Penny Jo Hamilton-Gaertner

SO ORDERED. Ne sills Bees

Oui

SIGNED this 1 day of May, 2019.

David M. Warren

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

IN RE: CASE NO. 17-00271-5-DMW

PENNY JO HAMILTON-GAERTNER

CHAPTER 11

DEBTOR

MEMORANDUM OPINION REGARDING CONFIRMATION OF PLAN

This matter comes before the court upon the Third Amended Plan of Reorganization

(“Third Amended Plan”) filed by Penny Jo Hamilton-Gaertner (“Debtor”) on March 23, 2018 and

the Objection thereto filed by Ascentium Capital LLC (“Ascentium’’) on May 1, 2018. The court

conducted a hearing on May 10, 2018 in Raleigh, North Carolina. Clayton W. Cheek, Esq.

appeared for the Debtor, Samuel D. Fleder, Esq. appeared for Ascentium, Gregory P. Chocklett,

Esq. appeared for Direct Capital Corporation (“DCC”), and Brian C. Behr, Esq. appeared on behalf

of the United States Bankruptcy Administrator (“BA”). Based upon the evidence presented and

arguments of counsel, the court confirmed the Third Amended Plan pursuant to 11 U.S.C.

§ 1129(a) and entered an Order Confirming Plan (‘Confirmation Order’) on June 22, 2018. This

opinion sets forth the court’s findings of fact and conclusions of law in support of the Confirmation

Order pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, made applicable by Rules

7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure.

I. JURISDICTION

This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) which the court has

the authority to hear and determine pursuant to 28 U.S.C. § 157(b)(1). See In re Cheatham, 78

B.R. 104, 106 (Bankr. E.D.N.C. 1987) (finding confirmation of a debtor-in-possession’s Chapter

11 plan of reorganization a core proceeding). The court has subject matter jurisdiction pursuant

to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference entered on August 3, 1984

by the United States District Court for the Eastern District of North Carolina.

II. FACTS AND BACKGROUND

A. The Debtor and Family

The Debtor is a 54-year-old emergency room physician who is employed by Wake

Emergency Physicians, PA (“WEPPA”) and WakeMed Hospital (“WakeMed”). She is married

and has three teenaged children. The Debtor’s family lives in a home owned by her and her

husband as tenants by the entirety. They also own as tenants by the entirety two Disney vacation

condominium timeshares. The Debtor and her husband own three vehicles. All three of the

Debtor’s children attend private schools, with the eldest child matriculating to college in 2018.

The middle child is at a specialized school to address her unique educational and emotional needs

resulting from a diagnosed disability, and the other two attend parochial schools.1

B. Sculpt MedSpa, PLLC

The Debtor formed Sculpt MedSpa, PLLC (“Sculpt MedSpa”) in December 2014 to

provide therapeutic and cosmetic medical treatments such as laser therapies and resurfacing, laser

hair removal, tattoo removal, and robotic hair transplant. The Debtor was originally partnered

with another doctor to open Sculpt MedSpa; however, that partner withdrew early in the process

1 Since the hearing in this matter, the eldest child graduated from the parochial high school and enrolled in college.

for personal reasons. Sculpt MedSpa financed its startup and equipment costs through loans and

leases from four different creditors, including Ascentium, DCC, and Pawnee Leasing Corporation

(“Pawnee”). The loans were secured by medical equipment, and the Debtor personally guaranteed

payment of each of these loans and leases.

Sculpt MedSpa struggled from inception and went out of business in the summer of 2016,

approximately 16 months after opening. Sculpt MedSpa began surrendering collateral equipment,

and each of its creditors filed suit against it and the Debtor in the Wake County Superior Court

(“State Court”) for recovery of outstanding indebtedness. On October 20, 2016, the State Court

entered a Summary Judgment in favor of Ascentium for $186,710.07 plus applicable interest and

costs, and on November 8, 2016, the State Court entered an Order for Summary Judgment in favor

of DCC for $282,099.98 plus applicable interest and costs.

C. The Debtor’s Bankruptcy

To reorganize and pay her debts resulting from Sculpt MedSpa, the Debtor filed a voluntary

petition for relief under Chapter 11 of the United States Bankruptcy Code2 on January 18, 2017.

