Lead Opinion
Reversed and remanded by published opinion. Judge WILKINSON wrote the majority opinion, in which Judge WIDENER joined. Judge MICHAEL wrote a dissenting opinion.
OPINION
This ease presents the question whether a Chapter 13 debtor must include in his “disposable income” some portion of funds invested in various individual retirement accounts (“IRAs”). The bankruptcy court denied confirmation of the debtor’s proposed Chapter 13 plan for failure to include hypothetical distributions from the IRAs in the disposable income to be paid under the plan. Because we believe that funds held in the debtor’s IRAs but not distributed to the debtor do not constitute “disposable income” under 11 U.S.C. § 1325, we reverse.
I.
The debtor herein, Neil Solomon, M.D., filed a Chapter 13 bankruptcy petition on September 20, 1993; he filed his proposed Chapter 13 plan shortly thereafter. Dr. Solomon’s only creditors are three former patients (and the spouse of one) who have sued him in tort for alleged sexual misconduct during the course of their treatment as his medical patients.
Solomon scheduled assets valued at $2,184,645, of which he claimed $2,140,501.25 to be exempt from the claims of his creditors. Of the assets claimed exempt, $1,413,888 is held in three individual retirement accounts. Federal law does not require that income be withdrawn from these accounts until the recipient reaches age 70½. See 26 U.S.C. § 408(a)(6); 26 C.F.R. § 1.408-2(b)(6). Solomon, currently age 62, informed the bankruptcy court that he had no intention of withdrawing any funds from the IRAs during the term of the plan. Moreover, under Maryland law, the IRAs are exempt from execution by creditors. Md.Cts. & Jud.Proc.Code Ann. § 11-504(h). Solomon was thus left with approximately $40,000 in non-exempt assets.
After his petition was filed, Solomon voluntarily surrendered his medical license and ceased practicing medicine. As a result, his net monthly income decreased substantially from the $14,800 initially disclosed in Schedule I to approximately $2,650, which consisted primarily of monthly mandatory distributions from his Maryland state pension. According to the plan, Solomon proposed to pay the Trustee $750 per month for an extended term of five years, 11 U.S.C. § 1322(d), for a total payout to the creditors of $45,000. Solomon planned to use the remainder of his monthly income, together with income from investments and exempt assets other than his IRAs, to pay his normal living expenses.
In February 1994, the Chapter 13 Trustee and the creditors filed various objections to the proposed plan. Only the treatment of Solomon’s three IRAs is relevant to this appeal. According to the Trustee, the IRAs should have been taken into account in determining the minimum amount Solomon should be required to pay under his Chapter 13 plan. See 11 U.S.C. § 1325(b)(1)(B) (upon objection by trustee or unsecured creditor, when plan proposes less than full payment of unsecured claims, debtor must devote all his projected disposable income for typical three-year term to payments under the plan). The Trustee also objected to the plan on the ground that it did not satisfy the “good faith” requirement of § 1325(a)(3), but the bankruptcy court declined to address this fact-dependent issue, preferring to decide questions such as the disposable income requirement that could be resolved as a matter of law.
The bankruptcy court agreed with the Trustee and denied confirmation on the ground that Solomon’s plan failed to provide for payment of all his projected disposable income when it failed to include some minimum amount attributable to allowed distributions from his IRAs. Under applicable non-bankruptcy law, the bankruptcy court noted, Solomon has the right to receive periodic distributions from these accounts without suffering a tax “penalty,” despite his stated intention not to take such distributions. On appeal, the district court affirmed. Solomon appeals, and the Trustee cross-appeals, arguing that confirmation should be denied since the plan was not filed in good faith.
II.
A.
The Trustee objected to confirmation of Solomon’s Chapter 13 plan on the ground that the plan did not meet the “disposable income” requirement of § 1325(b) since it failed to include hypothetical withdrawals from the IRAs in the calculation of Solomon’s monthly income. We hold, however, that the funds invested in Solomon’s IRAs are not “disposable income” within the meaning of § 1325(b)(2).
