In Re Egan
Memorandum Opinion
Introduction
Before this Court is the Objection dated November 16, 2010 (the “Objection”), filed by the Chapter 13 Trustee (the “Trustee”) to the confirmation of the chapter 13 plan submitted by Paul J. Egan and Barbara A. Egan (collectively, the “Debtors”). The substance of the Objection was originally raised at a confirmation hearing held by this Court on October 7, 2010 (the “Hearing”), to address the Debtors’ proposed chapter 13 plan (the “Proposed Plan”). At the Hearing, the Trustee raised the issue of whether the Debtors’ may increase the amount of their post-petition contributions to their respective 401 (k) retirement plans and still comply with the requirement that all of the Debtors’ projected disposable income be devoted to plan payments. Unable to resolve whether the Debtors’ proposed plan could be confirmed, this Court set a briefing schedule to allow the parties to address the issues raised at the Hearing. The parties agree that no material facts are in dispute and have filed a Stipulation of Facts dated December 16, 2010, upon which this Court, along with the contents of the Debtors’ schedules, relies. On January 6, 2011, the Debtors filed a brief in support of confirmation of their proposed plan (the “Debtors’ Brief’). Shortly thereafter on January 13, 2011, the Trustee filed his response to the Debtors’ Brief (the “Response”). Having considered the issues raised by the parties at the Hearing and in their subsequent filings, this Court will overrule the Trustee’s Objection and confirm the Debtors’ Proposed Plan.
Factual Background
On January 13, 2010 (the “Petition Date”), the Debtors filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. Together with their petition, the Debtors filed an Official Form B22C-Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (the “Form B22C”), their required schedules and the Proposed Plan. In the Debtors’ Schedule I, they listed monthly income of $4,388.09. They listed on Schedule J a monthly net income of $514.07. The Debtors’ current monthly income
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as disclosed by their Form B22C is $8,455.76.
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Because the
Consistent with the amount of disposable income disclosed by their Form B22C, the Debtors’ Proposed Plan calls for monthly payments of $514.07 for 60 months for a total budget of $30,844.20 over the life of the Proposed Plan. The Debtors have listed one secured claim in the amount of $167,562.00 related to a loan payable to the Franklin Mint Federal Credit Union that is secured by a mortgage of the couple’s residence (the “FMFCU Mortgage”). The Debtors are currently making monthly payments on the FMFCU Mortgage outside of the Proposed Plan and in the amount of $1,601.40 per month. Exclusive of the sole secured claim, the Debtors’ proof of claim docket lists the total unsecured claims asserted against Debtors in the total amount of $83,135.00. The Debtors’ Proposed Plan proposes to pay all unsecured claimants not less than 32.89% of their allowed claims.
Prior to filing for chapter 13 relief, the Debtors took three separate loans from their 401(k) plans for the purpose of repaying then existing creditors. As of the Petition Date, Mr. Egan owed $3,680.82 relating to a loan in the amount of $4,075.00 advanced on or about September 9, 2009 from his employer’s retirement plan (the “Target 401(k)”). To repay this loan, Mr. Egan’s employer is deducting $55.69 from Mr. Egan’s bi-weekly paycheck. The last payment is scheduled to be made on September 12, 2012. Upon completion of repayment, Mr. Egan plans to make a $115.69 bi-weekly contribution to his Target 401(k), an increase of $55.69 over his contributions as of the Petition Date. In addition to Mr. Egan’s loan, Mrs. Egan owed as of the Petition Date (i) $5,706.55 relating to a loan in the amount of $25,000.00 advanced on or about August 10, 2007 from her employer’s retirement plan (the “IBC 401(k)”)
