Solomon, In re

• Decision Date: 23 October 1995
• Docket Number: Nos. 94-2198,94-2263,s. 94-2198
• Citation: 67 F.3d 1128
• Parties: -7124, 64 USLW 2274, 19 Employee Benefits Cas. 2065 In re Neil SOLOMON, M.D., Debtor. Neil SOLOMON, Plaintiff-Appellant, v. Ellen W. COSBY, Chapter 13 Trustee; Jane Coe; Mary Doe; Jane Roe; John Roe, Defendants-Appellees. In re Neil SOLOMON, M.D., Debtor. Neil SOLOMON, Plaintiff-Appellee, v. Ellen W. COSBY, Chapter 13 Trustee, Defendant-Appellant, v. Jane COE; Mary Doe; Jane Roe; John Roe, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1128

67 F.3d 1128

76 A.F.T.R.2d 95-7124, 64 USLW 2274,

19 Employee Benefits Cas. 2065

In re Neil SOLOMON, M.D., Debtor.

Neil SOLOMON, Plaintiff-Appellant, v. Ellen W. COSBY, Chapter 13 Trustee; Jane Coe; Mary Doe;

Jane Roe; John Roe, Defendants-Appellees.

In re Neil SOLOMON, M.D., Debtor.

Neil SOLOMON, Plaintiff-Appellee, v. Ellen W. COSBY, Chapter 13 Trustee, Defendant-Appellant, v. Jane COE; Mary Doe; Jane Roe; John Roe, Defendants-Appellees.

Nos. 94-2198, 94-2263.

United States Court of Appeals Fourth Circuit.

Argued June 5, 1995.

Decided Oct. 23, 1995.

ARGUED: Alan M. Grochal, Tydings & Rosenberg, Baltimore, Maryland, for Appellant. Deborah Hunt Devan, Weinberg & Green, Baltimore, Maryland, for Appellee Cosby; Edward Charles Dolan, Hogan & Hartson, L.L.P., Washington, D.C., for Appellees Coe, Doe, and Roe. ON BRIEF: Paul Walter, Mary Fran Ebersole, Tydings & Rosenberg, Baltimore, Maryland, for Appellant. Shoshana Katz, Weinberg & Green, Baltimore, Maryland, for Appellee Cosby; James H. Lystad, Hogan & Hartson, L.L.P., Washington, D.C., for Appellees Coe, Doe, and Roe.

Before WIDENER, WILKINSON, and MICHAEL, Circuit Judges.

Reversed and remanded by published opinion. Judge WILKINSON wrote the majority opinion, in which Judge WIDENER joined. Judge MICHAEL wrote a dissenting opinion.

OPINION

WILKINSON, Circuit Judge:

This case presents the question whether a Chapter 13 debtor must include in his "disposable income" some portion of funds invested in various individual retirement accounts ("IRAs"). The bankruptcy court denied confirmation of the debtor's proposed Chapter 13 plan for failure to include hypothetical distributions from the IRAs in the disposable income to be paid under the plan. Because we believe that funds held in the debtor's IRAs but not distributed to the debtor do not constitute "disposable income" under 11 U.S.C. Sec. 1325, we reverse.

I.

The debtor herein, Neil Solomon, M.D., filed a Chapter 13 bankruptcy petition on September 20, 1993; he filed his proposed Chapter 13 plan shortly thereafter. Dr. Solomon's only creditors are three former patients (and the spouse of one) who have sued him in tort for alleged sexual misconduct during the course of their treatment as his medical patients. ^* The plaintiffs claimed compensatory and punitive damages totaling approximately $160 million. Solomon scheduled each plaintiff's claim as contingent, unliquidated and disputed and listed the amount of each claim as zero. Although these debts were arguably non-dischargeable under Chapter 7 since they arose from "willful and malicious injury by the debtor," 11 U.S.C. Sec. 523(a)(6), the claims could be discharged under the broader "super-discharge" available to Chapter 13 debtors. 11 U.S.C. Sec. 1328(a).

Solomon scheduled assets valued at $2,184,645, of which he claimed $2,140,501.25 to be exempt from the claims of his creditors. Of the assets claimed exempt, $1,413,888 is held in three individual retirement accounts. Federal law does not require that income be withdrawn from these accounts until the recipient reaches age 70 1/2. See 26 U.S.C. Sec. 408(a)(6); 26 C.F.R. Sec. 1.408-2(b)(6). Solomon, currently age 62, informed the bankruptcy court that he had no intention of withdrawing any funds from the IRAs during the term of the plan. Moreover, under Maryland law, the IRAs are exempt from execution by creditors. Md.Cts. & Jud.Proc.Code Ann. Sec. 11-504(h). Solomon was thus left with approximately $40,000 in non-exempt assets.

After his petition was filed, Solomon voluntarily surrendered his medical license and ceased practicing medicine. As a result, his net monthly income decreased substantially from the $14,800 initially disclosed in Schedule I to approximately $2,650, which consisted primarily of monthly mandatory distributions from his Maryland state pension. According to the plan, Solomon proposed to pay the Trustee $750 per month for an extended term of five years, 11 U.S.C. Sec. 1322(d), for a total payout to the creditors of $45,000. Solomon planned to use the remainder of his monthly income, together with income from investments and exempt assets other than his IRAs, to pay his normal living expenses.

