Miner et al v. Johns
Filing
16
MEMORANDUM RULING: The order of the Bankruptcy Court denying confirmation of the Appellants proposed plan is hereby REVERSED. This matter is REMANDED to the Bankruptcy Court for further proceedings consistent with this opinion. Signed by Judge Elizabeth E Foote on 5/23/2018. (crt,Keifer, K)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION
DONALD EUGENE MINER,
SANDRA RANDOLPH MINER,
APPELLANTS
CIVIL ACTION NO. 5:17-CV-0879
VERSUS
JUDGE ELIZABETH ERNY FOOTE
TODD S. JOHNS, TRUSTEE
APPELLEE
MAGISTRATE JUDGE HAYES
MEMORANDUM RULING
Before the Court is an appeal filed by debtors, Donald Eugene Miner and Sandra
Randolph Miner (“the Miners” or “Appellants”), of the Bankruptcy Court’s March 14,
2017 order denying their proposed Chapter 13 plan. [Rec. Doc. 1]. The Trustee, Todd
S. Johns (“Trustee” or “Appellee”), opposes the appeal and recommends that the Court
affirm the Bankruptcy Court’s order. [Rec. Doc. 9]. For the reasons assigned herein,
the order of the Bankruptcy Court is hereby REVERSED and REMANDED for further
proceedings consistent with this Memorandum Ruling.
BACKGROUND INFORMATION
On March 17, 2016, the Miners filed a voluntary joint petition for Chapter 13
bankruptcy relief. [Bankr. Doc. 1]. 1 Donald Miner, age 62, is employed full time at Rose
1
“Bankr. Doc.” refers to entries contained in the bankruptcy docket in the underlying
proceeding In re Miner, USBC, W.D. La., 16-10441. If this Court has referred to a
bankruptcy document that is not contained in the record on appeal, the Court hereby
takes judicial notice of the document. See ITT Rayonier Inc. v. United States, 651 F.2d
343, 345 at n.2. (5th Cir. 1981) (A court may take judicial notice of the records of an
inferior court).
1
Neath Funeral Home where he earns a gross monthly income of $5,788.61. He is also
employed part time at Aulds Funeral Home where he earns an additional $525.00 per
month. Sandra Miner, age 52, is disabled and receives Social Security. The Miners are
above median income, and therefore have an applicable commitment period of 60
months to complete Chapter 13 bankruptcy. See 11 U.S.C. § 1325(b)(4). 2 The Miners
filed their first proposed Chapter 13 Plan on March 24, 2016. [Bankr. Doc. 8].
However, the Trustee and several creditors objected to the Plan. [Bankr. Docs. 21, 24,
26, 29]. On September 14, 2016, the Miners filed an Amended Plan. [Bankr. Doc. 46].
The same day the Miners also filed Amended Schedules I and J, which reflected Mr.
Miner’s voluntary monthly contributions to his 401(k) retirement plan in the amount of
$700.82 (12% of his salary), and repayment to a 401(k) loan in the amount of $356.18
per month. [Bankr. Doc. 49]. Amended Schedule J indicated that Mr. Miner’s 401(k)
loan would be paid off February 20, 2020. Id. Amended Schedule I reflected that Mrs.
Miner’s only source of income is $1,253.00 from Social Security. Id.
On October 5, 2016, the Trustee filed objections to the confirmation of the
Debtors’ proposed Plan because it failed to increase payments to unsecured creditors
after Mr. Miner’s 401(k) loan repayments are complete. [Bankr. Doc. 52]. The Trustee
questioned whether the Plan was proposed in good faith given Mr. Miner’s monthly
$700.82 voluntary contribution to his retirement fund, which is 12% of his gross
monthly income. [Bankr. Doc. 52, 57]. However, after considering the inclusion of Mrs.
Miner’s Social Security income in addition to Mr. Miner’s income on the overall budget,
2
Title 11 U.S.C. § 1325(b)(4) defines the applicable commitment period as three years
for debtors below median income, and five years for debtors above median income.
2
the Trustee withdrew his objections, recommended confirmation of the Plan, and
submitted a proposed order of confirmation for the Court’s approval. [Bankr. Doc. entry
dated Nov. 9, 2016].
