In Re Deborah K. Seafort

• Decision Date: 14 September 2010
• Docket Number: Nos. 09-8062, 09-8063.,s. 09-8062, 09-8063.
• Citation: 437 B.R. 204
• Parties: In re Deborah K. SEAFORT and Frederick C. Schuler and Carrie A. Schuler, Debtors. Beverly M. Burden, Chapter 13 Trustee, Appellant, v. Deborah K. Seafort and Frederick C. Schuler and Carrie A. Schuler, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

437 B.R. 204

In re Deborah K. SEAFORT and Frederick C. Schuler and Carrie A. Schuler, Debtors.

Beverly M. Burden, Chapter 13 Trustee, Appellant,

v.Deborah K. Seafort and Frederick C. Schuler and Carrie A. Schuler, Appellees.

Nos. 09-8062, 09-8063.

United States Bankruptcy Appellate Panelof the Sixth Circuit.

Argued: May 4, 2010.

Decided and Filed: Sept. 14, 2010.

ARGUED: Daniel Hitchcock, Wyatt, Tarrant & Combs, LLP, Lexington, Kentucky, for Appellant. Michael B. Baker, The Baker Firm, PLLC, Florence, Kentucky, for Appellees. ON BRIEF: Daniel Hitchcock, Wyatt, Tarrant & Combs, LLP, Lexington, Kentucky, for Appellant. Michael B. Baker, The Baker Firm, PLLC, Florence, Kentucky, for Appellees.

Before: BOSWELL, McIVOR, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.

OPINION

MARCI B. McIVOR, Bankruptcy Judge.

In these consolidated appeals, Beverly M. Burden, Chapter 13 Trustee (“Trustee”), appeals the bankruptcy court's ruling that Debtors may use income which becomes available once 401(k) loans are repaid to commence making contributions to debtors' 401(k) plans. For the reasons stated in this opinion, the Panel concludes that post-petition income which becomes available after a debtor repays a 401(k) loan must be committed to the chapter 13 plan. Therefore, the bankruptcy court's rulings confirming the Debtors' chapter 13 plans are reversed. The cases are remanded for further proceedings consistent with this opinion.

I. ISSUE ON APPEAL

The issue raised in this appeal is whether a chapter 13 debtor who is repaying a 401(k) loan, but not making any 401(k) contributions at the time the bankruptcy petition is filed, may use the income which becomes available when the loans are repaid to start making contributions to debtor's 401(k) plan rather than committing the extra income to repay creditors.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations and internal quotations omitted). The order of the bankruptcy court confirming the Debtors' chapter 13 plans over the objections of the Trustee is a final, appealable order. Gen. Elec. Credit Equities, Inc. v. Brice Rd. Devs., L.L.C. (In re Brice Rd. Devs., L.L.C.), 392 B.R. 274, 278 (6th Cir. BAP 2008).

The bankruptcy court's legal conclusions, including its interpretation of the applicable statutes, are reviewed de novo. Brice Rd. Develops., L.L.C., 392 B.R. at 277. “De novo means that the appellate court determines the law independently of the trial court's determination.” Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001) (citations omitted).

The court's findings of fact are reviewed under the clearly erroneous standard. Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir.2007). “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ ” Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)).

III. FACTS

On November 20, 2008, Deborah Seafort filed a petition for relief under chapter 13 of the Bankruptcy Code. On November 25, 2008, Frederick C. Schuler and Carrie A. Schuler filed a joint petition for relief under chapter 13 of the Bankruptcy Code. At the time the debtors filed their respective petitions for relief, Deborah Seafort and Frederick C. Schuler (hereinafter collectively “Debtors”) were both eligible participants in their respective employers' ERISA qualified 401(k) retirement plans. The Debtors were not making contributions to their plans at the time they filed for bankruptcy relief; however, each Debtor was repaying a 401(k) loan. Seafort was paying her loan at the rate of $254.71 per month, and Schuler was paying $815.86 per month.

The Debtors each filed a proposed chapter 13 plan which provided for a commitment period of five years. Under their respective proposed plans, the loans would be repaid in full before completion of the plans. The plans proposed to complete repayment of the loans and then continue payroll deductions as 401(k) contributions in the same amount as the loan payments. The plan payments would not, therefore, increase after the loans were paid in full. The Trustee objected to confirmation of both plans asserting that because the Debtors were not making 401(k) contributions as of the commencement of their bankruptcy cases the Debtors must increase their plan payments by the amount of the loan payments once the loans were paid in full.

