Davis v. Helbling (In re Davis)

• Citation: 960 F.3d 346
• Decision Date: 01 June 2020
• Docket Number: No. 19-3117,19-3117
• Parties: IN RE: Camille T. DAVIS, Debtor. Camille T. Davis, Appellant, v. Lauren A. Helbling, Chapter 13 Trustee, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

960 F.3d 346

IN RE: Camille T. DAVIS, Debtor.Camille T. Davis, Appellant,

v.Lauren A. Helbling, Chapter 13 Trustee, Appellee.

No. 19-3117

United States Court of Appeals, Sixth Circuit.

Argued: August 8, 2019

Decided and Filed: June 1, 2020

OPINION

LARSEN, Circuit Judge.

Camille Davis filed for bankruptcy. Chapter 13 of the Bankruptcy Code allows her to satisfy her unsecured debts by paying all of her "projected disposable income" to her unsecured creditors over a five-year period. Davis believes that the wages she contributes to her employer-sponsored retirement plan are not considered disposable income under the Code. The bankruptcy court disagreed. Because we conclude that the statutory text is best read to exclude voluntary retirement contributions from disposable income, we VACATE the bankruptcy court's order and REMAND for further proceedings.

I.

In 2017, Davis filed a petition for relief under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Ohio. She had more than $200,000 in debt and fewer than $39,000 in assets. The vast majority of Davis's debt—more than $189,000—was unsecured. Unsecured creditors lack recourse to any interest in collateralized property. See 11 U.S.C. § 506(a). Chapter 13 allows Davis to satisfy her unsecured debts by paying all her disposable income to her unsecured creditors during a sixty-month commitment period. See id. §§ 1321–1328.

Davis proposed a bankruptcy plan that would pay her unsecured creditors a total of $19,380—equal to sixty monthly payments of $323. To obtain court approval, her plan needed to provide for payment of all her "projected disposable income" to her unsecured creditors. Id. § 1325(b)(1). Davis believed that $323 represented her monthly disposable income. Although she reported gross monthly income of $5,627, she claimed $5,304 in allowable monthly expenses. One of those claimed expenses was a monthly retirement contribution. Long before her bankruptcy, Davis had authorized her employer to withhold $220.66 from her monthly wages as contributions to a 401(k) retirement plan.¹ Davis sought to continue those contributions during her bankruptcy.

The Trustee objected to Davis's plan. The Trustee contended that wages withheld as voluntary 401(k) contributions are considered disposable income under the Code; as a result, Davis's proposed plan would not pay all her projected disposable income to her unsecured creditors. The bankruptcy court sustained the Trustee's objection. In doing so, the court noted that it felt bound by dictum found in this court's decision in Seafort v. Burden (In re Seafort ), 669 F.3d 662, 674 n.7 (6th Cir. 2012), which suggested that the Code always counts voluntary retirement contributions as disposable income, even if the debtor began making those contributions prior to bankruptcy. The bankruptcy court elaborated:

While I don't necessarily agree with the Seafor [t ] analysis, it is the analysis of the Sixth Circuit. I agree with [Davis's] attorney that it is dicta, but ... it's a very strong direction from the Sixth Circuit .... So what I've done in the six years or so since the Seafor [t ] case came out is to say I'm going to follow [it] ... until someone tells me that it's no longer the law of the circuit. And I'm happy if a party wants to take the issue up to certify it for direct appeal to the circuit.

Transcript of Confirmation Hearing at 4–6, In re Davis , No. 17-12965 (Bankr. N.D. Ohio May 24, 2018) As a result of the bankruptcy court's decision, Davis filed an amended bankruptcy plan that would pay her unsecured creditors $519 each month. The increase reflected, in part, the addition of Davis's monthly 401(k) contributions to her disposable-income calculation. Davis then objected to her own plan, preserving the disposable income issue for appellate review. See Lindsey v. Pinnacle Nat'l Bank (In re Lindsey ), 726 F.3d 857, 860 (6th Cir. 2013) (noting that a debtor can "appeal a confirmed plan with which [s]he disagrees"). The bankruptcy court confirmed the amended plan over Davis's objection. Davis then obtained a certification from the bankruptcy court authorizing a direct appeal to this court. This appeal followed.

II.

We begin with the legal background. Section 1325(b)(1) of the Code provides that, upon objection, a bankruptcy plan cannot be approved "unless ... [it] 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." 11 U.S.C. § 1325(b)(1)(B). Section 1325(b)(2) defines "disposable income" as the debtor's "current monthly income ... less amounts reasonably necessary to be expended ... for the maintenance or support of the debtor." Id. § 1325(b)(2)(A)(i). For debtors with above-median income, like Davis, the "amounts reasonably necessary to be expended" are determined by the National and Local Standards promulgated by the IRS. See id. § 1325(b)(3). "Projected disposable income," as used in § 1325(b)(1), is not defined anywhere in the Bankruptcy Code. But the Supreme Court has held that it is simply the debtor's disposable income, under § 1325(b)(2), adjusted for any "changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation." Hamilton v. Lanning , 560 U.S. 505, 524, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010).

