IN RE: CAMILLE T. DAVIS, Debtor. CAMILLE T. DAVIS, Appellant, v. LAUREN A. HELBLING, Chapter 13 Trustee, Appellee.
No. 19-3117
United States Court of Appeals for the Sixth Circuit
Decided and Filed: June 1, 2020
20a0167p.06
Before: CLAY, LARSEN, and READLER, Circuit Judges.
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b). Appeal from the United States Bankruptcy Court for the Northern District of Ohio at Cleveland. No. 1:17-bk-12965—Arthur I. Harris, Judge. Argued: August 8, 2019.
COUNSEL
ARGUED: Eugene R. Wedoff, Oak Park, Illinois, for Appellant. Philip D. Lamos, OFFICE OF THE CHAPTER 13 TRUSTEE, Cleveland, Ohio, for Appellee. ON BRIEF: Eugene R. Wedoff, Oak Park, Illinois, Joseph M. Romano, Cleveland, Ohio, for Appellant. Philip D. Lamos, OFFICE OF THE CHAPTER 13 TRUSTEE, Cleveland, Ohio, for Appellee.
LARSEN, J., delivered the opinion of the court in which CLAY, J., joined. READLER, J. (pp. 16–28), delivered a separate dissenting opinion.
LARSEN, Circuit Judge. Camille Davis filed for bankruptcy. Chapter 13 of the Bankruptcy Code allows her to satisfy her unsecured debts by paying
I.
In 2017, Davis filed a petition for relief under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Ohio. She had more than $200,000 in debt and fewer than $39,000 in assets. The vast majority of Davis‘s debt—more than $189,000—was unsecured. Unsecured creditors lack recourse to any interest in collateralized property. See
Davis proposed a bankruptcy plan that would pay her unsecured creditors a total of $19,380—equal to sixty monthly payments of $323. To obtain court approval, her plan needed to provide for payment of all her “projected disposable income” to her unsecured creditors.
The Trustee objected to Davis‘s plan. The Trustee contended that wages withheld as voluntary 401(k) contributions are considered disposable income under the Code; as a result, Davis‘s proposed plan would not pay all her projected disposable income to her unsecured creditors. The bankruptcy court sustained the Trustee‘s objection. In doing so, the court noted that it felt bound by dictum found in this court‘s decision in Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012), which suggested that the Code always counts voluntary retirement contributions as disposable income, even if the debtor began making those contributions prior to bankruptcy. The bankruptcy court elaborated:
While I don‘t necessarily agree with the Seafor[t] analysis, it is the analysis of the Sixth Circuit. I agree with [Davis‘s] attorney that it is dicta, but . . . it‘s a very strong direction from the Sixth Circuit . . . . So what I‘ve done in the six years or so since the Seafor[t] case came out is to say I‘m going to follow [it] . . . until someone tells me that it‘s no longer the law of the circuit. And I‘m happy if a party wants to take the issue up to certify it for dirеct appeal to the circuit.
Transcript of Confirmation Hearing at 4–6, In re Davis, No. 17-12965 (Bankr. N.D. Ohio May 24, 2018)
As a result of the bankruptcy court‘s decision, Davis filed an amended bankruptcy plan that would pay her unsecured creditors $519 each month. The increase reflected, in part, the addition of Davis‘s monthly 401(k) contributions to her disposable-income calculation. Davis then objected to her own plan, preserving the disposable income issue for appellate review. See Lindsey v. Pinnacle Nat‘l Bank (In re Lindsey), 726 F.3d 857, 860 (6th Cir. 2013) (noting that a debtor can “appeal a confirmed plan with which [s]he disagrees“). The bankruptcy court confirmed the amended plan over Davis‘s objection. Davis then obtained a certification from the bankruptcy court authorizing a direct appeal to this court. This appeal followed.
II.
We begin with the legal background. Section 1325(b)(1) of the Code provides that, upon objection, a bankruptcy plan cannot be approved “unless . . . [it] provides that all of the debtor‘s projected disposable income to be received in the applicable commitment period . . . will be applied to make payments to unsecured creditors.”
Determining a debtor‘s “projected disposable income” under § 1325(b)(1) is therefore a two-step process. See id. at 519, 524. First, the debtor‘s current “disposable income” is determined by the formula prescribed in § 1325(b)(2). Id. at 519. Second, in certain circumstances, that sum is adjusted for changes “known or virtually certain” to occur during the commitment period. Id. When a debtor expects no changes in financial circumstances, as “in most cases,” her “projected disрosable income” under § 1325(b)(1) is simply her “disposable income” as defined in § 1325(b)(2). Id.
