In re Mccullers

• Decision Date: 08 June 2011
• Docket Number: No. 10–34281.,10–34281.
• Citation: 451 B.R. 498
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re Ralph Goff McCULLERS, II, Debtor.

451 B.R. 498

In re Ralph Goff McCULLERS, II, Debtor.

No. 10–34281.

United States Bankruptcy Court, N.D. California.

June 8, 2011.

Jeena J. Cho, JC Law Group, San Francisco, CA, for Debtor.David Burchard, Foster City, CA, Trustee.

MEMORANDUM DECISION REGARDING TRUSTEE'S OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

THOMAS E. CARLSON, Bankruptcy Judge.

The principal issue raised in this case is whether section 541(b)(7) ¹ authorizes a chapter 13 debtor to deduct voluntary postpetition contributions to a qualified benefit plan in calculating the debtor's disposable income under section 1325(b). I conclude that section 541(b)(7) does not authorize such a deduction.

FACTS

Debtor is a 43–year–old single man with no dependents, who earns $9,806 per month. As of the petition date he owed $23,571 on a car loan, $27,000 to his ex-wife, $71,461 to general unsecured creditors, and $23,780 to his own 401(k) retirement plan.

Debtor proposed a chapter 13 plan under which he would pay $200 per month for 60 months. General unsecured creditors would receive total payments of $7,900, which represents approximately 11 percent of their claims. Debtor would pay the priority support claim of his ex-wife and repay the loan from his 401(k) retirement plan in full outside of the plan.

The chapter 13 trustee objected to confirmation of the plan, contending that the plan did not pay to unsecured creditors all of Debtor's “projected disposable income,” as required under section 1325(b).

Whether Debtor's plan provides for the payment of all of his projected disposable income turns upon whether Debtor is entitled to deduct voluntary contributions to his 401(k) plan, and amounts necessary to repay money he borrowed from that plan.

In calculating his disposable income on Official Form B22C, Debtor claimed a deduction of $1,921 per month for payments to his 401(k) plan. This amount includes both ongoing contributions to the plan and repayment of the loan Debtor obtained from his plan, but does not specify how much represents new contributions and how much represents repayment of the loan. In the last pay period before the petition date, Debtor made a new contribution of $1,768 and a loan payment of $721. Debtor acknowledges that his employer does not require him to make any contributions to his 401(k) plan and that all proposed contributions to that plan are voluntary.

Trustee contends that as a matter of law Debtor is not entitled to deduct any voluntary retirement contributions in calculating his disposable income. Trustee acknowledges that under section 1322(f) Debtor is entitled to deduct payments necessary to repay the loan from his 401(k) plan, but contends that the loan will be repaid after 32 months, and that plan payments should be increased once the loan is repaid.

Debtor contends that, under section 541(b)(7), he is entitled to deduct contributions in the maximum amount permissible under a 401(k) plan, and that the total amount deducted over the life of the plan does not exceed the deductions authorized under section 1322(f) and section 541(b)(7). Debtor further contends that his ongoing contributions are reasonable and necessary to provide for his retirement in light of his age and existing retirement savings.²

DISCUSSIONA. Repayment of Money Borrowed from Retirement Plan

Trustee acknowledges that section 1322(f) permits Debtor to deduct the amount necessary to repay money Debtor borrowed from his retirement plan in calculating his disposable income.³ Trustee complains that Debtor's plan does not provide for payments to increase after Debtor has repaid the loan, which Trustee contends will occur 32 months into the 60–month plan. ⁴

The calculation of a debtor's projected disposable income must take into account any changes in the debtor's financial circumstances that are reasonably certain to occur during the term of the plan. Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 725, 178 L.Ed.2d 603 (2011); Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2478, 177 L.Ed.2d 23 (2010). Thus, at such time that a retirement loan is fully repaid, the postpetition income previously used to repay that loan must then be used to pay creditors. In re Lasowski, 575 F.3d 815, 820 (8th Cir.2009); Burden v. Seafort (In re Seafort), 437 B.R. 204, 211 (6th Cir. BAP 2010).

It appears that Debtor's loan from his 401(k) plan will be fully repaid 32 months into the 60–month plan. At that time, the income previously used to repay that loan becomes disposable income that must be used to repay creditors.⁵ Debtor's current plan does not provide for such an adjustment.

