In re Cantu
- Reporters:
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- Before:
- Kenney
MEMORANDUM OPINION
Brian F. Kenney, United States Bankruptcy JudgeThis case comes before the Court on: (a) the Chapter 13 Trustee’s Objections to the Debtor’s claim of exemptions (Amended Schedule C); and (b) the Chapter 13 Trustee’s Objections to the Debtor’s Amended Plan. The Court sustains the Trustee’s Objections to the Debtor’s claim of exemptions and overrules the Trustee’s Objections to the Debtor’s Amended Plan.
Findings of Fact
The following facts are not genuinely in ’ dispute:
A. The Debtor’s Bankruptcy Filing and His Initial Chapter 13 Plan.
1.The Debtor filed a Voluntary Petition under Chapter 13 with this Court on December 31, 2015. Docket No. 1. His income is above-median. Docket No. 10 (Official Forms 122C-1,122C-2).
2. The Debtor filed his initial Chapter 13 Plan on January 14, 2016. Docket No. 11. The Debtor attached a copy of his Schedule I to the Plan, under which he deducted $0.00 for voluntary contributions to a retirement plan, and $338.37 for required repayments on two retirement fund loans. Id. at Schedule I, Lines 5c, 5d.
3. The Debtor’s initial Chapter 13 Plan was denied confirmation. Docket No. 20.
B. The Debtor’s Amended Chapter 13 Plan.
4. On March 31, 2016, the Debtor filed an Amended Chapter 13 Plan. Docket No. 22. The Amended Plan called for payments of $1,250.00 per month for 6 months and then $810.00 per month for 54 months, for total plan funding of $51,240.00. Id. at ¶ 1. This, according to the Amended Plan, will result in a distribution to unsecured creditors of approximately 13% of their allowed claims. Id. at ¶ 4.
5. At the same time, the Debtor filed Amended Schedules B and C. Docket No. 23. In his Amended Schedule B, the Debtor identified $804.00 in “future income from 1/21/2016-5/11/2016 from a retirement loan being paid off on 1/20/2016.” Id. at .Amended Schedule B, ¶ 16. In his Amended Schedule C, the Debtor claimed this $804.00 as exempt pursuant to Va. Code § 34-4, Virginia’s wildcard exemption statute. Id. at Schedule C, ¶2; see also
’ 6. One of the Debtor’s retirement fund loans was paid in full in January 2016. Accordingly, the Debtor attached an Amended Schedule I to his Amended Plan, under which the Debtor indicated that he
7. The Trustee filed an Objection to confirmation of the Debtor’s Amended Chapter 13 Plan, on the grounds of good faith and disposable income. Docket No. 24
8. The Trustee also filed an Objection to the Debtor’s Amended Schedule C. Docket No. 25.
C. The May 12, 2016, Hearing.
9. The Court held a hearing on May 12, 2016. At the hearing, Debtor’s counsel argued that the Debtor was entitled to exempt the income represented by the savings in not having to pay his retirement fund loan under either Va.Code § 34-29 (which allows an exemption from garnishment of 75% of wages for non-support debts) or Va.Code
10. Debtor’s counsel represented to the Court that the Debtor’s employer refused to allow him to make voluntary contributions to his retirement plan because he had taken out two hardship loans under the same plan. Debtor’s counsel also represented that the proposed $268.62 per month in voluntary contributions were about one-third of what the Debtor legally would be entitled to contribute to his retirement plan, outside of bankruptcy. These representations were not challenged by the Chapter 13 Trustee, and the Court accepts them.
11.The Court ruled from the bench that it would sustain the Trustee’s Objection to the Debtor’s claim of exemption under Va.Code
Conclusions of Law
The Court has jurisdiction over this matter pursuant to
I. The Debtor’s Claim of Exemption in Post-Petition Income.
The Trustee argues that the Debt- or’s claim of exemption under Va.Code
Rather, the Debtor’s claim of exemption cannot be allowed under Va.Code
Any claim of exemption for post-petition wages — whether under the Virginia wage exemption statute (Va.Code
The Court will sustain the Trustee’s Objection to the Debtor’s Amended Schedule C insofar as the Debtor claims an exemption in his post-petition wages.
II. The Trustee’s Disposable Income and Good Faith Objections.
The second question presented is whether the Debtor is entitled to make voluntary contributions to his retirement plan, now that he has completed the payments on one of his retirement plan loans, where the voluntary contributions will be in the same monthly amount as his former loan payments. More specifically, the questions are: (a) whether the Debtor’s voluntary retirement contributions may be deducted from his disposable income for purposes of the disposable income test under Bankruptcy Code
Section 541 of the Bankruptcy Code defines property of the estate for all Chapters. In addition, under Chapter 13 unlike in Chapter 7, the Debtor’s post-petition wages and compensation are included in property of the estate.
