In re Drapeau

485 B.R. 29

In re Stephen M. DRAPEAU, Jr., Jennifer R. Drapeau, Debtors.

No. 11–44747.

United States Bankruptcy Court,

D. Massachusetts,

Central Division.

Jan. 8, 2013.

Walter Oney, Fitchburg, MA, for Debtors.

Richard King, Asst. U.S. Trustee, Worcester, MA.

Denise M. Pappalardo, Worcester, MA, Trustee.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is an objection by the Chapter 13 trustee (the “Trustee”) to confirmation of the Chapter 13 plan filed by Stephen and Jennifer Drapeau (the “Debtors” or “Stephen” and “Jennifer” individually). Resolution of the objection requires the Court to determine whether funds proposed to be used by the Debtors to make voluntary contributions to their retirement accounts constitute disposable income that must be included in the calculation of payments required under their plan, or whether those contributions are excluded from disposable income by operation of 11 U.S.C. § 541(b)(7).

I. FACTS AND TRAVEL OF THE CASE

The Debtors filed their voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”) ¹ on November 14, 2011 (the “Petition Date”). In the schedules and statements filed with the petition (the “Schedules”), Stephen and Jennifer disclosed their interests in two retirement savings plans (the “401(k)” accounts), with balances as of the Petition Date in the amounts of $9,571.40 and $2,401.41, respectively. The Debtors indicated on the Schedules that the accounts were “not property of [the] estate,” although they claimed the balance of the accounts as exempt under § 522(d)(12).

On Schedule I, the Debtors reported their respective gross monthly incomes and payroll deductions. From Stephen's gross monthly income of $6,666.70, he deducted payments of $400.01 per month for an “optional retirement plan” and $246.69 per month for a “retirement loan repayment.” From Jennifer's gross monthly income of $5,150.75, she deducted $412.05 per month for an “optional retirement plan” and $57.35 per month for a “retirement loan repayment.” Also on Schedule I, the Debtors indicated that “[t]he Debtor [sic] anticipates being unable to make 401(k) contributions for the first 6 months of the case due to taking a hardship withdrawal in order to pay attorney's fees.” Sched. I–Current Income of Indiv. Debtors, Nov. 14, 2011, ECF No. 1.

For a time prior to the bankruptcy case filing, Jennifer had made average monthly contributions of $412 to her 401(k) account. However, she ceased making contributions in August 2011 after taking a hardship withdrawal from the account. She maintains that, as a result of that withdrawal, she was legally prevented from making 401(k) account contributions for a period of 6 months. ² Therefore, although Schedule I reflects monthly contributions of $412, Jennifer was not making voluntary contributions to her 401(k) account as of the Petition Date. Postpetition, in February 2012, Jennifer resumed her monthly contributions, although in the lesser amount of $396 per month.

Stephen also made prepetition contributions to his 401(k) account, averaging approximately $350 per month. But he also took a prepetition hardship withdrawal in early November 2011 and thus claims to have been prevented from making further contributions for the following 6 months—notwithstanding the indication on Schedule I that he was contributing $400.01 per month to the account. Postpetition, in June 2012, he resumed making contributions, now in the amount of $400.01 per month.³

On the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (“Form 22C”), the Debtors reported an annual income of $129,447.84, an amount greater than the applicable median family income in Massachusetts. As “above-median” debtors, the Debtors were required to calculate their monthly disposable income using the expenses allowed under § 707(b)(2), see11 U.S.C. § 1325(b)(3), which are in turn calculated on Form 22C.⁴ On Part V, Line 55 of Form 22C, the Debtors claimed “Qualified retirement deductions” in the monthly amount of $365.89. ⁵

The Debtors' Chapter 13 plan (the “Plan”) contemplates monthly Plan payments of $954 over 5 years. Through the Plan, the Debtors intend to cure over $20,000 in arrears on secured debts, strip off and avoid certain liens on their residence, and cram down the security interest on an automobile. The Plan also estimates a 23.5% dividend to general unsecured creditors. Objections to the Plan were filed by both a secured lender and the Trustee. All but one of those objections have been previously resolved.

