Court Opinion

ID: 6936524
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:36:05.106191+00
Date Added: 2024-06-11T16:07:30.000266
License: Public Domain

MICHAEL, Circuit Judge,
dissenting:
I respectfully dissent.
Facing tort claims of sexual misconduct made by several former medical patients who seek damages of $160 million, the debtor, Neil Solomon, filed a bankruptcy petition. In an attempt to wipe out these claims under the broader “super-discharge” available under Chapter 13, Solomon proposes a plan that offers his former patients (his only creditors) a total of just $45,000, payable in monthly installments of $750 over the next five years. But Solomon, who has retired, refuses to make available to his creditors any income (which is readily accessible without penalty) from three exempt IRAs worth more than $1.4 million. He does not need any income from the IRAs for the reasonable maintenance and support of himself or any dependent. I would hold that income he could elect to receive without penalty from his IRAs may be counted as projected disposable income for purposes of his Chapter 13 plan. This result best comports with the language of section 1325(b) and the overall purposes of Chapter 13, which gives a debtor such as Solomon an enormous break under the “super-discharge.”
I.
A.
A debtor can not be forced into Chapter 13 bankruptcy, as he can be into Chapter 7. The debtor alone makes the affirmative decision to seek the protections of Chapter 13 in order to obtain the “super-discharge.” See 11 U.S.C. § 303(a). Here, Solomon filed un*1045der Chapter 13 because only under that chapter can he wipe out the claims his patients made against him for sexual misconduct. “Super-discharge,” however, does not come without a price, and indeed it should not. The debtor must be willing to sacrifice his projected disposable income for three years. Specifically, under section 1325(b)(1), when an objection is made and the Chapter 13 plan does not afford full payment of unsecured claims, the court may not approve the plan unless it “provides that all of the debt- or’s projected disposable income to be received in the three-year period beginning on the date that first payment is due under the plan -will be applied to make payments under the plan.” Projected pension and social security payments are taken into account in calculating disposable income under Chapter 13. In re Hagel, 171 B.R. 686, 689 (Bankr.D.Mont.1994); In re Schnabel, 153 B.R. 809, 818 (Bankr.N.D.Ill.1993). Likewise, if a Chapter 13 debtor has retired and is old enough to take distributions from his IRA without penalty under the federal tax laws, his projected IRA distributions should be included in the disposable income calculation.1 Including social security, pension or IRA payments in the disposable income calculation does not mean that the Chapter 13 debtor is thrown into the streets to beg or forced onto the public assistance rolls. Section 1325(b)(2) defines “disposable income” as “income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor.” Thus, even under Chapter 13, the claims of creditors are secondary to the reasonable needs of the debtor and his dependents. Yet once those needs are met, the creditors are entitled to the remaining income in the three-year period.
Although section 1325(b)(2) defines “disposable income” as “income which is received by the debtor,” section 1325(b)(1)(B) calls for a “projection” of income for three years into the future. The court, not the debtor, has the final say in projecting the debtor’s disposable income. 5 Collier on Bankruptcy ¶ 1325.08[4][a] (15th ed. 1995). In the usual case, the projection is relatively straightforward. E.g., Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 357 (9th Cir.1994) (court multiplies the debtor’s monthly income by 36 and then determines how much of the total is income that is disposable). This, however, is not the usual case.
Solomon is 62 years old. Before January 1, 1994, he had a net monthly income of $14,800. As of January 1, 1994, Solomon reports a net monthly income of $2,650; of this amount, $2,146 is his state pension payment from Maryland. It is from the $2,650 that Solomon proposes to make monthly payments of $750 to his creditors. Solomon’s monthly income has dropped substantially because he surrendered his medical license and stopped practicing medicine. He plans to support himself with his state pension and interest and dividends from exempt assets owned jointly with his wife.
The point here is simple: Solomon has retired. One would, therefore, expect (and could reasonably project) that Solomon would start to draw income from his IRAs. They are, after all, called retirement accounts.
The Internal Revenue Code supports this analysis. It allows a person to draw income without penalty from his IRA once he reaches the age of 591 See 26 U.S.C. § 408(a)(6); 26 C.F.R. § 1.408-l(b)(6). Congress therefore determined that 59jé is a reasonable age to begin retirement. Because Solomon is 62, has retired, and can never return to the practice of medicine, it is reasonable to project that his disposable income during the *1046next three years will include income from his IRAs.
Under Chapter 13 Solomon can still shield all of his assets, including exempt assets such as his IRAs. And he can obtain a “super-discharge” and free himself of the sexual misconduct claims. In return, Solomon must do one thing: pay all of his projected disposable income (including that from exempt assets) to his creditors during the relatively short life of his plan. This is a small price to pay for any debtor in such trouble, regardless of his disposable income level.. The bankruptcy and district courts were right to refuse confirmation of a plan that did not project income from Solomon’s IRAs.
B.
The majority says that requiring a Chapter 13 debtor such as Solomon to contribute disposable IRA income “could have devastating results for pension and retirement savings.” Ante at 1133. I respectfully disagree for three reasons.
