Penfound v. Ruskin (In re Penfound)
| Decision Date | 10 August 2021 |
| Docket Number | No. 19-2200,19-2200 |
| Citation | 7 F.4th 527 |
| Parties | IN RE: John S. PENFOUND; Jill L. Penfound, Debtors. John S. Penfound; Jill L. Penfound, Appellants, v. David W. Ruskin, Chapter 13 Trustee, Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ON BRIEF: Aaron J. Scheinfield, GOLDSTEIN, BERSHAD & FRIED, P.C., Southfield, Michigan, for Appellants. Stuart A. Gold, GOLD, LANGE, MAJOROS & SMALARZ, P.C., Southfield, Michigan, for Appellee.
Before: GRIFFIN, LARSEN, and NALBANDIAN, Circuit Judges.
In Davis v. Helbling (In re Davis ), this court held that when a Chapter 13 debtor has regularly contributed to his 401(k) in the months leading up to his petition for bankruptcy, he may exclude that recurring amount from the calculation of his "projected disposable income." See 960 F.3d 346, 355–57 (6th Cir. 2020). This case presents a twist to that fact pattern. What if a debtor has historically contributed to a 401(k) plan, but was unable to make further contributions in the months leading up to bankruptcy? John and Jill Penfound claim that such a track record should permit them to shield voluntary post-petition contributions from the reach of their creditors. Because neither the statute nor our caselaw supports the Penfounds’ position, we AFFIRM the judgment below.
Between 1993 and 2017, John Penfound worked for a company that provided its employees with a 401(k) plan. For much of his tenure, Penfound voluntarily contributed a portion of his wages to the plan. In August 2017, Penfound transitioned to a new company, Protodesign, Inc. Unlike his previous employer, Protodesign did not offer a 401(k) plan. So Penfound was unable to make further contributions to his retirement account.
Penfound's time with Protodesign was short-lived. He left the company in March 2018. And, on May 7, 2018, Penfound started working for a third company, Laird Technologies, Inc. Laird offered a 401(k) plan, and Penfound eventually resumed making contributions to his retirement account. However, the record on appeal is silent as to the exact date on which Penfound began making these payments.
On June 22, 2018, Penfound and his wife, Jill, filed for Chapter 13 bankruptcy. As part of their petition, the Penfounds sought to deduct $1,375.01 per month from their disposable income as voluntary contributions to John's 401(k) retirement plan. The Trustee objected to the exclusion. And the bankruptcy court—relying on dictum from our decision in Seafort v. Burden (In re Seafort ), 669 F.3d 662 (6th Cir. 2012) —agreed that the Penfounds could "not exclude their voluntary contributions ... from the calculation of disposable income." While reserving their right to appeal, the Penfounds agreed to confirm their repayment plan, subject to a monthly payment increase that would reflect the bankruptcy court's ruling.
The Penfounds then appealed to the district court. The district court affirmed, likewise reading our decision in Seafort as establishing a blanket rule that all "voluntary post-petition contributions to a 401(k) account are part of disposable income," such that they cannot be shielded from creditors. This appeal followed.
The parties agreed to hold briefing in abeyance pending this court's decision in Davis , 960 F.3d 346. In that case, we held that 11 U.S.C. § 541(b)(7) "is best read to exclude from disposable income a debtor's post-petition monthly 401(k) contributions so long as those contributions were regularly withheld from the debtor's wages prior to her bankruptcy." Id. at 357. Accordingly, the debtor—who had made consistent contributions of $220.66 "for at least six months prior to her bankruptcy"—was permitted to exclude that recurring amount from her disposable income. Id. In this case, the Penfounds concede that John made no contributions "within the six (6) months pre-petition as there were no retirement accounts available with his employer during that time period." But they ask us to "broaden" and "expand" Davis ’s ruling to account for John's "long, historical track record of voluntary retirement contributions" and the fact that Protodesign's lack of a 401(k) plan constituted a circumstance "outside [his] control."
We begin with some legal background. "Chapter 13 of the Bankruptcy Code provides bankruptcy protection to ‘individual[s] with regular income’ whose debts fall within statutory limits." Hamilton v. Lanning , 560 U.S. 505, 508, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) (alteration in original) (quoting 11 U.S.C. § 101(30) ). Its principal benefit is that debtors may "obtain some relief from their debts while retaining their property." Bullard v. Blue Hills Bank , 575 U.S. 496, 498, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015) ; see 11 U.S.C. § 1327(b). But in order to receive such protection, Chapter 13 debtors "must agree to a court-approved plan under which they pay creditors out of their future income," Lanning , 560 U.S. at 508, 130 S.Ct. 2464 ; see 11 U.S.C. § 1322(a), for a period of up to five years, see 11 U.S.C. § 1322(d). A debtor is initially responsible for proposing this repayment plan. Id. § 1321. But upon objection, the bankruptcy court "may not approve the plan unless" it either: (a) proposes full satisfaction of unsecured claims, or (b) "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." Id. § 1325(b)(1).
