Paul A. Sheridan and Amanda Lee McKee-Sheridan

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
PAUL A. SHERIDAN
AMANDA LEE MCKEE-SHERIDAN
DEBTORS
CASE NO.
08-00110-8-ATS
MEMORANDUM OPINION REGARDING TIMING OF DISCHARGE
A combined hearing to consider approval of the debtors' disclosure statement and
confirmation of their chapter 11 plan of reorganization was held in Raleigh, North Carolina on July
8, 2008. 	The debtors' disclosure statement, which had been conditionally approved, contains
adequate information and will be approved. Also, the debtors' plan of reorganization meets the
confirmation requirements of 11 U.S.C. § 1129(a) and will be confirmed.
In this chapter 11 case the debtors are individuals, and the issue to be addressed in this
memorandum opinion is the timing of the debtors' discharges. Should discharge be granted upon
completion of all payments under the plan, or, should, as requested by the debtors, discharge become
effective, as it would in a chapter 11 case involving a debtor that is not an individual, upon
confirmation of the plan? The debtors have followed the court's procedures for requesting that their
discharges take effect prior to completion of their plan payments and have shown cause why their
request should be granted.
SO ORDERED.
SIGNED this 14 day of July, 2008.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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1 This is not a small business case as defined in § 101(51C), and the 45-day rule under §
1129(e) regarding confirmation of a plan in a small business case is not applicable.
2
Paul A. Sheridan and Amanda Lee McKee-Sheridan filed a voluntary joint petition for relief
under chapter 11 of the Bankruptcy Code on January 7, 2008. As is the custom in this district, an
order was entered on January 9, 2008, directing the debtors to file a plan and disclosure statement
within 90 days of the petition date. The debtors requested and were granted a 30-day extension, and
their plan and disclosure statement were filed on May 6, 2008. The court conditionally approved
the disclosure statement on May 7, 2008, and the combined hearing was held on July 8, 2008. 1
Mr. Sheridan is an attorney in Raleigh, North Carolina who specializes in construction law.
Mrs. Sheridan is a veterinarian, who is currently unemployed because she is staying at home to
attend to the debtors' two-year-old child, who requires care for a serious medical condition. Mr.
Sheridan left the practice of law in 2005 and moved to Arizona to become a real estate developer.
His timing could not have been worse. The Arizona real estate market collapsed and so did his real
estate development business. The debtors returned to North Carolina, and Mr. Sheridan has resumed
his law practice. According to Schedule I, Mr. Sheridan’s annual income is $100,000, which is
somewhat less than he made as an attorney before leaving for Arizona.
The debtors’ schedules reflect unsecured debts of more than $1,074,000, most of which are
related to failed business ventures in Arizona and are listed as unliquidated, contingent or contested.
The debtors’ disclosure statement estimates that of the listed unsecured obligations, only $189,000,
primarily consumer claims, are liquidated debts.
The debtors’ other debts include administrative obligations for their attorney and accountant,
an ad valorem tax debt of $3,412 owed to the Pima County, Arizona, unknown priority debt to the
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3
Internal Revenue Service and the North Carolina Department of Revenue, a domestic support
obligation owed by Mr. Sheridan for child support, a secured debt to Wells Fargo Home Mortgage
secured by a deed of trust on their residence in Fuquay Varina, North Carolina, two secured debts
to Countrywide Home Loans secured by deeds of trust on the debtors’ former residence in Tucson,
Arizona, and a secured debt to Vantage West Credit Union secured by a lien on their 2005 Ford
F250 truck.
The debtors’ assets include their residence in North Carolina, valued at $175,000 subject to
a lien of $116,000 in favor of Wells Fargo, their former residence in Arizona valued at $400,000
subject to the two liens aggregating $548,000 in favor of Countrywide, their Ford truck valued at
$6,600 subject to the lien in favor of Vantage West of $4,600, net equity of $3,000 in a Jeep owned
by Mrs. Sheridan and her mother, an unencumbered inoperable 1971 MGB automobile valued at
$4,000, IRA accounts totaling $77,000, personal property valued at no more than $3,000, and non-
exempt business investments worth no more than $25,000.
