### 1999 D e c i sion s O p inion s of the U nit e d

S t a t e s C our t of Appe al s for the Thir d C ir c uit

10-27-1999 

# I n R e: Anes

P r e c e de n t i al or N on-P r e c e de n t i al :

D ock e t 99-7043

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. e du/thir dc ir c uit_1999/292Filed October 27, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 99-7043

IN RE: LUISA V. ANES; IN RE: ROBERT TIERNEY and BEVERLY TIERNEY,

Debtors

LUISA V. ANES; ROBERT TIERNEY and BEVERLY TIERNEY, Appellants

v.

CHARLES J. DEHART III, TRUSTEE, Appellee

On Appeal from the United States District Court for the Middle District of Pennsylvania
D.C. Civil Action No. 98-cv-00314 (Honorable James M. Munley)

Argued July 27, 1999

Before: SCIRICA and STAPLETON, Circuit Judges, and GREEN, District Judge*

(Filed October 27, 1999)

___________________________________________________ ______________

* The Honorable Clifford Scott Green, United States District Judge for the Eastern District of Pennsylvania, sitting by design ation.JOHN DiBERNARDINO, ESQUIRE

(ARGUED)
417 Iron Street
P.O. Box 599 Lehighton, Pennsylvania 18235

Attorney for Appellants

AGATHA R. McHALE, ESQUIRE (ARGUED)
P.O. Box 410 Hummelstown, Pennsylvania 17036

Attorney for Appellee

HENRY J. SOMMER, ESQUIRE Miller, Frank & Miller 640 PSFS Building
21 South 12th Street Philadelphia, Pennsylvania 19107

Attorney for Amicus Curiae- Appellant, National Association of Consumer Bankruptcy Attorneys

OPINION OF THE COURT

SCIRICA, Circuit Judge.

The issue on appeal is whether an individual debtor 's bankruptcy plan that proposes to repay a loan drawn from a retirement system without first paying unsecured creditors in full conforms with the Bankruptcy Code and, in particular, whether it violates 11 U.S.C. S 1325(b) (1). Debtors, Luisa Anes and Robert and Beverly Tierney, appeal the District Court's judgment to uphold the dismissal of their respective voluntary Chapter 13 bankruptcy petitions. The appeals in these otherwis e unrelated bankruptcy cases were consolidated on Apr il 6, 1998. See In re Anes, 216 B.R. 514, 514 (Bankr. M.D . Pa. 1998) (noting joint disposition of In re Anes and I n re Tierney).

2I

Luisa Anes is a New York City employee who particip ates in a mandatory pension plan administered by the New York City Employees Retirement System. Contributions are deducted from her paycheck on a monthly basis. In September 1995, Anes obtained a loan from the Retir ement System. The application characterized the loan as b eing made not from Anes' pension fund but from "other retirement system funds." Anes was permitted to bor row no more than 75% of the balance in her pension account

. Payments on the loan, including interest, are deduc ted from her paycheck, in addition to her regular pensi on contribution. If she fails to pay off the loan, the balance will be deducted from her pension balance.

Robert Tierney is a New Jersey firefighter whose mandatory pension is administered by the New Jersey Police and Fireman's Retirement Fund. In May 1996, he borrowed money from the fund under terms that allow employees to borrow no more than 50% of the amount of their retirement account. Loan payments are withhel d from Tierney's paycheck. If he fails to pay off the loan , the
balance owed will be deducted from his retirement a ccount.

Both Anes and the Tierneys (Robert and his wife Bev erly) filed for Chapter 13 bankruptcy on August 23, 1996, proposing to make full loan repayments by way of pa ycheck deductions but no payments to their unsecured credi tors. After Charles Dehart, the bankruptcy trustee, objec ted to the respective plans, the Bankruptcy Court rejected them, ruling that the Debtors had not borrowed money from their respective pension plans but rather had withdrawn f unds
from their retirement accounts. Because the debtors did not have a debt to the Retirement System, the court rul ed they could not "repay" that debt under their bankruptcy plans. See In re Anes, 216 B.R. at 514-15. The District Co urt affirmed,1 see In re Anes, No. 98-CV-0314, typescri pt op. at

___________________________________________________ ______________

1. The District Court agreed with the Bankruptcy Co urt "that a loan taken against a retirement account is not a `debt.' " In re Anes, No. 98-
CV-0314 at 3. It further concluded that because the payments were not directed at debts they constituted disposable incom e and had to be used to satisfy unsecured creditors under the Chapter 13 plans. See id.

