Business Law
Saldana v. Bronitsky (In re Saldana)
The following is a case summary written by Gary M. Kaplan, a partner at Farella Braun + Martel LLP in San Francisco, analyzing Saldana v. Bronitsky (In re Saldana), 122 F.4th 333 (9th Cir. Nov. 22, 2024), a recent decision of interest.
Summary
In Saldana v. Bronitsky (In re Saldana), 122 F.4th 333 (9th Cir. Nov. 22, 2024), the Ninth Circuit Court of Appeal (“Ninth Circuit”), in a split decision, reversed a prior holding by the Ninth Circuit Bankruptcy Appellate Panel (“BAP”), and held that voluntary contributions to employer-managed retirement plans are not disposable income which must be included in determining minimum required payments to creditors in a debtor’s Chapter 13 plan. The Ninth Circuit’s ruling creates a circuit split, thus laying the groundwork for the Supreme Court to potentially grant certiorari.
Facts
Debtor Saldana voluntarily filed for Chapter 13 bankruptcy in April 2022 and calculated her monthly disposable income to be $116. She did not include voluntary contributions of hundreds of dollars that she made monthly to an employee-operated retirement fund as part of her disposable income. This led to an objection by the Chapter 13 trustee to confirmation of the debtor’s proposed Chapter 13 plan, followed by multiple rounds of litigation as the trustee argued that the retirement plan contributions should be included in the debtor’s disposable income and accordingly paid to creditors under the debtor’s Chapter 13 plan.
The Bankruptcy Court for the Northern District of California (Bankruptcy Court) ultimately confirmed the Debtor’s amended Chapter 13 plan, holding that retirement plan payments were disposable income, relying on the BAP’s decision in Parks v. Drummond (In re Parks), 475 B.R. 703 (B.A.P. 9th Cir. 2012), and should be included in that calculation.
The District Court for the Northern District of California affirmed the Bankruptcy Court’s ruling, also citing the BAP’s Parks decision. The debtor appealed to the Ninth Circuit.
Reasoning
The dispute centered around the “hanging paragraph” in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), amending Section 541(b)(7) of the Bankruptcy Code, which generally excludes from the bankruptcy estate an employee’s payments to employer retirement plans, and states: “except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).”
In Saldana, the Ninth Circuit noted that prior to BAPCPA, courts routinely held that voluntary retirement contributions were deemed disposable income in Chapter 13, and thus should be directed to creditors. The majority opinion, authored by Circuit Judge Sidney Thomas, held that part of the intention of BAPCPA was to encourage individual debtors to file for Chapter 13 bankruptcy, where they would make regular payments over years to creditors, rather than for Chapter 7 bankruptcy, where the debtor’s assets would be liquidated. The majority explained that its interpretation of the BAPCPA amendments, particularly the “hanging paragraph” in Section 541(b)(7), was consistent with this Congressional objective. The Ninth Circuit accordingly ruled that “pursuant to the plain language of the hanging paragraph, debtors can exclude any amount of their voluntary retirement contributions to employer-managed plans from their disposable income calculation under Chapter 13.”
The Ninth Circuit’s majority opinion in Saldana recognized that other courts had reached conflicting rulings on this issue, based on “varied bankruptcy court interpretations” of the “hanging paragraph” in Section 541(b)(7). The majority found that “most of the bankruptcy courts that have considered this issue have also concluded that voluntary retirement contributions do not constitute disposable income,” while seeking to explain what it viewed as flawed rulings in contrary cases, including the BAP’s Parks decision and the Sixth Circuit’s ruling in Davis v. Helbling (In re Davis), 960 F.3d 346 (6th Cir. 2020).
The Ninth Circuit observed that Parks, which found that the “hanging paragraph” was intended to only protect retirement contributions that were in an employer’s hands at the time of the employee’s bankruptcy filing, would make the “hanging paragraph” superfluous, as the statute already excluded prior contributions from property of the estate. As for Davis—which held that voluntary contributions are only excluded from disposable income to the extent the debtor was making such contributions before bankruptcy—the majority opinion in Saldana found there “is no foundation in the Code to limit a debtor’s disposable income to the debtor’s prepetition contribution amount.”
Dissent
Circuit Judge Consuelo Callahan dissented, finding the majority’s decision to be “contrary to the general purpose of [BAPCPA],” which requires that “any income a debtor with above average income does not need to survive during those three to five years [of a Chapter 13 plan] should be allocated as disposable income.”
Contrary to the majority opinion, Judge Callahan’s dissent found the “hanging paragraph” to be ambiguous, pointing out: “as the majority admits, in the almost
twenty years since the passage of the BAPCPA, bankruptcy courts and circuit courts have found not one or two meanings of the ‘hanging paragraph’ but four meanings.”
Rather than adopting an all or nothing approach, she suggested a “workable solution” by allowing a deduction for “the debtor’s [retirement plan] contributions for six months prior to bankruptcy.” Judge Callahan said that her proposal “does the least amount of harm until such time as Congress decides to clarify the statute or change the law.”
Author Commentary
The Ninth Circuit’s ruling in Saldana will permit Chapter 13 debtors to make retirement contributions up to the limit in the Internal Revenue Code, regardless of whether, or to what extent, the debtor had been making contributions before bankruptcy. To reduce potential abuse by debtors purporting to commence or increase their retirement plan contributions after filing bankruptcy, some courts have required monitoring the debtor, so that funds earmarked for retirement plans will be redirected to creditors if the debtor stops or reduces the designated contributions during the term of their Chapter 13 plan.
In view of the Circuit split created by the Ninth Circuit’s decision in Saldana, which is contrary to the Sixth Circuit’s ruling in Davis, the U.S. Supreme Court may grant a petition for certiorari to resolve such split.
These materials were prepared by ILC member Gary M. Kaplan, a partner at Farella Braun + Martel LLP in San Francisco, with editorial contributions from ILC member Kathleen A. Cashman-Kramer, a director with Fennemore LLP in San Diego and the Hon. Meredith Jury (ret.).