The bankruptcy court consolidated the cases to determine whether the Debtors could exclude their proposed 401(k) contributions from projected disposable income which would otherwise be paid into their respective chapter 13 plans. On June 22, 2009, the court issued a memorandum opinion and order concluding that the exclusion was permissible and that the Debtors' respective chapter 13 plans should be confirmed without modification. On June 30, 2009, the Trustee moved the court to alter or amend its order. The Trustee's motion was resolved by entry of an agreed order on October 5, 2009, which required the Debtors to provide certain documentary evidence to the Trustee regarding their 401(k) plans and established certain events which would require amendment of the plans during the applicable commitment period. The Trustee's timely appeal followed.

IV. DISCUSSION

Prior to the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), a chapter 13 debtor could not make contributions to a 401(k) plan because such funds were considered disposable income which had to be committed to the chapter 13 plan. Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775, 777-78 (6th Cir.1995). For the same reason, chapter 13 debtors were also prohibited from repaying a 401(k) loan during the life of a chapter 13 plan, regardless of any adverse consequences which might result from nonpayment. Id. The adoption of BAPCPA, however, resulted in several changes to the treatment of ERISA qualified employee benefit plans (“Qualified Plans”). In particular, BAPCPA amended § 541 to add subsection (b)(7) which allows debtors to shelter contributions to certain Qualified Plans from property of the estate. As a result, a debtor may now exclude contributions to Qualified Plans, including contributions to a 401(k) plan, up to the permitted amount of the plan from his bankruptcy estate. In re Nowlin, 366 B.R. 670, 676 (Bankr.S.D.Tex.2007) (citing In re Johnson, 346 B.R. 256, 263 (Bankr.S.D.Ga.2006)), aff'd, No. 07-2446, 2007 WL 4623043 (S.D.Tex. Dec. 28, 2007), aff'd, 576 F.3d 258 (5th Cir.2009). In addition, BAPCPA added subsection (f) to 11 U.S.C. § 1322 which prohibits a chapter 13 plan from altering the terms of a 401(k) loan and excludes “any amounts” used to repay loans from Qualified Plans from the calculation of a debtor's “disposable income.” 11 U.S.C. § 1322(f). In sum, BAPCPA changed the way contributions to Qualified Plans and loan payments to such plans are treated in chapter 13 cases.

BAPCPA also made changes to 11 U.S.C. § 1325, the Code section which spells out the requirements for confirmation of chapter 13 plans; however, the amendments did not directly address how to treat the income which becomes available when a 401(k) loan is repaid during the applicable commitment period. The Fifth and Eighth Circuit Courts of Appeal have classified the resulting available funds as projected disposable income which must be committed to the debtor's chapter 13 plan. McCarty v. Lasowski (In re Lasowski), 575 F.3d 815, 820 (8th Cir.2009); Nowlin v. Peake (In re Nowlin), 576 F.3d 258 (5th Cir.2009). However, no court has addressed the precise question presented by this appeal: whether a debtor, who was not contributing to an ERISA qualified plan when the case was filed, may begin making 401(k) contributions once the 401(k) loan has been repaid.

The Trustee makes three arguments in support of her position that the bankruptcy court erred in permitting these Debtors, who were not making contributions to their 401(k) plans at the commencement of their cases, to exclude the income which became available once their 401(k) loans were repaid from projected disposable income and then use that income to make contributions to a 401(k) plan. First, pursuant to fundamental rules of statutory construction, the Trustee argues that chapter 13 debtors may only exclude contributions they are making to a 401(k) plan as of the commencement of their case from property of the estate and disposable income. Second, the Trustee asserts that the Debtors' proposed plans did not comply with the projected disposable income requirements of § 1325(b)(1). Lastly, the Trustee contends that the Debtors' plans were not proposed in good faith.

A. Property of the Estate and Exclusions from Property of the Estate

In determining the meaning of a statute, the Panel must first examine the plain language of the statute. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). “If the statutory language is unambiguous, ... that language must ordinarily be regarded as conclusive.” Reves v. Ernst & Young, 507 U.S. 170, 177, 113 S.Ct. 1163, 1169, 122 L.Ed.2d 525 (1993) (...