In re Hughes

• Court: U.S. Bankruptcy Court — Eastern District of Tennessee
• Writing for the Court: RALPH H. KELLEY
• Citation: In re Hughes, 7 B.R. 791, 7 B.C.D. 12 (Bankr. E.D. Tenn. 1980)
• Decision Date: 18 December 1980
• Docket Number: 1-80-00651,1-80-00822,1-80-01243,1-80-00090,1-80-00853,1-80-00671,1-79-01863,Bankruptcy No. 1-79-01481,1-80-00850,1-80-01237 and 1-80-01247.
• Parties: In re Charles Frank HUGHES, Jr., In re Deonnia Jane BAXTER, In re Maggie Jean WRIGHT, In re Roy MASON, In re Mary Jane HARTLEY, In re Peggy Jane PENDERGRASS, In re Mary Catherine K. BRADFORD, In re John E. DAWSON, In re James R. JIRLES, In re William H. CHADWICK, Sr., In re John Alvin KITTLE, Jr., Debtors.

7 B.R. 791 (1980)

In re Charles Frank HUGHES, Jr. In re Deonnia Jane BAXTER In re Maggie Jean WRIGHT In re Roy MASON In re Mary Jane HARTLEY, In re Peggy Jane PENDERGRASS, In re Mary Catherine K. BRADFORD, In re John E. DAWSON, In re James R. JIRLES, In re William H. CHADWICK, Sr., In re John Alvin KITTLE, Jr., Debtors.

Bankruptcy Nos. 1-79-01481, 1-79-01863, 1-80-00090, 1-80-01243, 1-80-00651, 1-80-00671, 1-80-00822, 1-80-00850, 1-80-00853, 1-80-01237 and 1-80-01247.

United States Bankruptcy Court, E.D. Tennessee.

December 18, 1980.

Lawrence R. Ahern, III, Chattanooga, Tenn., for the trustee.

John C. Littleton, Chattanooga, Tenn., Asst. U.S. Atty., for the Social Security Administration.

MEMORANDUM

RALPH H. KELLEY, Bankruptcy Judge.

The debtor in each of these cases filed a petition under Chapter 13 of the Bankruptcy Code. 11 U.S.C. (1979). The debtors proposed to make payments into their Chapter 13 plans from benefits payable to them under Subchapter II of the Social Security Act, 42 U.S.C. §§ 401-431. The questions in these cases are (1) whether such benefits can be used in a Chapter 13 plan and (2) whether the court can order the Social Security Administration to pay the benefits directly to the Chapter 13 trustee.

The questions arise as a result of the enactment of the Bankruptcy Code. It was the major part of the Bankruptcy Reform Act of 1978. Pub.L. No. 95-598, 92 Stat. 2549-2688 (1978). In his opinion dealing with these same questions, District Judge Wiseman reviewed the legislative history of Chapter 13. In re Buren, 6 B.R. 744 (Bkrtcy.M.D.Tenn.1980) affirming 4 B.R. 109, 6 B.C.D. 828, 2 C.B.C.2d 380 (Bkrtcy.M. D.Tenn.1980) (J. Jennings).

The following is a lengthy quotation from that opinion:

Chapter 13 of the Bankruptcy Reform Act is not limited to wage earner plans; it is entitled "Adjustment of Debts of an Individual with Regular Income." The class of persons to whom Chapter 13 is available has been dramatically expanded. The practice under old Chapter 13 did not live up to the basic purpose of permitting "an individual to pay his debts and avoid bankruptcy by making periodic payments to a trustee under bankruptcy court protection." S.Rep.No.95-989, 95th Cong., 2d Sess. 12, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5798. The problem with the old law was that it was limited to wage earners. According to the Senate report, one of the five aspects of the old law that caused it to be "basically and seriously defective" was that "it did not permit some individuals with regular income to qualify, such as small business owners or social welfare program recipients, because their principal incomes do not come from wages, salary, or commissions." Id. at 13 (emphasis added). The purpose of the new Chapter 13 was to solve these problems. "The new Chapter 13 will permit almost any individual with regular income to propose and have approved a reasonable plan for debt repayment based on that individual\'s exact circumstances." Id.

An "individual with regular income" for purposes of the Bankruptcy Code is an "individual whose income is sufficiently stable and regular to enable such individual to make payments under a Chapter 13 plan." 11 U.S.C. § 101(24). Both the House and Senate committee reports analyzed this provision as applying to social security recipients. "Individuals on welfare, social security, fixed pension incomes, or who live on investment incomes, will be able to work out repayment plans with their creditors rather than being forced into straight bankruptcy." S.Rep.No.95-989, supra, at 24 (emphasis added); H.R.Rep.No.95-595, 95th Cong., 1st Sess. 312, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6289 (emphasis added).