The statute defines “disposable income” as “income which is received by the debtor and which is not reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor.” 11 U.S.C. § 1325(b)(2). If the trustee or the holder of an allowed unsecured claim objects to the confirmation of a Chapter 13 plan and the plan proposes less than full payment of
Solomon’s IRAs are not “income” under the clear terms of this section. Both the statutory definition of “disposable income” as income that is received by the debtor as well as the requirement that projected income must be calculated over the life of the plan contemplate income that a debtor is actually receiving at the time of confirmation. Projected disposable income typically is calculated by multiplying a debtor’s monthly income at the time of confirmation by 36 months, the normal duration of a Chapter 13 plan, then determining the portion of that income which is “disposable” according to the statutory definition. See Anderson v. Satterlee (In re Anderson),
On these facts, we cannot sanction the bankruptcy court’s inclusion of some hypothetical amount of income from the IRAs in the calculation of disposable income. “[Rjather than engaging in hopeless speculation about the future,” a court should determine projected disposable income by calculating a debtor’s “present monthly income and expenditures” and extending those amounts over the life of the plan. In re Crompton,
Cases such as In re Schnabel,
B.
Although they are not a source of regular, periodic income, Solomon’s IRAs are assets of the estate, much like a checking or savings account. See Education Assistance Corp. v. Zellner,
Here, the debtor’s IRAs would be “exempt” assets and thus unavailable to creditors in a Chapter 7 liquidation. Maryland has elected to opt out of the federal exemptions, see 11 U.S.C. § 522(b); Md.Cts. & Jud.Proc.Code Ann. § ll-504(g), and instead has established specific exemptions under state law. Solomon relies on one of these state-law exemptions, Md.Cts. & Jud. Proc.Code Ann. § ll-504(h), which provides,
Because the IRAs would be unavailable to creditors in a Chapter 7 proceeding by virtue of the state law exemption, creditors would receive nothing from those accounts if Solomon’s non-exempt assets were to be liquidated. Thus, preserving the IRAs from the claims of Solomon’s creditors in this Chapter 13 proceeding is both logically sound and in- keeping with the Code. In fact, in a Chapter 7 proceeding, Solomon’s creditors would be entitled to the proceeds from liquidation of non-exempt assets worth approximately $40,000. The $45,000 he proposes to pay the creditors under his Chapter 13 plan thus appears to satisfy the “best interests of creditors” prerequisite for confirmation. The Supreme Court has emphasized that the mere happenstance of bankruptcy should not result in a windfall to creditors. Patterson v. Shumate,
Our holding today is consistent with the treatment accorded IRAs by the Internal Revenue Code. Subject to certain limitations, a taxpayer’s contribution to an IRA is tax deductible, and the account accrues interest tax-free. 26 U.S.C. §§ 219, 408(e); In re Chiz,
In sum, we do not think it a condition of invoking the protections of Chapter 13 that one withdraw pension or retirement income to fund a plan that otherwise meets the § 1325 prerequisites for confirmation. A contrary holding could have devastating results for pension and retirement savings. By requiring an otherwise eligible Chapter 13 debtor to withdraw such monies to fund a Chapter 13 plan, we would effectively undercut the very purpose of retirement and pension plans: to ensure that workers have sufficient funds with which to support themselves and their dependents during their retirement years. We agree with the Third Circuit that “Congress has expressed a deep and continuing interest in the preservation of pension plans, and in encouraging retirement savings, as reflected in the statutes which have given us ERISA, Keogh plans and IRAs,” Velis v. Kardanis,
III.