The remaining objection to the Plan was raised by the Trustee in her March 23, 2012 objection to confirmation (the “Objection”). There, she argues that confirmation should be denied because the Debtors' voluntary contributions to their 401(k) accounts represent disposable income that must be paid into the Plan. After a hearing on the Objection and the Debtors' response thereto (the “Response”), the matter was taken under advisement. The parties have filed a stipulation of facts and each has provided the Court with further briefing.

II. POSITIONS OF THE PARTIES

Relying primarily on Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir.2012), the Trustee argues that “the Plan may not be confirmed as the post-petition 401(k) contributions constitute projected disposable income pursuant to § 1325(b)(1)(B) and must be committed to the Plan.” Trustee's Mem. 3. She maintains that only retirement contributions that are being made as of the Petition Date are excluded from the bankruptcy estate under § 541(b)(7). And because the Debtors were making no retirement contributions as of the Petition Date (regardless of whether or why they were prevented from so doing), those sums must be considered disposable income in the Debtors' Chapter 13 case.⁶

The Debtors characterize the issue somewhat differently, emphasizing the fact that the Debtors had ceased making voluntary 401(k) contributions as of the Petition Date only because they were prevented from doing so by the earlier hardship withdrawals. Their essential argument, however, is that Seafort was wrongly-decided by both the Sixth Circuit and its Bankruptcy Appellate Panel because their construction of § 541(b)(7) was flawed. The Debtors argue that this Court should instead adopt the position that “§ 541(b)(7) unambiguously remove[s] pre- and post-petition retirement plan contributions from the estate and from treatment as disposable income.” Debtors' Suppl. Resp. to Conf. Obj. 2, Aug. 24, 2012, ECF No. 85. The Debtors say that they should be permitted to continue making their voluntary 401(k) contributions, and even to increase those contributions, limited only by the good faith requirement of § 1325(b)(3). They maintain that, because the Trustee does not object to the Plan on grounds that it was not proposed good faith—and the Debtors say there is no evidence to support such an objection if raised—the Objection should be overruled.

III. DISCUSSION

As a prerequisite to confirmation of a Chapter 13 plan, § 1325(b)(1) requires the debtor to devote all “projected disposable income” to make payments under the plan.⁷ While projected disposable income is not defined in the Code, “[d]isposable income” is now defined as “current monthly income received by the debtor” less “amounts reasonably necessary to be expended” for the debtor's maintenance and support, for qualifying charitable contributions, and for business expenditures. § 1325(b)(2)(A)(i) and (ii) (2006 ed.).... The phrase “amounts reasonably necessary to be expended” in § 1325(b)(2) is also newly defined. For a debtor whose income is below the median for his or her State, the phrase includes the full amount needed for “maintenance or support,” see § 1325(b)(2)(A)(i), but for a debtor with income that exceeds the state median, only certain specified expenses are included, see §§ 707(b)(2), 1325(b)(3)(A).

Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2469–70, 177 L.Ed.2d 23 (2010).⁸

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. 109–8, 11 Stat. 23 (2005), the question of whether voluntary retirement contributions were reasonably necessary for the debtor's maintenance or support and whether those funds should be considered part of the debtor's projected disposable income available to make payments under a Chapter 13 plan was not settled. See In re Rolon, 381 B.R. 575, 580(Bankr.D.P.R.2007). Some courts adopted a per se rule that retirement contributions were never “reasonably necessary,” while other courts made the determination on a case-by-case basis. Id. (collecting cases).

The BAPCPA amendments to § 541, however, directly address voluntary retirement contributions, albeit with language that has led to the different interpretations here discussed. Generally, § 541 (now and pre-BAPCPA) defines the contours of the bankruptcy estate. 11 U.S.C. § 541. Subsection (a) details the types of property that comprise the estate, while subsection (b) specifies types of property that are not included in the bankruptcy estate. Section 541(b)(7), added by BAPCPA, excludes from the estate “any amount ... withheld by an employer from the wages of employees for payment as contributions” to a qualified retirement account or “received by an employer from employees for paymentas contributions” to a qualified retirement account.⁹11 U.S.C. § 541(b)(7)(A), (B). Both of these subparagraphs go further, however, ending with an oddly-worded “hanging-paragraph,” each of which provides: “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)(A), (B). In a Chapter 13 case, section 1306 incorporates “the property specified in § 541” into the bankruptcy estate, and defines the estate to include both the debtor's postpetition...