In re Mihal

JOHN PAUL MIHAL and AGNES LOUISE MIHAL, Debtors.

Case No.: 13-54435

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - DETROIT

May 6, 2015

Chapter: 13

Hon. Walter Shapero

OPINION SUPPLEMENTING BENCH OPINION AND OVERRULING CHAPTER 13 TRUSTEE'S OBJECTION TO PLAN CONFIRMATION

This Court issued a summary bench opinion on March 12, 2015 overruling the Chapter 13 Trustee's objection to the Debtors' proposed Chapter 13 plan. As stated then, this written Opinion is intended to supplement that bench opinion.

The facts in this case are not in dispute. Debtors, John and Agnes Mihal, are both retirees and receive Social Security income in the amounts of $2,173.90 and $833.00, respectively, such totaling $3,006.90. Debtors' other income is Mr. Mihal's monthly pension of $1,547.63 and monthly VA benefits of $2,973.00, for a total of $4,520.63, exclusive of the Social Security income. Debtors' expenses as shown on Schedule J are $4,020.63. Debtors' Chapter 13 plan proposes payments to creditors of the difference, $500 per month, for 60 months. The Chapter 13 Trustee estimates that, based on the then filed unsecured claims, such would result in an approximately 25% dividend on unsecured claims.

The Trustee objected to confirmation on the sole and limited basis that the Debtors' plan was not proposed in good faith as required by 11 U.S.C. § 1325(a)(3) because they completely excluded their Social Security income from their plan. The Debtors argue that (1) § 1325(b)(1)(B) requires them to commit all of their "projected disposable income"; and (2) "disposable income" is defined in § 1325(b)(2) to mean "current monthly income", which is defined in § 101(10A)(b) to "include[] any amount paid by any entity other than the debtor... butexcludes benefits received under the Social Security Act[.]" Thus, Debtors' position is that they are under no obligation to commit any of their Social Security income to their plan under the plain language of the Bankruptcy Code, and failing to do so cannot, in and of itself, constitute a lack of good faith and impede confirmation of their proposed plan.

Initially, the Trustee argues that §101(10A)'s definition of "currently monthly income" does include Social Security income. The Trustee's reasoning is that (1) §101(10A) is broken into two subsections: subsection (A) relating to average monthly income from all sources derived during the past 6 months, and subsection (B) relating to "any amount paid by any entity other than the debtor"; and (2) the pertinent language that states "but excludes benefits received under the Social Security Act" only appears in subsection (B); and (3) nothing in subsection (A) itself excludes Social Security income from the definition of "currently monthly income." The Trustee attempts to bolster this argument with various maxims of statutory interpretation. For a number of reasons, the Court is not persuaded by these arguments. First, they ignore that subsections (A) and (B) are joined by the conjunctive "and." Second, the Trustee's interpretation would essentially erase subsection (B)'s clear exclusion of Social Security income from the definition of "current monthly income" by opening a back door through subsection (A), by which the Trustee contends Social Security income should be included. Third, the Sixth Circuit has explicitly stated that, by virtue of the § 101 exclusion, "disposable income" excludes benefits received under the Social Security Act. Baud v. Carroll, 634 F.3d 327, 345 (6th Cir. 2011) ("We conclude that benefits received under the Social Security Act—such as the benefits the Appellees receive—should not be included in the calculation of projected disposable income.").

Having determined that Social Security income is thus excluded from the definitions of "current monthly income" and "disposable income," the remaining issue is whether the Debtors'exclusion of that Social Security income from their Chapter 13 plan, by itself, can constitute a lack of good faith, and thus a basis to deny confirmation. The Trustee is not here arguing that Debtors failed to meet any other substantive requirements of the Bankruptcy Code or that there are any other grounds for denying confirmation or affording a basis for a finding of lack of good faith. Both parties agree this is purely a legal issue and if the Court decides in favor of the Trustee, confirmation should be denied.

