Case: 19-50982     Document: 00515541304         Page: 1    Date Filed: 08/26/2020




         United States Court of Appeals
              for the Fifth Circuit                                  United States Court of Appeals
                                                                              Fifth Circuit

                                                                            FILED
                                                                      August 26, 2020
                                 No. 19-50982
                                                                       Lyle W. Cayce
                                                                            Clerk

 In the Matter of: Annette Marie Diaz,

                                                                        Debtor,

 Annette Marie Diaz,

                                                                    Appellant,

                                     versus

 Mary K. Viegelahn,

                                                                      Appellee.


                 Appeal from the United States District Court
                      for the Western District of Texas
                           USDC No. 5:18-CV-798


 Before STEWART, CLEMENT, and COSTA, Circuit Judges.
 EDITH BROWN CLEMENT, Circuit Judge:
        This appeal is about whether a provision in a local chapter 13
 bankruptcy plan is valid. That provision—Section 4.1—requires that debtors
 in the Western District of Texas turn over to the bankruptcy trustee any tax
 refund amounts they receive in excess of $2,000. We hold that Section 4.1 is
 invalid because it abridges debtors’ substantive rights and conflicts with the
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                                  No. 19-50982


 Supreme Court’s guidance on 11 U.S.C. § 1325(b)(2) in Hamilton v. Lanning,
 560 U.S. 505 (2010).
        We therefore VACATE the bankruptcy court’s confirmation of
 Debtor’s Revised Plan and REMAND to allow Debtor to file a new plan.
                                        I.
        In October 2017, the United States Bankruptcy Court for the Western
 District of Texas adopted a district-wide “form” chapter 13 plan (“Local
 Plan”) by issuing its Consolidated Standing Order for the Adoption of a
 District Form Chapter 13 Plan, applicable to cases filed on or after November
 1, 2017. The Local Plan includes Section 4.1, which states that any annual tax
 refund amounts that a chapter 13 debtor receives in excess of $2,000 are to
 be turned over to the bankruptcy trustee:
        All tax refunds received by Debtor . . . while the chapter 13 case
        is pending shall be allocated as set forth below:
        1) The total amount of the aggregate tax refund(s) received for
        any tax period that exceeds $2,000.00 shall, upon receipt, be
        paid and turned over to the Trustee as additional disposable
        income and such amount shall increase the base amount of the
        Plan. The Plan shall be deemed modified accordingly, and the
        Trustee will file a notice of plan modification within 21 days of
        receipt of the tax refund.
        ...
        4) Notwithstanding subparagraph (1) above, Debtor may file a
        notice to retain the portion of the tax refund otherwise payable
        to the Plan under subparagraph (1) with twenty-one (21) days
        negative notice as set forth in Local Rule 9014(a) if, at the time
        of receipt of a refund, Debtor’s Plan provides for the payment
        of 100% of allowed general unsecured claims within the term of
        this Plan. If the Trustee does not object within the twenty-one




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         (21) day negative notice period, Debtor may retain that portion
         of the tax refund.
         In December 2017, Annette Marie Diaz (“Debtor”), a single mother
 with two minor sons whose income is below median for the State of Texas,
 filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code
 (“Code”). 1 On the same day, Debtor filed her Schedules, Statement of
 Financial Affairs, and initial Chapter 13 plan. Debtor’s initial Schedules did
 not indicate that she expected to receive a federal income tax refund.
         On February 13, 2018, two days before the confirmation hearing,
 Debtor filed an amended plan (“First Amended Plan” or “Plan”). Debtor’s
 First Amended Plan proposed variable monthly payments for sixty months:
 $1,440 for months 1−4 of the Plan and $1,505 for months 5−60 of the Plan.
 Debtor also crossed out—or “struck through”—all of Section 4.1. Along
 with her First Amended Plan, Debtor filed her amended Schedules. Debtor
 amended her Schedule I—which is for monthly income—to pro-rate, or
 “amortize,” on a monthly basis the full tax refund she expected to receive.
 Debtor’s 2017 tax return indicated she was to receive a refund of $3,261 in
 2017. Accordingly, Debtor’s amended Schedule I stated that she would
 receive $272 from “other monthly income,” or “1/12th [of her] Tax
 Refund.” 2 Debtor also amended her Schedule J—which is for expenses—to