On January 16, 2017, the Bankruptcy Court denied confirmation of the proposed
Plan as follows:
Denied without prejudice, hearing required. Hearing set 9:30 a.m. on
3/8/2017. Combined, the debtor’s voluntary 401(k) contribution and
401(k) loan repayment calculate to about 18% of his income. This plan
only pays a 16% unsecured dividend.
[Bankr. Doc. 60].
On March 8, 2017, a confirmation hearing was held. [Bankr. Doc. 82]. Mr. Miner
was the only witness called to testify. Id. He was questioned by his own counsel,
counsel for the Trustee, and the Bankruptcy Court. Id. The matter was taken under
advisement. Id. Thereafter, the Bankruptcy Court issued an order and opinion denying
confirmation. [Bankr. Doc. 64]. The Bankruptcy Court’s order contained the following
holdings: (1) the Miners failed to meet their burden of proof for confirmation; (2) Mr.
Miner’s post-petition voluntary payments to his 401(k) plan are properly considered
disposable income; (3) post-petition voluntary 401(k) contributions are allowed in
Chapter 13 cases; (4) post-petition 401(k) contributions are limited by the good faith
requirements of the Code; and (5) Mr. Miner cannot offset increased 401(k)
contributions with his wife’s Social Security income. Id. at 7.
The Bankruptcy Court also provided general guidance regarding retirement
account contributions to the Chapter 13 bar, stating that in the future the Bankruptcy
Court will presume that a 3% voluntary contribution to a retirement plan is reasonable.
3
Id. at 20. The Bankruptcy Court would consider allowing retirement contribution
amounts greater than 3% if found to be reasonable on a case-by-case basis using a
“totality of the circumstances” approach. Id.
The Miners filed an Amended Plan to comply with the Bankruptcy Court’s
concerns, which reduced Mr. Miner’s voluntary 401(k) contribution to $178.63 per
month, or 3% of his gross income. [Bankr. Docs. 66 and 70]. The 401(k) loan
repayment was not changed and remained at $356.18. Id. The Miners also filed
Amended Schedules I and J. [Bankr. Doc. 72]. No objections were filed, and the
Bankruptcy Court confirmed the Amended Plan on June 26, 2017. [Bankr. Doc. 74].
The Miners have appealed the Bankruptcy Court’s denial of their original proposed Plan.
[Bankr. Doc. 76].
JURISDICTION
This Court has appellate jurisdiction over final judgments, orders, and decrees
issued by the bankruptcy court. 28 U.S.C. § 158(a).
STANDARD OF REVIEW
In reviewing a decision by the Bankruptcy Court, this Court functions as an
appellate court, applying the same standards of review generally applied to federal
appellate courts. Webb v. Reserve Life Ins. Co., 954 F.2d 1102, 1103-04 (5th Cir.
1992). This Court reviews discretionary decisions made by the Bankruptcy Court under
an abuse of discretion standard. In re ASARCO LLC, 702 F.3d 250, 257 (5th Cir. 2012).
This Court reviews a Bankruptcy Court’s findings of fact for clear error. Id. Legal
conclusions are reviewed de novo. Id.
4
LAW AND ANALYSIS
I.
3
Whether the Bankruptcy Court properly determined that Mr. Miner’s
voluntary retirement contributions should be included as disposable
income.
The Bankruptcy Court held that Mr. Miner’s post-petition voluntary 401(k)
contributions are considered disposable income under the Bankruptcy Code, and should
be included in determining the amount of funds available to pay unsecured creditors
pursuant to 11 U.S.C. § 1325(b)(1)(B). [Bankr. Doc. 64 at 8]. Appellants argue that the
Bankruptcy Court erred, and that post-petition retirement contributions are excluded
from disposable income. [Rec. Doc. 8 at 7-10]. The Trustee argues that the
Bankruptcy Court was correct in finding that the contributions are disposable income.
[Rec. Doc. 9 at 6].
