Marshall v. Blake

• Decision Date: 22 March 2018
• Docket Number: No. 17-2809,17-2809
• Citation: 885 F.3d 1065
• Parties: Marilyn O. MARSHALL, Trustee-Appellant, v. Denise L. BLAKE, Debtor-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

885 F.3d 1065

Marilyn O. MARSHALL, Trustee-Appellant,

v.Denise L. BLAKE, Debtor-Appellee.

No. 17-2809

United States Court of Appeals, Seventh Circuit.

Argued February 15, 2018

Decided March 22, 2018

Lauren L. Tobiason, Attorney, Office of the Chapter 13 Trustee, Chicago, IL, for Trustee-Appellant.

James A. Brady, Attorney, Jamie F. Reisman, LAF, Chicago, IL, for Debtor-Appellee.

Nathan E. Curtis, Attorney, Peter F. Geraci, Attorney, Geraci Law L.L.C., Chicago, IL, for Amicus Curiae Geraci Law L.L.C.

Before Bauer, Flaum, and Manion, Circuit Judges.

Flaum, Circuit Judge.

Appellee Denise L. Blake is a below-median income debtor who filed for Chapter 13 bankruptcy. In her proposed bankruptcy plan, Blake sought to retain her annual earned income tax credit and a portion of her tax over-withholdings. Trustee Marilyn O. Marshall objected to confirmation of Blake’s plan, arguing that Blake is required to turn over her entire tax refund for use as additional plan payments. The bankruptcy court confirmed the plan over Marshall’s objection. In doing so, it agreed with Marshall that tax credits are income under the Bankruptcy Code that must be taken into account when calculating the debtor’s projected disposable income for plan payments. However, the bankruptcy court held that Blake could retain her tax refund if she prorated it as monthly income and offset it with reasonably necessary expenses to be incurred throughout the year. The bankruptcy court certified the case for direct appeal to this court. For the reasons below, we affirm.

I. Background

A. Blake’s Income, Expenses, and Bankruptcy Plan

Blake is a single mother who lives in subsidized housing with her three dependent children. She has worked as a security officer for more than six years. As a low-income wage earner, Blake consistently qualifies to receive the earned income tax credit.

On July 12, 2016, Blake filed for bankruptcy under Chapter 13. According to her Form 122C-1, Blake’s current monthly income ("CMI") is $2,512, or $30,144 annually.¹ This falls well below the median income in Illinois for a household of four, which is $86,921 annually. When calculating her monthly income on her Schedule I,² Blake included a pro-rata share of her anticipated earned income tax credit for the following year in the amount of $168.50. Blake also filed a Schedule J³ listing her ongoing monthly expenses. After subtracting payroll deductions and expenses from her monthly income, Blake was left with $119.91 of disposable income each month to make plan payments to her creditors.

On July 26, 2016, Blake filed her original Chapter 13 plan, which proposed monthly plan payments of $119 for thirty-six months, for a total of $4,284. Her plan also included the following provision:

For each year that the case is pending, Debtor will submit a copy of her federal income tax return to the Trustee by April 30 of each year. Debtor shall tender to the trustee the amount of any federal tax refund within 14 calendar days of receipt, except that Debtor shall be permitted to keep the amount of any earned income tax credit. For tax year 2016, Debtor shall tender to the trustee (1/2) of any federal tax refund within 14 days, excluding the earned income tax credit.

On September 8, 2016, the trustee filed a motion to dismiss Blake’s case for failing to correctly list her income and expenses and failing to confirm her plan in a timely manner. A week later, Blake filed an amended Schedule I to reflect a decrease in her income due to fewer overtime hours. She also filed an amended Schedule J. After these amendments, Blake’s monthly disposable income for plan payments was $74.75. She proposed a new plan under which she would pay the trustee $119 for two months and then $74 for forty-eight months, for a total of $3,790.

B. Trustee’s Objection and Bankruptcy Court’s Memorandum Order

On January 20, 2017, the trustee objected to confirmation of Blake’s plan. Specifically, the trustee argued that Blake was not committing all of her projected disposable income to the plan because she was retaining her tax refund. The trustee argued that the entire tax refund should be turned over to the trustee to be used for additional plan payments. In response, Blake asserted that she should be allowed to keep the earned income tax credit because it does not count as income under the Bankruptcy Code. The bankruptcy court consolidated Blake’s case with two other cases to consider the issue of whether a debtor may retain some or all of a tax refund that includes tax credits.

