In re Scholz

447 B.R. 887

11 Cal. Daily Op. Serv. 4423

2011 Daily Journal D.A.R. 5333

In re Robert Lynn SCHOLZ; Carolyn Gail Scholz, Debtors.Michael Hugh Meyer, Chapter 13 Trustee, Appellant,

v.Robert Lynn Scholz; Carolyn Gail Scholz; United States Trustee, Appellees.

BAP No. EC–10–1153–MkZJu.

Bankruptcy No. 09–14453.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued And Submitted On Nov. 18, 2010.Decided: March 22, 2011.

Brent D. Meyer, San Francisco, CA, for Appellant Michael H. Meyer, chapter 13 trustee.Gary L. Huss, Law Offices of Gary Huss, Fresno, CA, for Appellees Robert L. Scholz and Carolyn G. Scholz.Before: MARKELL, ZIVE ^* and JURY, Bankruptcy Judges.

OPINION

MARKELL, Bankruptcy Judge.

INTRODUCTION

This appeal presents two related questions: (1) does the Bankruptcy Code's definition of “current monthly income”, found at 11 U.S.C. § 101(10A)(“CMI”), include Railroad Retirement Act benefits (“RRA Benefits”); and (2) regardless of the answer to the first question, should RRA Benefits be considered when calculating projected disposable income under § 1325(b)? ¹

Debtors Robert Lynn Scholz and Carolyn Gail Scholz take the position that RRA Benefits do not count towards CMI, and should not be counted as part of projected disposable income. Their chapter 13 trustee, Michael Hugh Meyer (the “Trustee”) disagrees on both counts.

This disagreement formed the basis of the Trustee's objection to the Debtors' plan. The bankruptcy court, however, confirmed the plan over the Trustee's objection in a published decision, In re Scholz, 427 B.R. 864 (Bankr.E.D.Cal.2010).

On appeal, we agree with the Trustee that RRA Benefits fall within the definition of CMI, but we agree with the bankruptcy court that RRA Benefits cannot be considered when calculating projected disposable income. As our first conclusion affects essential elements of the confirmation order and the order overruling the Trustee's objection, we VACATE and REMAND.

FACTS

The facts relevant to this appeal are undisputed. The Debtors filed a voluntary petition and plan on May 15, 2009 seeking relief under chapter 13. Mr. Scholz, now retired, formerly worked in the railroad industry. Ms. Scholz is not retired and works for a real estate agency.

Pursuant to Rule 1007(b)(6), the Debtors filed Form B22C which indicated that they were below-median-income debtors and that their CMI was $3,822.98. This sum consisted of wages and commissions received on account of Ms. Scholz's current employment in the average monthly amount of $3,436.13 and retirement benefits received from her former employer in the average monthly amount of $386.85. The Debtors reported no monthly income or benefits of any type for Mr. Scholz in the body of their Form B22C. The Debtors did, however, attach an addendum in which they disclosed that they had excluded from their calculation of CMI Mr. Scholz's average monthly RRA Benefits.

That exclusion was significant. On their Schedule I the Debtors reported combined average monthly income of $6,799.61. This higher amount reflected Mr. Scholz's monthly RRA Benefits of $3,709.25. This income was also necessary. The Debtors' Schedule J indicated combined average monthly expenses of $6,361.36. The Debtors' plan committed to pay this positive difference of $438 per month to the Trustee. The plan provided for a 60–month term.

The Trustee did not object to the 60–month term, but did object to the manner in which the Debtors' expenses were calculated. To understand the basis of this objection, one must understand the role CMI plays in a debtor's chapter 13 bankruptcy case. If a debtor's CMI is above the median income level in the debtor's state, the debtor's expenses are subject to calculation using the method specified in § 707(b)(2). Section 707(b)(2) is typically more restrictive for above-median-income debtors because it refers to Internal Revenue Service standards instead of actual expenses. In contrast, debtors whose CMI is below-median generally are entitled to deduct all actual expenses that are “reasonably necessary” for their “maintenance or support.” See 11 U.S.C. § 1325(b)(2), (3) and (4).²

On June 29, 2009, the Trustee filed his objection to the Debtors' plan. The Trustee asserted that the Debtors should have included Mr. Scholz's RRA Benefits in their CMI calculation. If this had been done, the Debtors would not have qualified as below-median-income debtors. While the effect on their projected disposable income is unknown, the Trustee asserts it would have increased their projected disposable income because he contended that the Debtors' actual expenses were more than those which would have been allowed under § 707(b)(2). Accordingly, the Trustee argued that the Debtors had not established, as required by § 1325(b)(1)(B), that their plan provided for payment to their unsecured creditors of all of their projected disposable income during the plan's five-year commitment period.³

Both sides briefed the issue of whether RRA Benefits must be included in the calculation of CMI. The court then requested supplemental briefing concerning the impact of the RRA's antigarnishment/antialienation statute, 45 U.S.C. § 231m, on the calculation of CMI. The Debtors filed a supplemental brief; the Trustee did not.