To properly analyze this issue, the Court must begin with the statutory language
of the Bankruptcy Code. The filing of a bankruptcy petition creates a bankruptcy estate,
which is comprised of all of a debtor’s legal and equitable interests in property unless
specifically excluded by statute. 11 U.S.C. § 541(a). In a Chapter 13 proceeding the
estate also includes property and earnings acquired by the debtor “after the
commencement of the case but before the case is closed, dismissed, or converted.” 11
U.S.C. §§ 1306(a)(1) and (2). A Chapter 13 Plan must demonstrate that all of a
3
The Bankruptcy Court issued two holdings that the Miners did not brief on appeal.
First, the Bankruptcy Court held that the Miners failed to meet their burden of proof for
confirmation of the plan as required pursuant to 11 U.S.C. §§ 1322 and 1325(a).
[Bankr. Doc. 64 at 7]. This holding was based primarily on Mr. Miner’s testimony
regarding his 401(k) contributions at the confirmation hearing. Id. at 8. Second, the
Bankruptcy Court held that Mr. Miner could not offset increased 401(k) contributions
with his wife’s Social Security income. Id. at 16. In light of this Court’s ruling that
401(k) contributions are excluded from disposable income, both issues are moot.
5
debtor’s projected disposable income received during the pendency of the bankruptcy
must be paid to unsecured creditors. 11 U.S.C. § 1325(b)(1)(B); see Hamilton v.
Lanning, 560 U.S. 505, 509 (2010).
The term “disposable income” is defined by section 1325(b)(2)(A) as “current
monthly income received by the debtor…. less amounts reasonably necessary to be
expended” for the debtor’s maintenance or support, for qualifying charitable
contributions, and for business expenditures. Lanning, 560 U.S. at 510. “Current
monthly income” is determined by calculating an average of the debtor’s monthly
income during a “look-back” period, generally consisting of the six months preceding
the filing of the bankruptcy petition. Id. The Bankruptcy Court may also factor in
known or virtually certain upcoming changes in a debtor’s monthly income or expenses
at the time of confirmation. Id. at 524.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer
Protection Act (“BAPCPA”) to correct certain perceived abuses within the bankruptcy
system. See Milavetz, Gallop & Milavetz PA v. United States, 559 U.S. 229 (2010).
BAPCPA newly defined the phrase “amounts reasonably necessary to be expended” for
above median income debtors to include only certain specified expenses. See 11 U.S.C.
§ 1325(b)(3). To determine the “amounts reasonably necessary to be expended” for
above income debtors, section 1325(b)(3) requires that expenditures be calculated
using a “means test” in accordance with 11 U.S.C. §§ 707(b)(2)(A) and (B). These
sections set forth various expenses, such as housing, transportation, food, and
insurance expenses, which may be deducted from a debtor’s overall disposable income
6
available to repay unsecured creditors. 4 Neither section 1325(b)(2) nor section
707(b)(2)(A) and (B) explicitly authorize 401(k) contributions as an allowable expense
in calculating disposable income. In re Vanlandingham, 516 B.R. 628, 632 (Bankr. Kan.
2014).
Whether 401(k) contributions should be considered disposable income available
to unsecured creditors, or whether such contributions are excluded from disposable
income remains an unsettled question. The uncertainty is a result of the implementation
of BAPCPA, which made significant, and at times inartful, changes to the bankruptcy
code. Prior to the enactment of BAPCPA, both 401(k) loan repayments and 401(k)
contributions were considered disposable income and were not a necessary expense.
See In re Anes, 195 F.3d 177, 180-81 (3d Cir. 1999); In re Hill, 328 B.R. 490, 495
(Bankr. S.D. Tex. 2005); In re Cornelius, 195 B.R. 831, 835 (Bankr. N.D.N.Y. 1995).
However, BAPCPA added two sections affecting both 401(k) loans and contributions.
See 11 U.S.C. § 1322(f) and 11 U.S.C. § 541(b)(7). There is a consensus among
bankruptcy courts that BAPCPA’s addition of section 1322(f) unequivocally states that a
debtor’s repayment of a 401(k) loan is a necessary expense and cannot be treated as
disposable income. 5 And indeed, the Bankruptcy Court in this case recognized this
4
The “means test” utilizes the National and Local Standards established by the IRS for
expenses in a given location. The “means test” form is found on the United States
Trustee’s website at https://www.justice.gov/ust/means-testing, and the United States
Courts’ website at http://www.uscourts.gov/forms/means-test-forms/chapter-13calculation-your-disposable-income.
