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Miner v. Johns

United States District Court, W.D. Louisiana, Shreveport Division

May 23, 2018

DONALD EUGENE MINER, SANDRA RANDOLPH MINER, APPELLANTS
v.
TODD S. JOHNS, TRUSTEE APPELLEE

          MEMORANDUM RULING

          ELIZABETH ERNY FOOTE UNITED STATES DISTRICT JUDGE

         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 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, 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. 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.

         LAW AND ANALYSIS [3]

         I. 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 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 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 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 ...


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