Brian F. Kenney, United States Bankruptcy Judge.
This case comes before the Court on: (a) the Chapter 13 Trustee's Objections to the Debtor's claim of exemptions (Amended Schedule C); and (b) the Chapter 13 Trustee's Objections to the Debtor's Amended Plan. The Court sustains the Trustee's Objections to the Debtor's claim of exemptions and overrules the Trustee's Objections to the Debtor's Amended Plan.
The following facts are not genuinely in dispute:
1. The Debtor filed a Voluntary Petition under Chapter 13 with this Court on December 31, 2015. Docket No. 1. His income is above-median. Docket No. 10 (Official Forms 122C-1, 122C-2).
2. The Debtor filed his initial Chapter 13 Plan on January 14, 2016. Docket No. 11. The Debtor attached a copy of his Schedule I to the Plan, under which he deducted $0.00 for voluntary contributions to a retirement plan, and $338.37 for required repayments on two retirement fund loans. Id. at Schedule I, Lines 5c, 5d.
3. The Debtor's initial Chapter 13 Plan was denied confirmation. Docket No. 20.
4. On March 31, 2016, the Debtor filed an Amended Chapter 13 Plan. Docket No. 22. The Amended Plan called for payments of $1,250.00 per month for 6 months and then $810.00 per month for 54 months, for total plan funding of $51,240.00. Id. at ¶ 1. This, according to the Amended Plan, will result in a distribution to unsecured creditors of approximately 13% of their allowed claims. Id. at ¶ 4.
5. At the same time, the Debtor filed Amended Schedules B and C. Docket No. 23. In his Amended Schedule B, the Debtor identified $804.00 in "future income from 1/21/2016-5/11/2016 from a retirement loan being paid off on 1/20/2016." Id. at Amended Schedule B, ¶ 16. In his Amended Schedule C, the Debtor claimed this $804.00 as exempt pursuant to Va. Code § 34-4, Virginia's wildcard exemption statute. Id. at Schedule C, ¶ 2; see also Va.Code Ann. § 34-4 (West 2016).
6. One of the Debtor's retirement fund loans was paid in full in January 2016. Accordingly, the Debtor attached an Amended Schedule I to his Amended Plan, under which the Debtor indicated that he
7. The Trustee filed an Objection to confirmation of the Debtor's Amended Chapter 13 Plan, on the grounds of good faith and disposable income. Docket No. 24.
8. The Trustee also filed an Objection to the Debtor's Amended Schedule C. Docket No. 25.
9. The Court held a hearing on May 12, 2016. At the hearing, Debtor's counsel argued that the Debtor was entitled to exempt the income represented by the savings in not having to pay his retirement fund loan under either Va.Code § 34-29 (which allows an exemption from garnishment of 75% of wages for non-support debts) or Va.Code § 34-4 (the wildcard exemption, which allows an exemption of up to $5,000 in value — $10,000 for those over 65 — plus $500 for each dependent). See Va.Code Ann. § 34-29 (West 2016); Va.Code Ann. § 34-4 (West 2016).
10. Debtor's counsel represented to the Court that the Debtor's employer refused to allow him to make voluntary contributions to his retirement plan because he had taken out two hardship loans under the same plan. Debtor's counsel also represented that the proposed $268.62 per month in voluntary contributions were about one-third of what the Debtor legally would be entitled to contribute to his retirement plan, outside of bankruptcy. These representations were not challenged by the Chapter 13 Trustee, and the Court accepts them.
11. The Court ruled from the bench that it would sustain the Trustee's Objection to the Debtor's claim of exemption under Va.Code § 34-29, on the ground that such a claim of exemption was inconsistent with Bankruptcy Code § 1306(a)(2), which defines property of the estate to include "earnings from services performed by the debtor after the commencement of the case." 11 U.S.C. § 1306; Docket No. 29 (Order Sustaining Trustee's Objection in Part). The Court took under advisement: (a) the Trustee's Objection to the Debtor's claim of exemption under Va. Code § 34-4; and (b) the Trustee's Objection to confirmation of the Debtor's Amended Plan. Id.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference entered by the District Court for this District on August 15, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(B) ("allowance or disallowance of ... exemptions from property of the estate"), and (L) (confirmation of plans).