5
Section 1322(f), found within section 1322 “Contents of the Plan,” provides that “[a]
plan may not materially alter the terms of a loan described in section 362(b)(19) and
any amounts required to repay such loan shall not constitute ‘disposable income’ under
section 1325.”
7
principle and did not include Mr. Miner’s 401(k) loan repayments as disposable income.
[Bankr. Doc. 64 at 9]. Unfortunately, there are highly divergent interpretations of 11
U.S.C. § 541(b)(7) and its application to voluntary 401(k) contributions.
Section 541(b)(7) has been described by courts as having “an oddly worded
hanging paragraph” that references the concept of Chapter 13 disposable income within
section 541, which defines “property of the estate” across the entire bankruptcy code.
See In re Vanlandingham, 516 B.R. at 632 (citing In re Drapeau, 485 B.R. 29, 34
(Bankr. D. Mass. 2013)).
Section 541(b)(7) is found within Chapter 541 “Property of the Estate” and sets
forth property that is excluded from the bankruptcy estate as follows: 6
(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) an employee benefit plan that is subject to Title 1
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
6
Section 541(b)(7)(A) and (B) are identical with the following distinction: section (A)
refers to any amount “withheld from an employer from the wages of employees for
payments as contributions,” and section (B) refers to any amount “received by an
employer from employees for payment as contributions.” The distinction is merely a
matter of how the retirement contribution is collected by the employer.
8
(III) a tax-deferred annuity under section 403(b) of
the Internal Revenue Code of 1986;
except that such amount under this subparagraph
shall not constitute disposable income as defined in
section 1325(b)(2).
(ii) to a health insurance plan regulated by State law
whether or not subject to such title.
Bankruptcy courts have struggled to interpret the relationship between section
541(b)(7) and section 1325(b)(2), which defines disposable income. However, the
cases analyzing the issue can be categorized into three distinct approaches as follows.
The first approach, known as the Johnson approach, is the most favorable to
debtors. See In re Johnson, 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006). Therein, the
bankruptcy court held that debtors are permitted to shelter retirement contributions
from unsecured creditors into qualifying employment benefit plans (“EBPs”) as long as
the contributions are within the legal limits allowed by the Internal Revenue Service. Id.
In reaching this decision the Johnson court read the plain language of section
541(b)(7), including the troublesome hanging paragraph as follows:
Any amount that is either ‘withheld by’ or ‘received by’ a debtor’s
employer for qualifying EBPs, deferred compensation plans, tax-deferred
annuities, or state-law regulated health insurance plans ‘shall not
constitute disposable income, as defined in section 1325(b)(2).’
Id. (citing 11 U.S.C. § 541(b)(7)). The Johnson court noted that a 401(k) plan is an EBP
covered by the Employee Retirement Income Security Act of 1974 (“ERISA”). Id. (citing
29 U.S.C. § 1003(a) (defining ERISA’s coverage)). Thus, relying on the plain language
of section 541(b)(7), the Johnson court held that both pre-petition and post-petition
retirement contributions are permitted under section 541(b)(7). Id. The Johnson court
9
also concluded that the plain language provided that “debtors may fund 401(k) plans in
good faith, so long as their contributions do not exceed the limits legally permitted by
their 401(k) plans.” Id. at 263.
The Johnson approach appears to be the majority view based on the number of
bankruptcy courts that have examined this issue. See, e.g., In re Garza, 575 B.R. 736
(Bankr. S.D. Tex. 2017); In re Vanlandingham, 516 B.R. 628; In re Cantu, 553 B.R. 565
(Bankr. E.D. Va. 2016); In re Drapeau, 485 B.R. 29; In re Mati, 390 B.R. 11 (Bankr. D.