Determining a debtor's "projected disposable income" under § 1325(b)(1) is therefore a two-step process. See id. at 519, 524, 130 S.Ct. 2464. First, the debtor's current "disposable income" is determined by the formula prescribed in § 1325(b)(2). Id. at 519, 130 S.Ct. 2464. Second, in certain circumstances, that sum is adjusted for changes "known or virtually certain" to occur during the commitment period. Id. When a debtor expects no changes in financial circumstances, as "in most cases," her "projected disposable income" under § 1325(b)(1) is simply her "disposable income" as defined in § 1235(b)(2). Id.

Before 2005, the "overwhelming consensus" among bankruptcy courts was that wages voluntarily withheld as 401(k) contributions formed part of a debtor's disposable income. In re Johnson , 241 B.R. 394, 399 (Bankr. E.D. Tex. 1999) ; see, e.g. , In re Austin , 299 B.R. 482, 486–87 (Bankr. E.D. Tenn. 2003) ; In re Keating , 298 B.R. 104, 110 (Bankr. E.D. Mich. 2003) ; In re Regan , 269 B.R. 693, 696–97 (Bankr. W.D. Mo. 2001) ; In re Merrill , 255 B.R. 320, 323–24 (Bankr. D. Or. 2000) ; In re Cox , 249 B.R. 29, 32 (Bankr. N.D. Fla. 2000) ; In re Cohen , 246 B.R. 658, 666–67 (Bankr. D. Colo. 2000) ; In re Hansen , 244 B.R. 799, 802 (Bankr. N.D. Ill. 2000) ; see also Anes v. Dehart (In re Anes ), 195 F.3d 177, 180–81 (3d Cir. 1999) ; Harshbarger v. Pees (In re Harshbarger ), 66 F.3d 775, 777 (6th Cir. 1995).

In 2005, however, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23. BAPCPA amended the Bankruptcy Code and added 11 U.S.C. § 541(b)(7). In relevant part, § 541(b)(7)(A) provides:

(b) Property of the estate does not include—

(7) any amount—

(A) withheld by an employer from the wages of employees for payment as contributions—

(i) to—

(I) [a 401(k) retirement plan]

except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2) .

11 U.S.C. § 541(b)(7)(A) (emphasis added). The emphasized portion is known as the "hanging paragraph." Its meaning has led to considerable disagreement among courts and litigants nationwide. Here, Davis argues that the hanging paragraph excludes 401(k) contributions from disposable income for purposes of § 1325(b)(2).

Most courts agree with Davis. See RESFL FIVE, LLC v. Ulysse , No. 16-CV-62900, 2017 WL 4348897, at *6 (S.D. Fla. Sept. 29, 2017) (collecting cases). The leading decision is Baxter v. Johnson (In re Johnson ), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006). There, the court concluded that the hanging paragraph "plainly state[s] that [401(k) ] contributions ‘shall not constitute disposable income.’ " Id. (quoting 11 U.S.C. § 541(b)(7) ). In its view, BAPCPA "placed retirement contributions outside the purview of a Chapter 13 plan." Id. Thus, Johnson held that a debtor's disposable income does not include the wages she contributes to her 401(k) plan—whether or not those contributions began prior to bankruptcy. Id.

Without deciding the precise question before us today, this court squarely rejected Johnson ’s reasoning in Seafort , 669 F.3d at 674. The debtor in Seafort was in the midst of repaying a 401(k) loan. Id. Payments made toward 401(k) loans are explicitly excluded from disposable income under 11 U.S.C. § 1322(f). But the debtor was scheduled to finish repaying her 401(k) loan during the commitment period, and she wished to use that newly available income to begin making 401(k) contributions. Id. We rejected her claim, concluding that "the Johnson line of cases [was] not persuasive." Id. at 673. Instead, we held that "post-petition income that becomes available to debtors after their 401(k) loans are fully repaid is ‘projected disposable income’ " under § 1325(b)(1). Id. at 663.

Seafort also opined, in dictum, on the circumstances present here. The trustee in Seafort had conceded that if the debtor had regularly made 401(k) contributions prior to filing her petition, she could have excluded those wages from her projected disposable income. See id. at 674 n.7. This court disagreed, endorsing a competing interpretation of the hanging paragraph adopted by In re Prigge , 441 B.R. 667 (Bankr. D. Mont. 2010), which held that a Chapter 13 debtor may never deduct "voluntary post-petition retirement contributions in any amount regardless of whether the debtor [made] pre-petition retirement contributions." Seafort , 669 F.3d at 667, 674 n.7. But we acknowledged that the "issue [was] not presently before us." Id. at 674 n.7.

Other courts have adopted Prigge ’s...