As part of the petition, the Debtor characterized her debts as primarily business debts which were

incurred to obtain money for a business or investment or through the operation of the business or

investment. She scheduled assets totaling $901,496.45 which are summarized as follows:

Residence (1/2 interest) $ 475,000.00

Disney Timeshares (1/2 interest) 56,000.00

2014 Jeep Cherokee 18,711.00

2008 Toyota Sequoia (1/2 interest) 7,250.00

Petrof Piano 15,000.00

Other Personal and Household Items 10,850.00

401k Account 318,249.66

Other Financial Accounts 435.79

Total Scheduled Assets $ 901,496.45

2 Except for within formal citations, references to the Bankruptcy Code, 11 U.S.C. § 101 et seq., will be by section

number only.

The Debtor claimed exemptions in most of these assets, most notably in her residence and the

Disney timeshares pursuant to § 522(b)(3)(B) and the law of the State of North Carolina pertaining

to property held as tenants by the entirety3 and in her 401k account pursuant to § 522(b)(3)(C) and

N.G. Gen Stat. § 1C-1601(a)(9).

The Debtor scheduled liabilities totaling $2,338,039.69 which are summarized as follows:

Secured Debt:

Residential Mortgages $ 841,327.44

Disney Timeshare Mortgages 62,653.00

Automobile Loans 46,714.73

Unsecured Debt:

Student Loans 288,838.00

Ascentium 201,358.69

DCC 285,624.30

Pawnee 65,777.24

Unsecured Joint Debt with Husband 57,960.81

Unsecured Individual Debt 487,785.48

Total Scheduled Liabilities $ 2,338.039.69

The Debtor’s amended Schedule I reports net monthly income from her employment with

WEPPA of $41,655.97 coupled with her husband’s net monthly income of $3,489.98 for a total

combined net monthly income of $45,145.95. Her amended Schedule J details monthly expenses

totaling $31,617.13, including residential mortgage and expenses totaling $7,226.05, educational

expenses of $4,818.64, car payments totaling $1,466.81, and timeshare mortgage and expenses

totaling $1,624.84.

In her Disclosure Statement filed with the court on May 18, 2017, the Debtor updated her

listings of assets and liabilities based in part upon claims filed in the case. She included a

liquidation analysis that projected that in a Chapter 7 case, joint unsecured creditors would be paid

3 The judgments against the Debtor in favor of Ascentium and DCC could not attach to the tenants by the entirety

properties, but even if so, the attachments would likely be avoidable as preferential transfers under § 547(b), because

the petition date is exactly 90 days after the State Court’s entry of judgment in favor of Ascentium and within 90 days

of the State Court’s entry of judgment in favor of DCC.

in full from equity in the tenants by the entirety properties but that only $115,210.00 would be

available to apply toward her individual unsecured obligations of approximately $1,433,528.85,

equating to an 8% distribution.

D. The Plans

The Third Amended Plan before the court is the fourth plan of reorganization proposed by

the Debtor, evolving over several months which included negotiations with Ascentium and DCC

and the court’s rejection of a plan agreed to by these creditors. The Debtor’s initial Plan of

Reorganization (“Original Plan”) provided, inter alia, for payment on the residential and Disney

timeshare mortgages allowed as fully secured claims, payment in full to joint unsecured creditors

from an anticipated tax refund, and a distribution of approximately 17.5% to the individual

unsecured creditors, including Ascentium and DCC, over a period of over 20 years. Ascentium

and DCC filed a joint objection to the Original Plan, questioning the Debtor’s good faith in paying

less than 20% to unsecured creditors while continuing to maintain what they dubbed a “luxurious

lifestyle” of paying housing and transportation costs that exceed the local Internal Revenue Service

standards, two vacation timeshares, and private school education. Additionally, these creditors

disputed that the Debtor was contributing all her projected disposable income as required in light

of their objections pursuant to § 1129(a)(15). Finally, Ascentium and DCC opposed the

preferential treatment given to the separate class of joint unsecured creditors. The BA filed a

statement essentially echoing the concerns of Ascentium and DCC, and other creditors filed their

own objections.