On March 16, 2017, the bankruptcy court issued a memorandum order overruling the trustee’s objection. The court explained that the portion of a tax refund attributable to over-withholdings is automatically included in the debtor’s income because it is calculated using a debtor’s gross income prior to tax withholding. In addition, the court held that tax credits are also considered income under the Bankruptcy Code. Thus, the court required Blake to include a prorated version of her annual tax credit as monthly income on her Schedule I (i.e., the annual tax credit divided by twelve months). At the same time, however, the court allowed Blake to offset that additional income by adding monthly prorated versions of reasonably necessary expenses to be incurred throughout the year on her Schedule J. In effect, this allowed Blake to retain some, or even all, of her tax credit. The court stated that as long as the offsetting expenses were reasonably necessary, it would confirm Blake’s plan without requiring payment of expected tax credits.

C. Blake’s Amended Schedules and Bankruptcy Plan

Pursuant to the bankruptcy court’s order, Blake filed amended schedules on April 4, 2017. In her amended Schedule I, Blake increased her prorated earned income tax credit from $168.50 per month to $311 per month. In addition, Blake added prorated monthly tax over-withholdings of $100.⁴ In her amended Schedule J, Blake added the following monthly prorated expenses: $132 for medical and dental expenses; $40 for shoes and clothing for her two sons (down from $85); $104 for new beds and furniture for her sons; and $43 for graduation expenses for her sons (including a school trip and prom). Once these expenses were deducted from her income, Blake had $102 in disposable income each month to make plan payments.

Blake then filed an amended bankruptcy plan. Her new plan proposed making payments to the trustee of $119 for two months, $74 for seven months, and $102 for fifty-one months, for a total of $5,958.⁵

D. The Bankruptcy Court’s Confirmation Order

On May 3, 2017, the bankruptcy court held a hearing on the confirmation of Blake’s plan. During the hearing, Blake’s counsel explained that the monthly prorated furniture expense was necessary because Blake’s two nineteen-year-old sons had previously been sleeping on air mattresses, their bed frames and mattresses are in "incredibly poor condition," and they do not have any dressers. The court noted that "[i]t’s a pretty skinny budget overall." The trustee again objected to confirmation. The court overruled the trustee’s objection, stating:

I think the kids are entitled to sleep on beds that aren’t falling apart. And I think that overall the budget as proposed is pretty skimpy and thin. So I think prorating these will be in the best interest of the estate, the best interest of the debtor in terms of hopefully having a plan that actually at the end of the day she can get a discharge. And, meanwhile, creditors will be getting a little.

On the same day, the bankruptcy court entered an order confirming Blake’s plan.

E. Motion for Certification For Direct Appeal

On May 16, 2017, the trustee filed a notice appealing the bankruptcy court’s confirmation order. At the same time, the trustee filed a motion to certify the order for direct appeal to this Court. On June 15, 2017, Blake filed her objection to the certification motion.

On July 5, 2017, the bankruptcy court denied the certification motion without prejudice. The bankruptcy court held that that, because more than thirty days had passed since the notice of appeal was filed, the matter was no longer "pending" in the bankruptcy court, but rather in the district court. As a result, the bankruptcy court concluded that, under Federal Rule of Bankruptcy Procedure 8006(b), it lacked power to certify the order for direct appeal. However, the bankruptcy court noted that if the district court remanded the case, it was prepared to enter an order certifying the case for direct appeal. On July 27, 2017, the district court remanded the case to the bankruptcy court for further proceedings.

On August 28, 2017, the bankruptcy court entered an order certifying the case for direct appeal to this Court. The court determined that certification was appropriate because there is no controlling decision from the Supreme Court or the Seventh Circuit as to whether tax credits are disposable income under the Bankruptcy Code. We subsequently authorized a direct appeal.

II. Discussion

We review questions of our jurisdiction de novo.

Muratoski v. Holder , 622 F.3d 824, 829 (7th Cir. 2010). "We review the bankruptcy court’s conclusions of law de novo and its factual findings for clear error." Stamat v. Neary , 635 F.3d 974, 979 (7th Cir. 2011).

A. Jurisdiction

As a threshold issue, Blake argues we lack jurisdiction to hear this direct appeal because: (1) this case does not actually involve the legal question certified for direct appeal; (2) the trustee failed to file a petition for permission to appeal as required by Federal Rule of Appellate Procedure 5 ; and (3) the bankruptcy court lacked authority to certify the direct appeal because it did not do so within the time limit in Federal Rule of Bankruptcy Procedure 8006(f). These arguments fail.

1. This Case Involves the Legal Question Certified for Direct Appeal

We have jurisdiction to hear direct appeals "if the bankruptcy court ... certif[ies] that ... the judgment, order, or decree involves a...