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November 8, 2009

Prof. Jean Braucher Leads Great Thread on In re Lanning

This is such a great thread from another list serve about In re Lanning, the chapter 13 case now before the Supreme Court which deals with the question, how do you compute the plan payment for an over-median debtor? 

From Karen Cordry,
Well, what can I say -- they decided Marrama on the "we don't believe Congress wanted this crazy result" analysis.  I think deciding all three case (Espinosa, the trustee exemption case (Reilly?) and this one) on the "anti-abuse" approach would take a much smaller stretch than that case. 

And, in going back and looking at Lanning, I had forgotten, but that is one where the Tenth Circuit opinion took the flexible view to PROTECT the debtor (she had gotten one-time income during the 6 months prebankruptcy) and using the strict calculation would have left her being required to pay far more than she was actually making.  So, I shouldn't say the latter view is necessarily "anti-debtor," as much as "pro reality."  On the whole, my guess is that upholding the Tenth Circuit approach will probably benefit more creditors than debtors, just because of the asymmetry arising from the debtor's right to choose when to file, and the fact that the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays.  But, the legal fact is that it actually works both ways and the debtor is the one trying to uphold the ruling in this instance. 

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General, Washington, DC  20036


From Prof. Jean Braucher,
The Supreme Court granted cert on this 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.”  The question is much broader than necessary to decide the Lanning case.

A possible answer starts with the point that the debtor in this case, whose income had an upward blip because of a one-time buyout from her former employer during the six months before filing, could simply have waited to file, that is until CMI lined up with her current income.  There is no indication she needed to rush, for example to stave off foreclosure.  Even if she did need to file immediately, section 101(10A)(A)(ii) provides for the CMI period to be moved forward by the debtor to deal with Lanning-type facts.  Several cases have so held—the debtor also needs to seek approval not to file a schedule of current income.  See notes 66 and 77 in this article of mine for the cites to cases from North Carolina and Illinois:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428927 So it is unnecessary to read another mechanism for moving forward the period for measuring CMI into section 1325(b).

Similarly, section 1325(b)(3) incorporates rebuttal on expenses under section 707(b)(2)(B).  Lanning did not involve changed expenses, so this issue need not be reached.  Still, the existence of Code mechanisms for debtors to reduce income or increase expenses for means-testing purposes strongly suggests that Congress did not intend for courts to make up their own other means of doing so.  These provisions were not discussed in the lower court cases, including the circuit court opinion.   The Solicitor General also neglected them in her amicus brief filed in September, even though the brief of the United States does cite section 101(10A(A)(ii) in passing, without considering its implications for the case.

Might the court dismiss the case without a decision once it realizes that the lower courts in this case did not address many twists and turns in the Code in their analysis?  Also, the debtor was unrepresented in the BAP and circuit court, making this a very bad case for a Supreme Court decision.  If the court does decide it, it is because it is looking for a way to complicate (and toughen) means testing with another layer using judicial discretion.   Means testing has turned out to be easier on debtors than prior law.  Lanning is an odd case where, as so far inadequately briefed, it looks like adding discretion helps the debtor.  The reality is that the trustee system is looking to “fix” means testing by making it tougher—its approach would have the debtor go through the hassle of the mechanical test and then also have to prepare to pass a discretionary test administered case-by-case by judges.  If Congress doesn’t like the results under means testing, shouldn’t it fix the statute?  Or better yet, it could repeal means testing and go back to the old case-by-case approach.  But if the court goes where the trustee system wants it to, we’ll end up with two layers of means testing, mechanical, followed by discretionary.  Sigh. 


From Mark Cornell,
I forgot about the Espinosa case. As a Don Quixote of the Debtor's Bar, I am embarrassed by the position taken by the Debtor in Espinosa. That case is going to do more harm than good. A victory by the debtor will be small potatoes compared to the damage a loss will do. I routinely claim exemptions in retirement assets and PI claims as "100%", which while not an issue directly in Espinosa, may get impacted by the ruling. IMNSHO, the debtor will do very poorly before the Supreme Court.