Obviously, the thrust of the Chapter 13 revision was to make its provisions available to a range of persons wider than the prior law. Expansion of the class to whom Chapter 13 is available comports with the basic legislative goal: to encourage financially overextended individual debtors to make greater use of voluntary repayment plans and thereby improve debtor relief, by allowing ratable distribution of future income without necessarily liquidating their non-exempt assets, and creditor recovery, by guaranteeing repayment of most, if not all, of the claims over an extended period. H.R. Rep.No.95-595, 95th Cong., 1st Sess. 116-120. See 5 Collier on Bankruptcy ¶ 1300.02, at 1300-19—1300-21 (15th ed. 1980). The clear purpose and intent of Congress was that social welfare recipients should not be denied the benefits of Chapter 13 plans.

I.

Consistent with that purpose, Congress broadly defined property of the bankruptcy estate. In Chapter 13, property of the estate includes all legal or equitable interests of the debtor in property as of the commencement of the case and acquired thereafter until the case is closed, dismissed, or converted to a case under another chapter. 11 U.S.C. §§ 541(a) & 1306(a) (1979). The definition is certainly broad enough to include the debtors' social security benefits in their bankruptcy estates.

The Social Security Administration relies on an older statute as preventing social security benefits from becoming part of the estate. The protective statute is § 207 of the Social Security Act, 42 U.S.C. § 407. It provides:

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

The protective statute is obviously in three parts. The first part applies only to the right to future payments and prevents transfer of it by the insured. The first part could not prevent the benefits from becoming part of the estate because of § 541(c)(1)(A) of the Bankruptcy Code. It provides that the property described in § 541(a) becomes part of the estate notwithstanding any provision that restricts or conditions transfer by the debtor. 11 U.S.C. § 541 (1979).

The second and third parts of the protective statute cover a broader range of benefits and rights. The second part, however, protects them only from legal process. Whether they become part of the estate does not depend on whether they can be reached by legal process. Compare § 541(a) of the Code and § 70(a)(5) of the Bankruptcy Act, 11 U.S.C. § 541(a) (1979) & 11 U.S.C. § 110(a)(5) (1976). See 4 Collier on Bankruptcy ¶ 541.021 (15th ed. 1979).

The third part of the protective statute presents the real statutory conflict. Congress apparently named bankruptcy and insolvency laws because the transfer effected by them may be by operation of law, rather than voluntary (by assignment) or involuntary (by legal process). See § 70(a) of the Bankruptcy Act, 11 U.S.C. § 70(a) (1976).¹ The third part of the protective statute must have been meant to keep the benefits out of bankruptcy.

Contrary to the administration's argument, the court must hold that for the purposes of Chapter 13 this part of the protective statute was implicitly repealed. The administration relies primarily on Morton v. Mancari, 417 U.S. 535, 94 S.Ct. 2474, 41 L.Ed.2d 290 (1974). See also United States v. United Continental Tuna Corp., 425 U.S. 164, 96 S.Ct. 1319, 47 L.Ed.2d 653 (1976). The court in Morton v. Mancari stated the general rule that repeals by implication are not favored and will be found only where legislative intent is clear. The court then explained how the facts showed that Congress did not intend to affect the earlier statute. The facts were far different from the facts in this case.

In Morton v. Mancari provisions of the later statute showed that it was not intended to repeal the earlier one. After enactment of the later statute, other statutes were enacted that showed Congress' intent not to affect the earlier statute. There was nothing in the legislative history that showed an intent to repeal the earlier statute.

The facts in this case are much different.

The legislative history shows clearly that Congress intended to make welfare benefits, including social security benefits, subject to Chapter 13. See quote above, pp. 792-793.

Section 1325(b) of Chapter 13 reinforces the conclusion that Congress meant for government benefits, not just government wages, to be subject to Chapter 13. That section provides that the bankruptcy court may order any department, agency, or instrumentality of the United States to deduct from the debtor's income and pay it to the Chapter 13 trustee. 11 U.S.C. §§ 101(14), 101(21), 1325(b) (1979).

Under the Bankruptcy Code, property which may be exempted becomes property of the estate. 11 U.S.C. §§ 522(b) & 541(a) (1979). See also S.Rep.No.95-989, 95th Cong., 2d Sess. 76-77, 82 (1978); H.R.Rep. No.95-595, 95th Cong., 1st Sess. 360, 368 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787; 4 Collier on Bankruptcy ¶ 541.023 (15th ed. 1979). In the federal exemptions Congress included an exemption of the debtor's right to receive social security benefits. 11 U.S.C. § 522(d)(10)(A) (1979). If the protective statute prevented the benefits in question from becoming part of the estate, there would have been no need for the exemption.

Furthermore, the protective statute and Chapter 13 are not entirely at cross purposes. The protective statute was meant to preserve the Subchapter II benefits for their intended use in avoiding the harsh results of loss of earning power. A beneficiary may feel that he is best protected by using the benefits in a Chapter 13 for protection from his creditors. The benefits can be made subject to Chapter 13 only by the beneficiary's voluntarily commencing and continuing a Chapter 13 case. There cannot be an involuntary Chapter 13 case. 11 U.S.C. §§ 303(a), 706(c), 1112(d), & 1307(b) (1979). The debtor is allowed to exempt his right to receive social security benefits in those...