Our holding does not mean, however, that Solomon is entitled to invoke the protections of Chapter 13. Whether his Chapter 13 plan will be confirmed hinges upon a finding by the bankruptcy court on remand that the
In Neufeld v. Freeman,
It is here that the concerns of our dissenting brother are addressed. The dissent vents its understandable displeasure with the nature of the acts of which Solomon stands accused. It fashions on appeal a “Solomon Rule” which, however attractive in the particular case, would thwart the general intent of Congress to safeguard pension and retirement plans. The better approach is to require triers of fact in bankruptcy cases to review the good faith with which individual debtors attempt to invoke Chapter 13 protections. This good faith inquiry is expressly mandated under § 1325(a)(3) of the Bankruptcy Code and has been expressly held by this circuit to encompass “both prepetition conduct and prior bankruptcy filings by the debtor.” Neufeld,
IV.
For the foregoing reasons, the judgment of the district court is reversed and the case is remanded for further proceedings.
REVERSED AND REMANDED.
Notes
Solomon apparently paid all his other creditors in full before filing his Chapter 13 petition.
Dissenting Opinion
dissenting:
I respectfully dissent.
Facing tort claims of sexual misconduct made by several former medical patients who seek damages of $160 million, the debtor, Neil Solomon, filed a bankruptcy petition. In an attempt to wipe out these claims under the broader “super-discharge” available under Chapter 13, Solomon proposes a plan that offers his former patients (his only creditors) a total of just $45,000, payable in monthly installments of $750 over the next five years. But Solomon, who has retired, refuses to make available to his creditors any income (which is readily accessible without penalty) from three exempt IRAs worth more than $1.4 million. He does not need any income from the IRAs for the reasonable maintenance and support of himself or any dependent. I would hold that income he could elect to receive without penalty from his IRAs may be counted as projected disposable income for purposes of his Chapter 13 plan. This result best comports with the language of section 1325(b) and the overall purposes of Chapter 13, which gives a debtor such as Solomon an enormous break under the “super-discharge.”
I.
A.
A debtor can not be forced into Chapter 13 bankruptcy, as he can be into Chapter 7. The debtor alone makes the affirmative decision to seek the protections of Chapter 13 in order to obtain the “super-discharge.” See 11 U.S.C. § 303(a). Here, Solomon filed un
Although section 1325(b)(2) defines “disposable income” as “income which is received by the debtor,” section 1325(b)(1)(B) calls for a “projection” of income for three years into the future. The court, not the debtor, has the final say in projecting the debtor’s disposable income. 5 Collier on Bankruptcy ¶ 1325.08[4][a] (15th ed. 1995). In the usual case, the projection is relatively straightforward. E.g., Anderson v. Satterlee (In re Anderson),
Solomon is 62 years old. Before January 1, 1994, he had a net monthly income of $14,800. As of January 1, 1994, Solomon reports a net monthly income of $2,650; of this amount, $2,146 is his state pension payment from Maryland. It is from the $2,650 that Solomon proposes to make monthly payments of $750 to his creditors. Solomon’s monthly income has dropped substantially because he surrendered his medical license and stopped practicing medicine. He plans to support himself with his state pension and interest and dividends from exempt assets owned jointly with his wife.
The point here is simple: Solomon has retired. One would, therefore, expect (and could reasonably project) that Solomon would start to draw income from his IRAs. They are, after all, called retirement accounts.
The Internal Revenue Code supports this analysis. It allows a person to draw income without penalty from his IRA once he reaches the age of 591 See 26 U.S.C. § 408(a)(6); 26 C.F.R. § 1.408-l(b)(6). Congress therefore determined that 59jé is a reasonable age to begin retirement. Because Solomon is 62, has retired, and can never return to the practice of medicine, it is reasonable to project that his disposable income during the
Under Chapter 13 Solomon can still shield all of his assets, including exempt assets such as his IRAs. And he can obtain a “super-discharge” and free himself of the sexual misconduct claims. In return, Solomon must do one thing: pay all of his projected disposable income (including that from exempt assets) to his creditors during the relatively short life of his plan. This is a small price to pay for any debtor in such trouble, regardless of his disposable income level.. The bankruptcy and district courts were right to refuse confirmation of a plan that did not project income from Solomon’s IRAs.