In February 1994, the Chapter 13 Trustee and the creditors filed various objections to the proposed plan. Only the treatment of Solomon's three IRAs is relevant to this appeal. According to the Trustee, the IRAs should have been taken into account in determining the minimum amount Solomon should be required to pay under his Chapter 13 plan. See 11 U.S.C. Sec. 1325(b)(1)(B) (upon objection by trustee or unsecured creditor, when plan proposes less than full payment of unsecured claims, debtor must devote all his projected disposable income for typical three-year term to payments under the plan). The Trustee also objected to the plan on the ground that it did not satisfy the "good faith" requirement of Sec. 1325(a)(3), but the bankruptcy court declined to address this fact-dependent issue, preferring to decide questions such as the disposable income requirement that could be resolved as a matter of law.

The bankruptcy court agreed with the Trustee and denied confirmation on the ground that Solomon's plan failed to provide for payment of all his projected disposable income when it failed to include some minimum amount attributable to allowed distributions from his IRAs. Under applicable non-bankruptcy law, the bankruptcy court noted, Solomon has the right to receive periodic distributions from these accounts without suffering a tax "penalty," despite his stated intention not to take such distributions. On appeal, the district court affirmed. Solomon appeals, and the Trustee cross-appeals, arguing that confirmation should be denied since the plan was not filed in good faith.

II.

A.

The Trustee objected to confirmation of Solomon's Chapter 13 plan on the ground that the plan did not meet the "disposable income" requirement of Sec. 1325(b) since it failed to include hypothetical withdrawals from the IRAs in the calculation of Solomon's monthly income. We hold, however, that the funds invested in Solomon's IRAs are not "disposable income" within the meaning of Sec. 1325(b)(2).

The statute defines "disposable income" as "income which is received by the debtor and which is not reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor." 11 U.S.C. Sec. 1325(b)(2). If the trustee or the holder of an allowed unsecured claim objects to the confirmation of a Chapter 13 plan and the plan proposes less than full payment of unsecured claims, the plan may be confirmed only if it provides for payment of "all of the debtor's projected disposable income" to be received during the life of the plan. 11 U.S.C. Sec. 1325(b)(1)(B).

Solomon's IRAs are not "income" under the clear terms of this section. Both the statutory definition of "disposable income" as income that is received by the debtor as well as the requirement that projected income must be calculated over the life of the plan contemplate income that a debtor is actually receiving at the time of confirmation. Projected disposable income typically is calculated by multiplying a debtor's monthly income at the time of confirmation by 36 months, the normal duration of a Chapter 13 plan, then determining the portion of that income which is "disposable" according to the statutory definition. See Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 357 (9th Cir.1994). It is undisputed that, at the time of the confirmation hearing on Solomon's plan, he was not actually receiving any disbursements from his IRAs; he further insisted that he had no intention of withdrawing funds from the IRAs during the life of the plan.

On these facts, we cannot sanction the bankruptcy court's inclusion of some hypothetical amount of income from the IRAs in the calculation of disposable income. "[R]ather than engaging in hopeless speculation about the future," a court should determine projected disposable income by calculating a debtor's "present monthly income and expenditures" and extending those amounts over the life of the plan. In re Crompton, 73 B.R. 800, 808 (Bankr.E.D.Pa.1987). Solomon's present, regular monthly income does not include distributions from his IRAs, and the bankruptcy court's imputation of amounts from such speculative distributions in its calculation of disposable income is contrary to the plain terms of the statutory definition.

Cases such as In re Schnabel, 153 B.R. 809 (Bankr.N.D.Ill.1993), and In re Hagel, 171 B.R. 686 (Bankr.D.Mont.1994), are distinguishable: they involved debtors who, at the time the bankruptcy petition was filed, were receiving regular monthly pension or social security payments. Schnabel, 153 B.R. at 812; Hagel, 171 B.R. at 687 & n. 3. In this case, by contrast, Solomon receives no regular distributions from his IRAs, has indicated no intent to take such distributions during the life of the Chapter 13 plan, and is not required to do so by the Internal Revenue Code until he reaches age 70 1/2. See 26 U.S.C. Sec. 408(a)(6); 26 C.F.R. Sec. 1.408-2(b)(6). Schnabel and Hagel thus do not require that these accounts be treated as a source of hypothetical income regularly received by Solomon.

B.

Although they are not a source of regular, periodic income, Solomon's IRAs are assets of the estate, much like a checking or savings account. See Education Assistance Corp. v. Zellner, 827 F.2d 1222, 1226 (8th Cir.1987) ($6,000 lump-sum payment from retirement fund, which Chapter 13 debtor transferred into IRA, was asset of the estate rather than disposable income); see also Official Bankr. Form 6, Schedule B (Personal Property) (listing "[i]nterests in IRA, ERISA, Keogh, or other pension or profit sharing plans" as personal property of the debtor); Official Bankr. Form 6, Summary of Schedules (debtor's real and personal property constitute assets of the estate). In fact,...