1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-27-1999

In Re: Anes

Precedential or Non-Precedential:

Docket 99-7043

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Recommended Citation

"In Re: Anes" (1999). 1999 Decisions. Paper 292.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/292
Filed 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 designation. 
 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 otherwise 

unrelated bankruptcy cases were consolidated on April 6, 

1998. See In re Anes, 216 B.R. 514, 514 (Bankr. M.D. Pa. 

1998) (noting joint disposition of In re Anes and In re 

Tierney). 

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I 

Luisa Anes is a New York City employee who participates 

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 Retirement 

System. The application characterized the loan as being 

made not from Anes' pension fund but from "other 

retirement system funds." Anes was permitted to borrow no 

more than 75% of the balance in her pension account. 

Payments on the loan, including interest, are deducted 

from her paycheck, in addition to her regular pension 

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 withheld from 

Tierney's paycheck. If he fails to pay off the loan, the 

balance owed will be deducted from his retirement account. 

Both Anes and the Tierneys (Robert and his wife Beverly) 

filed for Chapter 13 bankruptcy on August 23, 1996,

proposing to make full loan repayments by way of paycheck 

deductions but no payments to their unsecured creditors. 

After Charles Dehart, the bankruptcy trustee, objected 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 funds 

from their retirement accounts. Because the debtors did not 

have a debt to the Retirement System, the court ruled they 

could not "repay" that debt under their bankruptcy plans. 

See In re Anes, 216 B.R. at 514-15. The District Court 

affirmed,1 see In re Anes, No. 98-CV-0314, typescript op. at 

_________________________________________________________________ 

1. The District Court agreed with the Bankruptcy Court "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 income and had to be used 

to satisfy unsecured creditors under the Chapter 13 plans. See id. 

 3 
2-4 (M.D. Pa. Nov. 23, 1998), and Debtors now appeal. 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 Bankruptcy 

Court's findings of fact for clear error and its conclusions of 

law de novo. See Meridian Bank v. Alten, 958 F.2d 

1226,1229 (3d Cir. 1992). We exercise plenary review over 

the District Court's determination, exercising the same 

review exercised by the District Court over the Bankruptcy 

Court. See In re Continental Airlines, 125 F.3d 120, 128 (3d 

Cir. 1997). 

III 

The trustee contends that, whether or not the Debtors' 

obligation to repay their respective retirement systems 

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 unsecured 

 claim objects to the confirmation of the plan, 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 distribute d under 

 the plan on account of such claim is not less than the 

 amount of such claim; or 

 (B) the plan provides that all of the debtor's projected 

 disposable income to be received in the three-year 

 period beginning on the date that the first payment is 

 due under the plan will be applied to make payments 

 under the plan. 

Because the trustee has objected to the Debtors' plans and 

the plans would not repay the unsecured creditors in full, 

 4 
the 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. Disposable 

income, for individuals not engaged in business such as 

Anes and the Tierney's, is that income "not reasonably 

necessary to be expended for the maintenance or support 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 are 

reasonably necessary for their maintenance or support. 

The Court of Appeals for the Sixth Circuit has held that 

repayment of amounts withdrawn from retirement accounts 

is not reasonably necessary for a debtor's maintenance or 

support, requiring that payments be made, if at all, only 

after satisfaction of all unsecured debts. See Harshbarger 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 proposed 

payments, the retirement systems will deduct the balance 

owed from their retirement accounts. The payments, even if 

classified as debt payments, therefore, will increase their 

retirement benefits rather than repay the retirement 

systems or ensure the viability of either pension system. In 

effect, the payments are contributions to the Debtors' 

retirement accounts. Voluntary contributions to retirement 

plans, however, are not reasonably necessary for a debtor's 

maintenance or support and must be made from disposable 

income. See In re Cornelius, 195 B.R. 831, 835 (Bankr. 

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. 135, 137 

(Bankr. E.D. Va.1992); In re Festner, 54 B.R. 532, 533 

(Bankr. E.D.N.C.1985). As one bankruptcy court explained 

in refusing to confirm a plan that proposed to make

mortgage payments on non-residential property rather than 

satisfy unsecured creditors, "[a]lthough investments may be 

financially prudent, they certainly are not necessary 

expenses for the support of the debtors or their dependents. 

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 understood 

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 support, 

Debtors argue the payments are nevertheless permissible 

under S 1325(b)(1), contending primarily that disallowance 

of repayment of retirement plan loans will create 

counterproductive incentives for people anticipating 

bankruptcy. Debtors maintain that a person expecting to 

file for bankruptcy who needs to purchase an asset 

necessary for his or her maintenance or support (such as 

an automobile) will choose to finance the purchase with a 

loan secured by the asset (an automobile loan) rather than 

by borrowing against retirement funds, because payments 

on a loan secured by an asset necessary for a debtor's 

maintenance or support are permissible under S 1325(b)(1). 

Because the interest rate on a loan from a retirement plan 

may be lower than one secured by an asset such as an 

automobile, Debtors assert that the Bankruptcy Court's 

decision will increase total debt levels and reduce

unsecured creditors' recovery. Debtors also contend that 

those with debts to their retirement systems will be 

encouraged to file for bankruptcy under Chapter 7 rather 

than Chapter 13, because Chapter 7 permits discharge of 

debts without regard to debtor's use of future income, 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." Robinson v. 

