Bankruptcy Newsletter

Supreme Court to Address "Projected Disposable Income"
The Court's grant of certiorari from a Tenth Circuit decision was limited to the following question: "Whether, in calculating the [Chapter 13] debtor's 'projected disposable income' during the plan period, the bankruptcy court may consider evidence suggesting that the debtor's income or expenses during that period are likely to be different from her income or expenses during the pre-filing period."

And did you know...
» Joint refund presumptively belongs to spouses equally
» Debt within §523(a)(14) despite lack of assessment
» Successive petitions didn't shift burden, raise standard
» Bankruptcy Code did not impliedly repeal the FDCPA

The United States Supreme Court has granted certiorari from a Tenth Circuit decision that "current monthly income" may be just the starting point for calculating an above-median-income Chapter 13 debtor's "projected disposable income." The Court's grant of certiorari in Hamilton v. Lanning (Docket No. 08-998), 2009 WL 273221, was limited to the following question: "Whether, in calculating the debtor's 'projected disposable income' during the plan period, the bankruptcy court may consider evidence suggesting that the debtor's income or expenses during that period are likely to be different from her income or expenses during the pre-filing period."

In the case below, In re Lanning, 545 F.3d 1269 (C.A.10 2008), the Tenth Circuit Court of Appeals ruled that, as to the income side of the inquiry under 11 U.S.C.A. § 1325(b)(1)(B), the section of the Bankruptcy Code precluding the confirmation, over an objection, of a Chapter 13 plan contemplating less than full repayment of all allowed unsecured claims, unless the plan provides for all of the debtor's projected disposable income to be received in the applicable commitment period to be applied to make payments to unsecured creditors under the plan, the starting point for calculating a debtor's "projected disposable income" is presumed to be the debtor's "current monthly income," as defined by the Code, subject to a showing of a substantial change in circumstances. The Court of Appeals noted that it had not been asked to determine whether the change in the particular circumstances of the debtor in the case at bar was substantial, and it left to the bankruptcy courts the determination of whether an adequate showing of changed circumstances has been made in each particular case.

Neither of the approaches adopted by courts interpreting the language of § 1325(b)(1)(B) – that is, neither the "mechanical" approach nor the "forward-looking" approach – was without problems, the Court of Appeals observed. "The difficulty with the forward-looking approach," the court stated, "is that it renders the new definition of 'disposable income,' with its link to historic 'current monthly income,' nearly meaningless unless one reads a presumption into the statute – that the defined term 'disposable income' is just the starting point – which can be rebutted by showing a substantial change in circumstances bearing on how much the debtor realistically can commit to repayment of unsecured creditors as of the effective date of the plan." Though the forward-looking approach, combined with the presumption, is compatible with the statutory language of § 1325(b)(1)(B), the new definition of disposable income, and the use of the means test to standardize an above-median-income Chapter 13 debtor's expenses, it "requires a certain disregard of the notion that Congress knows how to create a presumption when it intends one," the Tenth Circuit acknowledged.

"The main problem with the analysis in decisions adopting the mechanical approach," the Court of Appeals continued, "is that little heed is given to three statutory phrases," namely, "as of the effective date of the plan," "to be received in the applicable commitment period," and "will be applied to make payments." Determining whether a debtor has committed all projected disposable income to the repayment of unsecured creditors "as of the effective date of the plan" suggests consideration of the debtor's actual financial circumstances as of the effective date of the plan, that is, as of the date of plan confirmation, the Court of Appeals found. Congress, moreover, defined "disposable income," not "projected disposable income," meaning that Congress must have intended the two phrases to mean different things. "Unlike the Ninth Circuit in [In re Kagenveama, 541 F.3d 868 (C.A.9-Ariz.)], we do not think the forward-looking approach leaves the definition of 'disposable income' floating with no apparent purpose." Rather, through its reliance on the statutory definition of "current monthly income," the definition of "disposable income" serves to describe the sources of revenue that constitute income, as well as those that do not, the Court of Appeals explained, citing In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex. 2006). Finally, the Court of Appeals pointed out, "under the mechanical approach, the amount 'to be received in the applicable commitment period' would be a fiction if, as of the effective date of the plan, the debtor had no realistic expectation of earning enough to produce the amount of 'disposable income' calculated on Form B22C." Such a debtor also could not get the plan confirmed due to infeasibility. These textual problems outweighed the concern about implying a presumption, the Court of Appeals concluded.