Section 1306(a)(2) provides that property of the estate includes, in addition to the property specified in Section 541, "earnings from services performed by the debtor after the commencement of the case..." 11 U.S.C. § 1306(a)(2). Section 1325(b) of the Code requires that, if the trustee or the holder of an allowed unsecured claim objects, the Debtor must either
The Trustee argues that the Debtor's claim of exemption under Va.Code § 34-4 cannot be allowed because the Debtor had not yet earned the income as of the date of the petition. This, however, is not a bar to a claim of exemptions. In re Walz, 546 B.R. 836, 840 (Bankr.D.Minn. 2016) (allowing exemption in post-petition inheritance; "the Code does not limit exemptions to property owned by the debtor as of the petition date"); In re Walley, 525 B.R. 320, 325 (Bankr.E.D.Va.2015) ("There is nothing in the language of §§ 1306 or 541 to suggest that Congress intended to limit an individual's exemptions to only that property of the estate owned at the commencement of the case and to deny the debtor the opportunity to assert any remaining allowed exemptions in property of the estate acquired after the bankruptcy filing.")
Rather, the Debtor's claim of exemption cannot be allowed under Va.Code § 34-4 for the same reason that the Court denied the Debtor's claim of exemption under Va.Code § 34-29 — a claim of exemption in post-petition wages is fundamentally inconsistent with the structure of Chapter 13, which requires a debtor to devote all of his or her disposable income to the Chapter 13 Plan, subject only to certain statutory exceptions. See Mort Ranta v. Gorman, 721 F.3d 241, 250-51 (4th Cir.2013) (recognizing statutory exemption for social security benefits under 11 U.S.C. § 101(10A)).
Any claim of exemption for post-petition wages — whether under the Virginia wage exemption statute (Va.Code § 34-29) or under the Virginia wildcard exemption statute (Va.Code § 34-4) — is fundamentally inconsistent with the requirement that the debtor devote all of his or her disposable income to the Chapter 13 plan. See Perez v. Campbell, 402 U.S. 637, 652, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971) (the "controlling principle" is that "any state legislation which frustrates the full effectiveness of federal law is rendered invalid by the Supremacy Clause.")
The Court will sustain the Trustee's Objection to the Debtor's Amended Schedule C insofar as the Debtor claims an exemption in his post-petition wages.
The second question presented is whether the Debtor is entitled to make voluntary contributions to his retirement plan, now that he has completed the payments on one of his retirement plan loans, where the voluntary contributions will be in the same monthly amount as his former loan payments. More specifically, the questions are: (a) whether the Debtor's voluntary retirement contributions may be deducted from his disposable income for purposes of the disposable income test under Bankruptcy Code Section 1325(b); and (b) whether such deductions are made in good faith. The Court concludes that Section 541(b)(7) of the Code allows the Debtor to deduct voluntary retirement plan contributions from his disposable income, and that the Debtor is proceeding in good faith.
Section 541 of the Bankruptcy Code defines property of the estate for all Chapters. In addition, under Chapter 13 unlike in Chapter 7, the Debtor's post-petition wages and compensation are included in property of the estate. 11 U.S.C. § 1306(a)(2) ("Property of the estate includes, in addition to the property specified in section 541 of this title ...") As stated by the Fourth Circuit:
Carroll v. Logan, 735 F.3d 147, 150 (4th Cir.2013).
Bankruptcy Code Section 1325(b) requires that the debtor either pay all unsecured claims in full or devote all of his or her disposable income to the plan. Section 1325(b)(3) requires, for above-median debtors, that the Court look to the means test of Section 707(b). 11 U.S.C. § 1325(b)(3). Section 707(b), in turn refers to the debtor's "current monthly income," which is a defined term in the Code. 11 U.S.C. § 707(b). Section 101(10A) defines "current
In 2005, Congress added to the Code two provisions of relevance here. First, Congress enacted Section 1322(f), which excludes from the disposable income calculus any amounts required to pay loans to a qualified retirement plan. 11 U.S.C. § 1322(f). The Trustee does not contest that any retirement plan loan repayments that the Debtor is required to make post-petition are excluded from the calculation of the Debtor's monthly disposable income.
Second, Congress added Section 541(b)(7), which excludes from property of the estate:
11 U.S.C. § 541(b)(7) (emphasis added). The "except that" portions of the statute, untethered to the language that precedes them, together have become known as the "hanging paragraph" of Section 541(b)(7).
