                                                                                                                           Opinions of the United
1999 Decisions                                                                                                             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Precedential or Non-Precedential: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


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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).

                                  2
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
