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Summarizing by Amir Shachmurove

Meyer v. U.S. Trustee (In re Scholz)

Ninth Circuit
In short, In re Scholz stands for the proposition that annuity income received by a former railroad employee under the Railroad Retirement Act ("RRA") "must be included when calculating [a debtor's] projected disposable income . . . ." To explain, a Chapter 13 plan cannot be confirmed over the objection of the trustee (or an unsecured creditor holding an allowed claim) unless all of the debtor's "projected disposable income" is contributed to the plan over the life of the plan. See 11 U.S.C. § 1325(b)(1). In general terms, a debtor's projected disposable income is calculated by subtracting reasonable monthly expenses from the debtor's "current monthly income" ("CMI"), as may be adjusted to account for any income fluctuation between the petition date and date of plan confirmation. While the Bankruptcy Code expressly allows certain forms of income (such as Social Security benefits) to be excluded from the CMI calculation, it does not specifically exclude income received under the RRA ("RRA Benefits"). See 11 U.S.C. 101(10A)(B). Noting that the Ninth Circuit, in Blausey v. U.S. Trustee, 552 F.3d 1124 (9th Cir. 2009), strictly construed Section 101(10A)(B) to permit exclusion of only the specific forms of income delineated, the bankruptcy court included the Debtors' RRA Benefits in the CMI calculation. The bankruptcy court reasoned, however, that the RRA Benefits did not have to be included in the Debtors' projected disposable income calculation because the RRA's antianticipation provision, 45 U.S.C. 231m(a), barred inclusion of RRA Benefits from the CMI and disposable income calculations, essentially removing the RRA Benefits from the Debtors' bankruptcy estates. The BAP disagreed on the CMI issue, concluding that the RRA Benefits must be included in the CMI calculation, however, the BAP agreed that the RRA's antianticipation provision precluded the RRA Benefits from being included in the final calculation of "projected disposable income." See 45 U.S.C. 231m(a). The RRA's anticipation provision provides: "[n]otwithstanding any other law of the United States, or of any State, no annuity or supplemental annuity shall be assignable or be subject to any tax or to garnishment, attachment, or other legal process under any circumstances whatsoever, nor shall the payment thereof be anticipated." The BAP determined, "[i]f Congress wanted bankruptcy courts to anticipate RRA Benefits as part of their calculation of projected disposable income, it would have needed to expressly limit the RRA's antianticipation clause to permit such anticipation." While the BAP agreed with the bankruptcy court that RRA Benefits should be excluded from projected disposable income, because the CMI calculation in this particular case affected what other items the debtor could deduct from projected disposable income, the BAP reversed and remanded for a recalculation. See 11 U.S.C. 1325(b)(2). The Ninth Circuit accepted the Chapter 13 trustee's interlocutory appeal, ultimately disagreing with both the bankruptcy court's and BAP's exclusion of RRA Benefits from the projected disposable income calculation. In particular, the Ninth Circuit disagreed with the BAP's interpretation of the meaning of "anticipated," an undefined term, in the RRA's antianticipation clause--each court interpreting the Supreme Court's discussion of the clause's meaning, in Hisquierdo v. Hisquierdo, 439 U.S. 572 (1979), differently. Both the BAP and Ninth Circuit agreed Hisquierdo required the word "anticipated" to be interpreted in line with the meaning given to similar provisions under trust law. The BAP concluded the RRA's antianticipation provision prohibits, "any attempt to pay, or commit for payment, RRA Benefits before they come due." The Ninth Circuit interpreted the underlying trust law differently, concluding that Hisquierdo only prohibits the premature receipt of payment, but not a debtor's commitment to pay RRA benefits to a creditor in the future. In so doing, the Ninth Circuit reasoned that Hisquierdo involved a divorce dispute over the inclusion of RRA Benefits in connection with a community property division--with the Supreme Court ultimately holding the RRA's antianticipation clause prevented one spouse from receiving a larger portion of currently available community property to offset the other's anticipated future receipt of RRA Benefits. On this point, the Ninth Circuit relied heavily on the Hisquierdo Court's statement that such an offset, "would improperly anticipate payment by allowing [the wife] to receive her interest before the date Congress has set for any interest to accrue." Applying this statement in the context of calculation of required Chapter 13 plan payments under the Bankruptcy Code, the Ninth Circuit held that including the RRA Benefits in the projected disposable income calculation does not allow a creditor to receive payment, "before the date Congress has set for any interest to accrue . . . because . . .[t]he debtor simply makes payments to unsecured creditors each month in accordance with the terms of the plan, using the debtor's 'regular income' to do so." Because plan payments are not be made until after a debtor actually receives RRA Benefits, the annuity income must be included in the projected disposable income figure used to calculate the required plan payments.
Procedural context:
Ninth Circuit reversal of a BAP decision affirming in part, and reversing in part, a bankruptcy court memorandum order. (The Ninth Circuit disagreed with both the bankruptcy court and the BAP on the relevant issue in question).
Married Debtors, Robert and Carolyn Scholz, filed for Chapter 13 bankruptcy and disclosed, but excluded the monthly annuity income Mr. Scholz received under the Railroad Retirement Act "RRA" (as a retired railroad employee) from the Debtors' calculation of "current monthly income" ("CMI"). See 11 U.S.C. 101(10A). Exclusion of the RRA income correspondingly decreased the Debtors' "projected disposable income"--the amount generally available for payment of creditors when a Chapter 13 Plan does not propose to fully pay unsecured creditors over the life of the plan. See 11 U.S.C. 1325(b)(1)-(2). The bankruptcy court overruled the trustee's objection to the income exclusion and confirmed the Debtors' Chapter 13 plan in a published decision. The trustee appealed to the Ninth Circuit Bankruptcy Appellate Panel after confirmation of the plan. The BAP held the bankruptcy court erred in excluding the RRA annuity payment from the "current monthly income" calculation, but correct in excluding it from the projected monthly income" calculations. On appeal to the Ninth Circuit, the Debtors conceded that the RRA annuity income should not have been excluded from the current monthly income calculation, but argued that an "anti-anticipation" clause in the RRA still prevented any future annuity payments from being included as part of the Debtors' projected monthly income.
Bankruptcy Judge Lee presided over the bankruptcy proceedings. The Bankruptcy Court opinion is found at 427 B.R. 864. Judges Markell, Zive, and Jury presided over the BAP appeal. The BAP opinion, authored by Judge Markell, is found at 447 B.R. 887. Ninth Circuit Judges Callahan and Watford, along with District Court Judge Singleton (sitting by designation) sat on the Ninth Circuit Panel. Judge Watford authored the Ninth Circuit's published opinion.

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