IN RE: DAVID C. WELSH AND SHARON N. WELSH, Debtors, ROBERT G. DRUMMOND, Chapter 13 Trustee, Appellant, v. DAVID C. WELSH and SHARON N. WELSH, Appellees.
No. 12-60009
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
March 25, 2013
BAP No. 10-1465. Argued and Submitted November 8, 2012—Portland, Oregon. FOR PUBLICATION.
Perris, Pappas, and Hollowell, Bankruptcy Judges, Presiding
Opinion by Judge Ripple
SUMMARY**
Bankruptcy
The panel affirmed the judgment of the Bankruptcy Appellate Panel, which affirmed the bankruptcy court‘s judgment confirming a Chapter 13 plan as proposed in good faith.
The panel held that Congress‘s adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act forecloses a court‘s consideration of a debtor‘s Social Security income or a debtor‘s payments to secured creditors as part of the inquiry into good faith under
COUNSEL
Robert G. Drummond, Great Falls, Montana, for Appellant/Trustee.
Tara Twomey, National Consumer Bankruptcy Rights Center, San Jose, California, for amicus curiae.
OPINION
RIPPLE, Senior Circuit Judge:
David and Sharon Welsh filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the District of Montanа. The Trustee objected to the Welshes’ proposed plan on the ground that it was not proposed in good faith. The bankruptcy court overruled the objection, and the Trustee appealed to the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP“). A divided panel of the BAP affirmed the decision of the bankruptcy court. Again the Trustee appealed, and we now affirm.
BACKGROUND
The Welshes filed a voluntary Chapter 13 petition on May 27, 2010. Their required schedules revealed the following assets: a home in Missoula, Montana, valued at $400,000, encumbered by a secured claim of $330,593.66; a Ford F-250 valued at $10,000, encumbered by a secured claim of $18,959; a 2006 Subaru Outback valued at of $9,500, encumbered by a secured claim of $12,211; a 2005 Toyota Matrix valued at $2,200, encumbered by a secured claim of $1,996; a 2005 Airstream trailer valued at $23,000, encumbered by a secured claim of $39,000; and two 2007 Honda ATVs each valued at $2,700, encumbered by sеcured
Mrs. Welsh is employed as a nurse and reported on Schedule I a monthly income of $6,975.40. She also draws a pension of $1,100 per month. Mr. Welsh is retired, but listed a monthly income of $358.03 from wages, salary and commissions, as well as Social Security income in the amount of $1,165.
Because their income exceeds the median for the state of Montana, the debtors calculated their disposable income according to the “means test.” On Form 22C,1 they listed their current monthly income as $8,116.31; their current monthly income did not include Mr. Welsh‘s Social Security income of $1,165 because Social Security income is excluded from the current monthly income calculation.2 After deducting future payments on secured claims, the debtors were left with a disposable income of $218.12 per month.3
The Welshes proposed a plan that provided for payments of $125 per month to unsecured creditors for the first thirty
The Trustee objected on the ground that the debtors had not proposed their plan in good faith, a requirement for confirming the plan under
In its decision, the bankruptcy court noted that it “reviews the totality of the circumstances to determine whether a plan has been proposed in good faith.”6 The bankruptcy court observed that, in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999), we had looked to four factors to determine whether a plan had been proposed in good faith: “(1) whether debtors misrepresented facts in their plan or unfairly manipulated the [Bankruptcy] Code, (2) the debtors’ history of filings and dismissals, (3) whether the debtors intended to defeat state court litigation, and (4) whether egregious behavior is present.”7 The bankruptcy court observed that
Egregious behavior supporting a finding of bad faith [in] In re Opper, 20 Mont. B.R. 123, 132 (Bankr. D. Mont. 2002), consisted of debtors proposing $0 to unsecured creditors while making payments to secured creditors to retain luxury items such as a boat and snowmobile, repaying a loan to a 401(k) plan, and failure to list assets. Opper, 20 Mont. B.R. at 132.
