Page 4
Ninth Circuit:
Voluntary Retirement Contributions Are Not ‘Disposable Income’
Majority Concludes Law ‘Unambiguously’ Excludes Contributions in Chapter 13 Cases, Drawing Dissent by Callahan Who Says Section Is Capable of Varying Interpretations
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held Friday, in a 2-1 decision, that a debtor’s voluntary contributions to employer-managed retirement plans do not constitute disposable income in a Chapter 13 bankruptcy proceeding, saying that the statutory language “unambiguously” carves them out, drawing sharp dissent by Circuit Judge Consuelo M. Callahan.
In Chapter 13 bankruptcy proceedings, designed for individual debtors with an ongoing source of income, such debtors may gain a discharge of their debts to unsecured creditors if they commit to a payment plan from their future income over the course of a three-to-five-year period. The bankruptcy petition must declare the debtor’s “assets and liabilities” and a provide a schedule of current income and expenditures.
Under the statutory scheme, only debtors who apply all “projected disposable income” to “make payments to unsecured creditors” are entitled to a discharge of unsecured debts upon completion of their plans.
For higher-earning debtors, Bankruptcy Code §1325(b) provides for the calculation of a person’s disposable income using an ability-to-pay test such that any “reasonably necessary” expenses are deducted along with certain statutorily excluded payments.
At issue is §541(b)(7), which provides that “[p]roperty of the estate” does not include any amount which is withheld by an employer from wages, or paid by employees, as contributions to any of the following:
“(I) an employee benefit plan that is subject to…the Employee Retirement Income Security Act of 1974 [such as a 401K]…; or
“(II)a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
“(III) a tax-deferred annuity under section 403(b) of the Internal Revenue Code of 1986;
except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2);….”
Known as the “hanging paragraph,” the final phrase is the focus of the appeal.
Voluntary Contributions
Appealing the judgment confirming her bankruptcy plan was debtor Jorden Saldana. A surgical technician earning about $101,776 annually, Saldana declared bankruptcy to reorganize her finances and seek relief from approximately $8,549 in unpaid taxes and $56,045 in other unsecured debts.
The trustee assigned to Saldana’s case objected to portions of her proposed plan which excluded voluntary retirement contributions, resulting in a negative disposable income calculation and providing for no payments to her unsecured creditors. Bankruptcy Judge Roger L. Efremsky of the Northern District of California sustained the objection.
Saldana updated her disposable income and filed an amended plan that called for the repayment of approximately 30% of her debts to unsecured creditors. Efremsky confirmed the plan and Saldana appealed.
District Court Judge Beth Labson Freeman of the Northern District of California affirmed, citing the 2012 decision by the Bankruptcy Appellate Panel of the Ninth Circuit in Parks v. Drummond (In re Parks), which held that voluntary retirement contributions are disposable income under §541(b)(7).
Senior Circuit Judge Sidney R. Thomas wrote the opinion reversing the judgment. Thomas acknowledged that courts have adopted four different interpretations of §541(b)(7) but concluded that “the statutory text unambiguously excludes voluntary contributions from a debtor’s disposable income in a Chapter 13 case.”
Circuit Judge Gabriel P. Sanchez joined in the opinion and Callahan dissented.
Plain Words
Thomas remarked:
“In construing a statute, ‘we begin with the plain words of the statute, employing the familiar canons of statutory construction.’….If the plain language is clear, our inquiry is complete.” Turning to §541(b)(7), he concluded:
“The words are plain enough. Congress declared that the referenced funds ‘shall not constitute disposable income as defined in section 1325(b)(2).’….The reference is to the type of contributions referred to in the preceding subsection. That is, ‘any amount’ ‘withheld by an employer from the wages of employees for payment as contributions’ or ‘received by an employer from employees for payment as contributions’ to specified retirement plans….Thus, pursuant to the plain language of the hanging paragraph, debtors can exclude any amount of their voluntary retirement contributions to employer-managed plans from their disposable income calculation under Chapter 13.”
He noted that prior to the 2005 enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”)—which added the hanging paragraph—there was an “overwhelming consensus” that voluntary retirement contributions constituted disposable income and said that “[w]e presume Congress intended to alter that consensus.”
Callahan’s View
In dissenting, Callahan wrote:
“The majority claims that 11 U.S.C. § 1325(b)(1), which has been referred to as the ‘hanging paragraph,’ and which has spawned at least four different judicial interpretations, is unambiguous. The majority’s focus on canons of statutory construction to unravel the ‘grammatical puzzle,’…leads it to adopt a result that is contrary to the general purpose of the underlying statute. A result for which there is really no evidence (other than the majority’s selective use of canons of statutory construction) that Congress intended.”
Noting some agreement with the majority, she said:
“We start at the same place. Before Congress passed the [BAPCPA] ‘courts routinely held that voluntary retirement contributions were disposable income for purposes of Chapter 13.’….This makes sense. The purpose of a Chapter 13 proceeding is to allow a debtor to ‘make steady payments to creditors over three to five years’…in return for which the debts are discharged….Why should the debtor’s choice of placing some of the disposable income in one particular type of investment make it unavailable to the creditors?”
The judge continued:
“I do not find the majority’s reasoning compelling because, as the majority admits, in the almost twenty years since the passage of the BABCPA, bankruptcy courts and circuit courts have found not one or two meanings of the ‘hanging paragraph’ but four meanings….I agree with my many colleagues who have found that the ‘hanging paragraph’ is truly ambiguous….”
Complimentary Interpretation
Under those circumstances, she opined:
“[A]s Congress’s intent in enacting the ‘hanging paragraph’—assuming it had an intent— eludes discovery, we must determine for ourselves how to enforce the ‘hanging paragraph.’ Consistent with another anon of construction, we should consider how to interpret it so that it fits into, and complements, the other provisions of bankruptcy law.”
Callahan agreed with the courts that have interpreted the section to allow for the “exclu[sion] from a debtor’s disposable post-petition income contributions to a retirement plan that are consistent with the debtor’s contributions for six months prior to bankruptcy,” saying it is “a workable solution that recognizes the competing interests and is consistent with the overall purposes of bankruptcy law.”
She declared that “[t]his approach does the least amount of harm until such time as Congress decides to clarify the statute or change the law.”
The case is In Re: Saldana v. Bronitsky, 23-15860.
Copyright 2024, Metropolitan News Company