32-4 (M.D. Pa. Nov. 23, 1998), and Debtors now appea l. We

will affirm, but on a different theory.

II

The Bankruptcy Court had jurisdiction under 28 U.S. C. S 1334. Confirmation of a proposed bankruptcy plan is a core bankruptcy matter. See 28 U.S.C. S 157(b)(2)(L ). The District Court, therefore, had jurisdiction to hear an appeal from the Bankruptcy Court's decision under 28 U.S.C

. S 158(a); our jurisdiction is provided by 28 U.S.C. S 158(d). In core matters, the District Court reviews the Ban kruptcy Court's findings of fact for clear error and its co nclusions of law de novo. See Meridian Bank v. Alten, 958 F.2d 1226,1229 (3d Cir. 1992). We exercise plenary revie w over the District Court's determination, exercising the same review exercised by the District Court over the Ban kruptcy Court. See In re Continental Airlines, 125 F.3d 120 , 128 (3d Cir. 1997).

III

The trustee contends that, whether or not the Debto rs' obligation to repay their respective retirement sys tems constitutes a debt for bankruptcy-law purposes, the repayment is impermissible under 11 U.S.C. S 1325(b )(1), which provides:

If the trustee or the holder of an allowed u nsecured claim objects to the confirmation of the pla n, then the court may not approve the plan unless, as of the effective date of the plan--

(A) the value of the property to be distrib ute d under the plan on account of such claim is not les s than the amount of such claim; or

(B) the plan provides that all of the debto r's projected disposable income to be received in the thre e-year period beginning on the date that the first payment is due under the plan will be applied to make p ayments under the plan.

Because the trustee has objected to the Debtors' pl ans and the plans would not repay the unsecured creditors i n full,

4the plans can be confirmed only under S 1325(b)(1)( B),

requiring all of the debtors' projected disposable income to be applied to unsecured debts for three years. Disp osable income, for individuals not engaged in business suc h as Anes and the Tierney's, is that income "not reasona bly necessary to be expended for the maintenance or sup port of the debtor or a dependent of the debtor . . . ." Id

. S 1325(b)(2)(A). Section 1325(b)(1)(B) contains no exception for repayment of secured debts. Debtors, therefore, can make the proposed payments only if those payments a re reasonably necessary for their maintenance or suppo rt.

The Court of Appeals for the Sixth Circuit has held that repayment of amounts withdrawn from retirement acco unts is not reasonably necessary for a debtor's maintena nce or support, requiring that payments be made, if at all , only
after satisfaction of all unsecured debts. See Hars hbarger v. Pees (In re Harshbarger), 66 F.3d 775, 777 (6th Cir . 1995); accord In re Gilliam, 227 B.R. 849, 851 (Bankr. S.D . Ind. 1998); In re Scott, 142 B.R. 126, 134 (Bankr. E.D. Va. 1992). We agree. If the Debtors do not make the pro posed payments, the retirement systems will deduct the ba lance owed from their retirement accounts. The payments, even if classified as debt payments, therefore, will increa se their retirement benefits rather than repay the retiremen t systems or ensure the viability of either pension s ystem. In effect, the payments are contributions to the Debto rs' retirement accounts. Voluntary contributions to ret irement plans, however, are not reasonably necessary for a debtor's maintenance or support and must be made from dispos able income. See In re Cornelius, 195 B.R. 831, 835 (Ban kr. N.D.N.Y. 1995); In re Cavanaugh, 175 B.R. 369, 373 & n.3 (Bankr. D. Idaho 1994); In re Fountain, 142 B.R. 13 5, 137 (Bankr. E.D. Va.1992); In re Festner, 54 B.R. 532, 533 (Bankr. E.D.N.C.1985). As one bankruptcy court expl ained in refusing to confirm a plan that proposed to make mortgage payments on non-residential property rathe r than satisfy unsecured creditors, "[a]lthough investment s may be financially prudent, they certainly are not necessa ry expenses for the support of the debtors or their de pendents.
Investments of this nature are therefore made with disposable income; disposable income is not what is left after they are made." In re Lindsey, 122 B.R. 157, 158

5(Bankr. M.D. Fla.1991). Debtors' proposed payments,

regardless of their financial prudence, must be und erstood as being made out of "disposable income" under the terms of their proposed plans.