Before 2005, the “overwhelming consensus” among bankruptcy courts was that wages voluntarily withheld as 401(k) contributions formed part of a debtor‘s disposable income. In re Johnson, 241 B.R. 394, 399 (Bankr. E.D. Tex. 1999); see, e.g., In re Austin, 299 B.R. 482, 486–87 (Bankr. E.D. Tenn. 2003); In re Keating, 298 B.R. 104, 110 (Bankr. E.D. Mich. 2003); In re Regan, 269 B.R. 693, 696–97 (Bankr. W.D. Mo. 2001); In re Merrill, 255 B.R. 320, 323–24 (Bankr. D. Or. 2000); In re Cox, 249 B.R. 29, 32 (Bankr. N.D. Fla. 2000); In re Cohen, 246 B.R. 658, 666–67 (Bankr. D. Colo. 2000); In re Hansen, 244 B.R. 799, 802 (Bankr. N.D. Ill. 2000); see also Anes v. Dehart (In re Anes), 195 F.3d 177, 180–81 (3d Cir. 1999); Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775, 777 (6th Cir. 1995).
In 2005, however, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23. BAPCPA amended the Bankruptcy Code and added
(b) Property of the estate does not include— (7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to—
(I) [a 401(k) retirement plan]
except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).
Most courts agree with Davis. See RESFL FIVE, LLC v. Ulysse, No. 16-CV-62900, 2017 WL 4348897, at *6 (S.D. Fla. Sept. 29, 2017) (collecting cases). The leading decision is Baxter v. Johnson (In re Johnson), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006). There, the court concluded that the hanging paragraph “plainly state[s] that [401(k)] contributions ‘shall not constitute disposable income.‘” Id. (quoting
Without deciding the precise question before us today, this court squarely rejected Johnson‘s reasoning in Seafort, 669 F.3d at 674. The debtor in Seafort was in the midst of repaying a 401(k) loan. Id. Payments made toward 401(k) loans are explicitly excluded from disposable income under
Seafort also opined, in dictum, on the circumstances present here. The trustee in Seafort had conceded that if the debtor had regularly made 401(k) contributions prior to filing her petition, she could have excluded those wages from her projected disposable income. See id. at 674 n.7. This court disagreed, endorsing a competing interpretation of the hanging paragraph adopted by In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010), which held that a Chapter 13 debtor may never deduct “voluntary post-petition retirement cоntributions in any amount regardless of whether the debtor [made] pre-petition retirement contributions.” Seafort, 669 F.3d at 667, 674 n.7. But we acknowledged that the “issue [was] not presently before us.” Id. at 674 n.7.
Other courts have adopted Prigge‘s interpretation as a holding. See, e.g., Parks v. Drummond (In re Parks), 475 B.R. 703, 709 (9th Cir. B.A.P. 2012); In re McCullers, 451 B.R. 498, 504 (Bankr. N.D. Cal. 2011). That interpretation focuses on the hanging paragraph‘s location within § 541. See Parks, 475 B.R. at 708. Section 541 defines the contours of the bankruptcy estate—a concept that deals primarily with pre-petition assets. Drawing clues from that context, the Prigge interpretation construes the hanging paragraph to reach
Other courts have adopted yet two more interpretations. First, several courts have followed the reasoning of our Bankruptcy Appellate Panel (BAP) in Seafort, 437 B.R. 204, 210 (B.A.P. 6th Cir. 2010). See, e.g., In re Thompson, No. 17-02877-JCO, 2018 WL 1320171, at *2 (Bankr. S.D. Ala. 2018); In re Read, 515 B.R. 586, 590 (Bankr. E.D. Wis. 2014); In re Jensen, 496 B.R. 615, 621 (Bankr. D. Utah 2013); In re Noll, No. 10-35209-SVK, 2010 WL 5336916, at *2 (Bankr. E.D. Wis. 2010). That interpretation—which we will refer to as ”Seafort-BAP“—also focuses on the hanging paragraph‘s placement in § 541. See Seafort, 437 B.R. at 210. Unlike Prigge, however, Seafort-BAP construes the hanging paragraph to exclude the debtor‘s pre-petition contribution amount—rather than merely her accumulated savings—from her disposable income under § 1325(b)(2). Id. Under this interpretation, a debtor may deduct 401(k) contributions from her disposable income if she made an equal or greater monthly contribution prior to her bankruptcy. Id. That means that the hypothetical debtor above could exclude from her disposable income the $100 401(k) contribution withheld from her wages each month, but a debtor who waited until after bankruptcy to begin making those contributions could not do the same. See id.