In response to the widespread opposition to the Original Plan, the Debtor sought and

obtained extensions of the exclusivity and acceptance periods and filed two amended plans of

reorganization. On March 6, 2018, the court conducted a hearing on the Debtor’s Second

Amended Plan of Reorganization (“Second Amended Plan”). The Debtor reported that all classes

of creditors had accepted the Second Amended Plan, including a newly created class that consisted

solely of Ascentium and DCC and was designated as “Judgment Creditors.” Both these Judgment

Creditors voted to accept the Second Amended Plan, which proposed to pay their claims in full

over a period of ten years with interest accruing at 4% per annum. The class of individual

unsecured creditors, which now excluded the Judgment Creditors, would also be paid in full but

over a 20-year period and with a lower interest rate of 1.25% interest per annum.

Despite full acceptance of the Second Amended Plan, the court viewed the discriminating

treatment between the Judgment Creditors and the individual unsecured creditors as unjustified.

Additionally, the court did not believe that payment to the individual unsecured creditors over 20

years, extending into the Debtor’s mid-70s, was feasible. The court declined to confirm the Second

Amended Plan and indicated that it would only consider a plan that paid unsecured creditors within

a feasibly reasonable time, even if that meant paying these creditors less than the full amount of

their claims.

The Third Amended Plan returns the Judgment Creditors to the individual unsecured class

of creditors and proposes a 70% distribution to this class over a nine-year period, with interest of

1.25% per annum. Based upon the liquidation analysis, the separate class of joint unsecured

creditors continues to receive 100% distribution to be paid over 20 years at 1.25% per annum, with

the Debtor and her husband reserving the right to accelerate payments. Ascentium filed its

Objection and voted to reject the Third Amended Plan; however, the majority of voting unsecured

creditors, including DCC, accepted the Third Amended Plan for the class. All other designated

classes of creditors also accepted the Third Amended Plan.

E. Financial Projections

At the hearing on confirmation of the Third Amended Plan, the Debtor presented a pro

forma analysis of projected income and expenses through 2022. The Debtor anticipates earning

between $400,000.00 and $405,000.00 annually in salary and bonuses from WEPPA and

WakeMed. Her husband’s annual salary is $41,880.00. From their combined income, the Debtor

projects payment of the following annualized expenses:

Utilities $ 31,200.00

Insurance (car, real property, health, life) 12,600.00

Food 21,000.00

Medical/Dental 4,200.00

Personal Care 2,400.00

Transportation 12,000.00

Clothing 3,000.00

Gifts and Donations 1,800.00

Entertainment 3,000.00

Household Supplies 6,000.00

House/Lawn Maintenance 9,600.00

Other Expenses (extracurriculars) 12,000.00

Schooling 34,288.30

Property Taxes 5,500.00

Husband’s Expenses 38,642.55

Total Expenses $ 197,230.85

After payment of these expenses, the Debtor’s remaining income would be devoted to payments

under the Third Amended Plan which total approximately $208,000.00 annually, including

$95,717.52 to the individual unsecured creditors. The Debtor represented that payment of the

Disney timeshare mortgages, while being treated under the Third Amended Plan, would be paid

by her husband and not from her income.

III. DISCUSSION

Section 1129(a) sets forth 16 requirements for confirmation of a Chapter 11 plan, and a

debtor must show that all these requirements have been met before confirmation will issue. Fed.

Land Bank of Columbia v. Cheatham (In re Cheatham), 91 B.R. 377, 379 (E.D.N.C. 1988). “Even

in the absence of creditor objections, the court has an independent duty to determine that the

confirmation requirements of 11 U.S.C. § 1129 are met and the duty to ascertain the debtor’s ‘good

faith.’” In re Landscaping Servs., Inc., 39 B.R. 588, 590 (Bankr. E.D.N.C. 1984) (citing In re

Economy Cast Stone Co., 16 B.R. 647 (Bankr. E.D. Va. 1981)).

A confirmation analysis begins appropriately with § 1129(a)(8), which dictates that each

class of claims has either accepted the plan or is not impaired under the proposed plan. If

§ 1129(a)(8) is not satisfied, then a plan is nonetheless confirmable pursuant to a “cramdown” if

all other requirements of § 1129(a) are met and the court finds that “the plan does not discriminate

unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired

under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). The Debtor’s Ballot Report reflects

that each of the Plan’s eight classes has accepted the Plan, thereby satisfying § 1129(a)(8). The

parties concede, and the court finds easily without the need for discussion, that the Debtor has also

satisfied as applicable §§ 1129(a)(1), (2), (4), (5), (6), (7), (9), (10), (12), (13), (14), and (16).