Congress has harmonized these two statutes for us. With Section 541, Congress established a general definition for bankruptcy estates. WithSection 1306 , it then expanded on that definition specifically for purposes of Chapter 13 cases. Thus, “Section 1306 broadens the definition of property of the estate for chapter 13 purposes to include all property acquired and all earnings from services performed by the debtor after the commencement of the case.” S. Rep. No. 95-989, at 140-41 (1978).
Carroll v, Logan, 735 F.3d 147, 150 (4th Cir.2013).
Bankruptcy Code
In 2005, Congress added to the Code two provisions of relevance here. First, Congress enacted Section 1322(f), which excludes from the disposable income calculus any amounts required to pay loans to a qualified retirement plan.
Second, Congress added Section 541(b)(7), which excludes from property of the estate:
(7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;
except that such amount under this sub-paragraph shall not constitute disposable income as defined insection 1325(b)(2) ‘, or
(ii) to a health insurance plan regulated by State law whether or not subject to such title; or
(B) received by an employer from employees for payment as contributions—
(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;
except that such amount under this sub-paragraph shall not constitute disposable income, as defined insection 1325(b)(2) ; or
(i) to a health insurance plan regulated by State law whether or not subject to such title[.]
The means test form (Official Form 122C-2) contains a line for “Involuntary deductions,” defined as “[t]he total monthly payroll deductions that your job requires, such as retirement contributions, union dues and uniform costs.” Chapter
Further, Line 41 of the Form states, in calculating the debtor’s “monthly disposable income” for purposes of
The monthly total of all amounts that your employer withheld from wages as contributions for qualified retirement plans, as specified in11 U.S.C. § 541(b)(7) plus all required repayments of loans from retirement plans, as specified in11 U.S.C. § 362(b)(19) .
Id. at Line 41.
The issue of voluntary retirement contributions has been the subject of some debate in the case law in recent years. There are essentially three divergent lines of cases. The first line of cases holds that the debtor is not entitled to any deduction for voluntary retirement contributions, whether or not he or she was making voluntary retirement contributions pre-pe-tition. In re Seafort, 669 F.3d 662, 674-75 (6th Cir.2012); In re McCullers, 451 B.R. 498, 503-05 (Bankr.N.D.Cal.2011); In re Prigge, 441 B.R. 667, 672-78 (Bankr. D.Mont.2010). The second view, that voluntary retirement contributions may be continued post-petition as long as they are consistent with the debtor’s pre-petition history of contributions, is represented by the Sixth Circuit Bankruptcy Appellate Panel’s decision in In re Seafort, 437 B.R. 204 (6th Cir. B.A.P. 2010), aff‘d, 669 F.3d 662 (6th Cir.2012). The third line of cases, which is the majority view, concludes that
A. The Prigge View.
The first line of cases, represented by Seafort, McCullers and Prigge, holds that debtors may not make post-petition voluntary contributions to their retirement plans. This line of cases is in the minority. In the Prigge case, the debtor, who was above-median, was a participant in his employer’s voluntary retirement plan and was making contributions of $1,181.08 per month (reduced to $900.00 per month after he filed for bankruptcy). In re Prigge, 441 B.R. at 670-71. The Prigge opinion, authored by Bankruptcy Judge Kirseher, relies on the fact that voluntary retirement contributions are not excluded from the debtor’s disposable monthly income in the text of either
Judge Kirscher’s views in Prigge later came before the 9th Circuit Bankruptcy Appellate Panel in In re Parks, 475 B.R. 703 (9th Cir. B.A.P.2012). In Parks, as in Prigge, the debtors were making voluntary retirement contributions, pre-petition. Id. at 705. The Chapter 13 Trustee objected, and Judge Kirseher sustained the Trustee’s objection, relying on his previous de-
Simply put, without a clearer direction comparable to the carve out from disposable income for the repayment of retirement loans in§ 1322(f) , it seems unlikely that Congress intended§ 541(b)(7)(A) to bestow a benefit on above-median chapter 13 debtors while their creditors absorbed an even greater loss.
Id. at 709; see also In re McCullers, 451 B.R. at 505 (“In using the words ‘except that,’ Congress suggests that its only purpose was to negate any inference that the exclusion of such contributions from property of the estate gives rise to income to the debtor.”)