Second, at least one court has adopted a modified version of Seafort-BAP. See In re Anh Thu Thi Vu, 2015 WL 6684227, at *4 (Bankr. W.D. Wash. 2015); In re Bruce, 484 B.R. 387, 394 (Bankr. W.D. Wash. 2012). This approach—known as the “CMI interpretation“—mirrors Seafort-BAP‘s focus on pre-petition contributions but offers slightly different mechanics. See Anh-Thu Thi Vu, 2015 WL 6684227, at *4. The CMI interpretation construes the hanging paragraph as excluding the debtor‘s pre-petition contributions from the calculation of her “current monthly income“—a subcomponent of § 1325(b)(2)‘s disposable-income calculation. Id. A debtor‘s current monthly income is defined as her average income over the six months preceding bankruptcy.
To recap, BAPCPA‘s insertion of the hanging paragraph into § 541(b)(7) has
III.
With the legal landscape in view, we turn to Davis‘s appeal. Davis argues that the hanging paragraph in § 541(b)(7) excludes from her disposable income, as defined in § 1325(b)(2), the amount she contributed monthly to her 401(k) prior to bankruptcy. Among the four competing interpretations of the hanging paragraph, three support Davis‘s view: Johnson, Seafort-BAP, and CMI. But our decision in Seafort, 669 F.3d at 674, rejected the Johnson interpretation, so we do not consider it here. See United States v. Mateen, 739 F.3d 300, 304 (6th Cir.), rev‘d en banc on other grounds, 764 F.3d 627 (6th Cir. 2014) (noting that we are bound by a “prior panel‘s statutory interpretation” where it was “essential to the decision“). That leaves Davis with the Seafort-BAP and CMI interpretations for support. In contrast, the Prigge interpretation supports the Trustee‘s position, which is that voluntary retirement contributions can never be excluded from disposable income, regardless of whether the debtor was making such contributions prior to her bankruptcy. Davis‘s appeal asks us to decide between these competing interpretations.
We start with the text. See Jimenez v. Quarterman, 555 U.S. 113, 118 (2009). Section 541(b)(7) excludes from property of the estate “any amount . . . withheld by an employer from the wages of employees for payment as contributions” to a 401(k) plan.
We must determine whether “such amount,” which “shall not constitute disposable income,” encompasses the continued monthly 401(k) contributions Davis sought to exclude from her disposable income in her proposed bankruptcy plan. See
Neither reading makes perfect sense of the text. “Amount” is defined as the “total financial value or cost (of something).” Oxford English Dictionary (3d ed. 2019). The “something” that is being measured depends on context. It can be an individual number (“the amount of the policy is [$]10,000“), or it can be an aggregate number (“the . . . amount of worthless IOUs collected during each day‘s business“). Amount, Merriam-Webster Unabridged
Here, context points in both directions. On the one hand, the hanging paragraph excludes the amount of the debtor‘s 401(k) contributions from “disposable income as defined in Section 1325(b)(2).”
Further confounding our search for meaning, § 541(b)(7) is a grammatical puzzle. See Seafort, 669 F.3d at 671 (describing the hanging paragraph as “inelegantly drafted” (citing Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011))). The hanging paragraph begins with the conjunction “except that,” which, to no one‘s surprise, is generally used to introduce an exception to an otherwise-applicable general rule. See, e.g.,
Established canons of construction counsel us to rule in favor of Davis. First, the reenactment canon provides that whenever Congress amends a statutory provision, “a significant change in language is presumed to entail a change in meaning.” Arangure v. Whitaker, 911 F.3d 333, 341 (6th Cir. 2018). Here, Congress enacted BAPCPA against the backdrop of an “overwhelming consensus among bankruptcy courts” that wages withheld by an employer as voluntary 401(k) contributions constituted part of the debtor-employee‘s disposable income. See Johnson, 241 B.R. at 399. BAPCPA‘s insertion of the hanging paragraph into § 541(b)(7) represents a substantial change to the statutory text. We must therefore presume that the hanging paragraph altered existing law. Arangure, 911 F.3d at 341.
The presumption against ineffectiveness offers similar guidance. See Antonin Scalia & Bryan A. Garner, Reading Law 63 (2012). That presumption reflects “the idea that Congress presumably does not enact useless laws.” United States v. Castleman, 572 U.S. 157, 178 (2014) (Scalia, J., concurring). In other words, when the plаin meaning of a provision is not clear, we should avoid interpretations that render the provision a “dead letter.” United States v. Hayes, 555 U.S. 415, 427 (2009) (quoting United States v. Hayes, 482 F.3d 749, 762 (4th Cir. 2007) (Williams, J., dissenting)). Thus, we should be skeptical of interpretations that deprive the hanging paragraph of any meaningful effect.