Ascentium’s Objection challenges predominantly whether the Plan has met the good faith

requirement of § 1129(a)(3), the feasibility requirement of § 1129(a)(11), and the disposable

income requirement of § 1129(a)(15)(B).

A. Section 1129(a)(3)

Section 1129(a)(3) requires that “[t]he plan has been proposed in good faith and not by any

means forbidden by law.” 11 U.S.C. § 1129(a)(3). As recently observed by this court—

[a]lthough the term “good faith” is not defined by the Code, courts have generally

interpreted it to mean there is a “‘reasonable likelihood that the plan will achieve a

result consistent with the objectives and purposes of the Bankruptcy Code.’” In re

Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984) (quoting In re Nite Lite

Inns, 17 B.R. 367, 370 (Bankr. S.D. Cal. 1982)). In addition, the Fifth Circuit has

held that “[w]here the plan is proposed with the legitimate and honest purpose to

reorganize and has a reasonable hope of success, the good faith requirement of

section 1129(a)(3) is satisfied.” Heartland Fed. Sav. & Loan Ass’n v. Briscoe

Enters., Ltd., II (In re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1167 (5th Cir. 1993).

When conducting a good faith inquiry, a court must view the plan in light of the

totality of the circumstances surrounding the proposal of the plan. In re Piece

Goods Shops Co., L.P., 188 B.R. 778, 790 (Bankr. M.D.N.C. 1995).

In re Bate Land & Timber, LLC, 523 B.R. 483, 492-93 (Bankr. E.D.N.C. 2015). Ascentium argues

that the Debtor’s expenses are excessive and unnecessary and support a lifestyle that should not

be maintained to the detriment of her unsecured creditors who are being paid less than the full

amount of their claims. In support of this position, Ascentium cites a string of cases which find

expenses such as private school tuition, maintaining a vacation home, and repayment of pension

loans to be unreasonable and unnecessary and indicative of a lack of good faith, most notably this

court’s decision in In re Osborne, No. 12-00230-8-SWH, 2013 WL 2385136 (Bankr. E.D.N.C.

May 30, 2013).

In Osborne, the debtors had approximately $140,000.00 in cash and projected a healthy

annual gross income of between $200,000.00 and $300,000.00. Their monthly budget included

residential mortgage and costs of almost $5,000.00, beach property mortgage and expenses of

approximately $3,750.00, automobile loan and other transportation costs exceeding $1,300.00,

household and recreation expenses of almost $1,500.00, and private school tuition of $1,450.00.

The debtors proposed to pay over five years a total of $20,000.00 toward the general unsecured

claims that totaled over $500,000.00, a distribution of less than 4%. The court found that—

based on the debtors’ massive $140,000 “war chest,” extremely high income,

retention of substantial assets, and their spending habits, a proposed distribution of

$20,000 over the course of five years is not indicative of a good faith desire to repay

creditors. Instead, it is somewhat like tossing the unsecured creditors a bit of spare

change. . . . In this case, the male debtor has reached a level of income that many

people will never attain, even in dual income households. At the same time, the

debtors maintain significant financial obligations, including a spacious primary

home and exclusive vacation home, as well as a luxury vehicle and private

schooling for their son. And, as clearly shown in the monthly reports and

testimony, the debtors spend significant amounts of money on food, clothing, and

recreation. A plan that allows the debtors to maintain such a high cost lifestyle,

while paying only $20,000.00 to unsecured creditors and retaining $140,000.00 in

the bank, certainly cannot be consistent with the purposes and objectives of the

Bankruptcy Code. While the Code confers many benefits to debtors, continued

maintenance of an extravagant lifestyle surely was not intended to be one of them.

Id. at *9. While instructive, Osborne presents facts and circumstances quite different from this

case. The court does not condone debtors living extravagantly and agrees that the Debtor’s

expenses exceed what is required to maintain comfortable lifestyle; however, based upon the

Debtor’s testimony and the totality of circumstances surrounding this case, the court cannot find

that the Third Amended Plan is proposed in bad faith.

