Business Law

In re Dubbin (Bankr. D. N.M.)

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The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:

Acknowledging a split in authorities, a Bankruptcy Court in the District of New Mexico (the “Court”) ruled that (1) pension plan loans are bona fide debts outside of bankruptcy and therefore are recognized as such under the Bankruptcy Code and (2) the payments on account of pension plan loans are transfers and the plan trustee is the initial transferee. In re Dubbin, 2021 WL 3476959 (Bankr. D. N.M. August 6, 2021).

To view the opinion, click here.


Margaret Dubbin (the Debtor) was the president and sole shareholder of IDEALS, Inc., which maintained a 401(k) profit sharing plan. The Debtor was the plan administrator, sole trustee, and a plan participant. In February 2018 the Debtor borrowed $50,000 from the plan, signing a promissory note payable to the plan trustee over 260 months. In July 2019 the Debtor sold some vehicles and used the sale proceeds and other funds to repay the 401(k) loan in full. On August 30, 2019, the Debtor filed a chapter 7 case.

The chapter 7 trustee brought an action against Ms. Dubbin as the trustee of the IDEALS 401(k) plan (Defendant) to recover the payoff of the 401(k) loan as a preferential transfer under section 547 and a fraudulent transfer under section 548. Defendant filed a motion to dismiss, asserting that there was neither an antecedent debt nor a transfer. The Court denied the motion, ruling that the 401(k) loan was a debt and that the payment of the loan balance was a transfer.


Whether a pension plan loan is a debt has been much litigated, with courts split on the answer. The Court first analyzed an early seminal case on the issue, In re Villarie, 648 F. 2d 810 (2d Cir. 1981), which reversed rulings by the bankruptcy court and district court by holding that a loan from a pension plan did not create a debt because it created “a claim which was unenforceable against the debtor.” The only recourse for the pension plan if a debtor did not repay the loan would be to offset the amount borrowed against his future benefits.  Therefore, the Villarie court ruled there was no debt.

Villarie was followed by bankruptcy courts when implementing the means test in chapter 13 proceedings, with those courts including the monthly payments on a pension plan loan in disposable income because the loan was not a debt.  However, the Court observed that the Villarie holding was undermined by the Supreme Court in Johnson v Home State Bank, 501 U.S. 78, 84 (1991), which held that nonrecourse secured obligations are “claims” against the debtor. Per section 102(2), a claim against the debtor includes a claim against property of the debtor. Since the pension plan trustee could set off any unpaid loan against the account balance of the borrower, a pension plan loan was a secured claim and therefore a debt of the debtor.

The Court then cited to bankruptcy court decisions subsequent to Johnson which rejected Villarie by reasoning that since a debt is simply “liability on a claim” under section 101(1) and the nonrecourse loan was a claim, then a pension plan loan was most certainly a debt. The Court here adopted that analysis as correct, likewise rejecting the holding of Villarie.

The Court then construed the provisions of BAPCPA, enacted in 2005, as supporting the ruling that a pension plan loan was a debt by providing in section 1322(f) that repayment of a pension plan loan was excluded from the disposable income calculation. Alas, the Court observed, some courts, including the Ninth Circuit in In re Egebjerg, 574 F 3d 1045 (9th Cir. 2009), notwithstanding BAPCPA and Johnson v Home State Bank, persisted with the view that a pension plan loan could not be a debt and therefore excluded from current monthly income because a loan to a plan participant is essentially a debt to oneself and did not create a debtor/creditor relationship.

The Court rejected the reasoning of Egebjerg, just as it rejected Villarie, and concluded that Johnson and BAPCPA together compelled the view that a pension plan loan was indeed a debt.

When considering whether the repayment of the loan was a transfer, the Court observed that the concept that no debtor/creditor relationship was created was short-sighted. The Defendant in the preference action was the trustee of the plan. All payments into the plan are pooled and then administered by the trustee, not segregated for each plan participant, i.e. potential borrower. When a participant borrowed, the funds came from the pooled funds entrusted to the trustee, so the debtor was the borrower but the creditor was the trustee of the plan, not the debtor. Repayment of the loan, as occurred here within the preference period, was not a payment by the Debtor to herself but rather a payment to the plan trustee Defendant. Such payment easily fell within the broad definition of transfer in the Code.


I remember when Egebjerg was decided by the Ninth Circuit. Before then, as a sitting bankruptcy judge, I had already questioned whether a pension plan loan was a debt because of what I perceived as the lacking debtor/creditor relationship. My narrow view was the debtor was merely borrowing from himself, just as the Ninth Circuit reasoned. So, of course, I embraced the decision. Although I was aware of BAPCPA’s section 1322(f) removing such loan repayments from disposable income in chapter 13’s, I viewed it as just a special provision, probably politically expedient in a bill that was otherwise consumer-unfriendly, and dismissed it as not having an impact on the characterization of whether a pension plan loan was really a debt.

This decision from the Court in New Mexico causes me to question my conclusions. I will be curious whether this issue reaches the Ninth Circuit again, in some en banc capacity, causing it to rethink its position based on reasoning similar to that of the Court here. No question under Johnson the pension plan loan is a claim and therefore a debt. The distinction of the pooled plan funds seems to equally put to bed the “loan from oneself” concept. If the Ninth Circuit cannot or will not reverse course, then perhaps the Supreme Court needs to weigh in.

This submission was authored by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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