Opinion
No. 91-00453
March 23, 1994
Hancock Estabrook, Syracuse, New York, attorneys for the debtors.
William F. Larkin, Assistant U.S. Attorney, Syracuse, New York, attorney for the Internal Revenue Service.
Richard Croak, Utica, New York, U.S. Trustee.
Opinion
Presently before the Court for confirmation is the Notified Amended Chapter 11 Plan ("Plan") of Thomas J. Rotella and Mary Sharon Rotella ("Debtors"), filed on October 27, 1993. The Internal Revenue Service ("IRS"), a creditor in Class 6 of the Plan, filed an objection to confirmation on November 18, 1993. The United States Trustee ("UST") had also filed an objection on the basis that the Debtors' Plan is not feasible.
The confirmation hearing was originally scheduled on September 23, 1993, in Utica, New York. The evidentiary hearing was subsequently adjourned to October 14, 1993 and then to November 23, 1993. On November 15, 1993, Debtor filed a Notice Of Intent To Seek Confirmation Pursuant to 11 U.S.C. § 1129(b) ("cram down motion"), which motion was also heard on November 23, 1993, as was an earlier motion of the UST seeking to convert or dismiss the Chapter 11 case. The parties were thereafter permitted to file, memoranda of law and the contested matters were submitted for decision on December 28, 1993.
JURISDICTIONAL STATEMENT
The Court has jurisdiction over the parties and subject matter of this core proceeding pursuant to 28 U.S.C. § 1334 and 157(a), 157(b)(1) and 157(b)(2)(A) and (L).
FACTS
The Debtors filed a joint voluntary petition seeking relief Pursuant to Chapter 11 of the Bankruptcy Code ( 11 U.S.C. § 101-1330) ("Code") on February 22, 1991. On May 23, 1991, the Court approved Debtors' Amended Disclosure Statement and fixed the date of confirmation hearing as August 1, 1991. Thereafter, the Debtors withdrew their Chapter 11 plan and did not file an amended plan until June 22, 1993, just prior to this Court's consideration of the UST's motion to dismiss or convert the case. The Amended Plan was further modified on October 27, 1993. It is the Modified Amended Plan which is the subject of the confirmation hearing and the objections filed herein.
The Plan provides for seven classes of claims. With the exception of Class 6, which is allegedly impaired and apparently comprised solely of the IRS, the Plan has been accepted by the other classes of creditors.
Although the New York State Department of Taxation Finance and the New York State Department of Labor are listed in Article III of the Plan as being included in Class 6, the Court notes that Article V, which addresses the treatment of the various classes, makes no reference to either. Upon review of the petition filed by the Debtors, it appears that the New York State Department of Labor is not listed and the New York State Department of Taxation Finance is listed in a "contingent" and "unknown" amount. Therefore, the Court will not inquire further into the absence of treatment in the Plan of either entity.
The IRS filed an amended proof of claim in the sum of $46,237.69 on September 9, 1993. See Debtors' Exhibit 8. The IRS' claim consists of a secured claim for taxes due in the sum of $20,154.96, a priority unsecured claim in the sum of $8,149.02, and a general unsecured claim in the sum of $11,990.22. Section B of the proof of claim, with respect to the IRS' priority claim, identifies the sum of $2,638.70 as comprising taxes and interest assessed on May 14, 1990. The balance of the IRS' priority claim in the amount of $5,510.32 was never assessed and is to be paid within six (6) years after the entry of an order confirming the Plan.
The IRS has a lien on the Debtors' residence which has a fair market value of $92,000. See Debtors' Exhibit 10. There is both a first and second mortgage on the property which together allegedly total approximately $72,000.
Under the Plan, the aggregate claim of the IRS is to receive the following treatment:
(a) That portion of the IRS claim secured by a lien on the Debtors' Residence shall he amortized over thirty (30) years with an eight percent (8%) interest rate, such payments to commence thirty (30) days after entry of an order confirming the Plan;
(b) The unsecured priority portion of the IRS claim shall be paid in full in six (6) equal annual payments, such payments to commence thirty (30) days after entry of an Order confirming the Plan;
(c) The Debtors' overpayment of 1990 income taxes in the sum of $1,998.00 shall be applied as credit against the unsecured priority portion of the IRS claim. The remainder of the IRS unsecured priority claim shall be paid as set forth above. See Plan at pg.8.
The general unsecured portion of the IRS claim is to receive the same treatment accorded other unsecured claims in Class 7 of the Plan.
Debtors' expenses are estimated to be $2,228.17 per month, which includes payments pursuant to the Plan. See Debtors' Exhibit 6 ("Exhibit 6"). The Debtors list income totalling $2,699.56 per month, including an estimated $500.00 per month in miscellaneous income from snow plowing, carpentry, etc. See id. At the hearing, Debtor Thomas Rotella ("Rotella") indicated that his wife is currently enrolled in a nursing program at Onondaga Community College and that she anticipates graduating in the Fall of 1994. Upon graduation, she allegedly will be employed by Community General Hospital. However, her anticipated income is not included in Exhibit 6.