Generally speaking, then, a debtor must commit all of his "projected disposable income" to his creditors for a fixed period of time. The code does not explicitly define "projected disposable income." But it 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). In turn, "current monthly income" is defined as "the average monthly income from all sources" (other than those specifically excluded) "that the debtor [has] receive[d]" in the six full months preceding the filing of the bankruptcy petition. Id. § 101(10A).
"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 [ § 1325(b)(2) ]." Davis , 960 F.3d at 350 (quoting Lanning , 560 U.S. at 519, 130 S.Ct. 2464 ). Yet, "where significant changes in a debtor's financial circumstances are known or virtually certain" prior to confirmation, "a bankruptcy court has discretion to make an appropriate adjustment" in calculating the debtor's "projected disposable income." Lanning , 560 U.S. at 513, 130 S.Ct. 2464 ; see also id. at 524, 130 S.Ct. 2464.
So far, so good. But here's where things start to get tricky. This case turns on whether John Penfound's post-petition 401(k) contributions—which he proposes to voluntarily withhold from his future wages—constitute "projected disposable income." If so, then the amount of such contributions must "be applied to make payments to unsecured creditors." 11 U.S.C. § 1325(b)(1)(B). If not, then the Penfounds can exclude this amount (or a fraction thereof) from their repayment plan. Doing so would significantly reduce the dividend paid to the Penfounds’ unsecured creditors.
"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." Davis , 960 F.3d at 350 (citation omitted); see, e.g. , Harshbarger v. Pees (In re Harshbarger ), 66 F.3d 775, 777–78 (6th Cir. 1995). That consensus quickly splintered, however, after Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). See Pub. L. No. 109-8, 119 Stat. 23 (2005). Most pertinent for our purposes, BAPCPA added 11 U.S.C. § 541(b)(7), which states in relevant part that:
11 U.S.C. § 541(b) (emphasis added). The italicized portion is known as the "hanging paragraph." And this "inelegantly drafted" statute has produced considerable confusion in bankruptcy cases nationwide. Seafort , 669 F.3d at 671 ; see also In re Vanlandingham , 516 B.R. 628, 632 (Bankr. D. Kan. 2014) (). Indeed, no fewer than four competing interpretations of the hanging paragraph have emerged, each of which presents its own interpretive difficulties. See Davis , 960 F.3d at 351–54.
The majority view—commonly referred to as the Johnson view—reads the hanging paragraph to "place[ ] retirement contributions outside the purview of a Chapter 13 plan," such that "[d]ebtors may fund 401(k) plans in good faith" during the commitment period. See Baxter v. Johnson (In re Johnson ), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006).
In Seafort , however, "this court squarely rejected Johnson ’s reasoning." Davis , 960 F.3d at 351. The two debtors in that case "were not making any contributions to their employers’ 401(k) retirement plans at the time of the filing of their petitions." Seafort , 669 F.3d at 663. Both "were in the process of repaying a 401(k) loan to their employers’ retirement plans." Id. at 663–64. And in their proposed Chapter 13 repayment plans, they sought to resume making contributions "post-petition after the[ir] 401(k) loans were paid in full." Id. at 664. We held that the bankruptcy code does not countenance such a debtor-friendly result. Instead, "post-petition income that becomes available to debtors after their 401(k) loans are fully repaid is ‘projected disposable income’ that must be turned over to the trustee for distribution to unsecured creditors." Id. at 663. In...
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...cases,' her 'projected disposable income' under § 1325(b)(1) is simply her 'disposable income' as defined in [§ 1325(b)(2)]." In re Penfound, 7 F.4th at 530 (citing Davis, 960 F.3d at 350 Lanning, 560 U.S. at 519)). The Sixth Circuit Court of Appeals looked at the interrelationship of these......
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In re Huston
...contributions are 13 excluded from disposable income only if commenced pre-petition. See Penfound v. Ruskin (In re Penfound), 7 F.4th 527 (6th Cir. 2021); Davis v. Helbling (In re Davis), 960 F.3d 346 (6th Cir. 2020).[6] Notably, in those cases the court found no need to choose between the ......