Court Opinion

ID: 810992
Source: CourtListenerOpinion
Date Created: 2012-10-29 23:17:29+00
Date Added: 2024-06-11T18:00:39.802351
License: Public Domain

Case: 11-31046        Document: 00512035790              Page: 1        Date Filed: 10/29/2012

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                                      FILED
                                                                                   October 29, 2012

                                             No. 11-31046                            Lyle W. Cayce
                                                                                          Clerk

In the Matter of: BENJAMIN RAGOS; STELLA CANNON RAGOS,

                                                  Debtors

--------------------------------------------------------------------------
S.J. BEAULIEU, JR.,

                                                  Appellant
v.

BENJAMIN RAGOS and STELLA CANNON RAGOS,

                                                  Appellees

                   Appeal from the United States Bankruptcy Court
                        for the Eastern District of Louisiana

Before DAVIS, DENNIS, and HAYNES, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
        Chapter 13 of the Bankruptcy Code provides bankruptcy protection to
individuals with regular income whose debts fall within statutory limits. Unlike
bankruptcy debtors who file under Chapter 7 and must liquidate their assets,
Chapter 13 debtors are permitted to keep their property subject to a
court-approved plan under which they agree to pay creditors out of their future
income. This appeal presents the question of whether social security benefits are
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                                  No. 11-31046

included in a debtor’s projected disposable income in the formulation of a
Chapter 13 plan and the calculation of the future payments the debtor will be
required to make to creditors. Because we find that social security benefits are
not included in the projected disposable income calculation, we AFFIRM the
bankruptcy court’s order.
                                        I.
      Benjamin and Stella Ragos (“Debtors”) voluntarily filed a joint Chapter 13
bankruptcy petition on February 22, 2011. On schedule I (Current Income of
Individual Debtors), Debtors itemized their monthly income, including a $200.00
portion of their monthly social security benefits. Debtors’ actual monthly receipt
of social security benefits totals $1,854.00. Pursuant to a Chapter 13
reorganization, the Debtors filed a proposed payment plan. Under the terms of
the plan, creditors would receive all of Debtors’ declared monthly net income.
However, the Debtors would retain the undeclared balance of their social
security benefits, $1,654.00 each month.
      S.J. Beaulieu, Jr., the Chapter 13 Trustee (“Trustee”), objected to
confirmation of the Debtors’ plan because Debtors did not dedicate 100% of their
social security income to the plan for payment to creditors. Trustee additionally
argued that Debtors’ willful failure to commit their social security income to the
repayment of creditors indicated that their plan had not been proposed in good
faith. After a hearing, the bankruptcy judge rejected both of Trustee’s
arguments. The bankruptcy court based its ruling primarily on the language of
provisions of both the Bankruptcy Code and the Social Security Act, reflecting
a congressional intent to exclude social security benefits in calculating projected
disposable income. The bankruptcy court’s order was certified for appeal under
28 U.S.C. § 158(d)(2) and we granted the motion for appeal of the order to this
Court.

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                                         II.
      We review a bankruptcy court’s conclusions of law de novo and we review
its findings of facts for clear error. In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001)
(en banc). The bankruptcy court’s interpretation of a provision of the Bankruptcy
Code is a clear-cut question of law. However, “A bankruptcy court’s
determination that a debtor has [or has not] acted in bad faith is a finding of fact
reviewed for clear error.” In re Jacobsen, 609 F.3d 647, 652 (5th Cir. 2010). We
will sustain that court’s factual findings absent “a firm and definite conviction
that the bankruptcy court made a mistake.” In re Cahill, 428 F.3d 536, 542 (5th
Cir. 2005) (citation omitted) (internal quotation marks omitted) .
                                         III.
                                         A.
      Trustee argues first that the bankruptcy court erred by allowing Debtors
to exclude their social security benefits from the Debtors’ projected disposable
income dedicated to the payment of creditors.
      Bankruptcy Code § 1325(a) lists the conditions under which the court shall
confirm a Chapter 13 debtor’s payment plan, the essential requirement being
that it guarantee creditors at least as much payment as they would receive
through the debtor’s liquidation. See 11 U.S.C. § 1325 (2006). Although Debtors’
plan complies with § 1325(a), Trustee nonetheless relies upon a separate
provision of the Bankruptcy Code to challenge the plan. Trustee bases his
objection upon § 1325(b)(1)(B), which states:
      If the trustee . . . objects to the confirmation of the plan, then the
      court may not approve the plan unless, as of the effective date of the
      plan–
      ....
      (B) the plan provides that all of the debtor’s projected disposable
      income to be received in the applicable commitment period . . . will
      be applied to make payments to unsecured creditors under the plan.