The facts shown by the record in the instant case are not comparable to Opper. Debtors’ Plan proposes $14,700 in payments to unsecured creditors. Their ATV‘s [sic] are not a luxury, since at least one is required for Sharon to plow her driveway in the winter in order to reach her home. David is the owner of the Toyota, on which they make payments but let their daughter use, and the secured creditor filed a claim in this case which has been allowed without objection showing David is the borrower. Their retention of the Airstream, by itself, is not enough to find egregious conduct.[8]
The court also believed that the Trustee‘s good faith objection “ignore[d] the fact that payments to secured claims are authorized in the means test at
The bankruptcy court also rejected the Trustee‘s argument that the plan was not proposed in good faith because it failed to utilize any of Mr. Welsh‘s Social Security income. The bankruptcy court observed that
A divided panel of the BAP affirmed the bankruptcy court‘s judgment. The BAP framed the issue accordingly:
The issue is whether, in determining whether a debtor has filed a chapter 13 plan in good faith, the сourt may take into consideration the debtors’ failure to include income for plan payments that the Code
specifically excludes from current monthly income, and the debtors’ deduction of expenses that are expressly allowed by the Code in calculating disposable income. In other words, if the debtor has properly calculated projected disposable income and so meets the minimum payment amount under § 1325(b)(1)(B) , can items used in that calculation be the basis for a finding that the plan was not proposed in good faith.[12]
In answering this question, the BAP noted that “[t]he Bankruptcy Code does not define ‘good faith.‘”13 The BAP further observed, however, that, in Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982), we had determined that “[t]he ‘good faith’ inquiry” was dependent on “whether the debtors [had] ‘acted equitably in proposing their Chapter 13 plan,‘” which, in turn, depended on “whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwisе proposed his Chapter 13 plan in an inequitable manner.”14 Although “‘the substantiality of the proposed repayment‘” was one consideration, “ultimately the good faith determination must take into account ‘all militating factors.‘”15
[T]aking advantage of a provision of the Code, such as calculating disposable income under the test explicitly set out in the Code, is not an indication of lack of good faith. Thus, we reject those cases that allow a court to take into consideration an above-median-income debtor‘s exclusion of income or deduction of expenses that are allowed by the means test formula in determining whether a debtor has proposed the plan in good faith.
Section 1325(a)(3) still plays a role, and the court must take into consideration the totality of the circumstances, based on the factors the Ninth Circuit has articulated for determining good faith. If, in proposing a plan, the debtor has misrepresented facts, unfairly manipulated the Code, or engaged in
egregious behavior, a court may find that the plan was not proposed in good faith. That finding may not, however, be based on the mere fact that the debtor has excluded income or deducted expenses that the Code allows.[17]
The BAP then observed that “[t]he same analysis applie[d] to consideration of a debtor‘s exclusion of Social Security income in calculating disposable income.”18 The BAP observed that, not only is Social Security income “specifically excluded from the disposable income calculation for chapter 13 debtors,”19 but
rejeсt[ed] the reasoning of the cases that say that, because Social Security payments are intended to provide for a recipient‘s basic needs, a debtor must use the benefit payments to provide for those basic needs, thereby freeing up other, non-exempt income, for plan payments. E.g., In re Hall, 442 B.R. 754 (Bankr. D. Idaho 2010). This approach simply does by indirection what the Code says
cannot be done, which is to include Social Security benefit payments in a debtor‘s disposable income calculation.[20]
The BAP therefore affirmed the bankruptcy court‘s order confirming the Welshes’ plan.
