Education Assistance Corp. v. Zellner

• Decision Date: 03 September 1987
• Docket Number: No. 86-2226,86-2226
• Parties: 17 Collier Bankr.Cas.2d 867, 16 Bankr.Ct.Dec. 802, Bankr. L. Rep. P 71,979 EDUCATION ASSISTANCE CORPORATION, Appellant, v. William Wesley ZELLNER, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1222

827 F.2d 1222

17 Collier Bankr.Cas.2d 867, 16 Bankr.Ct.Dec. 802,

Bankr. L. Rep. P 71,979

EDUCATION ASSISTANCE CORPORATION, Appellant, v. William Wesley ZELLNER, Appellee.

No. 86-2226.

United States Court of Appeals Eighth Circuit.

Submitted May 13, 1987.

Decided Sept. 3, 1987.

Jeffrey T. Sveen, Aberdeen, S.D., for appellant.

William Wesley Zellner, pro se.

Before ARNOLD and JOHN R. GIBSON, Circuit Judges, and WRIGHT, ^* Senior Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

The bankruptcy court confirmed a Chapter 13 reorganization plan discharging William Zellner's student loans. The district court ¹ affirmed the bankruptcy court's decision, and Zellner's creditor, Education Assistance Corporation (EAC), now appeals. Zellner, now an assistant sociology professor, obtained a $7,500 loan from the South Dakota Assistance Corporation to finance his PhD program. EAC guaranteed the loan. The loan provided for 113 monthly payments of $93 and one final $170.55 payment, for a total of $10,679.55. Zellner was unable to make the first payment, which came due on February 1, 1983, but he did make two $20 payments. In August 1983, he filed a Chapter 7 bankruptcy petition. Student loans, however, are not dischargeable under this chapter without a showing of hardship, see 11 U.S.C. Sec. 523(a)(8)(B) (1982 & Supp. III 1985), which Zellner, filing pro se, did not attempt to make. In October 1984, EAC obtained a judgment against Zellner in South Dakota and in May 1985 registered it in Nebraska.

On March 4, 1985, Zellner proceeded under Chapter 13 of the Bankruptcy Code, listing his debt to EAC along with another student loan and a car loan. He filed a plan at the time he initiated the Chapter 13 proceedings and amended it on June 5, 1985. The plan proposes sixty monthly payments of $193.13 to be divided pro rata among the creditors. EAC will receive $7,404.60, seventy-one percent of Zellner's total payment under the plan. This will amount to approximately eighty-one percent of EAC's allowed claim of $9,176.33. After a hearing before the bankruptcy judge, the amended plan was confirmed. EAC appealed to the district court arguing that: (1) the plan does not pass muster under the "best interests of creditors" test of 11 U.S.C. Sec. 1325(a)(4) (1982), (2) the debt is a long-term debt and is therefore nondischargeable, (3) the plan does not include all of Zellner's projected disposable income for the plan's three-year period, and (4) the plan was not proposed in good faith. The district court rejected these arguments and affirmed the decision of the bankruptcy court. On review, we examine the bankruptcy court's factual findings using a "clearly erroneous" standard, and we examine its legal conclusions de novo. Wegner v. Grunewaldt, 821 F.2d 1317, 1320, (8th Cir.1987); In re Martin, 761 F.2d 472, 474 (8th Cir.1985). We affirm the judgment of the district court.

I.

Under the "best interests of creditors" test of Chapter 13, a plan should not be confirmed if the property to be distributed under the plan is less than the amount each allowed unsecured creditor would be paid if the debtor's estate were liquidated under Chapter 7. 11 U.S.C. Sec. 1325(a)(4). EAC argues that because a student loan is not dischargeable under Chapter 7, EAC would have been entitled to payment in full, thus, the loan should not be discharged under Chapter 13.

The simple fact that a loan that is nondischargeable under Chapter 7 does not make it nondischargeable under Chapter 13. The district court correctly rejected this argument. See In re Estus, 695 F.2d 311, 314 n. 5 (8th Cir.1982); In re Johnson, 787 F.2d 1179, 1181 (7th Cir.1986); In re Kitchens, 702 F.2d 885, 887 n. 2 (11th Cir.1983); In re Akin, 54 B.R. 700, 702 (Bkrtcy.D.Neb.1985). The relevant issue is whether a creditor would in fact receive more in a Chapter 7 liquidation than it will under the proposed Chapter 13 plan. To determine this, the bankruptcy court must value the estate property, taking into account those assets that would be beyond the reach of the creditors in a Chapter 7 liquidation. If any creditor would receive more in a liquidation, the plan may not be confirmed. Thus, even if the loan could not have been discharged under Chapter 7, that does not mean that EAC would actually have been paid in a liquidation. If a debtor has little or no non-exempt assets in his estate, liquidation under Chapter 7 does not put the creditor in any better position--and often in a worse position--than if the creditor were to receive less than one hundred percent repayment under a Chapter 13 plan.