         1
          Debtor reported a total income of $29,791 for 2017. The median income for the
 years 2014−2018 in the State of Texas was $59,570. U.S. Census Bureau, Quick
 Facts: Texas, https://www.census.gov/quickfacts/TX (last visited August 13, 2020).
         2
            Trustee’s brief emphasizes that Debtor filed two sets of amended Schedules on
 February 13, 2018, the first of which included an estimated tax refund amount of $9,500 on
 Schedule I. But that Debtor filed two sets of amended Schedules is irrelevant because the
 first set of Schedules filed that day was based on her 2016 tax refund of approximately
 $9,500. The bankruptcy court was correct to consider only the second set of Debtor’s
 amended Schedules filed on February 13, which reflected her 2017 tax filing and reduced
 her estimated refund to $3,261.




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 include additional expense amounts that, in essence, offset her tax refund
 “monthly income.” Amended Schedule J’s estimated monthly expenses for
 Debtor included, inter alia: $410 for food and housekeeping supplies; $50 for
 clothing, laundry, and dry cleaning; $40 for personal care products and
 services; and $36 for entertainment, clubs, recreation, newspapers,
 magazines, and books.
        At the confirmation hearing on February 15, 2018, the bankruptcy
 trustee, Mary Viegelahn (“Trustee”), objected to Debtor’s First Amended
 Plan on account of Debtor’s late filing. The bankruptcy court allowed
 Trustee the opportunity to file a brief, which was submitted on March 1,
 2018. On March 7, 2018, Debtor filed a Second Amended Plan that did not
 physically strike Section 4.1, but included a nonstandard provision in Section
 8, which stated that the provisions of Section 4.1 were null and void and that
 the instructions to Schedule I require that she amortize her refund. Debtor
 also filed a response brief and letter supplement in support of confirmation
 of her Second Amended Plan. However, the bankruptcy court did not grant
 Debtor leave to file any post-hearing documents. As such, the bankruptcy
 court did not consider Debtor’s Second Amended Plan when it denied
 confirmation of her First Amended Plan in its Memorandum Opinion issued
 May 14, 2018.
        In its opinion, the bankruptcy court made the following findings of
 fact: “Debtor is single with two dependents”; “Debtor works as a medical
 assistant and earns $2,644.16 per month”; and “Debtor’s Schedule I
 (Statement of Income) pro-rates Debtor’s refund for 2017 of $3,261.00 in the
 monthly amount of $272.00.” In denying confirmation of Debtor’s First
 Amended Plan, the court held that: Debtor could not strike Section 4.1;
 Debtor’s argument that only a debtor may propose the form and terms of a
 chapter 13 plan was incorrect; tax refunds are disposable income; and the
 instructions to Schedule I do not require Debtor to account for annual tax



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                                  No. 19-50982


 refunds as monthly income. The bankruptcy court entered its Order Denying
 Confirmation of Debtor’s Chapter 13 Plan on May 15, 2018.
        On May 30, 2018, Debtor filed another Chapter 13 plan (“Revised
 Plan”) which did not strike Section 4.1 or contain any nonstandard provision
 in Section 8. On July 18, 2018, the bankruptcy court confirmed Debtor’s
 Revised Plan. The bankruptcy court’s confirmation order stated that:
 “Debtor’s 2017 tax refund due to the Trustee in the amount of $1,261.00 will
 be paid through the [Revised] Plan at an additional $25.00 month [sic] which
 is included in the last stair step payment for months 8 - 60 of [$1,635.00].”
 Debtor then appealed the bankruptcy court’s denial of her First Amended
 Plan to the district court. The district court affirmed the bankruptcy court’s
 decision. Debtor timely appealed to this court.
                                       II.
        “We review the decision of the district court by applying the same
 standards of review to the bankruptcy court’s findings of fact and conclusions
 of law as applied by the district court.” Kennard v. MBank Waco, N.A. (In re
 Kennard), 970 F.2d 1455, 1457 (5th Cir. 1992). The district court reviewed
 the bankruptcy court’s conclusions of law de novo. See Drive Fin. Servs., LP
 v. Jordan, 521 F.3d 343, 346 (5th Cir. 2008). The bankruptcy court’s findings
 of fact are reviewed for clear error. In re Kennard, 970 F.2d at 1457. Mixed
 questions of law and fact are reviewed de novo. Bass v. Denney, 171 F.3d 1016,
 1021 (5th Cir. 1999).
                                      III.
        Filing for chapter 13 bankruptcy relief is an alternative to filing for
 chapter 7 relief. While chapter 7 requires that debtors liquidate their assets,
 chapter 13 allows debtors with a regular source of income to discharge certain
 debts after completing a bankruptcy plan that meets the Code’s
 requirements. See Lanning, 560 U.S. at 508. A chapter 13 debtor has the