Mass. 2008); In re Devilliers, 358 B.R. 849 (Bankr. E.D. La. 2007); In re Shelton, 370
B.R. 861 (Bankr. N.D. Ga. 2007); In re Nowlin, 366 B.R. 670 (Bankr. S.D. Tex. 2007),
aff’d on other grounds, 576 F.3d 258 (5th Cir. 2009); see also 5 Collier on Bankruptcy P
§ 541.23 (16th ed. 2018) (explaining that section 541(b)(7)’s reference to disposable
income under section 1325(b)(2) makes it clear that the provision is intended to
exclude retirement withholdings so that Chapter 13 debtors may save for their
retirement).
Taking the opposite position, the Prigge approach holds that debtors cannot
deduct voluntary retirement contributions when computing disposable income. See In
re Prigge, 441 B.R. 667, 677 (Bankr. D. Mont. 2010). The bankruptcy court in Prigge
held that in passing BAPCPA Congress did not unequivocally stipulate that 401(k)
contributions are to be excluded from disposable income. In reaching this conclusion
the Prigge court noted that Congress added section 1322(f) to the Code, which clearly
states that payments for 401(k) loans are not to be considered disposable income. Id.
at 677. However, Congress did not include a similar section for contributions. Id. The
Prigge court concluded that if Congress had intended for 401(k) contributions to be
10
given the same treatment, it would have done so. Id. (citing Keene Corp v. United
States, 508 U.S. 200, 208 (1993) (“Where Congress includes particular language in one
section of a statute but omits it in another, it is generally presumed that Congress acts
intentionally and purposely in the disparate inclusion or exclusion.”)). The Prigge court
also noted that the “means test” requires a debtor to reference the IRS guidelines in
determining necessary expenses, which do not include contributions to a retirement
account as a necessary expense. Id. at 676 (citing In re Egebjerg 574 F.3d 1045, 1052
(9th Cir. 2009)). 7 Thus, the Prigge court held that post-petition 401(k) contributions
are disposable income available for repayment to unsecured creditors. Prigge, 441 B.R.
at 677; see also In re Parks, 475 B.R. 703 (B.A.P. 9th Cir. 2012) (section 541(b)(7)
does not authorize debtors to exclude post-petition retirement contributions when
calculating disposable income).
The third approach strikes a balance between the two, and allows the deduction
of voluntary retirement contributions to be excluded from disposable income to the
extent the contributions were already being made when the petition was filed. See In re
Seafort, 437 B.R. 204 (B.A.P. 6th Cir. 2010); In re Read, 515 B.R. 586 (Bankr. E.D. Wis.
2014); In re Bruce, 484 B.R. 387 (Bankr. W.D. Wash. 2012). Bankruptcy Courts
following this approach have determined that section 541(b)(7) must be read in
conjunction with section 541(a), which defines the scope of property of the estate to be
established at the time a bankruptcy petition is filed. See Seafort, 437 B.R. at 209.
7
In re Egebjerg provides that 401(k) loan repayments and contributions are not
necessary expenses because they are not listed in the Internal Revenue Manual, which
is promulgated by the Internal Revenue Service. 574 F.3d at 1052. This Court notes
that Egebjerg involved a Chapter 7 petition, not a Chapter 13.
11
Reading both sections concurrently, the filing of the petition provides a fixed point in
time from which the parties and the Bankruptcy Court may determine which assets
should be included or excluded from the estate. Id. Thus, only 401(k) contributions
that are established with the employer at the filing of the bankruptcy petition are
excluded from property of the estate under section 541(b)(7). Id. Under this approach
a debtor may not begin or increase retirement contributions post-petition. Id. at 210.
8
The only circuit court to have examined the issue is the Sixth Circuit, which
considered the Seafort decision on appeal. See In re Seafort, 669 F.3d 662 (6th Cir.