The Seafort case is the only Court of Appeals decision to address the issue. Seafort actually involved two cases, those of Ms. Seafort and the Shulers. The facts in Seafort mirror more accurately the facts in this case because, in Seafort, the debtors were repaying pension plan loans and as a result were not making voluntary pre-petition contributions to their pension plans. In re Seafort, 669 F.3d at 663-64. Once the loans were repaid, however, the debtors sought to apply that income to post-petition voluntary contributions. Id. The Sixth ‘Circuit agreed with the views expressed in Prigge and McCullers, that “Congress intended to exclude from disposable income and projected disposable income available for unsecured creditors only voluntary retirement contributions already in existence at the time the petition is filed.” Id. at 674. The Trustee in the case conceded that “if a debtor is making voluntary retirement contributions when the bankruptcy petition is filed, such continuing contributions may be excluded from disposable income.” Id. at 674, n. 7. The Sixth Circuit, however, stated that it did not agree with this assertion for the reasons stated in Prigge, but that it did not reach the issue because the issue was not before it. Id.
B. The Sixth Circuit Bankruptcy Appellate Panel’s Decision in Seafort.
The Sixth Circuit Bankruptcy Appellate Panel’s decision in Seafort held that debtors may continue to make voluntary contributions to their retirement plans if the debtor was making contributions in comparable amounts pre-petition. 437 B.R. at 209-10. Like the Sixth Circuit, the B.A.P. placed significance on the placement of the exclusion from disposable income in the Code. Id. at 209 (“Because Congress identified 401(k) contributions as excluded in
After consideration of the competing policy concerns — BAPCPA’s desire “to ensure debtors repay creditors the maximum they can afford,” versus Congress’s encouragement of retirement savings for all Americans — the B.A.P. reached the following conclusion:
In regard to retirement savings, Congress clearly intended to strike a balance between protecting debtors’ ability to save for their retirement, and requiring that debtors pay their creditors the maximum amount they can afford to pay. This balance is best achieved by permitting debtors who are making contributions to a Qualified Plan at the time their case is filed to continue making contributions, while requiring debtors who are not making contributions at the time a case is filed to commit post-petition income which becomes available to the repayment of creditors rather than their own retirement plan. To conclude otherwise encourages the improvident behavior that BAPCPA sought to discourage. If the bankruptcy court is affirmed, debtors who were not contributing to their tax qualified plan and borrowing against their own retirement savings may file bankruptcy, repay . themselves, and, once the loan is repaid, start contributing again to their own retirement savings. Alowing debtors to do so would tip the delicate balance struck by BAPCPA impermissibly in favor of debtors. On the other hand, allowing debtors who are making contributions at the commencement of a case to continue making those contributions furthers the goal of encouraging retirement savings. Limiting these protections to contributions in place at the time debtors file their petitions also protects the goal of ensuring that debtors pay creditors the maximum amount debtors can afford to pay.
One judge dissented from the B.A.P’s decision, describing the majority’s decision as “harsh and uneven.” 437 B.R. at 216 (Shea-Stonum, M., dissenting). Judge Shea-Stonum argued that the majority’s ruling discriminated in favor of higher-income debtors and against lower-income debtors because the former category are more likely to have made contributions consistently, pre-petition. Id. at 222-23. Judge Shea-Stonum also noted that the rule allowing post-petition contributions is subject to a good faith inquiry. Id. at 223 (“A debtor’s proposal to increase or to begin Qualified Contributions post-petition is one of many circumstances that may be considered by a court in assessing the debtor’s good faith.”)
A number of courts have adopted the Sixth Circuit B.A.P.’s test for voluntary contributions. In re Read, 515 B.R. 586 (Bankr.E.D.Wis.2014); In re Jensen, 496 B.R. 615, 621 (Bankr. D. Utah 2013) (“The Court agrees with the reasoning of the Sixth Circuit Bankruptcy Appellate Panel and concludes that voluntary retirement contributions being made as of the date of the petition do not constitute disposable income and debtors may continue making those contributions during the life of the plan”); In re Noll, No. 10-35209-svk, 2010 WL 5336916, at *1 (Bankr.E.D.Wis. Dec. 21, 2010).
C. The Johnson View.
In Johnson, the court was faced with a good faith objection from the Trustee. 346 B.R. at 256. The court unequivocally held: “So long as a debtor’s contributions are within the limits permitted by the EPB [Employee Benefit Plan] ‘any amount’ of this contribution is exempted from , disposable income.” Id. at 263.