I also agree that the Lanning decision is a double edged sword. I wonder if the Court is going to get that. The better rule is to allow courts the flexibility to address each debtor on their merits, but that is certainly not the intent of Congress in passing the BARF.

We can disagree as to whether or not "the means test quirks tend to go in the direction of allowing more expenses than the debtor actually pays".  While the majority view is that in a chapter 7 case, the debtor can deduct ownership expenses for cars with no loans and secured debt payments for property being surrendered, the inflexible budget items like food, rent and utilities are penurious. Sometimes the Debtor's B22 shows less ability to pay then reality, sometimes it shows more. The one thing everyone should be able to agree with is that the B22 is an abomination in chapter 13 cases.

Mark Cornell
Concord, NH


From Jim Gray,
In analyzing whether these views are anti-debtor or pro-reality, I look at the "reality" of the Means Test in which student loan payments, as just one example, are not counted as a legitimate deduction even though they cannot be discharged in a 7 nor can they be fully paid off with the accruing interest in a 13.

I've had a few clients stopped by the B22 even though the reality of their situation did not match the "one size fits all" test.  They weren't "abusing" anything, but tell that to Sen. Grassley.

This mechanical test had only one purpose that anyone can seriously consider, seeking to make debtors continue paying on credit cards for up to 6 months before they could file a 7.

And the sad thing is, it appears that a number of debtors were so scared that they paid on credit cards instead of house payments, fueling or at least aggravating the foreclosure crisis.

I think it's poetic justice that the big banks who bought and paid for BAPCPA suffered some mighty big unintended consequences and reaped a catastrophe.  Their lobbyists perhaps owe them a refund.

Jim Gray
Atlanta, GA

From Ken Doran,
Judges, and appellate judges particularly, have a pretty good lot in life and I don't generally feel sorry for them, but in one way I do:  they are obliged to try very hard to assume that the legislature acted intelligently and in good faith, and knew what it was doing, and to find the wisdom that is buried in there somewhere.  That is often, to put it mildly, a fool's errand, and rarely more so than with BAPCPA.  I have no expertise in predicting Supreme Court decisions, but it will not surprise me if they kick it around and spit out a result that leaves us little more illuminated than before; the Rash decision about valuing collateral in Chapter 13 comes to mind.

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /

From Dan Press,
The only "abuse" in Lanning is the fact that the debtor had to include this non-existent income because of the silly six-month lookback.  Seems to me that it should have been dealt with by applying "special circumstances" rather than throwing out the mean test that the banks bought and paid for.   The banks wanted it to be applied strictly, with special circumstances as the only safety valve (and that had to be fought for), so they should get what they wanted.  Yes, what they are realizing now is that all of this "abuse" was non-existent, and by putting in the fake numbers, they are lowering what they get in a 13, and allowing people to file 7 who otherwise couldn't.   Sorry.  I have no sympathy for them.

Let's see who sides with whom in Lanning - which is backwards from most cases.  The trustee in Lanning is advocating for the strict Kagenveama approach, while the debtor wants flexibility.  While that is what some may have predicted in 2005, reality is that most debtors are better off with the Kagenveama approach, and this C13 trustee is arguing against the position of most trustees and creditors.  Watch what position the bankers take - I bet they side with the debtor here!

Dan Press
Chung & Press, P.C.

From Karen Cordary,
Yup, mea culpa, I took back the "abuse" statement.  I had forgotten what the facts were in Lanning and it doesn't apply there.  (As opposed to cases such as Nowlin, where a single debtor making $90,000 a year wanted to file a Chapter 13 plan that would pay less than $1,000 to her unsecured creditors based on a strict application of the disposable income test, even though, after she paid off her 401(k) loan in two years, she would have something like an added $1,000 A MONTH that she could pay to them.)  My guess is they may have taken Lanning because it presents a sympathetic fact pattern that would allow them to uphold the flexible approach and show that it is not just pro-creditor or pro-debtor.