Judge Pappas dissented. He believed that “the bankruptcy court did not engage in the sort of unfettered ‘totality of the circumstances’ review mandated by In re Goeb. Instead, the bankruptcy court applied a ‘not-quite totality of the circumstances’ test, and decided it should not consider two highly relevant factors about Debtors’ plan. That was error.”21 Judge Pappas first opined that it was not violative of the Social Security prohibition to consider those payments in the good faith analysis. He observed that
the fact that a debtor receives Social Security income is considered all the time, for many different purposes, in chapter 13 cases. For example, a debtor‘s monthly Social Security payments can provide the basis for a bankruptcy court to find that a debtor has “regular income” to be eligible for chapter 13 relief in the first place.[22]
Moreover, “[w]hile a debtor‘s projected disposable income as calculated under
Like the many other bankruptcy courts that have done so, this Panel should hold that Social Security income is a relevant factor for the bankruptcy court to consider in evaluating a debtor‘s good faith under a [sic]
§ 1325(a)(3) . If Congress wanted bankruptcy courts to exclude consideration of Social Security benefits under§ 1325(a)(3) , it could have easily done so expressly, as it did in§ 101(10A) . It did not, and we should not strain to imply that restriction in reading other, inapplicable statutes. In this case, when the bankruptcy court held that it was constrained from considering Debtor‘s Social Security payments, it erred.[24]
Judge Pappas also took issue with the bankruptcy court‘s conclusion that it could not consider payments made to secured creditors in the good faith calculus. According to Judge Pappas, “that current payments to secured creditors are deducted in a
Debtors should reasonably be expected to propose a chapter 13 plan that retains, and pays the debts secured by, their home and necessary vehicles. But there is nothing in the record to demonstrate that Debtors needed, or that they should pay the debts for, a car their nonresident, physician-daughter drives, two four-wheeler ATVs, or an Airstream travel trailer.[26]
Judge Pappas concluded:
While it may be an amorphous, somewhat subjective standard, at bottom,
§ 1325(a)(3) is designed to prevent confirmation of inequitable plans. A bankruptcy court simply cannot decide if a plan is proposed in good faith if it declines to consider either that a debtor receives Social Security income, or the nature, amount and reasonableness of the debtor‘s proposed payments to secured creditors through a plan. Because the bankruptcy court refused to consider such highly relevant facts as part of the totality of the circumstances in Debtors’ case, it applied an incorrect legal analysis in examining Debtors’ good faith, and abused its discretion
in confirming Debtors’ plan. The principles of fairness embodied in
§ 1325(a)(3) require that we vacate the order confirming the plan and remand to the bankruptcy court to perform a proper good faith analysis of Debtors’ plan.[27]
DISCUSSION
In this appeal, the Trustee renews the arguments made to the bankruptcy court and to the BAP. Specifically, he maintains that, in determining whether the Welshes proposed their Chapter 13 plan in good faith, the bankruptcy court should have considered the amount that the Welshes were paying to secured creditors for luxury items and also should have considered Mr. Welsh‘s Social Security income.28
A. The History of the Good Faith Requirement
We begin our consideration of the good faith requirement with the statutory language and the interpretation of that language over the years. The good faith requirement of
§ 1325. Confirmation of plan
(a) Except as provided in subsection (b), the court shall confirm a plan if--
(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title;
(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;
(3) the plan has been proposed in good faith and not by any means forbidden by law;
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date; . . . .
decline[d] to impose a substantial-repayment requirement because (1) it is contrary to the language of the statute, (2) whether it would best further the purposes of the Bankruptcy Code is uncertain, and (3) Congress is aware of the perceived deficiency in
§ 1325(a) . Rather than set a rigid standard under the guise of interpreting “good faith,” we deem[ed] it advisable to apply the law as written and wait for Congress to create, if it chooses, further conditions for the confirmation of Chapter 13 plans.[34]
We then focused on the task of defining good faith. In doing so, we were “impeded not only by it[s] being an ambiguous term that resists precise definition in any case, but also by the lack of authoritative guidance on its meaning in
In 1984, Congress amended Chapter 13 to address perceived abuses in the bankruptcy process. Most pertinent
The changes in the Bankruptcy Code did not require our reconsideration of the “totality of the circumstances” test as
In 2005, Congress again revised Chapter 13 when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA“). The good faith requirement under
The disparity between a debtor‘s actual disposable funds and “disposable income,” as defined in Chapter 13, as well as the apparent priority given to secured creditors has “renewed the debate over ability to pay as a good faith factor.”54 As in the present case, trustees and unsecured creditors have challenged debtors’ proposed plans as lacking good faith when the debtor retains Social Security income or proposes to continue making payments on expensive homes, cars or other items, to the detriment of unsecured creditors. We turn first to the issue of Social Security income.