In Vanlandingham, the Debtor deducted voluntary monthly 401-K contributions in the amount of $151.67 on her means test form, contributions that she was not making pre-petition and only started after she filed for bankruptcy. 516 B.R. at 630. The court noted that
In short, Johnson’s interpretation of§ 541(b)(7) ’s hanging paragraph is most consistent with promoting the legislative policy of protecting and encouraging retirement savings. There is no reason to protect postpetition 401(k) loan repayments, but not postpetition 401(k) contributions in chapter 13.
Id. at 636.
The Vanlandingham court held that the Johnson view is also “consistent with the
The Vanlandinghgm court also mentioned the requirement of good faith, in stating: “when an ‘abusive case’ presents itself, the trustee and unsecured creditors are well-armed with the ability to object to confirmation for lack of good faith under
More recently, the Bankruptcy Court for the District of Massachusetts issued its opinion on post-petition retirement contributions in In re Drapeau, 485 B.R. 29 (Bankr.D.Mass.2013). The Drapeau opinion agreed with the Johnson view. In its opinion, the Drapeau court rejected reliance on the placement of
Section 1306 incorporates all of§ 541 into the definition of estate property in the Chapter 13 case, including those exceptions detailed in subsection (b). And because§ 541(b)(7) expressly excludes voluntary retirement contributions from the bankruptcy estate, there is no need for§ 1306 to contain a duplicative provision excepting such contributions. The exception becomes applicable with the wholesale incorporation of§ 541 .
485 B.R. at 36 (emphasis in original); The Drapeau court also alluded to the good faith of the debtor, but held that where the debtor’s ability to make voluntary contributions was interrupted by circumstances beyond the debtor’s control (“e.g., a limited period in which a debtor could not contribute on account of a hardship withdrawal”), the court found that the debtor was proceeding in good faith. Id. at 38-39.
D. This Court’s Ruling.
(i) The Trustee’s Disposable Income Objection.
The Trustee in this case urges the Court to adopt the middle ground of the Sixth Circuit B.A.P.’s opinion in Seafort, limiting contributions to those consistently made by the debtor pre-petition. The Court, however, adopts the Johnson view, for the simple reason that
In the Court’s view, the absolutist position represented by Prigge and the Sixth Circuit’s opinion in Seafort places an unwarranted emphasis on the placement of
Further, by the time that
The Court similarly rejects the middle ground represented by the Sixth Circuit B.A.P.’s opinion in Seafort. First, the B.A.P. relied heavily on the placement of the exclusion in
The Sixth Circuit B.A.P. also placed reliance on the fact that under
The Sixth Circuit B.A.P.’s requirement that post-petition contributions be comparable to the debtor’s historic, pre-petition contributions appears to be grounded more in policy concerns than in the text of
(ii) The Debtor’s Good Faith.
Finally, good faith is an independent requirement for confirmation of a Chapter 13 plan.
The Court finds that the Debtor is proceeding in good faith, and overrules the Chapter 13 Trustee’s good faith objection.
Conclusion
For the foregoing reasons:
A. The Trustee’s Objections to the Debtor’s claim of exemptions under Va. Code
B. The Trustee’s Objections to the Debtor’s Plan on disposable income and good faith grounds are overruled.
C. The Court will set a status hearing in this matter for August 11, 2016, at 1:30 p.m.7
Notes
. Virginia is an opt-out state.
. As noted above, the Debtor only claimed an exemption under Va.Code
. The portion of the Fourth Circuit’s holding in Mort Ranta that denial of confirmation of a Chapter 13 plan is a final, appealable order has been effectively overruled in Bullard v. Blue Hills Bank, - U.S. -, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015). The holding in Mort Ranta that social security benefits are excluded from the definition of disposable income remains good law.
. For below-median debtors, the inquiry is whether the deduction for voluntary retirement plan contributions is “reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor.”
. The Hamilton v. Lanning analogy may be an imperfect one in this context. Hamilton v. Lanning involved a departure from the mechanical application of the six-month look-back period of the means test, which requires the debtor to state his or her income for the six months preceding the petition date. 130 S.Ct. at 2475-77. In this case, as in Seafort, the Debtor was not in fact making any voluntary retirement contributions during the six months preceding the bankruptcy filing because the Debtor was precluded from doing so, owing to the two hardship loans.
. The Court also finds some guidance to Congressional intent in its use of the term “contributions” in
. Given that the Court has sustained the Trustee’s Objections to the Debtor’s claim of exemptions, the Court does not know whether the Debtor’s Plan meets the liquidation test and the disposable income test of