2012). Therein, the court approved of the statutory interpretations offered in Prigge,
noting that if Congress had intended to exclude 401(k) contributions from disposable
income it would have done so like it did for the repayment of 401(k) loans found in
section 1322(f). Seafort, 669 F.3d at 672 (citing Keene Corp., 508 U.S. at 208). The
court also noted the exclusion of voluntary contributions as a “necessary expense” from
Form 22C, which provides the formula for calculating reasonable and necessary
expenses of above-median income debtors. Seafort, 669 F.3d at 672. 9
10
8
The record demonstrates that Mr. Miner was contributing to his 401(k) prior to filing
for Chapter 13 bankruptcy. [Bankr. Doc. 6]. However, the Bankruptcy Court held that
the pre-petition contribution amount of $781.02 per month was not “sufficiently limited”
or reasonable. [Bankr. Doc. 64 at 15].
9
But see In re Devilliers, 358 B.R. at 864. Contributions are excluded from disposable
income pursuant to section 541(b)(7) and “are not a deduction because they were
never included in the first instance.” Id.
10
Form 22C has been superceded by Form 122C-2. See
http://www.uscourts.gov/forms/bankruptcy-forms/chapter-13-calculation-yourdisposable-income.
12
However, the court also recognized that section 541(b)(7) does provide some
degree of protection for voluntary retirement contributions because it contains the
phrase “such contributions ‘shall not constitute disposable income as defined in section
1325(b)(2).’” Seafort, 669 F.3d at 672 (citing section 541(b)(7)’s “hanging paragraph”).
The court determined that section 541(b)(7) must be read in conjunction with section
541(a), which defines property to be included in the estate at the time a bankruptcy
petition is filed. Seafort, 699 F.3d at 672. Reading the sections concurrently, the court
concluded that the purpose of section 541(b)(7) is to “clarify that pre-petition
retirement contributions do not constitute property of the estate or post-petition
disposable income.” Id. at 673. Based on the structure of Chapter 13 and section 541,
the court concluded that Congress only intended to exclude voluntary retirement
contributions in existence (i.e. amounts funded in a retirement account) at the time a
bankruptcy petition is filed from disposable income available to repay unsecured
creditors. Id. at 674. The court stopped short of deciding whether continuing voluntary
contributions should be excluded from disposable income because the issue was not
raised on appeal. However, in dicta contained within a footnote, the court indicated
that given the reasons set forth in Prigge, it could not agree that continuing
contributions should be excluded from disposable income. Id. at n.7.
The Bankruptcy Court in this case adopted the reasoning of the Sixth Circuit’s
review of Seafort, holding that post-petition voluntary 401(k) contributions are not
excluded from disposable income. [Bankr. Doc. 64 at 11]. In reaching this decision the
Bankruptcy Court noted that Seafort is the only circuit court opinion to have addressed
the issues raised in this case. Id. The Bankruptcy Court also noted that two other
13
circuit courts have adopted other holdings contained within Seafort concerning issues of
statutory interpretation, which is paramount in this case. Id. (citing In re Lively, 717
F.3d 406 (5th Cir. 2013) (interpreting section 1115 as unambiguous in Chapter 11 case)
and In re Maharaj, 681 F.3d 558 (4th Cir. 2012) (interpreting section 1115 in Chapter
11 case)).
Upon de novo review, this Court disagrees with the conclusion of the Bankruptcy
Court that post-petition retirement contributions are to be considered disposable
income. Statutory interpretation requires that the Court look to the plain language of
the statute, reading it as a whole while being mindful of the linguistic choices made by
Congress. BMC Software, Inc. v. C.I.R., 780 F.3d 669, 674 (5th Cir. 2015) (citation
omitted). “If the language is plain and unambiguous, it must be given effect.” Id.
(citation omitted).