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and (ii) $10,247.27 relating to a loan in the amount of $15,000.00 advanced on or about November 16, 2008 from her IBC 401(k). To repay her loans, Mrs. Egan’s employer is deducting $367.61 for the first loan and $207.28 for the second loan from Mrs. Egan’s bi-weekly paycheck. The last payment on Mrs. Egan’s first loan was made on August 12, 2010 and the last payment on Mrs. Egan’s second loan will be made on November 9, 2012. Upon completion of her repayments, Mrs. Egan plans to make a $207.28 bi-weekly contribution to her IBC 401(k), an increase of $170.71 over her contributions as of the Petition Date (inclusive of Mr. Egan’s $115.69 bi-weekly contribution to his Target 401(k), the “Proposed Contributions”). Prior to the Petition Date, Mr. Egan was making a $60.00 bi-weekly contribution and Mrs. Egan was making a $24.57 bi-weekly contribution (the “Existing Contributions”). Inclusive of both their Existing Contributions and their Proposed Contributions, the amount
Mr. Egan and Mrs. Egan are currently 58 and 54 years of age respectively. The Debtors are both presently employed. Mr. Egan works for the Target Corporation (“Target”) at its Mount Laurel, New Jersey location. Through the Target 401(k), Target offers to its employees a retirement plan in which Target matches employee contributions up to five percent of an employee’s annual salary. The current value of Mr. Egan’s Target 401(k) is less than $10,000.00. His only other retirement savings are limited to a personal pension account with a balance of less than $5,000.00. Mrs. Egan works for Independence Healthcare Management, Inc. (“Independence”) at its offices located in Philadelphia, Pennsylvania. Through the IBC 401(k), Independence offers to its employees a retirement plan in which Independence matches fifty percent of employee contributions up to eight percent of an employee’s annual salary. The current value of Mrs. Egan’s Independence 401(k) is approximately $150,000.00. Mrs. Egan has disclosed no other retirement savings.
Discussion
In his Objection, the Trustee raised two grounds for denial of confirmation of the Proposed Plan. First, the Trustee states that the Debtors’ failure to pro-rate their 401(k) loan balances causes the Debtors to have “nominal monthly disposable income ... and substantially reduces the amount available to unsecured creditors.”
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Objection, ¶ 2(b). Second, the Trustee states that the Debtors’ Proposed Plan was not submitted in good faith. Objection, ¶ 2(c). In the Response, the Trustee addressed neither argument. Instead, the Response recasts the substance of the Objection and exclusively argues that confirmation should be denied because the Debtors’ Proposed Plan fails to allocate the entirety of their projected disposable income as required by
The parties do not dispute whether the Debtors may deduct from their projected
I. The Proposed Plan Must Account for the Completion of the 401(h) Loan Repayments
Upon objection to the confirmation of a chapter 13 plan, “the court may not approve the plan unless ... the plan 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 under the plan.”
II. Application of the Means Test to Determine Projected Disposable Income
In
Hamilton v. Lanning,
— U.S. -,
Due to the failure of the Bankruptcy Code to explain the difference between a debtor’s disposable income as defined by
Here, the Debtors’ Form B22C establishes that the Debtors have a disposable income of $514.07. Although the Debtors’ Proposed Plan proposes to disburse to creditors all of their disposable income as calculated by their Form B22C, application of Hamilton’s forward-looking approach makes clear that the Debtors plan must account for the completion of repayment of their respective 401(k) loans. However, it is not clear whether the Debtors may account for this event by increasing the amount of their post-petition 401(k) contributions.
At first glance, Judge Sigmund’s decision in
Roberts
appears to resolve the issue now before this Court. In that decision, Judge Sigmund addressed an objection to plan confirmation that argued that the plan did not allocate the entirety of a debtor’s disposable income because the plan failed to step up plan payments when the debtor completed repayment of 401(k) loans.