The debtors were residents of two states within 730 days prior to bankruptcy, and under §
522(b)(3), Arizona law applies to the debtors’ exemptions. 	Pursuant to those exemptions, the
debtors claimed the equity in their North Carolina home, their IRA accounts, one of their
automobiles, and personal household goods as exempt. After accounting for exemptions, assets
available to creditors are worth approximately $30,000, and after deducting priority claims of
$13,000, the amount available for unsecured creditors is only $17,000.
The debtors’ plan includes 9 classes, only one of which, Class IX for general unsecured
claims, is impaired. Administrative claims (Class I) will be paid in full at confirmation, taxes
(Classes II, III and IV), to the extent there are any owing, will be paid in accordance with §
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4
1129(a)(9)(C), Mr. Sheridan’s domestic support obligation for child support (Class V) is current and
will be paid each month, the Wells Fargo claim (Class VI) secured by the debtors’ North Carolina
residence is current and contractual payments will be maintained, the Countrywide claim (Class VII)
secured by the debtors’ former residence in Arizona will be satisfied by surrendering the residence
for foreclosure (which, under Arizona’s anti-deficiency statute, will eliminate any remaining
unsecured claim), and the Vantage West claim (Class VIII) secured by the debtors’ truck is current
and contractual payments will be maintained.
The only impaired class, Class IX for general unsecured claims, will be paid a total of
$20,000 with interest at the rate of 6% per annum over a period of 5 years in monthly installments
commencing within 90 days of the effective date of the plan. The payments will be made pro rata
to general unsecured claimants and will be secured by a second deed of trust on the debtors’ North
Carolina residence. An attorney will serve as the trustee under the deed of trust and may foreclose
if payments are not made. 	The trustee will release the deed of trust when the obligation to the
creditors in Class IX is paid in full.
As is typical in chapter 11 cases of this size, few creditors bothered to vote for or against the
plan, but there were sufficient acceptances in Class IX to satisfy the requirements of § 1129(a)(7)
and § 1129(a)(10). Although one small unsecured creditor did vote to reject the plan, no holder of
an allowed unsecured claim objected to the debtors’ plan, and, consequently, the disposable income
requirement of § 1129(a)(15) is not applicable. The bankruptcy administrator filed a response to the
plan, but she generally supported confirmation.
All of the confirmation requirements of § 1129(a) were met and the only remaining issue is
the timing of the discharge. In chapter 11 cases that do not involve individuals, confirmation of the
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2 Delaying the discharge until all payments are made presents several practical problems.
How will the court know when all payments have been made? Typically, there is no trustee in a
chapter 11 case, so presumably it will be up to the debtor to notify the court that all plan payments
have been made. In the Eastern District of North Carolina, notification of the completion of plan
payments is accomplished by a notice and request for discharge that is sent to the court and served
on all creditors and the bankruptcy administrator.
A delayed discharge also raises questions regarding the timing of the closing of the case.
If the debtor does not get a discharge until all payments are made, must the case remain open until
the discharge is entered? If no notice of payment completion is filed, will the case remain open
indefinitely? Must the clerk’s office or the bankruptcy administrator’s office monitor the case to
see that the notice is filed? And, as long as the case remains open, must the debtor pay the chapter
11 quarterly fees required by 28 U.S.C. § 1930(a)(7)? See Robert J. Landry, Individual Chapter 11
Cases After BAPCPA: Can You Still Close The Case Early?, 25 Am. Bankr. Inst. J. 10 (July/August
2006).
When a case should be closed is an issue that should be considered at the confirmation
hearing. 	In most cases in the Eastern District of North Carolina, even though discharge will
typically be entered when all payments are completed, the case will be closed upon substantial
consummation under § 1101(2) when there has been a commencement of distribution under the plan.
In the EDNC orders confirming plans for individuals provide that “upon the filing of a ‘Notice of
Completion of Plan Payments and Request for Entry of Discharge’ accompanied by a certificate of
service, the case will be automatically re-opened pursuant to § 350 without the payment of a fee.”
The notice, which the debtor serves on all creditors and the bankruptcy administrator, provides that
if there is no response within 20 days, a discharge order may be entered.