At the hearing, the UST introduced copies of monthly operating reports filed by the Debtors for the months of June-October 1993, which show actual expenses, particularly in the food and clothing category, to be substantially higher than that listed in Exhibit 6. Exhibit 6 lists $560.00 as the estimated monthly expense for food and clothing for the Debtors' family of five. Yet actual food and clothing expenses amounted to $886.85 (June, 1993); $939.03 (July, 1993); $580.50 (August 1993); $1,253.39 (September 1993), and $983.56 (October 1993). In addition, medical expenses ranged from a low of $272.00 in September, to a high of $355.00 in August, and miscellaneous expenses ranged from a low of $93.00 in October to a high of $272.00 in September. Debtors' statement of estimated monthly expenses does not include any provision for either medical or miscellaneous expenses. See Exhibit 6.
ARGUMENTS
Pursuant to Code § 1129(b), the Debtors seek to confirm the Plan over the objection of the IRS. Debtors contend that the Plan does not unfairly discriminate against the IRS, and that it is fair and equitable with respect to its treatment of the IRS' claims.
Debtors make the argument that Code § 1129(a)(9)(C), which requires a debtor to complete payments within six years of the date of assessment of the claim, applies only to the priority unsecured portion of the IRS claim. Therefore, it is the Debtors' contention that the secured portion of the IRS' claim may be treated like any other loan would be in the commercial loan market. Debtors Assert that payment of the secured portion of the IRS' claim over 30 years at an interest rate of 8% is both fair and equitable.
The main objection of the IRS is with respect to the Debtors' proposed payment of the secured portion of the IRS' claim over 30 years. The IRS contends that the Debtors' proposal to cram down the secured portion of its claim unfairly discriminates against the IRS. The IRS asserts that its secured claim should be entitled to treatment no worse than what a priority unsecured tax claim would receive, namely payment within six years from the date of assessment. Furthermore, the IRS asserts that the Debtors have failed to establish that the deferred payments of the IRS' secured claim constitute a present value equal to the amount of its claim as required by Code § 1129(b)(2).
At the time the Debtors filed their Plan, the IRS had also raised certain other objections, which were resolved at the time of the hearing on November 23, 1993. The Debtors agreed to modify the Plan to provide that the IRS is to retain its lien. The Debtors also agreed to provide for the payment of interest at the statutory rate of 7% on the unsecured priority claim, rather than 10% as originally proposed by the Debtors. It appears from the papers filed by the IRS in opposition to the Debtors' motion for confirmation and cramdown that the IRS does not object to the Debtors' apportionment of its priority unsecured claim based on whether or not there had been a prior assessment.
The IRS also joins the UST in making the argument that the Plan is not feasible. Both contend that the expenses listed in the Debtors' monthly operating reports exceed those estimated by the Debtors in proposing their Plan.
The Debtors contend that they have established reasonable likelihood that they will be able to complete the payments under the Plan, and that that is all that is necessary for a plan to be considered feasible.
DISCUSSION
Pursuant to Code § 1129(b)(1), the Court is required to confirm a plan, even though a class is impaired, as long as the plan does not discriminate unfairly and is fair and equitable with respect to the impaired class that has not accepted the plan. In re 499 W. Warren Street Assoc., 151 B.R. 307, 310-311 (Bankr.N.D.N.Y. 1992). As a prerequisite to allowing the debtor to "cramdown" the impaired class, Code § 1129(b)(1) also mandates that all requirements found in subsection (a), with the exception of ¶ 8, be met. Id. Specifically, Code § 1129(a)(9)(C) provides that claims specified in Code § 507(a)(7) be paid over a period not to exceed six years after the date of assessment of the claim. Code § 507(a)(7) applies only to "allowed unsecured claims of governmental units." United States v. Neal Pharmacal Co., 789 F.24 1283, 1284, n. 2 (8th Cir. 1986); In re Camino Real Landscape Maint. Contractors, Inc., 818 F.2d 1503, 1504, n. 1 (9th Cir. 1987); United States v. Darnell (In re Darnell), 834 F.2d 1263, 1266, n. 6 (6th Cir. 1987). It follows that Code § 1129(a)(9)(C) requires a six year time frame for payment only of unsecured priority tax claims. In re Reichert, 138 B.R. 522, 527 (Bankr.W.D.Mich. 1992); see also Camino Real, supra, 818 F.2d at 1504, n. 1; Neal Pharmacal Co., supra, 789 F.2d 1284, n. 2 (§ 507(a)(7) expressly applies only to unsecured tax claims and, by its express terms, § 1129(a)(9)(C) refers only to claims arising under § 507(a)(7)). In Reichert the IRS made the same argument that it is making in the case sub judice, namely that it should not be penalized by the presence of a tax lien. See id. at 526. The court in Reichert held that the IRS' secured claim need not be paid within six years in accordance with Code § 1129(b)(2)(C) as the IRS "is not entitled to claim both the benefits of its right to encumbered property and, when it is desirable, the status afforded to unsecured claims under § 507." Id. at 527.