Without disputing that the loan payments are not reasonably necessary to their maintenance or suppor t, Debtors argue the payments are nevertheless permiss ible under S 1325(b)(1), contending primarily that disal lowance of repayment of retirement plan loans will create counterproductive incentives for people anticipatin g bankruptcy. Debtors maintain that a person expectin g to file for bankruptcy who needs to purchase an asset necessary for his or her maintenance or support (su ch as an automobile) will choose to finance the purchase with a loan secured by the asset (an automobile loan) rath er than by borrowing against retirement funds, because paym ents on a loan secured by an asset necessary for a debto r's maintenance or support are permissible under S 1325 (b)(1).
Because the interest rate on a loan from a retireme nt plan may be lower than one secured by an asset such as a n automobile, Debtors assert that the Bankruptcy Cour t's
decision will increase total debt levels and reduce unsecured creditors' recovery. Debtors also contend that those with debts to their retirement systems will b e encouraged to file for bankruptcy under Chapter 7 r ather than Chapter 13, because Chapter 7 permits discharg e of debts without regard to debtor's use of future inco me, see 11 U.S.C. S 726, freeing the debtor to build up his or her
retirement account.

Where, as here, the language of a statute is unambiguous, we will enforce that language as long as "the statutory scheme is coherent and consistent." Robin son v. Shell Oil Co., 519 U.S. 337, 340 (1997) (internal q uotation marks omitted). Therefore, Debtors' objections to S 1325(b)(1)'s consequences, if valid, must be dire cted to Congress.

As we have noted, the proposed loan payments are properly understood to be payments made using dispo sable income. Because the proposed plans call for repayme nt of the respective retirement systems out of disposable income

6without full satisfaction of the Debtors' unsecured debts,

they were properly rejected under S 1325(b)(1)(B).2

IV

Debtors contend their retirement systems have a rig ht to deduct loan payments from their respective paycheck s under the doctrine of recoupment. Maintaining that neither they nor the Bankruptcy Court can prevent the retir ement systems from effectuating these deductions, Debtors assert that recoupment may be made in preference to other creditors' claims. Debtors, however, are mistaken a s to the applicability of recoupment.

The law of recoupment is best understood in contras t to the related doctrine of setoff. See University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 106 5, 1079 (3d Cir. 1992). "The right of setoff (also called ` offset') allows entities that owe each other money to apply their m utual debts against each other, thereby avoiding `the abs urdity of making A pay B when B owes A.' " Citizens Bank v. S trumpf, 516 U.S. 16, 18 (1995) (citation omitted). With exc eptions not relevant here, Congress has specified that bank ruptcy law does not affect a creditor's right of setoff, p rovided that both the creditor's claim against the debtor and th e debtor's claim against the creditor arose before the debtor went into bankruptcy. See 11 U.S.C. S 553(a); 3 University Me d. Ctr.,
973 F.2d at 1079.

The common-law doctrine of recoupment "is not codif ied in the Bankruptcy Code, but has been established th rough decisional law." Megafoods Stores, Inc. v. Flagstaf f Realty Assocs. (In re Flagstaff Realty Assocs.), 60 F.3d 1 031, 1035

___________________________________________________ ______________

2. Having determined that the proposed payments are an inappropriate use of disposable income, we need not consider whet her Debtors have secured debts to their retirement systems. See Hars hbarger, 66 F.3d at 778; Gilliam, 227 B.R. at 851 n.2.

3. "Except as otherwise provided in this section an d in sections 362 and 363 of this title, this title does not affect any r ight of a creditor to

offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the c ommencement of the case . . . ." 11 U.S.C. S 553(a).