After the completion of briefing, the bankruptcy court entered an order overruling the Trustee's objection (the “Objection Order”). The court also issued a memorandum decision explaining its reasoning, 427 B.R. 864, in which it held that RRA Benefits should not be included in the calculation of CMI. The bankruptcy court acknowledged that, unlike benefits paid under the Social Security Act (“SSA Benefits”), RRA Benefits are not expressly excluded from the statutory definition of CMI. Id. at 870. In addition, the court noted that RRA Benefits are not the same as SSA Benefits, and that Congress could have expressly excluded RRA Benefits from the CMI calculation if it had wanted to do so (as it had done with SSA Benefits). Id. Citing Lamie v. U.S. Trustee, 540 U.S. 526, 542, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), the bankruptcy court conceded that, if Congress enacted something other than what it meant to, it was Congress's sole prerogative to amend its statute to conform with its actual intent. 427 B.R. at 870.

Nonetheless, the bankruptcy court held that RRA Benefits must be wholly excluded from the operation of the Bankruptcy Code, including the calculation of CMI. Id. at 871–72. The court's holding hinged entirely on its interpretation of the RRA's antigarnishment/antialienation statute, § 231m. Id. at 870–71.

The bankruptcy court thereafter entered an order confirming the Debtors' plan, and the Trustee appealed.⁴

DISCUSSION

A. Chapter 13 Plans, Disposable Income and CMI⁵

When a chapter 13 trustee objects to confirmation of a chapter 13 plan, the bankruptcy court may not confirm the plan unless the plan provides for payment to unsecured creditors of all of the debtor's projected disposable income over the course of the plan's commitment period. 11 U.S.C. § 1325(b)(1). The statute does not define the term “projected disposable income,” but it does define the term “disposable income” in relevant part as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for ... maintenance or support.” 11 U.S.C. § 1325(b)(2).

For purposes of calculating disposable income, the type of expenses that may be deducted differs depending on whether the debtor's CMI is above or below the median for similarly-sized households in the debtor's state. Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2470, 177 L.Ed.2d 23 (2010). Section 1325(b)(2) allows a debtor whose CMI is less than the median family income ⁶ of the state in which he or she resides to deduct their actual expenses so long as those expenses are reasonably necessary for the maintenance or support of the debtor and his or her dependents. If the debtor's CMI is above the median, however, Section 1325(b)(3) requires that debtor to calculate the expense side of his or her disposable income according to the standards set forth in the chapter 7 “means test” found in 11 U.S.C. § 707(b)(2).

When converting the statutorily defined term of “disposable income” into projected disposable income, a court starts with the CMI calculation as a presumptive start, and then “may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Hamilton, 130 S.Ct. at 2478; American Express Bank, FSB v. Smith (In re Smith), 418 B.R. 359, 365 (9th Cir. BAP 2009).

In short, for purposes of calculating projected disposable income, CMI determines what receipts to include initially and consequently strongly affects what a chapter 13 debtor ultimately must pay to confirm a plan over a trustee's objections. See 11 U.S.C. § 1325(b).⁷

B. SSA Benefits, RRA Benefits and CMI

As with any other inquiry into statutory construction, our analysis begins with the language of the statute itself. See Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 723, 178 L.Ed.2d 603 (2011). According to the Code, CMI “means the average monthly income from all sources” regardless of whether it is taxable. 11 U.S.C. § 101(10A)(A). CMI typically is measured by calculating the debtor's average monthly income during the full six months immediately preceding the debtor's bankruptcy filing. See § 101(10A)(A)(i). CMI also includes “any amount paid by any entity other than the debtor ... on a regular basis for the household expenses of the debtor or the debtor's dependents....” 11 U.S.C. § 101(10A)(B). This last-mentioned form of CMI is sometimes referred to as “income replacement” and while it is expansive, it expressly excludes three specific types of payments. One of the exclusions is for SSA Benefits. 11 U.S.C. § 101(10A)(B). ⁸

Notably, however, these exclusions from CMI do not include RRA Benefits. The bankruptcy court...