Finally, the canon against surplusage provides a related command. It conveys the familiar rule that courts
Applying those principles to Davis‘s appeal, we conclude that the hanging paragraph is best read to exclude from disposable income the monthly 401(k)-contribution amount that Davis‘s employer withheld from her wages prior to her bankruptcy. That interpretation reads the amendment to § 541(b), which added thе hanging paragraph, in a way that actually amends the statute. It also gives a meaningful effect—one not already accomplished by § 1325(b)(2)—to Congress‘s instruction in § 541(b)(7) that 401(k) contributions “shall not constitute disposable income.”
The Trustee‘s proposed interpretation fails on these objectives. Instead, as the Trustee concedes, its interpretation would read the hanging paragraph as merely “counteract[ing] any suggestion that the exclusion of [accumulated 401(k)] contributions from property of the estate constitutes postpetition income of the debtor.” Appellee Br. at 24. But that interpretation “makes no sense” because assets are not income. 5 Collier on Bankruptcy ¶ 541.23[1] (16th ed. 2019). Those accumulated funds “would never be considered . . . disposable income” under § 1325(b)(2). Id.; see McCullers, 451 B.R. at 505 (“[I]t is unlikely even without the language in question that excluding sums earned by the debtor prepetition from property of the estate would ever be construed as creating postpetition disposable income to [the] debtor.“). Thus, the Trustee‘s interpretation would render the hanging paragraph a “dead letter.” Hayes, 555 U.S. at 427.
The dissent points to dividends, capital gains, and early withdrawals from retirement accounts as examples of income that could be protected by the hanging paragraph under the Trustee‘s interpretation. But even if those post-petition events would constitute disposable income under the pre-petition formula in § 1325(b)(2), it is unclear how the hanging paragraph would protect them. See
There remains the puzzle of the hanging paragraph‘s conjunction, “except that.” See
We note, however, that this grammatical oddity is not without precedent in the Code. Other provisions also use “except that” to signal something besides an exception from a general rule. See, e.g.,
This use of “except that” is certainly not grammatically correct. But Congress‘s use of “awkward, or even ungrammatical” language does not alleviate our obligation to interpret the statute as best we can. See Lamie v. U.S. Tr., 540 U.S. 526, 534–35 (2004). Here, we conclude that the hanging paragraph is best read to allow Davis to exclude from her disposable income the monthly 401(k)-contribution amount that her employer withheld from her wages prior to her bankruptcy.
The counterarguments do not persuade us otherwise. The Trustee argues that the hanging paragraph‘s location in § 541—which focuses on pre-petition assets—indicates that it does not apply to post-petition 401(k) contributions. But that argument ignores the hanging paragraph‘s express reference to § 1325(b)(2). See 5 Collier on Bankruptcy, supra, ¶ 541.23[1] (“[T]he reference to disposable income under Section 1325(b) . . . removes аny doubt that postpetition contributions . . . are to be excluded from the disposable income calculation.“). And the Trustee‘s position fails to recognize the significance of Congress‘s choice to reference § 1325(b)(2) rather than § 1325(b)(1). See Seafort, 437 B.R. at 209 (“Conspicuously, § 541(b)(7) makes no reference to ’projected disposable income.‘” (emphasis added)). Section 1325(b)(2) measures disposable income exclusively by the debtor‘s income in the six-month period prior to filing her petition. In contrast, § 1325(b)(1) requires courts to forecast the debtor‘s ”projected disposable income.” Hamilton, 560 U.S. at 524 (emphasis added). Our interpretation is entirely consistent, therefore, with the pre-petition focus of § 541. Further, the hanging paragraph‘s express reference to § 1325(b)(2) reinforces our conclusion that Congress intended to allow a debtor to exclude from her disposable income the 401(k)-contribution amount withheld from her monthly wages prior to bankruptcy.
The dissent expresses dismay at the policy consequences of our interpretation. It suggests that our ruling “invites abuse by debtors” and incentivizes those in
Additionally, the dissent argues that our interpretation will upset “settled expectations” by deviating from our court‘s dictum in Seafort, 669 F.3d at 674 n.7. Dissenting Op. at 25. But we have never afforded stare decisis weight to a party‘s reliance on dictum. See, e.g., Slusser v. United States, 895 F.3d 437, 440 (6th Cir. 2018); Coca-Cola v. Procter & Gamble, 822 F.2d 28, 30 (6th Cir. 1987); see also Gonzalez v. United States, 553 U.S. 242, 256 (2008) (Scalia, J., concurring) (“[A] formula repeated in dictum but never the basis for judgment is not owed stare decisis weight.“). The dissent‘s application of stare decisis principles here is at odds with the firmly established rule that prior-panel dictum has no binding effect. See Wright v. Spaulding, 939 F.3d 695, 700 (6th Cir. 2019) (“[O]nly holdings are binding, not dicta.“).
