UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DONALD and LISA FULKERSON, No. 93-10193
Debtors Donald and Lisa Fulkerson are former business associates of Henry and Pearl Owades. There is state court litigation pending between them concerning Wired-Rite Systems, Inc., a corporation owned by the Owades and the Fulkersons. The Fulkersons claim that they are owed a substantial sum by the Owades on account of their minority interest in Wired-Rite. The Fulkersons filed a Chapter 7 bankruptcy petition in early 1993, and the Chapter 7 trustee soon thereafter agreed to sell the Fulkersons' ownership rights in Wired-Rite to the Owades for $47,182.00. The Fulkersons, seeing that the Owades were end-running the state court litigation by purchasing their stock from the trustee, exercised their right to convert the case to Chapter 13 and have filed a plan calling for $51,000.00 to be paid to the Chapter 13 trustee over a period of five years, at the rate of $850.00 per month. They have commenced payments as required by the Bankruptcy Code and order of the court. In the Chapter 13, about $32,000.00 will have to be paid on secured claims, leaving $19,000.00 for unsecured creditors. If the case had remained in Chapter 7, about $27,000.00 would have been paid on secured claims and $2,500.00 in capital gains taxes, leaving $17,500.00 for unsecured creditors. While these amounts appear justify confirmation, the Owades have raised three issues in objection to confirmation. First, they argue that the "time value" of money must be considered. Second, they argue that the increased Chapter 13 administrative fees must be considered; third, they argue that they are now willing to up their bid, and the Fulkersons must either up their plan payments to match (which they appear unable to afford) or the plan cannot be confirmed. The court addresses each of these arguments below.
II. Adjustment for the Time Value of Money
The Fulkersons propose to pay $51,000.00 in equal monthly payments over five years, with distributions to creditors to begin immediately. The Owades claim that since they are willing to pay the trustee now, the value of the Fulkersons' payments must be discounted by the time value of money. In other words, they argue that their $20,000.00 paid now is worth more than the debtor's payments of the same amount over time. Section 1325(a)(4) of the Bankruptcy Code requires that the value of the plan payments to be paid to each unsecured creditor must be equal to the amount each would receive if the debtor's assets were liquidated under Chapter 7. It takes considerable time to close a Chapter 7 case and pay a dividend to creditors. Assets must be liquidated, tax returns filed, the trustee must wait for final approval of his or her tax liability, an accounting must be prepared, audited by the U.S. Trustee, noticed, and approved by the court. This process invariably takes at least three or four years, as the court knows from review of its own docket. For example, of the fifteen Chapter 7 final hearing on the court's last calendar, only two very small cases were closed less than three years after commencement. Five others were between three and four years old, and the other eight stretched all the way back to 1979. Under the Fulkersons' proposed plan, dividends would begin to unsecured creditors in year three and continue through year four, just about the same time as Chapter 7 distribution would take place. The only difference would be that in Chapter 7 perhaps $15,000.00 would earn passbook interest for three years and be available for distribution along with the principal. At today's low interest rates, this would be perhaps an additional $1,500.00. The payments proposed by the Fulkersons are sufficiently more than the Chapter 7 dividend would be to cover this amount.
III. Administrative Expenses
If the Fulkersons had filed a Chapter 13 initially, the administrative expenses would have been a wash. That is, the Chapter 13 trustee's expenses and fees would have been about the same as a hypothetical Chapter 7 trustee's expenses and fees. However, in this case the debtors converted the case after actual Chapter 7 administrative expenses had been incurred. The total amount of administrative expenses which will have to be paid if the Chapter 13 plan is confirmed is $2,480.00 more than they would be in Chapter 7. Accordingly, the Fulkersons' payments must be increased to cover these additional costs.
IV. Belated Bid Increase
Although the Owades establish standing to object based on an unliquidated claim they have filed, it is clear that their motivation for objecting is because they were frustrated purchasers of assets from the Chapter 7 trustee. Upon seeing that the Fulkersons were very close to a confirmable plan, they offered in court to up their bid if the case was reconverted to Chapter 7. It seems inherently unfair to allow them to do so. As the Fulkersons point out in their well-formulated brief, a primary purpose of Chapter 13 is to permit debtors to retain their assets by paying their creditors what a Chapter 7 trustee would have recovered had he sold them. The Owades would not be offering to up their bid but for the conversion to Chapter 13. The court has no problem holding that under the equities of this case the value of the assets should be the amount for which the Chapter 7 trustee had agreed to sell them prior to conversion.
The value of the payments the Fulkersons have proposed to make under their proposed plan is sufficient to compensate for the time value of money. However, the total to be paid needs to be increased by $2,480.00 to cover the increased administrative expenses. If the Fulkersons have a feasible way of paying the increased amount, their plan will be confirmed. A further hearing will be held on November 22, 1993, at 3:00 P.M., to see if a plan consistent with this memorandum can be confirmed. For purposes of said hearing, the decisions in this memorandum shall be deemed established and not subject to further argument.
Dated: October 2, 1993 _______________________
U.S. Bankruptcy Judge