The means test form (Official Form 122C-2) contains a line for "Involuntary deductions," defined as "[t]he total monthly payroll deductions that your job requires, such as retirement contributions, union dues and uniform costs." Chapter
Further, Line 41 of the Form states, in calculating the debtor's "monthly disposable income" for purposes of Section 1325(b)(2), the debtor is to deduct the following amounts from the debtor's "current monthly income" to arrive at the debtor's "monthly disposable income":
Id. at Line 41.
The issue of voluntary retirement contributions has been the subject of some debate in the case law in recent years. There are essentially three divergent lines of cases. The first line of cases holds that the debtor is not entitled to any deduction for voluntary retirement contributions, whether or not he or she was making voluntary retirement contributions pre-petition. In re Seafort, 669 F.3d 662, 674-75 (6th Cir.2012); In re McCullers, 451 B.R. 498, 503-05 (Bankr.N.D.Cal.2011); In re Prigge, 441 B.R. 667, 672-78 (Bankr. D.Mont.2010). The second view, that voluntary retirement contributions may be continued post-petition as long as they are consistent with the debtor's pre-petition history of contributions, is represented by the Sixth Circuit Bankruptcy Appellate Panel's decision in In re Seafort, 437 B.R. 204 (6th Cir. B.A.P. 2010), aff'd, 669 F.3d 662 (6th Cir.2012). The third line of cases, which is the majority view, concludes that Section 541(b)(7) allows the deduction, whether or not the debtor was making voluntary contributions prior to the bankruptcy filing, but subject to a determination of the debtor's good faith. In re Vanlandingham, 516 B.R. 628 (Bankr. D.Kan.2014); In re Johnson, 346 B.R. 256, 263 (Bankr.S.D.Ga.2006). The Court reviews each line of cases, below.
The first line of cases, represented by Seafort, McCullers and Prigge, holds that debtors may not make post-petition voluntary contributions to their retirement plans. This line of cases is in the minority. In the Prigge case, the debtor, who was above-median, was a participant in his employer's voluntary retirement plan and was making contributions of $1,181.08 per month (reduced to $900.00 per month after he filed for bankruptcy). In re Prigge, 441 B.R. at 670-71. The Prigge opinion, authored by Bankruptcy Judge Kirscher, relies on the fact that voluntary retirement contributions are not excluded from the debtor's disposable monthly income in the text of either Section 1325(b) or Section 707(b)(2). Id. at 677. The Prigge court stated in a footnote that Section 541(b)(7)'s exclusion of pension contributions from property of the estate "seems intended to protect amounts withheld by employers from employees that are in the employer's hands at the time of filing of bankruptcy, prior to remission of the funds to the plan." Id. at 677, n. 5 (quoting 5 COLLIER ON BANKRUPTCY ¶ 541.22C[1] (15th ed. rev.))
Judge Kirscher's views in Prigge later came before the 9th Circuit Bankruptcy Appellate Panel in In re Parks, 475 B.R. 703 (9th Cir. B.A.P.2012). In Parks, as in Prigge, the debtors were making voluntary retirement contributions, pre-petition. Id. at 705. The Chapter 13 Trustee objected, and Judge Kirscher sustained the Trustee's objection, relying on his previous decision
Id. at 709; see also In re McCullers, 451 B.R. at 505 ("In using the words `except that,' Congress suggests that its only purpose was to negate any inference that the exclusion of such contributions from property of the estate gives rise to income to the debtor.")
The Seafort case is the only Court of Appeals decision to address the issue. Seafort actually involved two cases, those of Ms. Seafort and the Shulers. The facts in Seafort mirror more accurately the facts in this case because, in Seafort, the debtors were repaying pension plan loans and as a result were not making voluntary pre-petition contributions to their pension plans. In re Seafort, 669 F.3d at 663-64. Once the loans were repaid, however, the debtors sought to apply that income to post-petition voluntary contributions. Id. The Sixth Circuit agreed with the views expressed in Prigge and McCullers, that "Congress intended to exclude from disposable income and projected disposable income available for unsecured creditors only voluntary retirement contributions already in existence at the time the petition is filed." Id. at 674. The Trustee in the case conceded that "if a debtor is making voluntary retirement contributions when the bankruptcy petition is filed, such continuing contributions may be excluded from disposable income." Id. at 674, n. 7. The Sixth Circuit, however, stated that it did not agree with this assertion for the reasons stated in Prigge, but that it did not reach the issue because the issue was not before it. Id.