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Id. (emphasis added). According to Trustee, the bankruptcy court should not
have approved the plan because it allows Debtors to withhold social security
benefits. This appeal thus asks us to decide whether a Chapter 13 debtor’s social
security income must be included in “projected disposable income.”
      The Trustee contends that the term “all of the debtor’s projected disposable
income” includes all sources of income and does not exclude social security
benefits. Under this view, because Debtors are receiving social security benefits
which they are keeping for themselves, they are withholding a portion of their
projected disposable income and “the court may not approve the plan.” Id.
      Although projected disposable income is not defined per se, we are guided
in this inquiry by two statutes. The first statute relevant here is the Bankruptcy
Code itself. Though “projected disposable income” is not defined in § 1325(b)(1),
the term “disposable income” is defined in the statute’s very next provision:
“[T]he term ‘disposable income’ means current monthly income received by the
debtor . . . less amounts reasonably necessary” for certain enumerated expenses.
Id. § 1325(b)(2) (emphasis added). “Current monthly income,” in turn, is
elsewhere defined as the average of “all sources” of the debtor’s monthly income
during the previous six-month period. See id. § 101(10A)(A). Importantly, the
statutory definition of “current monthly income” explicitly “excludes benefits
received under the Social Security Act.” Id. § 101(10A)(B).1 Trustee’s argument
thus rests on the uncertain premise that although social security benefits are not
included in “current monthly income,” which is the starting point for

      1
       The term ‘current monthly income’–
      ....
      (B) includes any amount paid by any entity other than the debtor (or in a joint case the
      debtor and the debtor’s spouse), on a regular basis for the household expenses of the
      debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not
      otherwise a dependent), but excludes benefits received under the Social Security Act[]
      ....
      Id.

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determining “disposable income,” “projected disposable income” should
nonetheless include a debtor’s social security income.
      We cannot square Trustee’s argument with the apparent intent of
Congress. If Congress excluded social security income from current monthly
income and disposable income, it makes little sense to circumvent that
prohibition by allowing social security income to be included in projected
disposable income. See Hamilton v. Lanning, 130 S. Ct. 2464, 2474 (2010)
(“[H]ad Congress intended for ‘projected’ to carry a specialized—and indeed,
unusual—meaning in Chapter 13, Congress would have said so expressly.”).
Nothing in the Bankruptcy Code suggests that bankruptcy courts may ignore the
statutory definition of disposable income in this manner. See Baud v. Carroll,
634 F.3d 327, 346 (6th Cir. 2011).
      The conclusion that Congress exempted social security benefits from
projected disposable income is also bolstered by two independently enacted
provisions of the Social Security Act. The first provision, Social Security Act §
407(a), was enacted in 1935, long before the enactment of the Bankruptcy Code.
That section provides:
      (a) . . . [N]one of the moneys paid or payable or rights existing under
      this subchapter shall be subject to execution, levy, attachment,
      garnishment, or other legal process, or to the operation of any
      bankruptcy or insolvency law.

42 U.S.C. § 407(a) (emphasis added). Section 407(a) thus makes it clear that
social security benefits such as the Debtors’ are not subject to the operation of
any bankruptcy law. Despite this explicit statutory language, some courts
however failed to read the § 407(a) as exempting social security benefits from
income available to pay creditors in Chapter 13 bankruptcy proceedings.
According to a 1983 House Conference Report,
      Based on the legislative history of the Bankruptcy Reform Act of
      1978, some bankruptcy courts ha[d] considered social security and

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      [Social Security Income] benefits listed by the debtor to be income
      for purposes of a Chapter XIII bankruptcy.2
The 1983 House Committee then made clear its intent to legislatively overrule
these cases and protect social security benefits by enacting a second provision
in § 407(b) of the Social Security Act, which states:

      No other provision of law, enacted before, on, or after April 20, 1983,
      may be construed to limit, supersede, or otherwise modify the
      provisions of this section except to the extent that it does so by
      express reference to this section.