The trustee's petition for a writ of certiorari noted the "clear split" in the circuits as to the interpretation of § 1325(b)(1)(B) and argued that the mechanical approach followed by the Ninth Circuit in Kagenveama was the proper approach. With the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Congress fashioned a rigid, mechanical test to determine a debtor's projected disposable income, the trustee contended. Judicial discretion has been statutorily eliminated. Interpreting "projected disposable income" as that calculated by Form 22C is consistent both with the plain language of the amendment and congressional intent. "[T]he various phrases employed by the courts below and others in the majority camp are judicial creations at odds with the clear language of the statute and apparent congressional intent," the trustee asserted.

For the purposes of allocating joint tax refunds between a debtor's bankruptcy estate and a debtor's nondebtor spouse, any joint tax refund presumptively belongs to the spouses equally, a New York bankruptcy court ruled as a matter of first impression in its district, applying an analysis that was also one of first impression. The presumption, however, may be rebutted if, had the taxes not been paid, the nondebtor spouse could have limited or avoided liability under an innocent spouse exception to tax liability or could have qualified for the limited liability for taxpayers no longer married or taxpayers legally separated or not living together. In so ruling, the bankruptcy court opined that spouses filing joint returns who equally share the liability for the payment of the taxes should equally share the benefit of any tax refund. Its approach, the court explained further, harmonized tax, bankruptcy, and state marital property law. In re Spina, 2009 WL 3078542 (Bkrtcy.E.D.N.Y., Judge Trust).

A "responsible person" penalty did not first need to have been assessed against a Chapter 7 debtor-husband, as the admitted "tax matters partner" for a limited liability company (LLC), in order for the debtor's use of his credit card to pay the withholding tax liability of the LLC, and to essentially substitute this credit card debt for an as-yet unassessed nondischargeable tax debt to the federal government, to trigger the dischargeability exception for debts "incurred to pay a tax to the United States that would be nondischargeable" [11 U.S.C.A. § 523(a)(14)]. There was nothing in the dischargeability exception suggesting that a tax had to be assessed prior to the debtor's payment. Moreover, the perceived harm that the exception was meant to address, the prepetition substitution of dischargeable debts for nondischargeable ones by astute debtors, was not dependent on the prepetition assessment of a tax. In re Cook, 2009 WL 3166945 (Bkrtcy.W.D.Va., Judge Stone).

A South Carolina bankruptcy court has held that the mere fact that the debtors had recently been debtors in another Chapter 13 case was insufficient, on a motion to dismiss the debtors' current Chapter 13 case as a bad faith filing, to shift to the debtors the burden of proof, let alone to satisfy any heightened standard of proof. "To the extent that our precedent shifts the burden of proof to the debtor upon a second filing, requires a showing of a substantial change in circumstances and imposes a heightened burden of proof, I must depart from it," the court stated, noting that dismissal of a Chapter 13 case is, by statute, for cause, and that dismissal for cause cannot mean that a debtor must show an absence of cause. Moreover, the successive Chapter 13 petition that the debtors filed following dismissal of their earlier case, in which the debtors had fallen behind in their plan payments due to the filing of an erroneous tax claim against them, would not be dismissed as having been filed in bad faith. The creditors moving to dismiss had been consistently protected by an interest in the debtors' real property, on which the debtors had maintained homeowners' insurance, and the plan provided for payment of the creditors' claim in full. In re Smith, 2009 WL 3358951 (Bkrtcy.D.S.C., Judge Duncan).

The Bankruptcy Code, as the later enacted statute, did not impliedly repeal the Fair Debt Collection Practices Act (FDCPA) in cases where the plaintiff's claim under the FDCPA arose out of actions that occurred during a bankruptcy proceeding. No argument had been made that there was an irreconcilable conflict between the Code and the FDCPA, nor was there any indication that the Code covered the whole subject of the FDCPA and was clearly intended as a substitute. In so ruling, a federal district court in Ohio declined to follow the decisions of two other district courts which had reached the opposite conclusion, In re Rice-Etherly, 336 B.R. 308 (Bankr.E.D.Mich. 2006), and Baldwin v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, L.L.C., 1999 WL 284788 (N.D.Ill. 1999), and noted that the Seventh Circuit has held that the Bankruptcy Code did not impliedly repeal the FDCPA. Kline v. Mortgage Electronic Sec. Systems, 2009 WL 3064660 (S.D.Ohio, Judge Rice).