B. Consideration of Social Security Income in the Good Faith Analysis
The Trustee maintains that the good faith inquiry requires us to consider whethеr an above-median-income debtor is
As we have set forth in some detail, in enacting the BAPCPA, Congress made a conscious effort to cabin the discretion of bankruptcy judges in assessing disposable income.55 Congress replaced a case-by-case analysis of disposable income with a rigid, mechanical means test. The calculation of “disposable income” now incorporates the definition of “current monthly income,” and the definition of “current monthly income” еxcludes Social Security income. Because “[p]rior to BAPCPA, courts typically included Social Security benefits in the calculation of disposable income,” Baud v. Carroll, 634 F.3d 327, 347 (6th Cir. 2011) (collecting cases), cert. denied, 132 S. Ct. 997 (2012), we agree with the Sixth Circuit that this new approach to disposable income is a “‘clear indication that Congress intended . . . a departure’ from any such pre-BAPCPA practice,” id. (alteration in original) (quoting Hamilton v. Lanning, 130 S. Ct. 2464, 2473 (2010)).
Here, the Trustee does not contend, of course, that the calculation of disposable income should have incorporated Social Security income; the statutory language is clearly to the contrary. Instead, he concedes that disposable income was calculated correctly under the BAPCPA, but nevertheless maintains that the Welshes’ failure to dedicate Mr. Welsh‘s
We previously have eschewed establishing “rigid” repayment requirements “under the guise of interpreting ‘good faith,‘” on the recognition that Congress could enact, “if it chooses, further conditions for the confirmation of Chapter 13 plans.” In re Goeb, 675 F.2d at 1389. Just as we cannot add to what Congress has enacted “under the guise of interpreting ‘good faith,‘” so too we cannot ignore the explicit repayment requirements that Congress has chosen to enact. When Congress speaks directly to one of the good faith factors, the judicial good faith inquiry is narrowed accordingly. See, e.g., Educ. Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987) (noting that
Wе agree with the Trustee‘s contentions, but disagree that it leads to the conclusion that the good faith inquiry can encompass considerations of what income, and how much income, a debtor is devoting to the proposed plan. As we set forth in In re Leavitt, 171 F.3d at 1224, our good faith analysis includes whether: (1) the debtor has misrepresented the facts, manipulated the Bankruptcy Code or filed in an inequitable manner; (2) the debtor‘s history of bankruptcy filings; (3) the debtor intended to frustrate collection of a state-court judgment; and (4) “egregious behavior is present.”
The Trustee further submits that the approach that we adopt today frustrates the policy undergirding the BAPCPA: “to help ensure that debtors who can pay creditors do pay them.” Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 721 (2011). The mechanism by which Congress chose to effectuate this policy, however, is the means test. See id. (describing the means test as being at “the heart of BAPCPA‘s consumer bankruptcy reforms” (brackets omitted) (internal quotation marks omitted)). Moreover, as we have observed in another context,
[l]egislation often results from a delicate compromise among competing interests and concerns. If we were to “fully effectuate” what we take to be the underlying policy of the legislation, without careful attention to the qualifying words in the statute, then we would be overturning the nuanced compromise in the legislation, and substituting our own cruder, less responsive mandate for thе law that was actually passed.
C. Consideration of Payments to Secured Creditors in the Good Faith Analysis
The Trustee also maintains that, in determining whether the Welshes proposed their plan in good faith, the bankruptcy court should have considered the Welshes’ payments to secured creditors with respect to “luxury” items. Specifically, the Trustee believes that a plan that allows the Welshes to continue to make payments on loans secured by these items, while paying relatively little to unsecured creditors, is not one proposed in good faith. Again, we conclude that the Trustee‘s argument is foreclosed by the disposable income calculation mandated by the BAPCPA.
Section 1325 states that disposable income is current monthly income “lеss amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent of a debtor.”
[d]etermining what was “reasonably necessary” for the maintenance or support of the debtor was dependent on each debtor‘s individual facts and circumstances. This amorphous standard produced determinations of a debtor‘s “disposable income” that varied widely among debtors in similar circumstances. BAPCPA replaced the old definition of what was “reasonably necessary” with a formulaic approach for above-median debtors.