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                                   No. 19-50982


 exclusive right to file a plan. 11 U.S.C. § 1321. And a debtor’s proposed plan
 may “include any other appropriate provision not inconsistent with [the
 Code].” Id. § 1322(b)(11). Chapter 13 plans that meet the Code’s
 requirements must be confirmed by the bankruptcy court. See id. §§ 1322,
 1325(a)(1). But if the bankruptcy trustee or an unsecured creditor objects to
 plan confirmation, the bankruptcy court may not confirm a chapter 13 plan
 unless “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.” Id. § 1325(b)(1)(B)
 (emphasis added).
        Bankruptcy courts have been delegated authority to adopt local rules
 governing practice and procedure. Fed. R. Bankr. P. 9029(a) (allowing
 district courts to adopt local bankruptcy rules “governing practice and
 procedure in all cases and proceedings within the district court’s bankruptcy
 jurisdiction”). The Federal Rules of Bankruptcy Procedure permit courts to
 create a local form for chapter 13 plans, as the Western District of Texas did
 here. Id. 3015.1. However, these rules must be procedural only—they may
 not “abridge, enlarge, or modify any substantive right.” Bonner v. Adams (In
 re Adams), 734 F.2d 1094, 1099 (5th Cir. 1984); see 28 U.S.C. § 2075. A
 “National Plan” for chapter 13 debtors also exists in the form of “Official
 Form 113.” A district must adopt the National Plan if it has not adopted a
 district-wide local form plan. See Fed. R. Bankr. P. 3015.1 advisory
 committee’s note.
                                       IV.
        Here, because Trustee objected to the confirmation of Debtor’s First
 Amended Plan, Debtor was required to pay all of her “projected disposable
 income” to the Trustee. See 11 U.S.C. § 1325(b)(1)(B). In 2005, Congress
 passed the Bankruptcy Abuse Prevention and Consumer Protection Act




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                                  No. 19-50982


 (“BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23. The BAPCPA did not define
 “projected disposable income,” but did attempt to define how “disposable
 income” is to be calculated. In Hamilton v. Lanning, the Supreme Court
 explained that, under the BAPCPA:
        “Disposable income” is . . . defined as “current monthly
        income received by the debtor” less “amounts reasonably
        necessary to be expended” for the debtor’s maintenance and
        support, for qualifying charitable contributions, and for
        business expenditures. “Current monthly income,” in turn, is
        calculated by averaging the debtor’s monthly income during
        what the parties refer to as the 6–month lookback period, which
        generally consists of the six full months preceding the filing of
        the bankruptcy petition. The phrase “amounts reasonably
        necessary to be expended” in § 1325(b)(2) is also . . . defined.
        For a debtor whose income is below the median for his or her
        State, the phrase includes the full amount needed for
        “maintenance or support,” but for a debtor with income that
        exceeds the state median, only certain specified expenses are
        included.
        560 U.S. at 510 (cleaned up).
        The Court further explained that to calculate a debtor’s projected
 disposable income, the starting point of the analysis is to calculate
 “disposable income” using the BAPCPA’s guidance. Id. at 519 (“[A]
 court . . . should begin by calculating disposable income, and in most cases,
 nothing more is required.”). But “in unusual cases,” the Court held, “[a
 court] may . . . take into account . . . known or virtually certain information
 about the debtor’s future income or expenses” in calculating projected
 disposable income. Id.
        While the Code does not address how tax refunds should be treated,
 Section 4.1 of the Local Plan imposes the specific, categorical rule that
 chapter 13 debtors in the Western District of Texas must turn over to the




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                                  No. 19-50982