The Sixth Circuit Bankruptcy Appellate Panel's decision in Seafort held that debtors may continue to make voluntary contributions to their retirement plans if the debtor was making contributions in comparable amounts pre-petition. 437 B.R. at 209-10. Like the Sixth Circuit, the B.A.P. placed significance on the placement of the exclusion from disposable income in the Code. Id. at 209 ("Because Congress identified 401(k) contributions as excluded in § 541, but not in § 1306, the Panel concludes that the absence of any reference in § 1306 to 401(k) contributions was intentional.")
After consideration of the competing policy concerns — BAPCPA's desire "to ensure debtors repay creditors the maximum they can afford," versus Congress's encouragement of retirement savings for all Americans — the B.A.P. reached the following conclusion:
437 B.R. at 210.
One judge dissented from the B.A.P's decision, describing the majority's decision as "harsh and uneven." 437 B.R. at 216 (Shea-Stonum, M., dissenting). Judge Shea-Stonum argued that the majority's ruling discriminated in favor of higher-income debtors and against lower-income debtors because the former category are more likely to have made contributions consistently, pre-petition. Id. at 222-23. Judge Shea-Stonum also noted that the rule allowing post-petition contributions is subject to a good faith inquiry. Id. at 223 ("A debtor's proposal to increase or to begin Qualified Contributions post-petition is one of many circumstances that may be considered by a court in assessing the debtor's good faith.")
A number of courts have adopted the Sixth Circuit B.A.P.'s test for voluntary contributions. In re Read, 515 B.R. 586 (Bankr.E.D.Wis.2014); In re Jensen, 496 B.R. 615, 621 (Bankr. D. Utah 2013) ("The Court agrees with the reasoning of the Sixth Circuit Bankruptcy Appellate Panel and concludes that voluntary retirement contributions being made as of the date of the petition do not constitute disposable income and debtors may continue making those contributions during the life of the plan"); In re Noll, No. 10-35209-svk, 2010 WL 5336916, at *1 (Bankr.E.D.Wis. Dec. 21, 2010).
In Johnson, the court was faced with a good faith objection from the Trustee. 346 B.R. at 256. The court unequivocally held: "So long as a debtor's contributions are within the limits permitted by the EPB [Employee Benefit Plan] `any amount' of this contribution is exempted from disposable income." Id. at 263.
In Vanlandingham, the Debtor deducted voluntary monthly 401-K contributions in the amount of $151.67 on her means test form, contributions that she was not making pre-petition and only started after she filed for bankruptcy. 516 B.R. at 630. The court noted that Section 541(b)(7)'s hanging paragraph (which it described as "oddly worded" and "awkward") does not distinguish between pre-petition contributions and post-petition contributions. 516 B.R. at 635. The court further stated:
Id. at 636.
The Vanlandingham court held that the Johnson view is also "consistent with the
The Vanlandingham court also mentioned the requirement of good faith, in stating: "when an `abusive case' presents itself, the trustee and unsecured creditors are well-armed with the ability to object to confirmation for lack of good faith under § 1325(a)(3)." In re Vanlandingham, 516 B.R. at 638.
More recently, the Bankruptcy Court for the District of Massachusetts issued its opinion on post-petition retirement contributions in In re Drapeau, 485 B.R. 29 (Bankr.D.Mass.2013). The Drapeau opinion agreed with the Johnson view. In its opinion, the Drapeau court rejected reliance on the placement of Section 541(b)(7) outside of Chapter 13:
485 B.R. at 36 (emphasis in original). The Drapeau court also alluded to the good faith of the debtor, but held that where the debtor's ability to make voluntary contributions was interrupted by circumstances beyond the debtor's control ("e.g., a limited period in which a debtor could not contribute on account of a hardship withdrawal"), the court found that the debtor was proceeding in good faith. Id. at 38-39.
The Trustee in this case urges the Court to adopt the middle ground of the Sixth Circuit B.A.P.'s opinion in Seafort, limiting contributions to those consistently made by the debtor pre-petition. The Court, however, adopts the Johnson view, for the simple reason that Section 541(b)(7) does not limit the debtor's ability to make contributions post-petition, nor is there any distinction between pre-petition contributions and post-petition contributions in the statute. There is nothing in the text of Section 541(b)(7) from which the Court can conclude that Congress intended any such distinctions. Indeed, the use of the term "any amount," without limitation, followed by the term "contributions" compels the conclusion that Congress meant no such distinction. See 11 U.S.C. § 541(b)(7)(A)-(B).