The plain language of section 541(b)(7) states that “property of the estate does
not include […] any amount withheld by an employer from the wages of employees for
payments as contributions” to an employee benefit plan, deferred compensation plan,
or a tax-deferred annuity. The Court finds this language to be unambiguous. This
language on its own would exclude funds already contained within a retirement account
at the time the petition is filed and the bankruptcy estate is created. Directly following
this language, and contained within the same subparagraph, is the phrase added by
BAPCPA “except that such amount under this subparagraph shall not constitute
disposable income as defined in section 1325(b)(2).” 11 U.S.C. § 541(b)(7). The Court
finds that this language is also unambiguous. Although the placement by Congress of
the “hanging paragraph” at issue is perhaps awkward, the plain language demonstrates
14
that Congress intended to exclude retirement contributions from available disposable
income as defined by the code in section 1325(b). As noted above, the added phrase is
not needed to exclude pre-petition retirement contributions under the plain language of
the statute. This Court can only conclude that Congress intentionally added the phrase
to exclude all retirement contributions from a debtor’s disposable income. See In re
Renteria, 470 B.R. 838, 843 (B.A.P. 9th Cir. 2012) (when Congress amends a statute to
add language courts must presume the statute is intended to serve some purpose). 11
In reaching this decision this Court joins the other courts within the Fifth Circuit
that have considered this issue and reached the same conclusion. See In re Garza, 575
B.R. 736; In re Devilliers, 358 B.R. 849; In re Oltjen, No. 07-60534, 2007 WL 2329695
(Bankr. W.D. Tex. 2007). 12 Accordingly, the Bankruptcy Court’s determination that
11
The Court notes that the “means test” for above income debtors requires a debtor to
complete Form 122C-2, which incorporates the National and Local Standards
established by the IRS. Form 122C-2 is promulgated by the Judicial Conference of the
United States. The Committee Notes dated 2005-2008 associated with the form’s
development explain that the form provides a line entry for the deduction of
contributions by the debtor of certain retirement plans listed in section 541(b)(7)(b)
because that provision states that such contributions shall not constitute disposable
income as defined by section 1325(b).
12
The Court also finds In re Nowlin, 576 F.3d 258, to be persuasive in reaching its
conclusion. The case involved a debtor whose Chapter 13 plan included monthly
contributions of $1,062.51 towards her 401(k) plan and $1,135.79 to repay a 401(k)
loan. Id. at 261. Overruling the objection of the Trustee, the bankruptcy court
determined that after the 401(k) loan was repaid Nowlin could increase her 401(k)
contribution to the maximum of $1200.00 per month, but the remaining funds were
disposable income and must be provided to the Trustee to pay unsecured creditors. Id.
Although the issue in Nowlin did not involve statutory interpretation of 541(b)(7), both
the district court and the Fifth Circuit affirmed the bankruptcy court’s findings regarding
the debtor’s 401(k) contributions upon conclusion of her 401(k) loan repayment. Id. at
267.
15
post-petition retirement contributions are properly considered disposable income must
be reversed.
The Bankruptcy Court also held that pursuant to Seafort, “post-petition income
that becomes available to debtors after their 401(k) loans are fully repaid is ‘projected
disposable income’ that must be turned over to the trustee for distribution to unsecured
creditors pursuant to section 1325(b)(1)(B) and may not be used to fund voluntary
401(k) plans.” [Bankr. Doc. 64 at 9 (quoting In re Seafort, 669 F.3d 662)]. Given this
Court’s finding that post-petition voluntary retirement contributions are excluded from
disposable income, the Bankruptcy Court must reevaluate whether funds that become
available to the Debtors upon completion of Mr. Miner’s 401(k) loan must be included in
a step-up of payments to unsecured creditors.
II.
The Bankruptcy Court’s good faith determination.
The Bankruptcy Court also held that contributions to retirement accounts are
subject to the “good faith” requirement found in 11 U.S.C. § 1325(a)(3), which states
that “the court shall confirm a plan if [it] has been proposed in good faith and not by
any means forbidden by law.” The good faith standard is included within the code to
protect the sanctity of the bankruptcy process and to preclude a debtor from
intentionally exploiting the bankruptcy process to unreasonably delay creditors or
achieve a reprehensible purpose. In re Stanley, 224 F. App’x. 343, 346 (5th Cir. 2007)
(citing In re Elmwood Development Co., 964 F.2d 508 (5th Cir. 1992)).
Appellants argue that the Bankruptcy Court applied the wrong legal standard in
determining good faith. [Rec. Doc. 8 at 21]. The Trustee urges this Court to affirm the
finding that the proposed plan lacked good faith. [Rec. Doc. 9 at 16-17]. Whether a
16
correct legal standard has been applied by the Bankruptcy Court is a legal conclusion,
which is reviewed de novo. The Bankruptcy Court’s determination of good faith is
reviewed for clear error, giving due regard for the Bankruptcy Court’s opportunity to
observe the credibility of the witness. In re Crager, 691 F.3d 671, 675 (5th Cir. 2012).