There is in fact a split of authority on this legal issue. The Sixth Circuit in Baud, 634 F.3d at 346 n.13, noted the divergent views without opining on the issue. The Debtors' position is part of what appears to be the majority view, including every Court of Appeals that has opined on this issue. Notable among those cases are In re Welsh, 711 F.3d 1120 (9th Cir. 2013); Mort Ranta v. Gorman, 721 F.3d 241, 253 n.15 (4th Cir. 2013); Beaulieu v. Ragos, 700 F.3d 220 (5th Cir. 2012); Anderson v. Cranmer, 697 F.3d 1314 (10th Cir. 2012); Fink v. Thompson 439 B.R. 140 (8th Cir. BAP 2010). Other such cases include In re Vandenbosch, 459 B.R. 140 (M.D. Fla. 2011); In re Worthington, 507 B.R. 276 (Bankr. S.D. Ind. 2014); In re Melander, 506 B.R. 855 (Bankr. D. Minn. 2014); In re Barfknecht, 378 B.R. 154 (Bankr. W.D. Tex. 2007). Further supporting the Debtors' position are the leading bankruptcy treatises, Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th ed., § 496.2, at ¶ 15 and 8 Collier on Bankruptcy ¶ 1325.04[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014).

These authorities generally start with the principle of statutory construction that a specific statute is favored over a conflicting general statute. See Corley v. United States, 556 U.S. 303, 326 (2009). The good faith requirement in § 1325 has been a part of the Bankruptcy Code since its enactment in 1978, and "good faith" is undefined in the Bankruptcy Code. In re Welsh, 711 F.3d at 1127. In the Sixth Circuit, "good faith" has been defined as a subjective analysis of thetotality of the circumstances including, but not limited to, a twelve factor test stated In re Okoreeh-Baah, 836 F.2d 1030, 1032 (6th Cir. 1988) and in other cases. As such, the good faith requirement is an amorphous, flexible, and nearly boundless requirement, meant to be tailored and responsive to a myriad of circumstances, even such not specifically provided for in the Bankruptcy Code. A debtor's refusal to include his or her Social Security income as part of their "disposable income" however, cannot be categorized or described as general. On the contrary, it is unmistakably statutorily specific that a debtor is required to commit all of his or her "disposable income" to the Chapter 13 plan, and that "disposable income" is defined to specifically exclude Social Security income. Section 1325(a), which contains the good faith requirement, begins with the phrase "except as provided in subsection (b)", thereby explicitly referring and giving precedence to subsection (b), which, as noted, clearly states that Social Security income is not part of a debtor's disposable income. In that sense, "[w]hen Congress speaks directly to one of the good faith factors, the judicial good faith inquiry is narrowed accordingly." In re Welsh, 711 F.3d at 1131. To adopt the Trustee's position would be to render this specific statutory exclusion meaningless, and to invalidate the benefits of this exclusion under the guise of the "good faith" requirement. This Court agrees with the following articulation in Welsh:

We cannot conclude, however, that a plan prepared completely in accordance with the very detailed calculations that Congress set forth is not proposed in good faith. To hold otherwise would be to allow the bankruptcy court to substitute its judgment of how much and what kind of income should be dedicated to the payment of unsecured creditors for the judgment of Congress. Such an approach would not only flout the express language of Congress, but also one of Congress's purposes in enacting the BAPCPA, namely to "reduce[ ] the amount of discretion that bankruptcy courts previously had over the calculation of an above-median debtor's income and expenses." Coop v. Frederickson (In re Frederickson), 545 F.3d 652, 658 (8th Cir.2008).

Id.

As an independent basis for this decision, there is the specific language of a provision of the Social Security Act, which provides:

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 execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

42 U.S.C. § 407(a) (emphasis added). Absent any provision in the Bankruptcy Code on the subject of inclusion of Social Security income, that provision alone can be seen as dictating the result the Debtors seek here. To mandate that a debtor commit (or that there be taken into account for purposes of the good faith determination) future Social Security payments would be to necessarily subject such payments "to the operation of any bankruptcy... law" by any definition of the term "operation." No one argues that a Chapter 13 debtor cannot voluntarily utilize his or her Social Security income to pay creditors through a confirmed plan or even outside bankruptcy. That differs from where a bankruptcy court mandates that such income be so utilized, lest confirmation be denied in the first place. This reasoning is reinforced when considered in the context of cases that have decided (based on this same provision of the Social Security Act) that such payments are not part of the bankruptcy estate. Instructive in that regard is an Eighth Circuit's decision:

We therefore hold, in accord with the BAP's decision, that § 407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate. See

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