Seafort v. Burden (In re Seafort)

52 Employee Benefits Cas. 2114

669 F.3d 662

In re Deborah K. SEAFORT; Frederick C. Schuler; Carrie A. Schuler, Debtors.Deborah K. Seafort; Frederick C. Schuler; Carrie A. Schuler, Appellants,

v.Beverly M. Burden, Trustee, Appellee.

No. 10–6248.

United States Court of Appeals, Sixth Circuit.

Argued: Jan. 18, 2012.Decided and Filed: Feb. 15, 2012.

ARGUED: Michael B. Baker, The Baker Firm, PLLC, Florence, Kentucky, for Appellants. Daniel E. Hitchcock, Wyatt, Tarrant & Combs, LLP, Lexington, Kentucky, for Appellee. ON BRIEF: Michael B. Baker, The Baker Firm, PLLC, Florence, Kentucky, for Appellants. Daniel E. Hitchcock, Wyatt, Tarrant & Combs, LLP, Lexington, Kentucky, for Appellee.Before: SUHRHEINRICH, GIBBONS, and McKEAGUE, Circuit Judges.

OPINION

SUHRHEINRICH, Circuit Judge.

Chapter 13 of the Bankruptcy Code permits “individual[s] with regular income” whose debt falls within statutory limits, see 11 U.S.C. §§ 101(30), 109(e), to keep their property if they agree to a court-approved plan to pay creditors out of their future “disposable income.” See 11 U.S.C. §§ 1306(b), 1321, 1322(a)(1), 1328(a). However, if a trustee of the plan or an unsecured creditor objects, a Chapter 13 plan can be confirmed only if the debtor contributes “all ... projected disposable income” to the plan. 11 U.S.C. § 1325(b)(1)(B). The question presented in this consolidated appeal is whether the income that becomes available after the debtors have fully repaid their 401(k) loans (which is allowed by 11 U.S.C. § 1322(f)) is “projected disposable income” to be paid to the unsecured creditors or whether the income can be used to begin making voluntary contributions to the debtors' 401(k) plans and deemed excludable from both disposable income and property of the estate under 11 U.S.C. § 541(a)(1) and (b)(7).

We hold that 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 § 1325(b)(1)(B) and may not be used to fund voluntary 401(k) plans.

I. Background

On November 20, 2008, Deborah K. Seafort filed a petition for relief under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Kentucky, Case No. 08–22380. On November 24, 2008, Frederick C. Schuler and Carrie Schuler also filed a joint petition for relief under Chapter 13 of the Bankruptcy Code in the same court, Case No. 08–22417. Both Seafort and Frederick Schuler (collectively “Debtors”) ¹ were eligible to participate in their employers' ERISA 401(k) qualified retirement plans.² Debtors were not making any contributions to their employers' 401(k) retirement plans at the time of the filing of their petitions. Both debtors were in the process of repaying a 401(k) loan to their employers' retirement plans. Schuler was repaying his 401(k) loan at the rate of $815.86 per month. Seafort was repaying her loan at the rate of $254.71 per month as of the petition dates.

Both debtors filed proposed Chapter 13 plans which called for a commitment period under 11 U.S.C. § 1325 of five years. Under the Chapter 13 plans Debtors were scheduled to repay their 401(k) loans in full prior to the completion of their commitment periods. Seafort was scheduled to repay her 401(k) loan by month 19. Schuler was scheduled to repay his 401(k) loan by month 48. Neither proposed Chapter 13 plan provided for an increase in plan payments to the Chapter 13 trustee once they had completed repayment of the 401(k) loans. Instead, both plans proposed that Debtors would begin making contributions to their 401(k) retirement plans post-petition after the 401(k) loans were paid in full. In other words, both Debtors proposed to use the income available after repayment of the 401(k) loans was completed to begin funding their retirement accounts, instead of using the freed-up income to pay unsecured creditors.

In both cases, the Chapter 13 trustee, Beverly Burden (“Trustee”), filed objections to confirmation of Debtors' plans of reorganization. Specifically, the Trustee objected to Debtors' attempts to exclude from estate property and projected disposable income proposed post-petition contributions to their 401(k) retirement plans, since Debtors were not contributing anything to their qualified retirement plans when their bankruptcy cases began.