The expenses of which Ascentium complains did not contribute to the financial crisis that

prompted the Debtor to seek bankruptcy relief. This case was filed to address the judgments

obtained by Ascentium and DCC, and the Debtor spent over a year negotiating with these creditors

to present a plan acceptable to both them and the court. The Debtor testified that she was counseled

on the alternative option of filing for Chapter 7 relief, which according to her liquidation analysis

would result in only an 8% distribution to unsecured creditors; however, she opted for Chapter 11

reorganization out of what the court deems a genuine desire to pay more to these creditors. Even

after the court rejected the Second Amended Plan, the Debtor did not consider dismissal or

conversion and continued in her efforts to present a confirmable plan.

Ascentium suggests that a Chapter 7 case for the Debtor would be an abuse of the

Bankruptcy Code, making her ineligible for discharge. The court is skeptical of this possibility.

The court may “dismiss a case filed by an individual debtor under this chapter whose debts are

primarily consumer debts . . . if it finds that the granting of relief would be an abuse of the

provisions of this chapter.” 11 U.S.C. § 707(b)(1) (emphasis added). It is well-settled in this

district and beyond that § 707(b) is inapplicable if the debtor’s debts are primarily business in

nature. See, e.g., In re Cromwell, No. 14-03707-5-SWH, 2015 WL 1119711, at *2 (Bankr.

E.D.N.C. Mar. 6, 2015); In re Fish, No. 13-05783-8-RDD, 2014 WL 657247, at *2 (Bankr.

E.D.N.C. Feb. 20, 2014); In re Jones, No. 08-05676-8-ATS, 2009 WL 102442, at *1 (Bankr.

E.D.N.C. Jan. 12, 2009). The court previously adopted a “totality of the circumstances” approach

to determining whether a debtor’s debts are primarily consumer debts, consistent with the United

States Court of Appeals for the Fourth Circuit’s precedent for applying a totality test in determining

good faith in filing petitions in Chapters 13 and 7. Jones, 2009 WL 102442, at *2 (citing Neufeld

v. Freeman, 794 F.2d 149, 152 (4th Cir. 1986); Green v. Staples (In re Green), 934 F.2d 568, 573

(4th Cir. 1991)).

While the issue is not before the court, it believes that the Debtor has viable arguments that

her debts are not primarily consumer in nature. The unsecured debts of Ascentium, DCC, and

Pawnee total less than half of all unsecured debt; however, the Debtor’s testimony revealed that

some seemingly consumer debts are rooted in the failed business. For instance, the Debtor secured

a loan to help pay the business expenses with her previously unencumbered vehicle, and she

borrowed money from her retirement account to pay business debt. At the hearing, the BA noted

that a student loan, especially for obtaining a professional degree, may in certain circumstances be

characterized as a business debt, and the court acknowledged this possibility in Cromwell.4

Cromwell, 2015 WL 1119711, at *5. Finally, under a totality test, it would be difficult to overlook

the fact that executions on Ascentium’s and DCC’s judgments, which are business debts, appear

to be the predominant reasons for the Debtor’s bankruptcy filing.

The court recognizes that while the Debtor is well-paid, this healthy income is the result of

her demanding and dedicated work as an emergency room physician. The Debtor testified that she

4 The court declined to adjudicate whether the subject student loans did indeed qualify as business debt as asserted

by the debtors, because their classification would not impact the court’s analysis under § 707(b)(1). Cromwell, 2015

WL 1119711, at *5

works 40-60 hours a week, and she is committed to continuing this schedule throughout the life of

the Third Amended Plan, at an age when others in her profession are likely reducing their

workload. The Third Amended Plan reserves the Debtor’s right to obtain a discharge until after

completion of payments to creditors. The Debtor is devoting an average of approximately

$8,000.00 per month or $96,000.00 per year toward the payment of unsecured creditors, and

through its Objection, Ascentium suggests that she should further curb expenses to allow for a

greater or quicker overall disbursement.

The Debtor explained convincingly why reducing some of her expenses deemed

extravagant by Ascentium was neither practical nor desirable. The Debtor contends that her home

would need extensive repair to be marketable and her cars are older models with high mileage.