Based on this analysis, the Court concludes that the IRS' secured claim is not entitled to priority and need not be paid within six years of assessment. Therefore, the Court must examine the requirements found in Code § 1129(b)(2)(A) which address the treatment of secured claims. Pursuant to Code § 1129(b)(2)(A), a court may confirm a plan that provides that the holder of a secured claim retain its lien and also receive deferred cash payments totaling at least the allowed amount of such claim. See In re Milspec, Inc., 82 B.R. 811, 814 (Bankr.E.D.Va. 1988). The Debtors have agreed that the IRS is entitled to retain its lien. Furthermore, the Plan provides that the IRS is to receive deferred cash payments over a period of 30 years at a current market rate of 8%. Citing to In re Flo-Lizer, Inc., 916 F.2d 363 (6th Cir. 1990), the IRS makes the argument that it should not receive the same treatment as other secured claimants as it is unable "to choose its debtors or to take advance security on tax debts." Id. at 366. However, the same court acknowledged that the bankruptcy laws can delay payment of taxes rightly owed as long as the IRS receives interest on the monies owed. (emphasis added) See id. (citing In re Mark Anthony Construction Co., 886 F.2d 1101, 1108 n. 10 (9th Cir. 1989).
Interestingly enough, the IRS has, on other occasions taken the position that despite the fact that it holds a nonconsensual secured claim, i.e. a lien fixed by operation of law and without consent of the debtor, it should be able to receive the same treatment us others holding consensual secured claims, i.e. liens created by agreement between the debtor and the creditor. See e.g. United States v. Ron Pair Enterprises, Inc., 489 U.S. 233, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (All oversecured claims, including nonconsensual liens, should be treated in the same way for purposes of post-petition interest.); In re Gilliland, 67 B.R. 410, 411 (Bankr.N.D.Tex. 1986) (IRS should be no better off or worse off than any other secured creditor.) It would appear that the IRS wishes to have the best of both worlds. On the one hand, it would have the courts treat it differently from other secured creditors because of the involuntary nature of its claim; on the other hand, it would have the courts accord it the same treatment as other secured creditors in awarding it post-petition interest on any oversecured claim it might have. Yet, nothing in the Code supports this view. A reading of the Code makes it clear that Congress has on numerous occasions seen fit to afford the IRS certain protections not available to other creditors. For instance, certain tax obligations are entitled to priority under Code § 507(a)(7), and other obligations are deemed nondischargeable pursuant to Code § 523(a)(1). So too, as noted previously, Code § 1129(a)(9)(C) requires that priority tax claims be paid in full within six years of assessment. However, nothing in § 1129 of the Code suggests that IRS liens or claims are totally immune from modification.See In re Dever, 1994 WL 43906 at 15 (Bankr.C.D.Cal. 1994) (Court held that "the debtors had a right under § 506 and § 1129 to limit the IRS' secured claim to the fair market value of its interest in the collateral under the terms of the plan. Section 506(d) permits avoidance of the unsecured portion of the lien, leaving the IRS with an allowed unsecured claim for the, deficiency.") In the absence of any specific language to the contrary, it appears that the IRS is to be afforded the same treatment as any other secured creditor.