3 In addition, a discharge may be entered under § 1141(d)(5)(B), which provides for entry
of discharge after confirmation but before all plan payments have been made. The debtor must show
that unsecured creditors received more than they would have received under chapter 7 and that
5
plan, unless otherwise provided in the plan or the order confirming the plan, has the effect of a
discharge and no separate discharge order is entered. 11 U.S.C. § 1141(d)(1). 	However, §
1141(d)(5)(A) provides that in a chapter 11 case in which the debtor is an individual:
unless after notice and a hearing the court orders otherwise for cause, confirmation
of the plan does not discharge any debt provided for in the plan until the court grants
a discharge on completion of all payments under the plan.
Under § 1141(d)(5)(A), the general rule in chapter 11 cases involving individuals is that the
discharge will not be entered until the debtor has made all plan payments. 2 But, the court may
deviate from that general rule “after notice and a hearing” if the court finds “cause.” 3 Essential to
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modification of the plan under § 1127 is “not practicable.” 11 U.S.C. § 1141(d)(5)(B). 	This is
similar to what is known as the “hardship discharge” under § 1328(b) in chapter 13 cases, except
no hardship is required under § 1141(d)(5)(B). A discharge under § 1141(d)(5)(B) requires a motion
to be filed by or behalf of the debtor.
6
the “notice and hearing” prerequisite is that creditors be given actual notice that a discharge prior
to completion of all plan payments is being requested. The notice requirement was fulfilled in this
case by a conspicuous notice in the disclosure statement, and by a statement in the notice of the
confirmation hearing. The first page of the disclosure statement in bold and capital letters alerted
creditors that the debtors were requesting that discharge be effective upon confirmation as follows:
THE DEBTORS HEREBY GIVE NOTICE THAT THEY INTEND TO SEEK
THE ABOVE-REFERENCED RELIEF [discharge upon confirmation of Plan on
Effective Date] AT THE HEARING ON CONFIRMATION OF THIS PLAN.
Additionally, consistent with this court’s procedure when an individual debtor requests that
the chapter 11 discharge be effective before all plan payments are completed, the notice of the
confirmation hearing sent to all creditors by the clerk’s office contained the following language:
As stated in the disclosure statement, the debtors’ plan proposes that the discharge
in this case shall become effective upon confirmation of the plan. Any objection to
that proposal must be filed by the deadline for objections contained in this notice.
Whether or not an objection is filed, the court may or may not grant the relief
requested based on whether or not the debtor has set forth sufficient cause as
required by 11 U.S.C. § 1141(d)(5)(A) in the disclosure statement.
Section 1141(d)(5)(B) gives no guidance or examples of what might constitute cause for
granting a discharge prior to the completion of all plan payments, and that section, having been
added to the Bankruptcy Code in 2005 by the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, 	is too new to have generated much
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4 See In re Ball, 2008 WL 2223865 at *4 (Bankr. N.D.W. Va. 2008) (cause does not include
desire to avoid quarterly fees or post-confirmation reports).
5 None of the exemptions claimed by the debtors require the court to consider the
requirements of § 1141(d)(5)(C) in determining whether to grant discharges in this case. 	Also,
because the debtors’ plan does not provide for the liquidation of all or substantially all of the
property of the estate, the debtors need not take the personal financial management course as a
prerequisite to receiving a discharge. See Fed. R. Bankr. P. 1007(b)(7) (Interim).
7
discussion in reported cases. 4 The factors that are persuasive to the court in this case are the
likelihood that the debtors will make all of their plan payments and the assurance, in the form of
collateral, that creditors will receive the amount they have been promised even if the plan payments
are not made. The debtors’ plan has only one impaired class and that class is being given collateral
to secure payment of the amount the class has been promised. Class IX is to receive $20,000 plus
interest of 6% that will be secured by a second deed of trust on the debtor’s North Carolina
residence. The real property is valued at $175,000 and is subject to a first lien deed of trust of
$116,000. Furthermore, Mr. Sheridan’s income as a construction law attorney is sufficiently reliable
that there is a strong probability that Class IX will be paid the $20,000 plus interest called for in the
plan. If Class IX is not paid by regular monthly payments, the trustee can foreclose the collateral
and there should be sufficient equity in that property to pay the amount that the plan provides. The
combination of the likelihood of payment and the assurance that the unsecured creditors will receive
what they have agreed to accept in satisfaction of their claims gives the court confidence to allow
the discharge to take effect upon confirmation of the plan.
A separate confirmation order will be entered providing that the debtors’ discharges shall
be effective upon the effective date of the plan’s confirmation.5
SO ORDERED.
END OF DOCUMENT
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