B.
The majority says that requiring a Chapter 13 debtor such as Solomon to contribute disposable IRA income “could have devastating results for pension and retirement savings.” Ante at 1133. I respectfully disagree for three reasons.
First, the statutory definition of “disposable income” under section 1325(b)(2)(A) ensures that during the life of his plan Solomon (or any other Chapter 13 debtor) would always have sufficient funds for the maintenance and support of himself and his dependents. All of the reasonable living expenses of the debtor and his family come off the top before a penny is paid to creditors.
Second, section 1325(b) does not require that all of the funds in the IRAs be used to fund the Chapter 13 plan. Far from it. A retired Chapter 13 debtor would simply be required to include the amount he would reasonably be expected to withdraw as retirement income for three years. Section 1325(b)(1)(B) gives the bankruptcy court the ultimate responsibility to make the projection, and there exists an ample basis for making a logical and sensible one. Here, the bankruptcy court suggested applying the minimum distribution formulas established by the Internal Revenue Code and regulations. In re Solomon,
This approach appears to serve the dual statutory objectives. It would reasonably preserve Debtor’s I.R.A.s for retirement within the applicable, statutory parameters for self-directed pension accounts; and it would also allow computation of a reasonable income expectation for Debtor’s disposable income determination under 11 U.S.C. 1325(b).
Id. at 845. Thus, under the bankruptcy court’s suggestion, a minimum annual IRA distribution would be dedicated to the payment of Solomon’s creditors during the life of his plan. Thereafter, Solomon (or any other Chapter 13 debtor) would get all of his IRA distributions for the rest of his (projected) lifetime.
Third, persons who are not retired would not be required to include projected income from their IRAs. They would have the disposable income from their jobs to pay their creditors. However, if a retiree voluntarily invokes Chapter 13, it is only reasonable to require him to use any excess pension or IRA income to fund his plan.
C.
The majority notes that paying projected IRA income to creditors goes beyond what is required by the “best interests of creditors” test for confirmation of a Chapter 13 plan.
Satisfaction of the “best interests” test is but' one prerequisite for confirmation of a Chapter 13 plan. The creditor must also satisfy the “disposable income” test. Therefore, I cannot accept the majority’s suggestion that satisfaction of the “best interests” test results in satisfaction of the “disposable income” test. Using the “best interests” test to set the minimum or “floor” for payments to creditors under Chapter 13 would completely eviscerate the “disposable income” test of section 1325(b)(1)(B). See In re Schnabel,
Finally, allowing creditors to share in a retired debtor’s projected disposable IRA income (for three years) under Chapter 13 does.not violate the Supreme Court’s admonition in Patterson v. Shumate,
II.
The majority remands for proceedings under section 1325(a)(3) to determine whether Solomon proposed his plan in good faith. Perhaps his creditors will ultimately achieve relief under that section. That possibility, however, does not change the fact that the bankruptcy and district courts have already correctly refused to confirm Solomon’s Chapter 13 plan because it fails to meet the “disposable income” test under section 1325(b). I would let the judgment stand and put an end to the matter right now.
. The language of section 1325(b) makes no distinction between income from exempt assets (such as pension funds and IRAs) and income from non-exempt assets (such as marketable securities). This was not an oversight on the part of Congress. To receive the protections of "super-discharge,” a debtor under Chapter 13 proposes to pay his debts over three years from future income. S.Rep. No. 65, 98th Cong. 1st Sess. 20 (1983). Also, even though such income is not shielded from creditors, a debtor’s fresh start remains assured because the debtor may keep all of his assets, whether exempt or not. What the debtor must give up, however, is his projected disposable income during the life of his plan. It is irrelevant whether that income is derived from exempt or non-exempt assets. In re Hagel,
. Under the "best interests” test a Chapter 13 plan must provide unsecured creditors with no less value than they would receive if the debtor liquidated under Chapter 7. See 11 U.S.C. § 1325(a)(4).