Law School Case Brief
In re Engle - 496 B.R. 456 (Bankr. S.D. Ohio 2013)
Under the best-interests-of-creditors test or the liquidation test, 11 U.S.C.S. § 1325(a)(4), the court must consider the amount that would be paid on each allowed unsecured claim if the debtor's estate were liquidated in a hypothetical Chapter 7 case, taking into account the Chapter 7 administrative expenses. In determining this amount, the court must keep in mind that under Chapter 7, a trustee in bankruptcy would have the power to avoid fraudulent and preferential transfers, thereby increasing the assets in the estate and the overall payout to creditors. Therefore, where such avoidance actions would be successful in Chapter 7, a Chapter 13 debtor must propose a plan which would equal or exceed the payout to creditors under Chapter 7, taking into account the value of the avoidance actions.
The debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code and approval of the plan. As of the petition date, the debtors had no non-exempt, unencumbered property available for distribution to their unsecured creditors. Under the terms of the debtors' Chapter 13 plan, each general unsecured creditor would receive cash payments having a value as of the effective date of the plan that was less than the creditor's pro rata share of the estimated net recovery from a potential preference action in favor of the Chapter 13 estate. In an effort to address this problem, the plan required the debtors to pay the actual net recovery from the preference action to their general unsecured creditors. The debtors proposed to pay the trustee $250 per month for 60 months, and after allowed claims were paid, allowed general unsecured claims were to be paid as a dividend detailed in the plan. The trustee filed an objection to confirmation of the plan contending that the plan did not meet the best interest test.
Should the objection be sustained?
The court sustained the objection to Chapter 13 plan. It held that the Chapter 13 plan could not be confirmed because the present value of the plan's distribution amount for allowed unsecured claims was less than the amount the unsecured claims would receive through a Chapter 7 liquidation and, as a result, the plan did not satisfy the best-interests-of-creditors test. The debtors could not condition the distribution of the net proceeds of the potential preference action on the trustee's election to commence litigation that he had no obligation to bring, and likely would not prosecute. Moreover, using a discount rate lower than the Till rate from the date of confirmation to the date payments would be completed under the Chapter 13 plan was inappropriate.
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