Our decision today builds on Seafort, 669 F.3d 662. Unlike Davis, the debtor in Seafort sought to exclude from her disposable income 401(k) contributions that she had not been making prior to bankruptcy. Id. at 664. Seafort rejected Johnson‘s view that the hanging pаragraph allowed debtors to begin making 401(k) contributions post-petition and then deduct those contributions from their disposable incomes. Id. at 672–73 (concluding that the “larger context” of § 541 establishes a “fixed point in time” on the petition date). We do not disturb that analysis. But Seafort acknowledged that “§ 541(b)(7) must provide some sort of protection for voluntary retirement contributions in Chapter 13 cases,” id. at 672, and the court expressly declined to decide what that protection included, id. at 674 n.7. We now conclude that the hanging paragraph is best read to exclude from disposable income a debtor‘s post-petition monthly 401(k) contributions so long as those contributions were regularly withheld from the debtor‘s wages prior to her bankruptcy.
IV.
Our holding is narrow. We do not choose between the Seafort-BAP and CMI interpretations because either would produce the same result in this case. The CMI interpretation would allow Davis to deduct the average monthly contribution she made in the six months prior to bankruptcy, Anh-Thu Thi Vu, 2015 WL 6684227, at *4–5, whereas Seafort-BAP would allow her to deduct the monthly amount she contributed “on a consistent basis pre-petition,” see In re Thompson, 2018 WL 1320171, at *2 (applying Seafort, 437 B.R. 204). Here, Davis‘s employer withheld $220.66 in 401(k) contributions each month from Davis‘s wages for at least six months prior to her bankruptcy. We hold only that a dеbtor in like circumstances may deduct her monthly 401(k) contributions from her disposable income under § 1325(b)(2). See
* * *
For the foregoing reasons, we VACATE the bankruptcy court‘s order confirming Davis‘s Chapter 13 plan and REMAND for further proceedings.
IN RE: CAMILLE T. DAVIS, Debtor. CAMILLE T. DAVIS, Appellant, v. LAUREN A. HELBLING, Chapter 13 Trustee, Appellee.
No. 19-3117
United States Court of Appeals for the Sixth Circuit
DISSENT
READLER, Circuit Judge, dissenting. Considering that the federal courts have answered today‘s question four different ways, it is perhaps no surprise that we too are not of one mind. But in selecting between those approaches, we do not write on a clean slate. In Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012), we all but held that a debtor cannot exclude voluntary retirement contributions from post-petition disposable income, even if the debtor began making contributions before filing for bankruptcy. While that decision arguably is not controlling, I would give it the weight it deserves. For to my mind, it is correct.
In the Bankruptcy Abuse Prevention and Consumer Protection Act (or “BAPCPA“), Congress adopted a simple, bright-line rule: a debtor‘s pre-filing 401(k) contributions are protected from creditors; those sought to be made during the post-filing Chapter 13 reorganization period are not. That is the lone conclusion to draw from the statutory amendments to the bankruptcy code enacted by BAPCPA, from the case law that proceeded BAPCPA‘s adoption, and from the interpretive clues left by Congress.
1. Start with the historical case law backdrop. Before BAPCPA, the Supreme Court had interpreted the then-current version of the bankruptcy code to exclude a Chapter 13 debtor‘s pre-filing 401(k) savings from the “property of the estate” potentially reachable by creditors. See Patterson v. Shumate, 504 U.S. 753, 760 (1992). The exclusion from the “property of the estate” for pre-petition 401(k)‘s and other ERISA-qualified plans, the Supreme Court concluded, was implied by
By the same token, there was also general agreement among the federal courts, pre-BAPCPA, regarding how to treat a debtor‘s post-petition 401(k) contributions. Although not addressed by the Supreme Court, the predominant view was that post-petition contributions were part of a debtor‘s “disposable income,” see
Congress writes against the backdrop of court decisions. Merck & Co. v. Reynolds, 559 U.S. 633, 648 (2010) (“We normally assume that, when Congress enacts statutes, it is aware of relevant judicial precedent.“). Given the universal view that pre-filing 401(k) savings were protected from creditors, and the majority (but not universal) view that post-filing voluntary 401(k) contributions were not, Congress sought to codify expressly these predominant judicial interpretations. It did so in
By its title, § 541‘s focus is on the “Property of the Estate.” Section 541(a) describes which assets held by the Chapter 13 debtor are included in the “property of the estate.” Assets that make up the “property of estate” are sometimes used to pay claims against the debtor, for example, when the debtor, as part of her bankruptcy plan, surrenders collateral to satisfy secured creditors. See
Section 541(b), in contrast, describes a host of assets held by the debtor that the “[p]roperty of the estate does not include,” meaning they are not reachable by creditors and do not influence the debtor‘s bankruptcy plan.