Shell Oil Co., 519 U.S. 337, 340 (1997) (internal quotation 

marks omitted). Therefore, Debtors' objections to 

S 1325(b)(1)'s consequences, if valid, must be directed to 

Congress. 

As we have noted, the proposed loan payments are 

properly understood to be payments made using disposable 

income. Because the proposed plans call for repayment of 

the respective retirement systems out of disposable income 

 6 
without 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 right to 

deduct loan payments from their respective paychecks 

under the doctrine of recoupment. Maintaining that neither 

they nor the Bankruptcy Court can prevent the retirement 

systems from effectuating these deductions, Debtors assert 

that recoupment may be made in preference to other 

creditors' claims. Debtors, however, are mistaken as to the 

applicability of recoupment. 

The law of recoupment is best understood in contrast to 

the related doctrine of setoff. See University Med. Ctr. v. 

Sullivan (In re University Med. Ctr.), 973 F.2d 1065, 1079 

(3d Cir. 1992). "The right of setoff (also called `offset') allows 

entities that owe each other money to apply their mutual 

debts against each other, thereby avoiding `the absurdity of 

making A pay B when B owes A.' " Citizens Bank v. Strumpf, 

516 U.S. 16, 18 (1995) (citation omitted). With exceptions 

not relevant here, Congress has specified that bankruptcy 

law does not affect a creditor's right of setoff, provided that 

both the creditor's claim against the debtor and the debtor's 

claim against the creditor arose before the debtor went into 

bankruptcy. See 11 U.S.C. S 553(a); 3 University Med. Ctr., 

973 F.2d at 1079. 

The common-law doctrine of recoupment "is not codified 

in the Bankruptcy Code, but has been established through 

decisional law." Megafoods Stores, Inc. v. Flagstaff Realty 

Assocs. (In re Flagstaff Realty Assocs.), 60 F.3d 1031, 1035 

_________________________________________________________________ 

2. Having determined that the proposed payments are an inappropriate 

use of disposable income, we need not consider whether Debtors have 

secured debts to their retirement systems. See Harshbarger, 66 F.3d at 

778; Gilliam, 227 B.R. at 851 n.2. 

3. "Except as otherwise provided in this section and in sections 362 and 

363 of this title, this title does not affect any right 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 commencement 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 1079-80; 

Bustamante v. Johnson (In re McConnell), 934 F.2d 662, 

667 (5th Cir. 1991). But the right of recoupment, unlike the 

right to setoff, exists only where the two debts arise out of 

the same transaction. See University Med. Ctr., 973 F.2d at 

1079; Flagstaff Realty, 60 F.3d at 1035; Newbery Corp. v. 

Fireman's Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 

1996). A creditor with a right of recoupment generally can 

recoup the full amount owed, to the exclusion of other 

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 over 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 debtor's entry 

into bankruptcy. See Lee v. Schweiker, 739 F.2d 870, 875 

(3d Cir. 1984). 

Assuming arguendo that Debtors' obligations to repay the 

loans in question constitute a debt for bankruptcy 

purposes, the loan payments nevertheless do not constitute 

recoupment. New York City, for example, would have a 

right to recoup Anes' loan obligation from her salary only if 

Anes' obligation to repay the loan and the city's obligation 

to pay her salary arose from the same transaction. In 

University Med. Ctr., we emphasized that the doctrine of 

recoupment must be narrowly construed in the bankruptcy 

context: 

 For the purposes of recoupment, a mere logical 

 relationship is not enough: the "fact that the same two 

 parties are involved, and that a similar subject matter 

 gave rise to both claims, . . . does not mean that the 

 two arose from the `same transaction.' " Rather, both 

 debts must arise out of a single integrated transaction 

 so that it would be inequitable for the debtor to enjoy 

 the benefits of that transaction without also meeting its 

 obligations. Use of this stricter standard for delineating 

 8 
 the bounds of a transaction in the context of 

 recoupment is in accord with the principle that this 

 doctrine, as a non-statutory, equitable exception 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 Retirement 

System, whereas the city's obligation to pay her salary 

arises from her contract of employment and performance of 

her job. These obligations cannot satisfy the University Med. 

Ctr. standard. The connection between Tierney's obligation 

to the New Jersey Police and Fireman's Retirement Fund 

and New Jersey's obligation to pay him for performance of 

his duties as a firefighter similarly cannot meet the 

University Med. Ctr. test. 

The respective retirement systems also may not continue 

to deduct loan payments in preference to unsecured 

creditors under the law of setoff. Assuming again that 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), however, 

does not exempt the setoff from S 1325(b)(1). Section 553(a) 

exempts a creditor's right of setoff from the bankruptcy 

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 at 1079; 

Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 

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 obligation to 

pay Anes' salary until she performs the services for which 

she is employed. Any setoff of Anes' salary against her 

alleged debt to the Retirement System, therefore, must be 

consistent with S 1325(b)(1). The same dynamic applies in 

Tierney's case requiring any setoff to conform to 

S 1325(b)(1)'s requirements. 

Because the salary deductions are neither a recoupment 

nor a valid setoff under S 553(a), we agree with those courts 

that have held that a bankruptcy court may order an

employer to stop deducting a debtor's payments on a loan 

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

 10