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Penfound v. Ruskin

United States District Court, E.D. Michigan, Southern Division

September 20, 2019

JOHN S. PENFOUND and JILL L. PENFOUND, Appellants,
v.
DAVID Wm. RUSKIN, CHAPTER 13 TRUSTEE, Appellee.

          MEMORANDUM AND ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT[1]

          AVERN COHN UNITED STATES DISTRICT JUDGE

         I. Introduction

         This is a Chapter 13 bankruptcy appeal. Appellants John and Jill Penfound (Debtors) appeal the bankruptcy court's order confirming a repayment plan. Specifically, the Debtors challenge the bankruptcy court’s determination that Debtors may not exclude their voluntary post-petition contributions to their 401(k) retirement plan from the calculation of disposable income. The Trustee, as Appellee, contends that the Debtors’ payments to their 401(k) are considered part of disposable income. The Court agrees based on its reading of relevant Sixth Circuit law. Accordingly, the decision of the bankruptcy court is AFFIRMED.

         II. Background

         Debtors filed for Chapter 13 bankruptcy on June 22, 2018. Line 5(c) of Debtors’ Schedule I reflects a voluntary contribution to John Penfound’s 401(k) retirement account in the amount of $1, 375.01 per month. John Penfound has been employed at Laird Technologies, Inc. since May 7, 2018. He previously worked at Protodesign, Inc. from August 2017 to March 2018. Prior to Protodesign, John Penfound worked at Jabil/Iqor from 1993 to 2017. During his tenure at Laird and Jabil/Iqor, he always contributed to his 401(k) retirement accounts; Protodesign did not offer a retirement plan. John Penfound is 54 years old and intends on retiring at age 62 – approximately three (3) years after the expiration of his Chapter 13 Plan. It has always been his intention to continue making voluntary contributions to his retirement account.

         On August 6, 2018, Debtors filed a First Amended Chapter 13 Plan. The Plan proposed a payment of $513.30 bi-weekly over sixty (60) months with a minimum dividend to Class 9 general unsecured creditors in the amount of $22, 175.56, or approximately 5.5% of the unsecured claims. The Plan also deducted Debtors’ voluntary monthly contribution to John Penford’s 401(k) plan in the amount of $1, 375 from disposable income. The Trustee objected to Debtors’ exclusion of their voluntary retirement contributions because it would place approximately $82, 000 out of the reach of unsecured creditors.

         The bankruptcy court concluded that based on relevant case law, particularly In re: Seafort, 669 F.3d. 662 (6th Cir. 2012); and In re: Rogers, No. 12-32558 (Bankr. E.D. Mich. Oct. 15, 2012) (unpublished), the Debtors may not exclude voluntary contributions to their 401(k) retirement plan from the calculation of disposable income. The Bankruptcy Court further held that the retirement contributions must be paid into the Debtors’ First Amended Plan. Debtors subsequently requested confirmation with a payment increase to comply with the court’s ruling. The confirmation order increased Debtors’ Plan payment from $513.30 biweekly to $1, 147.92 bi-weekly effective October 18, 2018 with a step payment increase to $1, 714.62 bi-weekly effective September 1, 2020.[2]

         III. Legal Standard

         On appeal to the district court from an order of the bankruptcy court, “the district court is required to review the bankruptcy court’s legal conclusions de novo and review factual questions on a clearly erroneous standard.” In re Araj, 371 B.R. 240, 241 (E.D. Mich. 2007) (citing In re Burns, 322 F.3d 421, 425 (6th Cir. 2003)); In re Made in Detroit, 414 F.3d 576, 580 (6th Cir. 2005).

         IV. Discussion

         A.

         The term “disposable income” is defined in relevant part as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance and support of the debtor.” 11 U.S.C. § 1325(b)(2)(A)(i). If a debtor has an above median monthly income, the “amounts reasonably necessary to be expended” is determined by the “means test” set forth in § 707(b)(2). 11 U.S.C. § 1325(b)(3).

         The bankruptcy court held that the Debtors voluntary post-petition retirement contributions are not deducted from disposable income and are therefore included in the calculation of “projected disposable income” available to pay creditors. As noted above, the bankruptcy court relied primarily on two cases: In re: Seafort and In re: Rogers.

         In Seafort, the Sixth Circuit considered whether income that becomes available after a debtor repays a 401(k) loan during the plan period is “projected disposable income” to be paid to unsecured creditors or whether the income can be used to begin making voluntary contributions to the debtors’ 401(k) plans and deemed excludable from both disposable income and property of the estate under 11 U.S.C. § 541(a)(1)[3] and (b)(7).[4]

         The Sixth Circuit first discussed the “competing views” regarding voluntary ...


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