Having followed the background judicial rule as to pre-petition 401(k) assets, there is no indication that Congress simultaneously displaced the parallel background judicial rule as to post-petition 401(k) contributions.
That Congress did not disrupt the then-existing approach to post-petition 401(k) contributions makes sense not only as a reflection of Congress‘s consistent treatment of the Chapter 13 case law backdrop, but also as a reflection of Congress‘s efforts to balance the interests of debtors and creditors. Through § 541(b)(7)(A), Congress preserved a debtor‘s pre-filing retirement contributions, which were made at a time when the debtor was unencumbered by the bankruptcy process, incentivized by the tax code, and had an eye to the future. Compare thosе circumstances, however, to the aftermath of a Chapter 13 filing. By her filing, the debtor has acknowledged that her debts have overwhelmed her income, that she cannot honor obligations made to creditors, and that a new financial path is in order. In that setting, the bankruptcy laws harmonize the needs of debtors and unsecured creditors. See 8A C.J.S. Bankruptcy § 2 (2020). For debtors, Congress afforded them the opportunity to resolve many debts over the course of a three- or five-year period, where a debtor‘s spending is tightly controlled by the contours of her bankruptcy plan. 8B C.J.S. Bankruptcy § 1204 (2020). For unsecured creditors, Congress afforded them a handful of years over which repayment by the debtor is emphasized, to the extent the debtor has “disposable income,” that is, income above that needed to afford “current,” “necessary” expenses for the debtor‘s “maintenance or support.” Id.;
2. To fortify its protection of pre-filing 401(k) contributions, Congress made a second addition to § 541(b)(7)(A), one commonly referred to as the “hanging paragraph.”
It is often the case that congressional “drafters intentionally err on the side of redundancy,” to ensure nothing slips through the legislative cracks. Abbe R. Gluck & Lisa Schultz Bressman, Statutory Interpretation from the Inside—An Empirical Study of Congressional Drafting, Delegation, and the Canons: Part I, 65 Stan. L. Rev. 901, 934 (2013) (noting that Congressional drafters “intentionally err on the side of redundancy to capture the universe or because you just want to be sure you hit it“) (internal quotation marks omitted). For the sake of certainty, the hanging paragraph serves as a “backstop” against creative arguments by unsecured creditors seeking to reach the debtor‘s pre-petition 401(k) assets during the Chapter 13 repayment period. Cf. Yates v. United States, 574 U.S. 528, 562 (2015) (Kagan, J., dissenting, joined by Scalia, Kennedy, and Thomas, JJ.) (noting that a seeming statutory redundancy merely “reflects belt-and-suspenders caution: If § 1519 contained some flaw, § 1512(c)(1) would serve as a backstop“).
And zealously guarding in all respects pre-petition 401(k) assets is not a trivial concern. Generally speaking, a well-performing 401(k) account generates earnings and/or income, yet “[n]either ‘earnings’ nor ‘income’ is defined by the Bankruptcy Code.” 7 Norton Bankr. L. & Prac. 3d § 149:3 (2020). To the extent the treatment of earnings, income, or other assets related to a pre-petition 401(k) account is unsettled, creditors, in the absence of the hanging paragraph, could argue that amounts generated by a pre-petition 401(k) during the post-petition repayment period qualify as disposable income, which those creditors may claim. Yet those amounts trace back to the same pre-petition 401(k) account created initially from funds “withheld by an employer from the wages of employees.”
- Gains and Dividends. While satisfying their three-to-five-year repayment period, many debtors will earn capital gains or receive dividend payments on pre-filing 401(k) contributions. See Jack VanDerhei, et al., 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2016 (Employee Benefit Research Institute), Sept. 10, 2018, at 1. (“The
bulk of 401(k) assets were invested in stock.“); Income, Black’s Law Dictionary (11th ed. 2019) (“The money or other form of payment that one receives . . . from . . . business, investments, . . . .“) (emphasis added); In re Zahn, 391 B.R. 840, 845 (B.A.P. 8th Cir. 2008) (noting that income includes “interest or profit realized on an asset‘s principal value“). - Early Withdrawals. During the repayment period, a debtor may choose to pay the 10% early withdrawal penalty and tap into her 401(k). The 401(k) Handbook ¶ 103 (Jane Meacham ed., 2019); see also In re Sullivan, 596 B.R. 325, 328–30 (Bankr. N.D. Tex. 2019) (rejecting a Chapter 13 trustee‘s plan modification proposal to increase debtor payments based on the trustee‘s argument that the debtor‘s income unexpectedly increased when he withdrew money from a concededly exempt 401(k) account).