The Debtor admitted that her food expenses are greater than for the average family but maintains

that the demands of her job necessitate take-out and other convenience meals which cost more than

home cooking. Ascentium does not dispute the decision to send the disabled child to a specialized,

private school but contends that the others should be in public school while the Debtor reorganizes

in bankruptcy. The Debtor’s eldest child is headed to college with a partial scholarship for an out-

of-state public university that makes the tuition comparable to in-state public universities. The

Debtor explained the need to pay the tuition for the Debtor’s youngest child to attend a parochial

school. The Debtor believes firmly that this education is in her child’s and her family’s best

interest and is committed continuing this expense. The court might agree with Ascentium if the

Debtor were not proposing a distribution to unsecured creditors substantially higher than required.

Most cases that find paying private school tuition in lieu of creditors as indicative of bad faith

reflect a meager distribution to unsecured creditors. The court suspects that the Debtor’s continued

career motivation is fueled in part by a desire to provide her children with a premium education,

and the Third Amended Plan is a good faith attempt to contemporaneously satisfy this goal and

provide graciously to the Debtor’s unsecured creditors.

Of all the Debtor’s continued household expenses, the court is most troubled by the Disney

timeshare mortgages, because retention of the timeshare interests is not necessary to an effective

reorganization. Requiring surrender, however, is not easy given the tenants by the entirety

ownership between the Debtor and her non-filing husband and the Debtor’s assurances that the

mortgages will paid only from his income. Like with the private school tuition, the court cannot

find that retention of the Disney timeshares is indicative that the Third Amended Plan is proposed

in bad faith when considering the totality of what is being provided to Ascentium and other

creditors under this plan.

B. Section 1129(a)(11)

Section 1129(a)(11), known as the feasibility test, requires that “[c]onfirmation of the plan

is not likely to be followed by the liquidation, or the need for further financial reorganization, of

the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization

is proposed in the plan.” 11 U.S.C. § 1129(a)(11). Whether a plan is feasible is a question of fact

for which the debtor bears the burden to show feasibility by a preponderance of the evidence. In

re Radco Props., Inc., 402 B.R. 666, 678 (Bankr. E.D.N.C. 2009) (citations omitted). “Feasibility

is ‘firmly rooted in predictions based on objective fact.’” Id. (quoting Cheatham, 78 B.R. at 109).

Feasibility “does not require that the debtor’s plan is guaranteed to be successful, but must merely

‘present a workable scheme or organization and operation from which there may be a reasonable

expectation of success.’” In re Gyro-Trac (USA), Inc., 441 B.R. 470, 482-83 (Bankr. D.S.C. 2010)

(quoting Crestar Bank v. Walker (In re Walker), 165 B.R. 994, 1004 (E.D. Va. 1994)).

Ascentium argues that the Third Amended Plan is not feasible, because the Debtor’s

monthly reports reflect expenses that exceeded scheduled projections, and her expenses will

increase with commencement of payments under the Third Amended Plan. Ascentium contends

that payment to the individual unsecured creditors “70% of their claims over a period of nine (9)

years at 1.25% interest . . . is both unsustainable and unreasonably long.” Objection ¶8, ECF No.

210. The issue of feasibility was first raised by this court in its consideration of the Second

Amended Plan which stretched out payment over 20 years. The court is satisfied with the Debtor’s

reduction of the overall payment period to individual unsecured creditors by more than half and is

persuaded that the Debtor’s projections of income and expenses are reasonably accurate. The

Debtor has demonstrated a commitment to the Third Amended Plan, and absent unforeseen

circumstances, the Debtor can continue her current job performance for the next decade.

Ascentium remains protected by the reservation of discharge for the Debtor until completion of

the Third Amended Plan.

C. Section 1129(a)(15)

Finally, Ascentium’s Objection triggers the applicability of § 1129(a)(15) which provides

that—

[i]n a case in which the debtor is an individual and in which the holder of an allowed

unsecured claim objects to the confirmation of the plan—

(A) the value, as of the effective date of the plan, of the property to be

distributed under the plan on account of such claim is not less than the

amount of such claim; or

(B) the value of the property to be distributed under the plan is not less

than the projected disposable income of the debtor (as defined in section

1325(b)(2)) to be received during the 5-year period beginning on the date

that the first payment is due under the plan, or during the period for which

the plan provides payments, whichever is longer.