The bankruptcy cases were consolidated to determine whether Debtors could exclude from estate property and projected disposable income post-petition earned income proposed to be used for future 401(k) retirement plan contributions. The Trustee argued that the contributions are only excludable from property of the estate and disposable income if they are being made at the time the petition is filed. The bankruptcy court disagreed, holding that “participation in a 401(k) plan is an ongoing endeavor, and while loan payments may take the place of contributions for the life of the 401(k) loan, the income stream that funds both loan payments and plan contributions is the same.” In re Seafort, Nos. 08–3380 & 08–22417, 2009 WL 1767627, at *2 (Bankr.E.D.Ky.2009). The bankruptcy court held that because § 541(b)(7) excludes contributions to a 401(k) plan from property of the estate and disposable income, Debtors were allowed to exclude their proposed 401(k) contributions from disposable income. Id.

The Trustee appealed the ruling to the Bankruptcy Appellate Panel (“BAP”). A divided BAP ruled in favor of the Trustee. The majority held that (1) exclusions from property of the estate and disposable income for contributions to a qualified retirement plan found in 11 U.S.C. § 541(b)(7) only apply to those cases where a debtor is contributing as of the commencement of a bankruptcy case, and (2) the post-petition income that becomes available after a debtor completes repayment of a 401(k) loan is not excluded from property of the estate or disposable income under 11 U.S.C. § 541(b)(7) and must be committed to a Chapter 13 plan under 11 U.S.C. § 1325(b). In re Seafort, 437 B.R. 204, 208–09, 211–12 (B.A.P. 6th Cir.2010). The dissent would have held that the disposable income does not include any amount withheld as a qualified contribution based upon the plain language of § 541(b)(7). Seafort, 437 B.R. at 217 (Shea–Stonum, J., dissenting).

Debtors appeal.

II. Discussion

A. The Statutory Framework

We start with the language of the relevant statutory provisions. Ransom v. FIA Card Servs. N.A., ––– U.S. ––––, 131 S.Ct. 716, 723–24, 178 L.Ed.2d 603 (2011) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). As noted, if the trustee or an unsecured creditor objects to confirmation of a Chapter 13 plan, “the court may not approve the plan unless ... the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period ... will be applied to make payments to unsecured creditors under the plan.” 11 U.S.C. § 1325(b)(1)(B); see also Hamilton v. Lanning, –––U.S. ––––, 130 S.Ct. 2464, 2469, 177 L.Ed.2d 23 (2010). “Disposable income” is defined in relevant part as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for the maintenance or support of the debtor.” 11 U.S.C. § 1325(b)(2)(A)(i).³ For debtors whose income exceeds the state median, as in this case, the “amounts reasonably necessary to be expended” is determined by the “means test” set forth in § 707(b)(2). See 11 U.S.C. § 1325(b)(3); see also Baud v. Carroll, 634 F.3d 327, 332–34 (6th Cir.2011) (explaining the appropriate method for calculating “amounts reasonably necessary to be expended”) cert. denied, ––– U.S. ––––, 132 S.Ct. 997, 181 L.Ed.2d 732 (Jan. 9, 2012) (No. 10A1008, 11–27), 2012 WL 33293.

“Projected disposable income” is not defined in the Bankruptcy Code, but the Supreme Court recently explained that “when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Lanning, 130 S.Ct. at 2478; Darrohn v. Hildebrand (In re Darrohn), 615 F.3d 470 (6th Cir.2010) (applying Lanning to the debtors' monthly mortgages, an otherwise deductible expense, because they intended to surrender the properties securing the mortgages). Because the Trustee here objected to Debtors' proposed plans, the bankruptcy court appropriately took into account the post-petition income available upon repayment of the 401(k) loans. Thus, we must decide whether that income is “projected disposable income” that must be committed to the Chapter 13 plan and paid out to unsecured creditors or instead is otherwise excluded.

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), both 401(k) loans and 401(k) contributions were considered “disposable income.” See Behlke v. Eisen (In re Behlke), 358 F.3d 429, 435–36 (6th Cir.2004) (holding that voluntary contributions to a 401(k) plan were “disposable income”); Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775, 777–78 (6th Cir.1995) (holding that the debtor's voluntary repayment of 401(k) loans should be treated as disposable income in the bankruptcy estate). However, the BAPCPA added two exclusionary sections of importance here. The first, § 1322(f), is clear: It states in relevant part that “any amounts required to repay such loan shall not constitute ‘disposable income’ under section 1325.” 11 U.S.C. § 1322(f).

The second provision, § 541(b)(7), is less so. See In re Egan, 458 B.R. 836, 842–43 (Bankr.E.D.Pa.2011) (commenting that “like many provisions of the Bankruptcy Code added by BAPCPA, ... the text of § 541(b)(7) [is] less than clear”). It provides as follows:

(b) Property of the estate does not include—

...

(7) any amount—

(A) withheld by an...