B. Voluntary Retirement Contributions

Trustee's second objection to confirmation raises a more difficult question, whether subsection 541(b)(7) authorizes Debtor to deduct voluntary postpetition contributions to his 401(k) retirement plan in determining the disposable income he must devote to payment of his creditors.

1. The Statutory Framework

Section 541(b)(7) provides the only means by which an above-median-income chapter 13 debtor can make voluntary postpetition contributions to a qualified retirement plan over the objection of a creditor or the trustee. Under section 1325(b)(1), a chapter 13 plan can be confirmed over the objection of the trustee or an unsecured creditor only if the debtor contributes all “projected disposable income” to the plan. The calculation of “projected disposable income” begins with the calculation of “disposable income,” which is defined as current monthly income less necessary expenses. § 1325(b)(2). For an above-median-income debtor, necessary expenses are limited to those recognized in IRS debt-collection guidelines. §§ 707(b)(2) and 1325(b)(3). Under the IRS guidelines, mandatory retirement contributions are deductible, but voluntary contributions are not.⁶ Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045, 1051–52 (9th Cir.2009); In re Prigge, 441 B.R. 667, 676–77 (Bankr.D.Mont.2010). Debtor does not contend that any of the contributions he seeks to deduct are required by his employer. Thus, the question presented is whether the very specific provisions of subsection 541(b)(7), discussed below, override the more general provisions of subsections 707(b)(2) and 1322(b) just described.

Section 541(b)(7)(A) states that property of the estate does not include any amount

withheld by an employer from the wages of employees for payment as contributions

[to three different forms of retirement savings plans that qualify for tax deferment under the Internal Revenue Code of 1986]

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

(emphasis added).

The reported decisions on section 541(b)(7) are split among three highly divergent interpretations: (1) that the debtor may continue to contribute at the rate he or she contributed prepetition; (2) that the debtor may contribute the maximum amount permitted under the statute governing the type of plan at issue; and (3) that section 541(b)(7) does not authorize postpetition contributions in any amount.

2. The Seafort Decision

The highest court to address the issue held that section 541(b)(7) excludes from disposable income postpetition contributions up to the amount of the debtor's prepetition contributions. Burden v. Seafort (In re Seafort), 437 B.R. 204 (6th Cir. BAP 2010). Seafort was followed in the only reported bankruptcy court decision to address the question since Seafort was decided. In re Noll, 2010 WL 5336916 (Bankr.E.D.Wis.2010). The Seafort court cites three reasons in support of its decision.

First, Seafort concludes that the contributions excluded from property of the estate under section 541(b)(7) are prepetition contributions.

Property of the estate under § 541(a)(1) and exclusions from property of the estate under § 541(b) must both be determined on the date of the filing of the case. As provided in the statute, § 541(a) specifically states that “the commencement of a case ... creates an estate.” Section 541(b) excludes certain property from the definition of “property of the estate.” Read together, § 541(a) and (b) establish a fixed point in time at which parties and the bankruptcy court can evaluate what assets are included or excluded from property of the estate. Section 541(a) clearly establishes this point as the commencement of the case. Therefore, only 401(k) contributions which are being made at the commencement of the case are excluded from property of the estate under § 541(b)(7).

Id. at 209 (quotations and ellipses in original). That section 541(b)(7) excludes only prepetition contributions from property of the estate is crucial to the issue at hand, because the plain language of section 541(b)(7) excludes from disposable income only “such amount” excluded from property of the estate.

Next, Seafort notes that section 1306, which addresses property acquired after the petition date in a chapter 13 case, does not exclude postpetition retirement contributions either from property of the estate or from disposable income.

Rather, 401(k) contributions are only excluded in § 541 which specifically applies to property in existence at the commencement of the case. 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.

Id. at 209.

Finally, Seafort determines that limiting retirement contributions permissible under a chapter 13 plan to the amount debtor contributed prepetition is consistent with legislative intent.

In regard to retirement savings, Congress clearly intended to strike a balance between protecting debtors' ability to save for their retirement and requiring that debtors pay their creditors the maximum amount they can afford to pay. This balance is best achieved by permitting debtors who are making contributions to a Qualified Plan at the time their case...