11 U.S.C. § 1129(a)(15). This subsection was added by the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005 (“BAPCPA”) and incorporates the Chapter 13 projected

disposable income requirement triggered when an unsecured creditor that is not being paid the full

value of its claim objects to a proposed plan. See 11 U.S.C. § 1325(b)(1).5 Section 1325(b)(2)

defines “disposable income” as “current monthly income received by the debtor . . . less amounts

reasonably necessary to be expended.” 11 U.S.C. § 1325(b)(2) (emphasis added). Section

1325(b)(3) goes on to provide that what constitutes “amounts reasonably necessary to be

expended” shall be determined in accordance with subparagraphs (A) and (B) of § 707(b)(2),

familiarly known as the “means test,” if the Chapter 13 debtor is above an applicable median

family income benchmark.

The Chapter 7 means test compares an individual debtor’s monthly income to the median

income for that debtor’s state, and if the debtor’s income is greater than the median, then allowed

expenses are subtracted to determine whether the debtor would have enough disposable income to

pay toward unsecured debts. For basic necessities such as housing and utilities, transportation,

food, and clothing, the means test allows deductions for amounts specified under the National

Standards and Local Standards rather than the debtor’s actual expenses for these categories. See

11 U.S.C. § 707(b)(2)(A)(ii).

5 This subsection is similar to § 1129(a)(15) and provides that—

[i]f the trustee or the holder of an allowed secured claim objects to the confirmation of the [Chapter 13] plan,

then the court may not approve the plan unless, as of the effective date of the plan—

(A) the value of the property to be distributed under the plan on account of such claim is not less

than the amount of such claim; or

(B) the plan provides that all of the debtor’s projected disposable income to be received in the

applicable commitment period beginning on the date that the first payment is due under the plan will be

applied to make payments to unsecured creditors under the plan.

11 U.S.C. § 1325(b)(1).

Ascentium proffers that § 1129(a)(15) adopts the means test for calculating projected

disposable income, and because the Debtor earns significantly more than the applicable median

income in North Carolina, her projected disposable income must be calculated using the

standardized expenses rather than her actual expenses. Under this analysis, her projected

disposable income is certainly more than being paid toward the Third Amended Plan. The BA

questioned whether the means test applies in Chapter 11, and the court now finds that it does not.

Soon after the enactment of BAPCPA, the United State District Court for the District of

Kansas considered the argument that the means test applies in Chapter 11, noting that “[s]ince

§ 1325(b)(3) specifies that the expense portion of the calculation of projected disposable income

under § 1325(b)(2) for an above-median-income debtor must be determined according to the

Chapter 7 means test, this is a plausible way to interpret § 1129(a)(15)(B)’s incorporation of

§ 1325(b)(2).” In re Roedemeier, 374 B.R. 264, 272 (Bankr. D. Kan. 2007). The court did not,

however, agree with this interpretation. The court focused on the three official bankruptcy forms

concerning “current monthly income” for individual debtors and the drafters’ deliberate omission

of means test expenses from the Official Form 22B applicable to individual Chapter 11 debtors:

The Chapter 11 form is the simplest of the three [22A, 22B, and 22C], since the

means-test deductions of § 707(b)(2) are not employed in determining the extent of

an individual Chapter 11 debtor's disposable income. Section 1129(a)(15) requires

payments of disposable income “as defined in section 1325(b)(2),” and that

paragraph allows calculation of disposable income under judicially-determined

standards, rather than pursuant to the means test deductions, specified for higher

income Chapter 13 debtors by § 1325(b)(3).

Id. (quoting Section D.2. of 2005 Committee Note to Official Bankruptcy Forms 22A, 22B, and

22C, reprinted in Norton Bankruptcy Law and Practice 2d, Bankruptcy Rules, at 1146

(Thomson/West 2006–2007 ed.)). The Roedemeier court concluded that “§ 1129(a)(15)(B) must

be read to allow a judicial determination of the expenses that are reasonably necessary for the

support of the debtor and his or her dependents.” Id. at 272-73.

