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In Re: Robert Lynn Scholz; Carolyn Gail Scholz v. Robert Lynn Scholz; Carolyn Gail Scholz; United States Trustee

March 22, 2011

IN RE: ROBERT LYNN SCHOLZ; CAROLYN GAIL SCHOLZ, DEBTORS.
MICHAEL HUGH MEYER, CHAPTER 13 TRUSTEE, APPELLANT,
v.
ROBERT LYNN SCHOLZ; CAROLYN GAIL SCHOLZ; UNITED STATES TRUSTEE, APPELLEES.



Appeal From The United States Bankruptcy Court for the Eastern District of California Honorable W. Richard Lee, Bankruptcy Judge, Presiding Bk. No. 09-14453

The opinion of the court was delivered by: Markell, Bankruptcy Judge:

ORDERED PUBLISHED

OPINION

Argued And Submitted On November 18, 2010, at Sacramento, California

Filed: March 22, 2011

Before: MARKELL, ZIVE*fn1 and JURY, Bankruptcy Judges.

INTRODUCTION

This appeal presents two related questions: (1) does the Bankruptcy Code's definition of "current monthly income", found at 11 U.S.C. § 101(10A)("CMI"), include Railroad Retirement Act benefits ("RRA Benefits"); and (2) regardless of the answer to the first question, should RRA Benefits be considered when calculating projected disposable income under § 1325(b)?*fn2

Debtors Robert Lynn Scholz and Carolyn Gail Scholz take the position that RRA Benefits do not count towards CMI, and should not be counted as part of projected disposable income. Their chapter 13 trustee, Michael Hugh Meyer (the "Trustee") disagrees on both counts.

This disagreement formed the basis of the Trustee's objection to the Debtors' plan. The bankruptcy court, however, confirmed the plan over the Trustee's objection in a published decision, In re Scholz, 427 B.R. 864 (Bankr. E.D. Cal. 2010).

On appeal, we agree with the Trustee that RRA Benefits fall within the definition of CMI, but we agree with the bankruptcy court that RRA Benefits cannot be considered when calculating projected disposable income. As our first conclusion affects essential elements of the confirmation order and the order overruling the Trustee's objection, we VACATE and REMAND.

FACTS

The facts relevant to this appeal are undisputed. The Debtors filed a voluntary petition and plan on May 15, 2009 seeking relief under chapter 13. Mr. Scholz, now retired, formerly worked in the railroad industry. Ms. Scholz is not retired and works for a real estate agency.

Pursuant to Rule 1007(b)(6), the Debtors filed Form B22C which indicated that they were below-median-income debtors and that their CMI was $3,822.98. This sum consisted of wages and commissions received on account of Ms. Scholz's current employment in the average monthly amount of $3,436.13 and retirement benefits received from her former employer in the average monthly amount of $386.85. The Debtors reported no monthly income or benefits of any type for Mr. Scholz in the body of their Form B22C. The Debtors did, however, attach an addendum in which they disclosed that they had excluded from their calculation of CMI Mr. Scholz's average monthly RRA Benefits.

That exclusion was significant. On their Schedule I the Debtors reported combined average monthly income of $6,799.61. This higher amount reflected Mr. Scholz's monthly RRA Benefits of $3,709.25. This income was also necessary. The Debtors' Schedule J indicated combined average monthly expenses of $6,361.36. The Debtors' plan committed to pay this positive difference of $438 per month to the Trustee. The plan provided for a 60-month term.

The Trustee did not object to the 60-month term, but did object to the manner in which the Debtors' expenses were calculated. To understand the basis of this objection, one must understand the role CMI plays in a debtor's chapter 13 bankruptcy case. If a debtor's CMI is above the median income level in the debtor's state, the debtor's expenses are subject to calculation using the method specified in § 707(b)(2). Section 707(b)(2) is typically more restrictive for above-median-income debtors because it refers to Internal Revenue Service standards instead of actual expenses. In contrast, debtors whose CMI is below-median generally are entitled to deduct all actual expenses that are "reasonably necessary" for their "maintenance and support." See 11 U.S.C. § 1325(b)(2), (3) and (4).*fn3

On June 29, 2009, the Trustee filed his objection to the Debtors' plan. The Trustee asserted that the Debtors should have included Mr. Scholz's RRA Benefits in their CMI calculation. If this had been done, the Debtors would not have qualified as below-median-income debtors. While the effect on their projected disposable income is unknown, the Trustee asserts it would have increased their projected disposable income because he contended that the Debtors' actual expenses were more than those which would have been allowed under § 707(b)(2). Accordingly, the Trustee argued that the Debtors had not established, as required by § ...


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