 Trustee any tax refund amounts they receive in excess of $2,000. The issue
 here is whether that rule—which automatically designates debtors’ “excess”
 tax refund amounts as “projected disposable income” to which the Trustee
 is entitled—is valid.
        In Lanning¸ the Supreme Court made clear that the Code requires
 courts to treat above- and below-median income debtors’ “disposable
 income[s]” differently. See 560 U.S. at 510. The Court held that, for below-
 median income debtors, any amounts reasonably necessary to be expended
 for the maintenance and support of a debtor are not to be considered as a part
 of his or her “disposable income”: “For a debtor whose income is below the
 median for his or her State, [‘amounts reasonably necessary to be expended’
 in § 1325(b)(2)] includes the full amount needed for ‘maintenance or
 support,’ but for a debtor with income that exceeds the state median, only
 certain specified expenses are included.” Id. (emphasis added) (citations
 omitted). As such, Debtor contends that, as a below-median income debtor,
 the Code and Lanning allow her to retain any tax refund amount she receives
 in excess of $2,000 if she can demonstrate that such amount is “reasonably
 necessary” for her family’s “maintenance and support.” According to
 Debtor, Section 4.1’s “one-size-fits-all” rule—which requires both above-
 and below-median income debtors to turn over to the Trustee any “excess”
 tax refund amounts—abridges the substantive rights of below-median
 income debtors and is therefore invalid. Trustee’s response, echoing the
 bankruptcy court, is that Section 4.1 balances the Code’s “requirement of
 individualization . . . with the [bankruptcy court’s] need for efficiency,” and
 asserts, with a single citation, that “[m]any judicial districts have adopted a
 form plan requiring all or some portion of a refund to be turned over.” That
 response is unavailing.
        We agree with Debtor that Section 4.1’s categorical rule is inapt as
 applied to below-median income debtors filing for chapter 13 relief in the



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 Western District of Texas. Section 1325(b)(2) of the Code, as clarified in
 Lanning, plainly allows below-median income debtors to retain any income
 that is reasonably necessary for their maintenance and support. See id. But
 Section 4.1 requires that all chapter 13 debtors turn over to the Trustee all
 tax refunds received in excess of $2,000 as “projected disposable income.”
 While we recognize that the bankruptcy court has an important interest in
 efficiency, that interest is not grounds for abridging below-median income
 debtors’ substantive rights to use their “excess” refund income to finance
 reasonably necessary expenses for their maintenance and support. At
 bottom, the provisions in a local chapter 13 plan must be procedural, not
 substantive. See In re Adams, 734 F.2d at 1099; Keith M. Lundin,
 Lundin          on      Chapter           13     §       72.5     ¶      23,
 https://lundinonchapter13.com/content/section/72.5 (last updated August
 3, 2020) (observing that local chapter 13 plans that prescribe “specific
 treatments” for tax refunds tend to require bankruptcy courts to make
 “substantive decisions” under the Code).
        Debtor’s case is a good example of how Section 4.1’s categorical rule
 could abridge a below-median income debtor’s substantive right to use her
 “excess” refund amount for reasonably necessary expenses for her
 maintenance and support. Here, Debtor’s “excess” tax refund amount is
 $1,261. Debtor’s initial Schedule J, submitted in December 2017, estimated
 her expenses as: $360 for food and housekeeping supplies; $0 for clothing,
 laundry, and dry cleaning; $40 for personal care products and services; and
 $0 for entertainment, clubs, recreation, newspapers, magazines, and books.
 Those expenses are well below the IRS’s National Standards (“National
 Standards”) for an above-median income chapter 13 debtor in a household of
 three: $803 for food and housekeeping supplies; $193 for apparel & services;




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                                       No. 19-50982


  $73 for personal care products & services; and $309 for miscellaneous. 3 See
  11 U.S.C. §§ 1325(b)(3), 707(b)(2)(A)−(B). But Debtor’s projected expenses
  in her amended Schedule J—which were adjusted to “offset” the $3,261
  refund that she amortized on her amended Schedule I—are still far below the
  National Standards. 4 Accordingly, we find it entirely plausible that Debtor
  will use her “excess” tax refund of $1,261 for expenses that are reasonably
  necessary for her family’s maintenance and support.
          Because Section 4.1 abridges Debtor’s substantive right to use the
  amount of her tax refund in excess of $2,000 in accordance with Code
  § 1325(b)(2) and Lanning’s guidance for below-median income debtors, we
  hold that it is invalid. See 560 U.S. at 510.
                                            V.
          Our holding today neither endorses nor rejects the practice of
  amortizing a chapter 13 debtor’s refund on Schedule I. Here, Debtor’s
  motive in amortizing her tax refund on Schedule I—and, in turn,
  “offsetting” that amount on Schedule J—is clear: she was attempting to
  avoid Section 4.1’s categorical rule, which she recognized violated her
  substantive right as a below-median income debtor to retain any refund
  income reasonably necessary to be expended for her maintenance and