In the Court's view, the absolutist position represented by Prigge and the Sixth Circuit's opinion in Seafort places an unwarranted emphasis on the placement of
Further, by the time that Section 541(b)(7) was enacted in 2005, the Supreme Court had already decided that qualified retirement funds were not property of the estate under Bankruptcy Code Section 541(c)(2). Patterson v. Shumate, 504 U.S. 753, 756-66, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992). Congress's intent in enacting Section 541(b)(7) was to expand upon the protections already in place at the time. See H.R. Rep. 109-31(1), at 63-64 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 132-33 ("Sec. 224: Protection of Retirement Savings in Bankruptcy. The intent of section 224 is to expand the protection for tax-favored retirement plans or arrangements that may not be already protected under Bankruptcy Code section 541(c)(2) pursuant to Patterson v. Shumate, or other state or Federal law.") (emphasis added). Under Prigge and the Sixth Circuit's opinion in Seafort, the enactment of Section 541(b)(7) in 2005 would have been redundant for pre-petition contributions, given 541(c)(2) and Patterson v. Shumate,
The Court similarly rejects the middle ground represented by the Sixth Circuit B.A.P.'s opinion in Seafort. First, the B.A.P. relied heavily on the placement of the exclusion in Section 541(b)(7), like Prigge and the Sixth Circuit itself. See In re Seafort, 437 B.R. at 209 ("Because Congress identified 401(k) contributions as excluded in § 541, but not in § 1306, the Panel concludes that the absence of any reference in § 1306 to 401(k) contributions was intentional.") As noted above, however, "as excluded income, the contributions were never included in disposable income in the first instance." In re Vanlandingham, 516 B.R. at 636 (emphasis in original).
The Sixth Circuit B.A.P. also placed reliance on the fact that under Section 541 property of the estate is determined at the outset of the case. In re Seafort, 437 B.R. at 209 ("401(k) contributions are only excluded in § 541 which specifically applies to property in existence at the commencement of the case.") This view however, simply reads the exclusion of the hanging paragraph of Section 541(b)(7) ("any amount ... shall not constitute disposable income as defined in section 1325(b)(2)"),
The Sixth Circuit B.A.P.'s requirement that post-petition contributions be comparable to the debtor's historic, pre-petition contributions appears to be grounded more in policy concerns than in the text of Section 541(b)(7). In the end, the Johnson line of cases hews the closest to the statutory text and Congress's intended purpose in enacting Section 541(b)(7) in 2005. The Court, therefore, overrules the Trustee's disposable income objection.
Finally, good faith is an independent requirement for confirmation of a Chapter 13 plan. 11 U.S.C. § 1325(a)(3). The Court agrees with the Johnson and Drapeau opinions that the debtor's good faith must be considered. In re Johnson, 346 B.R. at 260-61; In re Drapeau, 485 B.R. at 38-39. The Court cannot conclude, however, that the Debtor is proceeding in anything other than good faith here. As in Drapeau, the Debtor was locked out of making voluntary contributions to his retirement plan on account of the hardship loans that he had taken out pre-petition. In re Drapeau, 485 B.R. at 31. The Debtor's proposed contribution of $268.62 per month is well within ERISA limits for employee contributions. See Retirement Topics-401(k) and Profit Sharing Plan Contribution Limits, IRS (Oct. 26, 2015), https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits ("The limit on employee elective deferrals ... is: $18,000 in 2015 and 2016"); see also Annual Limit on Elective Deferrals, Federal Retirement Thrift Investment Board (December 2015), https://www.tsp.gov/PDF/formspubs/oc91-13.pdf. The Debtor has no other pension benefits available to him.
The Court finds that the Debtor is proceeding in good faith, and overrules the Chapter 13 Trustee's good faith objection.
For the foregoing reasons:
A. The Trustee's Objections to the Debtor's claim of exemptions under Va. Code §§ 34-4 and 34-29 are sustained. The Trustee will submit an Order within 10 days sustaining the Objection.
B. The Trustee's Objections to the Debtor's Plan on disposable income and good faith grounds are overruled.
C. The Court will set a status hearing in this matter for