7(3d Cir. 1995). Like a setoff, recoupment permits a creditor

that owes a debt to the debtor to reduce the amount of its debt by the amount of a debt owed by the debtor to the creditor. See University Med. Ctr., 973 F.2d at 107 9-80; Bustamante v. Johnson (In re McConnell), 934 F.2d 6 62, 667 (5th Cir. 1991). But the right of recoupment, u nlike the right to setoff, exists only where the two debts ar ise out of the same transaction. See University Med. Ctr., 973 F.2d at 1079; Flagstaff Realty, 60 F.3d at 1035; Newbery Co rp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1399 (9th Ci r. 1996). A creditor with a right of recoupment genera lly can recoup the full amount owed, to the exclusion of ot her creditors. See Flagstaff Realty, 60 F.3d at 1035 (" A claim subject to recoupment avoids the usual bankruptcy channels and thus, in essence, is given priority ov er other creditors' claims."); United States Abatement Corp. v. Mobil Exploration and Producing U.S., Inc. (In re United States Abatement Corp.), 79 F.3d 393, 398 & n.13 (5th Cir. 1996). The right of recoupment is not subject to the S 553 requirement that both debts arise prior to the debt or's entry into bankruptcy. See Lee v. Schweiker, 739 F.2d 870 , 875 (3d Cir. 1984).

Assuming arguendo that Debtors' obligations to repa y the loans in question constitute a debt for bankruptcy purposes, the loan payments nevertheless do not con stitute recoupment. New York City, for example, would have a right to recoup Anes' loan obligation from her sala ry only if Anes' obligation to repay the loan and the city's o bligation to pay her salary arose from the same transaction. In University Med. Ctr., we emphasized that the doctri ne of recoupment must be narrowly construed in the bankru ptcy

context:

For the purposes of recoupment, a mere logic al relationship is not enough: the "fact that t he same two parties are involved, and that a similar sub ject matter gave rise to both claims, . . . does not mea n that the two arose from the `same transaction.' " Rat her, both debts must arise out of a single integrated transaction so that it would be inequitable for the debt or to enjoy
the benefits of that transaction without als o meeting its obligations. Use of this stricter standard f or delineating

8the bounds of a transaction in the context o f

recoupment is in accord with the principle t hat this doctrine, as a non-statutory, equitable exce ption to the automatic stay, should be narrowly construed

.

973 F.2d at 1081 (quoting Lee, 739 F.2d at 875 and citing Ashland Petroleum Co. v. Appel (In re B&L Oil Co.), 782 F.2d 155, 158 (10th Cir. 1986)) (omission in original). Anes' debt
arises from the loan she obtained from the Retireme nt System, whereas the city's obligation to pay her sa lary arises from her contract of employment and performa nce of her job. These obligations cannot satisfy the Unive rsity Med. Ctr. standard. The connection between Tierney's obl igation to the New Jersey Police and Fireman's Retirement F und and New Jersey's obligation to pay him for performa nce of his duties as a firefighter similarly cannot meet t he University Med. Ctr. test.

The respective retirement systems also may not cont inue to deduct loan payments in preference to unsecured creditors under the law of setoff. Assuming again t hat Anes has a debt to the Retirement System, the System has at most a right to set off Anes' debt against the city 's obligation to pay Anes' salary. Section 553(a), how ever, does not exempt the setoff from S 1325(b)(1). Secti on 553(a) exempts a creditor's right of setoff from the bankr uptcy code only where each party's obligation arose prior to commencement of the bankruptcy case. See 11 U.S.C. S 553(3); see also University Med. Ctr., 973 F.2d a t 1079; Davidovich v. Welton (In re Davidovich), 901 F.2d 1 533, 1537 (10th Cir. 1990). Anes' debt to the Retirement System (if debt it was) arose when she obtained the loan, before she entered bankruptcy. The city, however, has no oblig ation to pay Anes' salary until she performs the services fo r which she is employed. Any setoff of Anes' salary against her alleged debt to the Retirement System, therefore, m ust be consistent with S 1325(b)(1). The same dynamic appl ies in Tierney's case requiring any setoff to conform to S 1325(b)(1)'s requirements.

Because the salary deductions are neither a recoupm ent nor a valid setoff under S 553(a), we agree with th ose courts that have held that a bankruptcy court may order an employer to stop deducting a debtor's payments on a loan

9from the debtor's retirement account from the debto r's

salary. See In re Delnero, 191 B.R. 539, 543 (Bankr

. N.D.N.Y. 1996); In re Carpenter, 23 B.R. 318, 320 ( Bankr. D.N.J. 1982).

V

For the reasons given, we will affirm the judgment of the
District Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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