          3
             Department of Justice U.S. Trustee Program, Means Testing
  Information: IRS National Standards for Allowable Living Expenses (Cases Filed Between
  November 1, 2017 and March 31, 2018, Inclusive), https://www.justice.gov/ust/means-
  testing (in the box entitled “Data Required for Completing the 122A Forms and the 122C
  Forms,” choose option “[11/1/2017 to 3/31/2018, Inclusive]” in drop-down list and click
  “Go”; then click “National Standards” hyperlink under the heading “2. National
  Standards: Food Clothing & Other Items”).
          4
            As discussed supra, Debtor’s amended Schedule J, submitted on February 13,
  2018, estimated her expenses as: $410 for food and housekeeping supplies; $50 for
  clothing, laundry, and dry cleaning; $40 for personal care products and services; and $36
  for entertainment, clubs, recreation, newspapers, magazines, and books.




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  support. We have invalidated Section 4.1, so we need not confront whether
  Debtor’s amortization was sound. 5 Nor do we need to address Trustee’s
  argument that Debtor’s First Amended Plan was not feasible. Any argument
  relating to Debtor’s First Amended Plan is moot, as we now remand to allow
  Debtor to submit a new plan. 6
          Lastly, Debtor asks that we instruct the Western District to adopt a
  certain approach to tax refunds but cites no authority for our ability to do so.
  Bankruptcy Rule 3015.1 clearly provides that “a district” may promulgate a
  “Local Form for a plan filed in a chapter 13 case.” Fed. R. Bankr. P.
  3015.1 (emphasis added). Thus, as we are not aware of any authority allowing
  us to dictate that a district adopt specific provisions in its local chapter 13



          5
            Contrary to Debtor’s assertion, this case is distinguishable from the Seventh
  Circuit’s decision in Marshall v. Blake, 885 F.3d at 1075−81, because Blake did not involve
  the threshold issue here, which is the validity of a specific local provision. The primary
  issue in Blake was whether a below-median income chapter 13 debtor who received a
  refundable tax credit was permitted to amortize that refund as income. See id. at 1075−76.
          6
             Additionally, Trustee argues that: (i) Debtor submitted her First and Second
  Amended Plans in bad faith, and (ii) we must also consider Section 7.1 of the Local Plan if
  we hold Section 4.1 invalid. Trustee did not raise either of these arguments to the
  bankruptcy court, so we may consider them forfeited. See Butler Aviation Int’l, Inc. v. Whyte
  (In re Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th Cir. 1993), abrogated on other grounds
  by Tex. Truck Ins. Agency, Inc. v. Cure (In re Dunham), 110 F.3d 286, 288–89 (5th Cir. 1997)
  (“[An] argument must be raised to such a degree that the trial court may rule on it.”). If
  we were to consider Trustee’s bad-faith argument, we note that where the bankruptcy
  court does not make a good- or bad-faith finding, “[w]e observe the sensible rule that
  ‘debtors are not in bad faith merely for doing what the Code permits them to do.’” Brown
  v. Viegelahn (In re Brown), 960 F.3d 711, 718 (5th Cir. 2020) (quoting Beaulieu v. Ragos, 700
  F.3d 220, 227 (5th Cir. 2012)). But the actions that Trustee alleges Debtor took in bad faith
  were simply Debtor’s efforts to circumvent a rule that we now find invalid: if anything,
  Debtor did just what the Code told her to do. As for Trustee’s argument regarding Section
  7.1, we recognize that because that provision is not at issue in this appeal, to deem it invalid
  would be to issue an improper advisory opinion on a controversy not before the court. See
  Wilson v. Zarhadnick, 534 F.2d 55, 57 (5th Cir. 1976) (“Article III courts have jurisdiction
  over actual controversies; they are not permitted the luxury of issuing advisory opinions.”).




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  plan, we decline to do so today. See Steinacher v. Rojas (In re Steinacher), 283
  B.R. 768, 774 (B.A.P. 9th Cir. 2002) (holding local rule invalid as conflicting
  with the Bankruptcy Code but staying silent on further instructions).
                                        VI.
         For the foregoing reasons, we VACATE the bankruptcy court’s
  confirmation of Debtor’s Revised Plan and REMAND to allow Debtor to
  file a new plan consistent with this decision.




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