692

With payments of $44,692 to general unsecured creditors, Debtors’ plan is not a “veiled Chapter 7 case” in which the Debtor is obtaining the chapter 13 superdischarge without making substantial payment to creditors holding claims that would be nondischargeable in a chapter 7 case. SeeWarren, 89 B.R. at 95. In so determining, I assume without deciding that Debtors’ liability to Nunzir would be nondischargeable under 11 U.S.C. § 523(a).[6] In so determining, I do not make any determination of what percentage dividend general unsecured creditors will receive. It is difficult to determine what the dividend will be, because many creditors listed in Debtors’ schedules have not yet filed claims, the bar date for filing claims has not yet passed, and it is not clear whether the priority claim of the IRS will be allowed in the amount requested.[7] If the IRS claim is disallowed or reduced, payments to general unsecured creditors will increase.

I determine that the other allegations of Debtors’ bad faith are without merit. Although Debtors made minor errors in their schedules, I do not believe that these mistakes or the other acts Nunzir complains of were intended to deceive creditors or that they were so serious that they should be a basis to bar Debtors from relief under chapter 13.

CONCLUSION
Confirmation of Debtors’ chapter 13 plan filed September 9, 1999 is denied.[8] Debtors shall file an amended plan consistent with this decision by October 8, 1999 or Debtors’ chapter 13 case will be dismissed with prejudice.

[1] Debtors should, of course, be permitted to credit plan payments made to date against the $122,400.
[2] These are the chapter 13 trustees fees currently charged. Nothing in this memorandum will limit the amount of the fees should the percentage be raised.
[3] Debtors’ counsel stated at trial that his unpaid attorneys fees were $1,500. Even if some additional fees are allowed, such additional fees will not significantly reduce the percentage dividend to general unsecured creditors.
[4] Debtors’ plan lists two claims secured totaling $29,000, and proposes to pay these claims in full with 10 percent interest. If the secured claims are paid over three years, the total payments including interest will be approximately $33,696.
[5] The IRS filed a secured claim in the amount of $33,411.37 for unpaid withholding taxes from 1991, and a priority claim of $1,682.33 for unpaid income taxes from 1997 and 1998. It appears that the claim for withholding taxes is unsecured because there is probably no unencumbered collateral to which it can attach. It is also likely, however, that the claim is entitled to priority under 11 U.S.C. § 507(a)(8). To the extent allowed, the claim for unpaid income tax would be entitled to priority under § 507(a)(8).
[6] There is some authority suggesting that under California law a stipulated judgment has issue preclusion effect only where that is the intent of the parties. See CaliforniaState Auto. Ass’n Inter-Ins. Bureau v. The Superior Court of theCity and County of San Francisco, 50 Cal.3d 658, 664
(1990). It is not entirely clear whether the stipulation between Debtors and Nunzir was intended to have issue preclusion effect.
[7] Debtors’ amended schedules list general unsecured claims of $240,783.65, valuing the Nunzir claim at $51,000. The Nunzir claim may be understated, because the state-court judgment isres judicata between the parties, and Debtors would be entitled to reduce the $107,741 judgment only for amounts paid after entry of the judgment in satisfaction of the judgment. Any understatement of unsecured claims through the understatement of the Nunzir claim may be more than offset by the failure of listed creditors to file proofs of claim. As of the date of this decision, proofs of claim filed on behalf of general unsecured creditors other than Nunzir total only $9,830.16. The bar date for filing claims (other than government claims) is September 26, 1999.
[8] The court is treating the plan filed in Debtors’ second open bankruptcy case as filed in case no. 99-3-1530-BTC. Because the filing of the second open case (case no. 99-3-2548 BDM) is unnecessary, that case will be dismissed.