- Mandatory Withdrawals. 401(k) account holders must take mandatory minimum withdrawals after they reach age 70 and a half. See Meacham, supra ¶ 265. For a Chapter 13 debtor, those withdrawals could begin during her repayment period. See In re Zahn, 391 B.R. at 846 n.2 (noting but leaving open for subsequent resolution whether mandatory withdrawals from a 401(k) may be income per
11 U.S.C. § 101(10A) ). - Involuntary Cash-Outs. A debtor whose employment is terminated and has less than $5,000 dollars in her account may be forced by her ex-employer to receive her 401(k) funds during her Chapter 13 repayment period, even over the debtor‘s objection. Meacham, supra ¶ 264.
Experienced investors, accountants, and financial advisors may well envision other similar scenarios.
Absent the hanging paragraph, an unsecured creditor could characterize each of these amounts received during the repayment period as disposable income. In a somewhat analogous context, for example, we held, pre-BAPCPA, that a tax refund for pre-filing income received by a Chapter 13 debtor during the repayment period is disposable income accessible by creditors. In re Freeman, 86 F.3d 478, 481 (6th Cir. 1996) (holding that a Chapter 13 debtor‘s tax refund, though generated by pre-petition income and exempt under state law, could still be disposable income); see also In re Harchar, 694 F.3d 639, 647 (6th Cir. 2012) (“Tax refunds for Chapter 13 debtors are considered income.” (citing In re Freeman, 86 F.3d at 481–82)). If not for the hanging paragraph, one could reach the same conclusion as to pre-petition 401(k) assets realized or received post-petition. Yet Congress put those arguments to bed through the hanging paragraph; pre-filing 401(k) contributions cannot be disposable income, no matter the form they take or the point at which they are received. See Gluck, supra, at 934 (acknowledging Congress‘s frequent desire “to ‘capture the universe‘“). In that sense, the clause is neither ineffective nor superfluous.
Rejecting this straightforward understanding of the hanging paragraph, the majority opinion suggests that the amounts “withheld by an employer from the wages of employees,”
We likewise understand Congress to act “intentionally and purposefully” when it “includes particular language in one section of a statute but omits it in another.” Seafort, 669 F.3d at 672 (quoting Keene Corp., 508 U.S. at 208). That canon of interpretation also weighs in favor of this straightforward reading of § 541(b)(7)(A). Many 401(k) accounts allow the account holder to borrow from the account and repay the loan later. Meacham, supra ¶ 430. With that practice in mind, Congress explicitly exempted those repayments from disposable income, even if the debtor repays her 401(k) loan during the Chapter 13 repayment period. See
In reaching that conclusion, Seafort thoroughly analyzed competing views and decisions addressing how to interpret the hanging paragraph. Id. at 667–73. After an extensive analysis, one that covered largely the same arguments raised by the parties here, we rejected the majority opinion‘s reading of the hanging paragraph. And we do not stand alone in that respect. See, e.g., In re Melendez, 597 B.R. 647, 660–61 (Bankr. D. Colo. 2019); In re Parks, 475 B.R. 703, 707–09 (B.A.P. 9th Cir. 2012); Prigge, 441 B.R. at 677. Agreeing with Seafort, I would honor its conclusion.
3. Despite the commonsense understanding that Congress, through BAPCPA, balanced the interests of creditors and debtors and uniformly adopted the background case law principles, and in the face of our prior unanimous conclusion in Seafort, the majority opinion charts another course. It finds a different and indeed expansive meaning in the hanging paragraph, a clause it nonetheless argues “has no clear meaning.” That conclusion suffers from numerous flaws.
One, the majority opinion‘s interpretation of the hanging paragraph does not make sense of its location. The hanging paragraph is located in § 541, which, by its title, addresses the “Property of the Estate.” As mentioned, the property of the estate consists of assets held by the debtor at the time she files for bankruptcy. See
Congress‘s draftsmanship is particularly head-scratching if one accepts the majority opinion‘s observation that Congress, through the hanging paragraph, sought to make a “significant change” from how the courts had previously treated post-petition 401(k) contributions. Maj. Op. at 10. “The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific.” Kelly v. Robinson, 479 U.S. 36, 47 (1986) (internal citations and quotations omitted); see, e.g., Vance v. Ball State Univ., 570 U.S. 421, 470 (2013) (Ginsburg, J., dissenting) (observing that Congress explicitly overrode Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007) through the Lilly Ledbetter Fair Pay Act of 2009). The Supreme Court “has followed this rule with particular care in construing the scope of bankruptcy codifications.” Kelly, 479 U.S. at 47; see also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 245–46 (1989) (reading the Bankruptcy Code of 1978 as altering pre-existing case law doctrine because “Congress expressly chose” to do so through “language . . . clearer than the language at issue in . . . Kelly“). If Congress intended to effect “significant change” from the pre-BAPCPA background rule that post-petition voluntary 401(k) contributions are disposable income, it is odd to think it chose to do so through an apparently misplaced hanging paragraph.