First, the statutory definition of “disposable income” under section 1325(b)(2)(A) ensures that during the life of his plan Solomon (or any other Chapter 13 debtor) would always have sufficient funds for the maintenance and support of himself and his dependents. All of the reasonable living expenses of the debtor and his family come off the top before a penny is paid to creditors.
Second, section 1325(b) does not require that all of the funds in the IRAs be used to fund the Chapter 13 plan. Far from it. A retired Chapter 13 debtor would simply be required to include the amount he would reasonably be expected to withdraw as retirement income for three years. Section 1325(b)(1)(B) gives the bankruptcy court the ultimate responsibility to make the projection, and there exists an ample basis for making a logical and sensible one. Here, the bankruptcy court suggested applying the minimum distribution formulas established by the Internal Revenue Code and regulations. In re Solomon, 166 B.R. 832, 845 (Bankr.D.Md. 1994). For example, “[o]ne alternative measure of .the minimum [yearly] withdrawal is the actuarially determined amount needed to exhaust the fund during the lifetimes of the owner and the primary beneficiary.” Id. In any event, the IRS’s formulas ensure a steady income stream from the IRA throughout a person’s retirement years. In addition, the formulas produce a ready projection of future income. As the bankruptcy court rightly observed:
This approach appears to serve the dual statutory objectives. It would reasonably preserve Debtor’s I.R.A.s for retirement within the applicable, statutory parameters for self-directed pension accounts; and it would also allow computation of a reasonable income expectation for Debtor’s disposable income determination under 11 U.S.C. 1325(b).
Id. at 845. Thus, under the bankruptcy court’s suggestion, a minimum annual IRA distribution would be dedicated to the payment of Solomon’s creditors during the life of his plan. Thereafter, Solomon (or any other Chapter 13 debtor) would get all of his IRA distributions for the rest of his (projected) lifetime.
Third, persons who are not retired would not be required to include projected income from their IRAs. They would have the disposable income from their jobs to pay their creditors. However, if a retiree voluntarily invokes Chapter 13, it is only reasonable to require him to use any excess pension or IRA income to fund his plan.
C.
The majority notes that paying projected IRA income to creditors goes beyond what is required by the “best interests of creditors” test for confirmation of a Chapter 13 plan.2 Thus, according to the majority, because Solomon’s IRAs would be exempt from liquidation in a Chapter 7 proceeding, his failure to include IRA income in his Chapter 13 plan “appears to satisfy the ‘best interests of creditors’ prerequisite for confirmation.” Ante at *10471132-33. Perhaps it does, but this does not dispose of the question before us today.
Satisfaction of the “best interests” test is but' one prerequisite for confirmation of a Chapter 13 plan. The creditor must also satisfy the “disposable income” test. Therefore, I cannot accept the majority’s suggestion that satisfaction of the “best interests” test results in satisfaction of the “disposable income” test. Using the “best interests” test to set the minimum or “floor” for payments to creditors under Chapter 13 would completely eviscerate the “disposable income” test of section 1325(b)(1)(B). See In re Schnabel, 153 B.R. at 815 (“[w]here assets may be claimed exempt, there is superimposed an entirely new floor [different from the Chapter 7 liquidation value], below which a confirmable plan may not fall — the § 1325(b) test of ‘disposable income’”).
Finally, allowing creditors to share in a retired debtor’s projected disposable IRA income (for three years) under Chapter 13 does.not violate the Supreme Court’s admonition in Patterson v. Shumate, 504 U.S. 753, 764, 112 S.Ct. 2242, 2249-50, 119 L.Ed.2d 519 (1992), that the mere happenstance of bankruptcy should not result in a windfall to creditors. See ante at 1132-33. I reemphasize that Solomon himself voluntarily chose to seek the protection of “super-discharge” under Chapter 13. That choice subjected his plan to the “disposable income” test of section 1325(b)(1)(B) and placed his IRA income at risk. That choice was not happenstance; it was Solomon’s considered decision. In fact, to hold that Solomon’s projected disposable income does not include projected income from his IRAs results in a -windfall to Solomon. It is a windfall that nullifies Congress’s determination that “Chapter 13 proceedings ... look to [the debtor’s] future income- ... as a source of repayment of debt.” S.Rep. No. 65, 98th Cong. 1st Sess. 20 (1983).
II.
The majority remands for proceedings under section 1325(a)(3) to determine whether Solomon proposed his plan in good faith. Perhaps his creditors will ultimately achieve relief under that section. That possibility, however, does not change the fact that the bankruptcy and district courts have already correctly refused to confirm Solomon’s Chapter 13 plan because it fails to meet the “disposable income” test under section 1325(b). I would let the judgment stand and put an end to the matter right now.

. The language of section 1325(b) makes no distinction between income from exempt assets (such as pension funds and IRAs) and income from non-exempt assets (such as marketable securities). This was not an oversight on the part of Congress. To receive the protections of "super-discharge,” a debtor under Chapter 13 proposes to pay his debts over three years from future income. S.Rep. No. 65, 98th Cong. 1st Sess. 20 (1983). Also, even though such income is not shielded from creditors, a debtor’s fresh start remains assured because the debtor may keep all of his assets, whether exempt or not. What the debtor must give up, however, is his projected disposable income during the life of his plan. It is irrelevant whether that income is derived from exempt or non-exempt assets. In re Hagel, 171 B.R. at 689; In re Schnabel, 153 B.R. at 817-18.

. Under the "best interests” test a Chapter 13 plan must provide unsecured creditors with no less value than they would receive if the debtor liquidated under Chapter 7. See 11 U.S.C. § 1325(a)(4).