This Court agrees with the Bankruptcy Court’s finding that a debtor’s postpetition contributions to a 401(k) plan are one of many elements it must consider in
determining good faith. A bankruptcy court is required to consider whether a plan has
been proposed in good faith during the confirmation process. See 11 U.S.C. §
1325(a)(3). This inquiry requires the Bankruptcy Court to evaluate a proposed plan in
its entirety, which would include a debtor’s retirement contributions as set forth within
the plan. However, the amount contributed by a debtor within the legal limits
established by the Internal Revenue Service cannot be the sole basis for determining
that a plan has been filed in bad faith. See In re Garza, 575 B.R. at 571. It appears
that the Bankruptcy Court in this case denied confirmation primarily because Mr. Miner’s
401(k) contributions reduced the amount of funds available to dispense to creditors. If
additional circumstances indicate that a debtor is attempting to abuse the spirit of the
Bankruptcy Code through his retirement contributions, the Trustee and unsecured
creditors may object for lack of good faith.
Unfortunately, the Bankruptcy Court applied an incorrect test in determining that
the Plan proposed by the Miners was not proposed in good faith. The Bankruptcy Court
applied its own test created by consolidating the most cited factors within the Eighth
Circuit and Eleventh Circuit. [Bankr. Doc. 64 at 15 (citing In re Estus, 695 F.2d 311 (8th
17
Cir. 1982) and In re Kitchens, 702 F.2d 885 (11th Cir. 1983)]. The factors considered by
the Bankruptcy Court are as follows:
(1)
(2)
(3)
(4)
frequency of filing bankruptcy;
accuracy of the petition, schedules, statements, and testimony;
burden of administration;
motivation and sincerity in filing Chapter 13, including
(a) prepetition conduct or misconduct;
(b) debt non-dischargeable in Chapter 13 or Chapter 7 case;
(c) timing of petition to interrupt other events;
(d) nature and extent of financial problems;
(5) degree and effort, including
(a) duration of the plan;
(b) percentage repayment of the debt;
(c) income, expenses, lifestyle and luxuries.
[Bankr. Doc. 64 at 15-16].
The Fifth Circuit has adopted a totality of the circumstances test to determine
whether a Chapter 13 plan has been proposed in good faith as required by 11 U.S.C. §
1325(a)(3). In re Stanley, 224 F. App’x at 346. The factors the Bankruptcy Court
should consider are set forth in Stanley as follows:
(1) the reasonableness of the proposed repayment plan; (2) whether the
plan shows an attempt to abuse the spirit of the bankruptcy code; (3)
whether the debtor genuinely intends to effectuate the plan; (4) whether
there is any evidence of misrepresentation, unfair manipulation, or other
inequities; (5) whether the filing of the case was part of an underlying
scheme of fraud with an intent not to pay; (6) whether the plan reflects
the debtor’s ability to pay; and (7) whether a creditor has objected to the
plan.
Id. at 346 (internal citations omitted). While the test employed by the Bankruptcy
Court has some similarities with the factors set forth in Stanley, the two are not so
similar that this Court may find that the Bankruptcy Court examined the issue under the
correct Fifth Circuit standard. The Court cannot determine the appropriateness of the
Bankruptcy Court’s good faith determination until the proper factors are applied to the
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facts of this case. Accordingly, this matter must be remanded to the Bankruptcy Court
for a determination of good faith under the correct standard.
CONCLUSION
For the reasons set forth herein, the order of the Bankruptcy Court dated March
14, 2017, denying confirmation of the Appellants proposed plan is hereby REVERSED.
This matter is REMANDED to the Bankruptcy Court for further proceedings consistent
with this opinion.
THUS DONE AND SIGNED, this _____ day of May, 2018.
23rd
________________________________
ELIZABETH ERNY FOOTE
UNITED STATES DISTRICT JUDGE
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