See In re Roberts,
III. Interpretation of
Although decisions addressing this issue remain sparse, a split of opinion has developed among courts as to whether the text
In the other camp, courts have determined that the omission of language limiting the amount of contributions grants debtors the discretion to set the amount of their post-petition contributions at any amount and this discretion is limited only by the good faith requirement imposed by
Finally, in a third camp, at least one court has found that as a matter of law
In their arguments before this Court, neither party disputed whether as a matter of law the Debtors are entitled to continue making retirement contributions in the amount of the Existing Contributions. As a result, this Court’s analysis will focus on the persuasiveness of the respective positions of the first two camps.
Scully v. U.S. WATS, Inc.,
A. The Textual Basis for Rule Limiting Retirement Contributions to the Amount Extant as of the Petition Date
The Trustee is asking this Court to adopt a rule limiting the amount of a debt- or’s retirement contributions to the amount extant as of the Petition Date. The leading case addressing this interpretation of
Notably, [§ 1306], which addresses property and earnings that come into existence after the debtor files a petition for relief does not exclude 401(k) contributions from property of the estate. Rather, 401(k) contributions are only excluded in§ 541 which specifically applies to property in existence at the commencement of the ease. Because Congress identified 401(k) contributions as excluded in§ 541 , but not in § 1306,the Panel concludes that the absence of any reference in § 1306 to 401 (k) contributions was intentional. Congress did not intend for income which becomes available post-petition to be excluded from property of the chapter 13 estate or from the calculation of projected disposable income.
Id. at 209 (emphasis in original and citations omitted).
Relying on the absence from § 1306(a)(2) of language similar to
The preamble of § 1306 and subsection (a)(1) both make reference to the entirety of
B. Textual Basis for Allowance of Post-petition Increases of Retirement Contributions
Courts finding that debtors are permitted to increase their post-petition contributions rely on the absence from
unlike the provisions of § 707(b)(2) and§ 1325(b)(2) or (3),§ 541(b)(7) does notmodify excluded contributions based on reasonableness or necessity. Throughout the other applicable sections of the Code, every deduction offered is modified by a requirement that the expense be necessary and reasonable. Yet, § 541(b)(7) omits any reference to this important limitation on the exclusion. Instead,§ 541(b)(7) simply declares that the contributions are “not disposable income as defined in§ 1325(b)(2) .” Although§ 1325(b)(2) contemplates, as a general premise, that reasonably necessary expenses for the support and care of the debtor and his dependents are the only deductions allowed, the more specific provisions of§ 541(b)(7) control over the general.
Devilliers,
The Trustee’s reliance on the Supreme Court’s recent decision in
Ransom
as a basis for this Court’s interpretation of
What makes an expense amount “applicable” in this sense (appropriate, relevant, suitable, or fit) is most naturally understood to be its correspondence to an individual debtor’s financial circumstances. Rather than authorizing all debtors to take deductions in all listed categories, Congress established a filter: A debtor may claim a deduction from a National or Local Standard table (like “[Car] Ownership Costs”) if but only if that deduction is appropriate for him
If Congress had not wanted to separate in this way debtors who qualify for an allowance from those who do not, it could have omitted the term “applicable” altogether. Without that word, all debtors would be eligible to claim a deduction for each category listed in the Standards. Congress presumably included “applicable” to achieve a different result.
Ransom,
As the Supreme Court observed in
Ransom,
this Court agrees that without some sort of qualifying term that creates a threshold for eligibility,
e.g.,
“applicable,” the text of
Similarly, this Court finds the reasoning of the Supreme Court’s decision in
Hamilton
to be consistent with a reading of
This Court observes that the same may be said for when Congress wishes to mandate that the petition date controls. For example, in the context of calculating the amount of exemptions a debtor may claim, Congress has expressly indicated courts must determine the “value” of a debtor’s exemption by reference to the “fair market value
as of the date of the filing of the petition
or, with respect to property that becomes property of the estate after such date,
as of the date such property becomes property of the estate.”
Not only is
Hamilton’s
textual analysis instructive, this Court believes that adopting a rule that fixes the amount of a debtor’s expenses, including 401(k) contributions, as of the petition date is contrary to the forward-looking approach adopted by
Hamilton.