42 U.S.C. § 407(b). According to the modified statute, even laws enacted after §
407 was enacted must expressly cite to § 407 if they wish to overcome social
security income’s exemption from the operation of any bankruptcy law. Id. These
two independently enacted provisions of the Social Security Act, read together
with the Bankruptcy Code, express the clear intent of Congress to protect Social
Security payments from bankruptcy process.
      The decisions of our sister circuits support this conclusion. In Baud v.
Carroll, 634 F.3d 327 (6th Cir. 2011), the Sixth Circuit considered a claim made
by a Michigan trustee under similar circumstances. The Baud trustee was also
trying to convince the court to recognize social security benefits as projected
disposable income. See id. at 330. The Sixth Circuit relied upon the clear
exclusion of social security benefits from the Bankruptcy Code’s definition of
“current monthly income” to reject the Trustee’s claim: “Were we to follow the
approach espoused by the Appellant, bankruptcy courts—. . . contrary to the
express statutory language—would be permitted to depart from the definition
of disposable income set forth in § 1325(b)(2) in virtually every case.” Id. at 347.
      The Eighth Circuit also considered a similar argument in In re Carpenter,
614 F.3d 930 (8th Cir. 2010). The debtor in Carpenter received a significant lump

      2
          H.R. REP. NO. 98-25, pt. 1, (1983), reprinted in 1983 U.S.C.C.A.N. 219, 302.

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sum social security payment just before filing for bankruptcy. Id. at 931. The
trustee argued that the lump sum payment was part of the bankruptcy estate.
Id. The court rejected this argument, relying on the clear language of the Social
Security Act § 407’s prohibition: “[Section] 407 does not contain any qualifying
language. It explicitly demands that no past or future social security payments
may be subject to the operation of any bankruptcy law.” Id. at 936.
      In response, Trustee argues that the Supreme Court’s recent decision in
Hamilton v. Lanning requires a different result. 130 S. Ct. 2464 (2010). Just
before her bankruptcy, the debtor in Lanning had received a one-time cash
buyout from her employer. Id. at 2470. Although all sources of income within the
six months prior to bankruptcy are included in disposable income, to include the
effects of the one-time buyout in her projected disposable income would have
grossly misrepresented her likely future income, obligating her to make
payments she would not be able to afford. See 11 U.S.C. § 101(10A)(A); Lanning,
130 S. Ct. at 2470. In light of this inequity, the Court addressed whether
projected disposable income could ever deviate from the statutorily-defined
disposable income figure. Lanning, 130 S. Ct. at 2469–71. The Lanning trustee
argued that projected disposable income was always identical to disposable
income, while the debtor argued that the figures could differ in certain
circumstances. See id. at 2471. The Court held that “when a bankruptcy court
calculates a debtor’s projected disposable income, the court may account for
changes in the debtor’s income or expenses that are known or virtually certain
at the time of confirmation.” Id. at 2478. However, the Court emphasized that
the two figures will normally be the same, stating that a court “should begin by
calculating disposable income, and in most cases, nothing more is required. Id.
at 2475. It is only in unusual cases that a court may go further and take into
account other known or virtually certain information about the debtor’s future
income or expenses.” Id. According to Trustee, the Debtors’ future social security

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benefits are precisely the kind of “known or virtually certain information about
the debtor’s future income” contemplated by the Court in Lanning. See id.
       Trustee is correct that Debtors’ social security benefit payments are
amounts certain to recur in the future and this fact is known to the debtors.
However, the facts before the Lanning Court and the issue those facts raised are
completely different from the issue in this case. Because of a material change of
circumstances, Lanning’s current income was not a reliable predictor of her
future income. Id. at 2470. Thus, her future income (projected disposable income)
was “virtually certain” to be different from her current income. Id. The Lanning
Court simply recognized that in calculating projected disposable income, a court
should consider and account for future changes in the income stream that are
known or virtually certain to occur. See id. at 2471–72, 2478 (“[W]e hold that .
. . the court may account for changes in the debtor’s income or expenses that are
known or virtually certain.”). Here, however, there has been no change in the
Debtors’ circumstances or in any income stream. Trustee simply seeks to
circumvent the exemption granted to social security income by accounting for it
in the future income (projected disposable income) calculation. However, the
mere existence of a statutorily exempt income stream the debtor has been
receiving for some time is not a change in circumstances, and Lanning does not
undermine our analysis.
       We said as much in In re Nowlin, where “we h[e]ld that a debtor’s
‘disposable income’ . . . is presumptively the debtor’s ‘projected disposable
income’ under § 1325(b)(1)(B), but that any party may rebut this presumption
by presenting evidence of present or reasonably certain future events that
substantially change the debtor’s financial situation.” 576 F.3d 258, 266 (5th Cir.
2009) (emphasis added).3 Because Trustee has not presented any evidence of a