Two, the majority opinion‘s holding is in tension with BAPCPA‘s emphasis on curbing perceived abuses of the bankruptcy process by debtors. Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 64 (2011). Through BAPCPA, Congress sought to discourage debtors from pursuing a Chapter 7 liquidation, where a debtor pays debts out of current assets, and instead to pursue a Chapter 13 reorganization, where a debtor pays debts out of income earned over the next three to five years. Elizabeth Warren, et al., The Law of Debtors and Creditors 253 (7th ed. 2014). Having encouraged the use of Chapter 13‘s multi-year plan for repaying creditors, it is difficult to believe Congress simultaneously created a massive loophole permitting a Chapter 13 debtor nonetheless to dramatically undermine creditors by dedicating her post-petition income to a 401(k), for her own future use.
Take this case as an example. At the time of her Chapter 13 filing, Davis owed $189,000 to her unsecured creditors. She committed to a plan that would pay her creditors just $19,380, barely 10% of the debt she amassed. To that end, Davis, despite having a gross monthly income of $5,627, attributed only $323 of that amount as disposable income available to her creditors. Davis calculated that diminutive figure in part by setting aside $220 of her gross monthly income to make contributions to her 401(k) account. The majority opinion now blesses that effort, allowing Davis to shield an additional 40% of the already modest amount she could have paid to her creditors, leaving those creditors with just a dime for every dollar they are owed. Quite a windfall, then, for Davis.
That is not to say Davis could nеver save for retirement, even in a post-petition Chapter 13 repayment setting. Were her
Three, the majority opinion upsets settled expectations. Dicta or not, Seafort was clear in its instruction that post-petition 401(k) contributions are disposable income. Numerous bankruptcy courts accepted that instruction in this exact situation. See, e.g., In re Rogers, 12-32558 (Bankr. E.D. Mich. 2012); In re Caticchio, 16-10800 (Bankr. N.D. Ohio 2016). Creditors have likely done the same, relying on our conclusion in Seafort to set interest rates to compensate themselves should a debtor default, on the assumption that any recovery would not be impeded by a debtor‘s additional 401(k) contributions. Cf. Joshua Goodman & Adam Levitin, Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates, 57 J.L. & Econ. 139, 156 (2014) (finding statistical evidence that before the Suрreme Court prohibited the judicial practice, jurisdictions that allowed bankrupt debtors to reduce their mortgage principal through “cramdowns” faced higher interest rates than jurisdictions that did not permit such cramdowns). The majority opinion, however, upsets that large basket of settled expectations. In this way and many others, the majority opinion does not “build on” Seafort—it goes in an entirely different direction. Maj. Op. at 14.
Four, the majority opinion‘s reading of § 541 invites abuse by debtors. If, as the majority opinion concludes, all that is required to keep post-petition income out of a creditor‘s hands is for a debtor to have some track record (perhaps even as short as one month) of 401(k) contributions before filing, debtors will no doubt take advantage of that unexpected invitation. Sophisticated or not, every debtor surely would understand the incentive to enhance dramatically their 401(k) contributions if bankruptcy potentially was on the horizon, knowing they could shield that inflated contribution level while in bankruptcy. Those enhanced contributions, ironically, might even contribute to one‘s ultimate bankruptcy, taking away mоney that otherwise would be used for current expenses. Drafting legislation, to be sure, is not always a perfect science. See Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004) (describing
Those abuses, moreover, cannot be sufficiently policed through the bankruptcy court‘s enforcement of
That leaves the majority opinion‘s observatiоn regarding § 541‘s reference to
To my mind, that delicate reading of §§ 541(b) and 1325(b)(2) has many interpretive holes. Take § 541(b) first. Nothing in § 541(b) speaks to protecting periodic actions like monthly 401(k) contributions. Section 541(b) identifies the items not included in the property of the estate by reference to the total amount of the asset at the time of bankruptcy, not the fractional nature in which the asset was accumulated. In other words, protecting the total value of a 401(k) asset accumulated pre-petition says nothing about authorizing additional periodic contributions post-petition.
Section § 1325(b)(2) is an equally poor vehicle for reaching the majоrity opinion‘s outcome. Section 1325, as its title indicates, addresses the requirements needed for “Confirmation of [the] plan [of reorganization].” Among the tasks necessary for a debtor to propose her three-to-five-year repayment plan is calculating the amount required “for the maintenance or support of the debtor” during the repayment period, with any remaining monies paid to creditors.
Nor, in any event, does § 541(b)(7)(A)‘s reference to § 1325(b)(2) foreclose my
For these reasons, I respectfully dissent.