If pursuant to
Hamilton,
this Court “may account for changes in the debtor’s income
or expenses
that are known or virtually certain at the time of confirmation,”
Hamilton,
In addition to finding that
Ransom
and
Hamilton
suggest a reading of
This Court further recognizes that Congress’s interest in protecting retirement savings is not a policy that was first acted upon in BAPCPA. Bankruptcy courts have long recognized Congress holds “a deep and continuing interest in the preservation of pension plans, and in encouraging retirement savings.”
In re Williams,
In addition to being unwilling-to adopt a rule that limits the amount of contributions a debtor may make to whatever amount existing as of the petition date, this Court finds that announcing such a rule will have no practical effect. Pursuant to such a rule, any debtor may prior to filing simply increase the amount of her prepetition contributions to an amount sufficient to render her projected disposable income to some nominal amount. Rather than deter bad faith conduct, the Trustee’s interpretation of
Despite recognizing that the text of
IV. Whether the Plan was Proposed in Good Faith,
In the Trustee’s Objection, the Trustee argues that the Debtors’ plan fails to comply with
Summary
For the reasons stated above, this Court finds that
An Order consistent with this Opinion will be entered.
ORDER
For the reasons stated in the accompanying Memorandum of Opinion issued by this Court, it is hereby ORDERED that:
1. The Trustee’s Objection to confirmation of the Debtor’s Chapter 13 Plan is OVERRULED.
2. The Debtors’ Chapter 13 Plan is CONFIRMED.
Notes
. The term "current monthly income” ("CMI”) is defined as the average monthly income of the debtor from all sources over the six-month period preceding the filing of the schedule of current income required by § 521(a).
See
. The discrepancy between the Debtors' monthly income as listed by their Schedule I and their Form B22C is attributable to payroll deductions in the total amount of $4,067.67.
. $8,455.76 X 12 = $101,469.12.
. The parties do not dispute whether the Target 401(k) or the IBC 401(k) are the type of account enumerated in
. This Court acknowledges that the fact that a chapter 13 plan provides for a nominal repayments is in and of itself insufficient to deny plan confirmation.
In re Hines,
. The disposable income requirement is set forth by
(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-
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(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.
. Pursuant to § 1322(f), a debtor’s repayments of a loan taken from her 401(k) plan may not be considered income for purposes of funding a chapter 13 plan.
See, e.g., In re Egebjerg,
. In relevant part,
. As recently explained by the Supreme Court:
“The means test instructs a debtor to deduct specified expenses from his current monthly income. The calculation of this formula is implemented by Form B22C. The result, a debtor's 'disposable income,’ is the amount he has available to reimburse creditors.”
Ransom,
. In relevant part,
"Property of the estate does not include any amount ... received by an employer from employees for payment as contributions to an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 [29 USC §§ 1001 et seq. ] ... except that such amount under this subparagraph shall not constitute disposable income, as defined insection 1325(b)(2) ...”
. This Court notes that as of the petition date the Debtors interest in their future income was and remains contingent. Until the Debtors’ actually receive their bi-weekly paycheck, the Debtors’ income is technically not property of their estate. Not only could the Debtors conceivably lose their jobs, the Debtors could conceivably be promoted. Each scenario would have an effect on the value of the contingent right to payment the Debtors held as of their petition date. As in cases addressing the valuation of other types of contingent interests held by debtors at the time of filing for relief, this Court finds that the proper method for valuing a contingent interest would be at the time that the right vests and actually becomes property of the Debtors’ chapter 13 estate.
See, e.g., In re Willett,
. Other sections that make explicit reference to the petition date as controlling a court’s inquiry include
. Qualifying language is also omitted from § 1322(f) which permits the deduction from projected disposable income 401(k) loan repayments and § 362(b)(19) which permits continuation of the 401(k) loans deductions without violating the automatic stay.