More recently, the United States Bankruptcy Court for the District of Nebraska followed

Roedemeier and reasoned that—

[s]ection 1129(a)(15) specifically incorporates Chapter 13's disposable income

definition found in § 1325(b)(2), but it is silent as to the determination of reasonable

expenses for purposes of calculating disposable income. That is, while § 1325(b)(3)

can be read as an instructional section of permissible expenses for § 1325(b)(2)—

and, therefore, presumably incorporated into § 1325(b)(2)— § 1129(a)(15) does

not include it. The omission seems intentional, as noted in a leading bankruptcy

treatise:

[T]he reference in section 1129(a)(15) is explicitly to, and only to,

paragraph (2) of section 1325(b). Congress had it within its power

to draft the cross-reference more broadly, but did not. It presumably

took into account the business orientation of most chapter 11s, as

well as the increased levels of creditor involvement in a [sic] chapter

11 cases. These factors, together with the requirement that the

debtor obtain the consent of all unsecured creditor classes under

section 1129(a)(8), would tend to indicate that individual creditor

insistence on the artificial expenses standards found in chapter 7 are

neither necessary nor appropriate in chapter 11 cases.

In re Woodward, No. BK11-40936, 2014 WL 1682847, at *4-5 (Bankr. D. Neb. Apr. 29, 2014)

(quoting 7 Collier on Bankruptcy ¶ 1129.02[15][a] (16th ed. rev. 2014)).6 See also In re Johnson,

No. 14-57104, 2016 WL 8853601, at *17 (Bankr. S.D. Ohio Nov. 10, 2016) (finding that the rule

of statutory construction for applying the plain meaning of a statute requires holding that the

Chapter 7 means test applicable to above-median income debtors in Chapter 13 does not also apply

in Chapter 11); In re Bacardi, No. 09 B 25757, 2010 WL 54760, at *5 n. 2 (Bankr. N.D. Ill. Jan.

6, 2010) (opining that the means test does not apply in Chapter 11, because § 1129(a)(15) mentions

§ 1325(b)(2) but not § 1325(b)(3)); but see In re Bennett, No. 07-10864-SSM, 2008 WL 1869308,

6 The Roedemeier court also referenced Collier on Bankruptcy in describing as “flawed” the position taken by

Ascentium that calculation of a Chapter 11 debtor’s disposable income must use expenses established by the Internal

Revenue Service rather than actual expenses. Roedemeier, 374 B.R. at 272.

at *2 n. 6 (Bankr. E.D. Va. Apr. 23, 2008) (suggesting that the means test may apply in calculating

“projected disposable income” under § 1129(a)(15)).

The court agrees that in considering whether the Debtor is dedicating her projected

disposable income to the Third Amended Plan, it may judicially determine under § 1325(b)(2)

what expenses are reasonably necessary to be expended rather than apply the means test. As

discussed supra, the court is satisfied that the Debtor’s projected expenses are reasonable and

necessary under the totality of the circumstances. The Debtor’s projected income exceeds these

expenses by over $200,000.00 annually, all of which she is dedicating to the Third Amended Plan

in satisfaction of § 1129(a)(15)(B).

IV. CONCLUSION

When Ascentium, along with DCC and the BA, objected to the Debtor’s Original Plan, the

court shared the concerns about the Debtor’s lifestyle and expenses in the midst of financial

reorganization. The court has since been impressed by the Debtor’s continued efforts to structure

a plan that strikes a balance between being fair to her business creditors and allowing her to support

her family in a similar manner to which they are accustomed. The Debtor’s expenditures

undoubtedly exceed what is necessary to maintain a minimal standard of living; however, she has

made some concessions, and considering the totality of the Debtor’s circumstances, the court

cannot find that the Third Amended Plan is either proposed in bad faith or infeasible.

The Debtor was prepared to pay Ascentium and her other unsecured creditors 100% of

their claims and was stopped short only by this court’s concern over feasibility of the length of the

repayment term and the preferential treatment given to the Judgment Creditors in negotiation of

the Second Amended Plan. The court is somewhat surprised that Ascentium renewed its initial

objections to confirmation simply because the Third Amended Plan reduced expected payment on

its claim to 70%. This distribution is significantly higher than Ascentium could expect in a Chapter

7 liquidation, and conversion appears to be a realistic option for the Debtor given the business

nature of many of her debts. For almost the next decade, the Debtor is devoting her projected

disposable income to the Third Amended Plan, and her discharge is contingent on her performance.

For these reasons, the court found that the Debtor satisfied all the requirements of § 1129(a),

overruled Ascentium’s Objection, and entered the Confirmation Order.

END OF DOCUMENT