In this instance, the Debtors have elected to make deferred cash payments to the IRS over a period of 30 years at an interest rate of 8%. The IRS asserts that the Debtors have failed to establish that the deferred payments of the IRS' secured claim constitute a present value equal to the amount of the claim as required by Code § 1129(b)(2). The Code provides little guidance on how to determine the appropriate interest rate in making a present value analysis. In re River Village Assoc., 161 B.R. 127, 135 (Bankr.E.D.Pa. 1993). If the parties are unable to agree on a rate of interest, it falls to the court to do so. Milspec, supra, 82 B.R. at 820. The rate to be charged should be based on the extent to which the claim is secured, the length of the payment period, and the potential risk of default. Id. The Milspec court concluded that a market rate/case-by-case approach was appropriate in determining the interest rate to be paid to the IRS pursuant to § 1129(b)(2) of the Code. Id. In other words, the prevailing market rate for a loan with like terms is but one factor for the court to consider. In this particular case, the Debtors have provided the Court with a list of the interest rates as of the date of the hearing on 30-year home mortgages. See Debtors' Exhibit 3. It is on this basis that the Debtors propose to pay the IRS secured claim of approximately $20,000 at the rate of 8%. However, the Court takes note that Merchants National Bank of Syracuse, who holds a first mortgage on the real property of the Debtors, is to receive 8|1/2% on its claim of approximately $22,000-$23,000 over a period of 14-15 years per the terms of the mortgage. See Exhibit C of Debtors' Counsel's Supplemental Affirmation dated November 23, 1993. Solvay Bank, who holds a second mortgage on the same real property, is to receive 9% over a period of 30 years on its claim of approximately $49,000-$50,000. See Modified Amended Plan, p. 7. Both of these claims are secured by the same real property that secures the IRS claim, namely the Debtors' residence. Section 1129(b)(1) of the Code prohibits unfair discrimination as to a dissenting class and requires that it receive value equal to the value given to all other similarly situated classes. Matter of Johns-Manville Corp., 68 B.R. 618, 636, aff'd in part, rev'd in part, 78 B.R. 407, aff'd sub nomine Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988). Accordingly, it appears to this Court that the IRS is entitled to receive the same 9% as Solvay Bank on its secured claim which is also to be paid over 30 years even though that rate may be significantly higher than current interest rates.
In light of the above conclusion, the Court must also address the objections raised by both the UST and the IRS to the effect that the Plan is not feasible. At the hearing on confirmation, Rotella admitted that the Debtors' actual expenses for food and clothing, as well as for medical care, for the months of June 1993 — October 1993 were substantially higher than those projected in the income and expense statement (Exhibit 6) prepared in support of the Plan. Rotella attributed this, in part, to be due to the fact that he and his wife had had a new baby whose care had resulted in additional food and medical expenses which were expected to drop now that the child was a year old. Rotella explained that Exhibit 6 represents a budget that the Debtors felt they could live with in order to make the plan work.
According to Exhibit 6, Debtors estimate that there will be a monthly surplus of approximately $470.00, assuming Rotella is able to generate $500.00 in miscellaneous income each month. The Court also takes note of the fact that Exhibit 6 includes monthly payments to the IRS of its priority claim which actually are to be paid on an annual basis. Given that Mrs. Rotella expects to be employed as a nurse in the Fall of 1994, it is reasonable to expect that additional income will be available to make those annual payments, as well as cover any additional expenses that may arise when she enters the work force.
In determining feasibility pursuant to Code § 1129(11), the Court is required to determine whether the Plan offers a reasonable prospect of success. See Johns-Manville, supra at 635. As Debtors' counsel correctly points out, a debtor need not prove with absolute certainty that he/she will be able to complete the payments under the plan. See id.; see also In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723, 762 (Bankr.S.D.N.Y. 1992). "The test is whether the things which are to be done after confirmation can be done as a practical matter." In re Bergman, 585 F.2d 1171, 1179 (2d Cir. 1978). The mere prospect of financial uncertainty is not a sufficient ground to defeat confirmation.Drexel Burnham, supra, 138 B.R. at 762.
The Debtors have, in the view of this Court, established a reasonable chance for success of the Plan. Mr. Rotella is no longer self-employed. He is receiving a regular salary as an employee of a building contractor. In a few months, Mrs. Rotella will also be entering the work force as a nurse. Given the recent weather conditions, the miscellaneous income to be earned by Mr. Rotella from snow plowing appears to be much more realistic. As a practical matter, once Mrs. Rotella starts working the Debtors should not have to rely on this miscellaneous income to comply with the Plan. In the meantime, the estimated $470.00 in surplus each month should be sufficient to cover any unexpected expenses, including the additional interest to be paid the IRS on its secured claim as provided above by the Court. The fact that some of the monthly expenses, namely that owed to the IRS, are to be paid on an annual basic thus delaying a portion of the listed monthly expenses until Mrs. Rotella enters the work force, lends further credence to the Plan's feasibility.
The Court calculates that the difference on $20,155.00 over 30 years between 8% and 9% is approximately $15.00 per month.
For the above reasons, it is
ORDERED that the Debtors' Plan be modified to include a provision that the IRS retain its lien; it is further
ORDERED that the Debtors' Plan be further modified to provide for interest at the statutory rate of 7% on the unsecured priority claim of the IRS and at the rate of 9% on the secured portion of the IRS' claim; and it is further
ORDERED that Debtors' Plan as modified herein, and with regard to the secured and unsecured priority claims of the IRS, complies with Code § 1129(b)(2)(A)(i)(I) and (II), as well as § 1129(a)(9)(C), and it is further
ORDERED that the Court finds that Debtors' Plan is feasible within the meaning of Code § 1129(a)(11) and the pending motion of the UST to dismiss or convert this case is hereby denied, and it is finally
ORDERED that the Debtors' Modified Amended Plan filed October 27, 1993, as further modified herein, be confirmed.