       3
        See also Baud v. Carroll, 634 F.3d at 345; Cranmer v. Anderson, 463 B.R. 548, 553–54
(D. Utah 2011).

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substantial change in the Debtors’ financial situation or income, disposable
income is equivalent to projected disposable income.
       Trustee alternatively points to another sentence in Lanning as supporting
his argument. Specifically, the Trustee argues that the Lanning Court implicitly
endorsed jurisprudence which held social security benefits subject to bankruptcy
process despite the admonition not to do so in § 407. Lanning states that when
considering bankruptcy issues, prior “bankruptcy practice is telling because we
will not read the Bankruptcy Code to erode past bankruptcy practice absent a
clear indication that Congress intended such a departure.” 130 S. Ct. at 2473
(internal quotation marks omitted). Trustee points out that some bankruptcy
courts in Chapter 13 cases have historically included social security benefits in
their calculations of projected disposable income.4
       The problem with Trustee’s argument based on this sentence in Lanning
is that it completely ignores the final clause in the sentence, “absent a clear
indication that Congress intended such a departure.” Id. As explained above,
Congress made such a clear indication in 2005 when it passed the Bankruptcy
Abuse Prevention and Consumer Protection Act (“BAPCPA”), which amended
the Bankruptcy Code in many respects. Part of the BAPCPA’s revision included
the modification of the definition of “current monthly income” in 11 U.S.C. §
101(10A)(A)—the starting point for projected disposable income—to explicitly
exclude social security benefits. We consider this a “clear indication that
Congress intended . . . a departure” from the practice of including social security
benefits in projected disposable income. See id.; Lanning, 130 S. Ct. at 2473. As
the Sixth Circuit recognized in Baud, “Permitting the bankruptcy court—as the
Appellant would have us do—to include Social Security benefits in the
calculation of the Appellees’ projected disposable income essentially would read

       4
        See, e.g., In re Cornelius, 195 B.R. 831, 835 (Bankr. N.D.N.Y. 1995); In re Schnabel,
153 B.R. 809, 815–18 (Bankr. N.D. Ill. 1993).

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out of the Code BAPCPA’s revisions to the definition of disposable income.” 634
F.3d at 345.
       Lastly, Trustee alternatively argues that the fact that Debtors’ disposable
income is negative5 constitutes a “special circumstance” which permits complete
abandonment of the disposable income figure for purposes of establishing
projected disposable income. However, nothing in the Bankruptcy Code or
Lanning suggests that a negative disposable income is a relevant event that
warrants a complete rejection of the figure’s use. Moreover, it makes little sense
to create an exception which permits deviations for projected disposable income
only in those cases in which disposable income is negative. To the contrary,
debtors with negative disposable income will be the least able to afford
additional payments. Here, the Trustee and creditors have not objected to the
calculation of the income and expenses which resulted in a negative disposable
income. As a result, Trustee may not later assert that Debtors’ low disposable
income is a basis for seeking greater payments.
       Because including social security income in projected disposable income
would violate both the Bankruptcy Code and the Social Security Act, we hold
that social security benefits are not included in a debtor’s projected disposable
income.
                                             B.
       Trustee also argues that the bankruptcy court erred in finding that the
Debtors’ payment plan was proposed and filed in good faith. As stated in 11
U.S.C. § 1325(a), a debtor’s plan shall be confirmed if “the plan has been
proposed in good faith” and “the action of the debtor in filing the petition was in
good faith.” Trustee rests his argument on the fact that “debtors have not

       5
        Here, negative disposable income means that the Debtors’ qualifying expenses and
deductions ($6,717.62) exceed their income ($5,481.78), leaving the Debtors with a disposable
income of -$1,235.84 per month.

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committed all available income, including their [social] security income, to pay
their unsecured creditors.” Specifically, Trustee contends that “Debtors’
retention of almost 90% of their Social Security benefits over the term of a 60
month plan, while paying their unsecured creditors only 38% of their claims,
reflects a lack of good faith in the filing and proposing of their plan.”
      Contrary to the assertions of the Trustee, there is no evidence that the
Debtors have acted in bad faith or seek any improper result. Having already
concluded that Debtors’ plan fully complied with the Bankruptcy Code, it is
apparent that Debtors are not in bad faith merely for doing what the Code
permits them to do. We thus hold that retention of exempt social security
benefits alone is legally insufficient to support a finding of bad faith under the
Bankruptcy Code.
                                        IV.
      For the reasons stated above, the order of the bankruptcy court is
AFFIRMED.

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