11 U.S.C. § 1325(b)(3) .
Again, in the BAPCPA, Congress chose to remove from the bankruptcy court‘s discretion the determination of what is or is not “reasonably necessary.”61 It substituted a calculation
The Trustee maintains, however, that “Congress did not adopt a policy to prefer secured creditors over unsecured creditors.”62 He points to the Supreme Court‘s statement in Ransom, 131 S. Ct. at 730, that “Congress did not express a preference for one use of these funds over the other,” in support of his contention. Read in context, Ransom does not support the Trustee‘s position. Ransom addressed the issue whether a debtor “who owns his car outright, and so does not make loan or lease payments, may claim an allowance for car-ownership costs” under the means test.63 The Court determined that the debtor could not. In doing so, it rejected the debtor‘s argument that “denying the ownership allowance to debtors in his position sends entirely the wrong message, namely, that it is advantageous to be deeply in debt on motor vehicle loans, rather than to pay them off.”64 The Court reasoned:
[T]he choice here is not between thrifty savers and profligate borrowers, as Ransom would have it. Money is fungible: The $14,000 that Ransom spent to purchase his Camry outright
was money he did not devote to paying down his credit card debt, and Congress did not express a preference for one use of these funds over the other. Further, Ransom‘s argument mistakes what the deductions in the means test are meant to accomplish. Rather than effecting any broad federal policy as to saving оr borrowing, the deductions serve merely to ensure that debtors in bankruptcy can afford essential items. The car-ownership allowance thus safeguards a debtor‘s ability to retain a car throughout the plan period. If the debtor already owns a car outright, he has no need for this protection.[65]
Therefore, when the Court made the statement upon which the Trustee relies, it was addressing a debtor‘s use of funds pre-bankruptcy, not whether Congress gave a priority to secured creditors after bankruptcy.
The calculation of “disposable income” under the BAPCPA requires debtors to subtract their payments to secured creditors from their current monthly income. In enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure. Given the very detailed means test that Congress adopted, we cаnnot conclude that this omission was the result of oversight. Moreover, even if it were, we would not be
Conclusion
We conclude that Congress‘s adoption of the BAPCPA forecloses a court‘s consideration of a debtor‘s Social Security income or a debtor‘s payments to secured creditors as part of the inquiry into good faith under
AFFIRMED.
Notes
There has been a disagreement among the bankruptcy courts in this circuit regarding whether, in light of Congress‘s recent amendments, the good faith inquiry should continue to include consideration of either a debtor‘s Social Security income or a debtor‘s use of funds to pay secured debts. Compare In re Welsh, 440 B.R. at 849–50 (holding that neither the debtors’ failure to use their Social Security income for the benefit of creditors nor their payments to secured creditors explicitly allowed by
In re Leavitt, 171 F.3d at 1224 (first, second and third alterations in original).(1) whether the debtor “misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner,” [Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (per curiam)] (citing In re Goeb, 675 F.2d 1386, 1391 (9th Cir. 1982));
(2) “the debtor‘s history of filings and dismissals,” id. (citing In re Nash, 765 F.2d 1410, 1415 (9th Cir. 1985));
(3) whether “the debtor only intended to defeat state court litigation,” id. (citing In re Chinichian, 784 F.2d 1440, 1445-46 (9th Cir. 1986)); and
(4) whether egregious behavior is present, [In re] Tomlin, 105 F.3d [933,] 937 [(4th Cir. 1997)]; In re Bradley, 38 B.R. 425, 432 (Bankr. C.D. Cal. 1984).
(a) In general
The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject . . . to the operation of any bankruptcy or insolvency law.
(b) Amendment of section
No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference tо this section.
(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan--
. . .
(B) the plan provides that all of the debtor‘s projected disposable income to be received in the
applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan. (2) For purposes of this subsection, the term “disposable income” means сurrent monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended--
(A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and
(ii) for charitable contributions (that meet the definition of “charitable contribution” under section 548(d)(3)) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and
(B) if the dеbtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
(3) Amounts reasonably necessary to be expended under paragraph (2), other than subparagraph (A)(ii) of paragraph (2), shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2), if the debtor has current monthly income, when multiplied by 12, greater than--
(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $625 per month fоr each individual in excess of 4.
(iii) The debtor‘s average monthly payments on account of secured debts shall be calculated as the sum of--
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition; and
(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor‘s primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor‘s dependents, that serves as collateral for secured debts; divided by 60.