The bankruptcy court found that had the estate been liquidated as of the filing of the petition EAC would not have received any funds. The bankruptcy court erred, however, by failing to include Zellner's interest in the Doane College Retirement Fund as property of the estate in making its valuation. While working at Doane College, Zellner had $95 per month deducted from his pay as a voluntary contribution to his retirement fund. When he left Doane College, he received a lump-sum payment of $6000 from this fund, which he immediately transferred into an IRA. The bankruptcy court did not consider the amount in the retirement fund to be relevant to its valuation of the estate until the date on which Zellner actually received the money. Then, citing 11 U.S.C. Sec. 541(a)(5) (1982 & Supp. III 1985), the court concluded that since Zellner received the money more than 180 days after he filed his Chapter 13 petition, the money could not be considered property of the estate for valuation purposes.

To determine what is estate property, Chapter 13 adopts the Chapter 5 definition in 11 U.S.C. Sec. 541, but also includes property acquired during the pendency of the Chapter 13 case. See 11 U.S.C. Sec. 1306(a)(1); McLean v. Central States, S.E. & S.W. Areas Pension Fund, 762 F.2d 1204, 1206 (4th Cir.1985); 5 Collier on Bankruptcy p 1306.01[A] (15th ed. 1987). Under section 541, a debtor's interest in a retirement fund should be considered estate property, then exempted if it qualifies as a "spendthrift trust" under relevant state law. See In re Graham, 726 F.2d 1268, 1270-72 (8th Cir.1984); cf. In re Goff, 706 F.2d 574, 581-82 (5th Cir.1983) (only spendthrift trusts that are beyond the reach of creditors under state law are excluded from the estate). Thus, in order to decide whether the property would be exempt in a Chapter 7 liquidation, the bankruptcy court must determine whether the beneficial interest in the fund is subject to a restraint on alienation such that it could not be reached by the beneficiary's creditors under non-bankruptcy law. See McLean, 762 F.2d at 1206-07; 2 A. Scott, The Law of Trusts Sec. 151 (3d ed. 1967) (defining "spendthrift trust"). There is insufficient evidence in the record for the bankruptcy court to have made such a determination regarding Zellner's retirement fund.

Even if we could conclude that Zellner's interest in the retirement fund was exempt property before he received the $6,000 in 1985, ² once Zellner received the money and transferred it into an IRA it clearly became non-exempt property of the estate. An IRA, which may be revoked by the debtor at any time subject only to a tax penalty, permits the debtor to retain considerable control over the funds and is therefore not a spendthrift trust. Whether Zellner had access to the funds until more than 180 days after filing the petition is irrelevant; the definition of "property of the estate" in section 1306 includes the kinds of property specified in section 541, but also includes postpetition property acquired by the debtor. See 11 U.S.C. Sec. 1306(a)(1) (1982). Thus:

The date of the valuation of the property to be distributed under the plan, as well as the date as of which the conceptualized chapter 7 liquidation is to have taken place, are one and the same; both relate to the effective date of the plan ..... Of course, the effective date of the plan cannot be antecedent to the confirmation hearing at which the issues raised by section 1325(a)(4) are to be heard by the court.

5 Collier on Bankruptcy p 1325.05[a] (footnotes omitted).

Despite the bankruptcy court's failure to include the $6,000 in its section 1325(a)(4) valuation of the bankruptcy estate, we conclude that the result was harmless error. Since a debtor need not surrender his estate property when he files for bankruptcy under Chapter 13, see 11 U.S.C. Sec. 1306(b) (1982). including the $6,000 as part of the estate is helpful to EAC's argument only if it means that EAC would receive more money in a Chapter 7 liquidation than it will receive from the series of payments provided for in the Chapter 13 plan. ³ EAC has provided no evidence to this court or the district court to establish that it would have received a greater amount had it received its pro rata share of the $6,000. Furthermore, our comparison of the two amounts indicates that EAC would have received less in a Chapter 7 liquidation. ⁴ Since the bankruptcy court's error had no effect on the application of the best interests of creditors test, EAC suffered no prejudice by the ruling. Thus, we conclude that the error was harmless. See McDonough Power Equipment, Inc. v. Greenwood, 464 U.S. 548, 553-54, 104 S.Ct. 845, 848-49, 78 L.Ed.2d 663 (1984).

II.

EAC next argues that the debt is a long-term debt under 11 U.S.C. Sec. 1322(b)(5) (1982) and that such debts are excepted from a section 1328 discharge. ⁵ Section 1322(b)(5) permits a Chapter 13 plan to provide for curing any default on a debt that has its last payment due after the due date of the final payment under the plan by allowing the debtor to extend the length of the repayment period beyond the amount of time allowed under a Chapter 13 plan. A debtor may, but is not required to, provide for his long-term debts by using this provision. Zellner's plan did not provide for curing a default on his student loan, but instead provided for a...