Karen Cordry, Bankruptcy Counsel
National Association of Attorneys General

From Hank Hildebrand,
Sorry.  In chapter 13 the "special circumstances" might help you with expenses - it cannot help you with income (read the way 707(b) applies to determine a debtors reasonable expenses).  The way to deal with the decline in income is outlined in a case called In re Shelor, 2008 WL 4344894 (Bkrtcy.M.D.N.C.,2008).

The application of the "means test" into the disposable income test was either a poison pill planted when the bill was working its way through the committee structure or a misguided staffer trying to create a balance between chapter 7 and chapter 13.  I cannot find anyone who admits to being the source of adding 707(b) - a litmus test - to 1325(b) - a determination of what must be paid.

I am afraid that the SCOTUS will be called upon to actually draft a statute because Congress did not do a very good job of it.  I fear the outcome.

Henry E. Hildebrand III
Chapter 13 Trustee
Nashville, TN 37219


From Prof. Braucher,
What about section 101(10A)(a)(ii)?  See In re Dunford 408 B.R. 489, 496-97 (Bankr. N.D. Ill. 2009) and In re Hoff, 402 B.R. 683 (Bankr. E.D.N.C. 2009); In re Crink, 2008 WL 2944652 (Bankr. M.D. N.C. 2008); In re Montgomery, 2008 WL 597180 (Bankr. M.D. N.C. 2008); In re Shelor, 2008 WL 4344894 (Bankr. M.D.N.C. 2008).  All these cases recognize a process for the debtor to move forward the CMI period to deal with reduced income as of filing.

Lanning probably could have just waited to file.  But if there was some need for a rush, she could have used the mechanism discussed in these cases.  So the courts do not need to invent some other end-run to deal with decreased income.

This point was not raised in the 10th Circuit or in the Solicitor General's brief to the Supreme Court arguing in favor in granting cert., but it surely will be in the briefs on the merits in the Supreme Court.

  --Jean Braucher, University of Arizona

From Karen Cordry,
That takes care of the debtor's problem with reduced income -- what takes care of the creditors' problem if the debtor has increased income?  Or will stop having an expense after filing the case (either due to abandonment or the completion of a loan), which is the scenario in some of the other cases?  Is this a situation where only the debtor can adjust the situation to protect his or her interests but cannot be forced to do anything to protect creditors' interests when the facts are reversed?

Karen Cordry, Bankruptcy Counsel

From Prof. Braucher,
Perhaps Congress "thought" that if your plan is feasible using the means test version of income, that's what you have to commit.  This is certainly the most obvious reading of a provision allowing the debtor to move forward the period for measuring income but not providing for anyone else to do so.  And if Congress now wants to get rid of the six-month lookback way of looking at income, it could certainly amend the statute.

The statute also provides for adjusting expenses upward by incorporating 707(b)(2)(B) into 1325(b)(3).

The fact that there are specific ways for the debtor to adjust income down and expenses up suggests that others are not allowed to argue for more disposable income payment than means testing requires--this is supposed to be a bright line rule (for the most part) about what debtors have to pay, but with adjustments permitted for feasibility if income has gone done or special circumstances require higher expenses.

From Prof. Braucher,
I've been asked off list if I really think Congress wrote a statute that was "heads, the debtors win, tails, the creditors lose."

My answer is this:  Hardly.  The debtor has to go through all the hassle of filling out the means testing form.  This and other burdens raise the price of bankruptcy.  But if the debtor proposes a chapter 13 plan based on the means test, just as Congress specified, it seems like Congress was saying that's what the debtor can reasonably afford.  The legislative history says the objective is to have debtors pay the maximum they can afford. Means testing has turned out to be more affordable than the unreal budgets chapter 13 debtors wrote for themselves, leading to a two-third failure rate in chapter 13 prior to 2005 (and we don't know yet whether that has changed).  Anyway, the court may very well ignore the statute, but the most obvious reading is that debtors have ways to deviate from the means test, but no one else does.  About 20 percent of debtors have to pay more in chapter 13 as a result of means testing there; the rest pay less than under prior law.
It might be a good thing to go back to prior law, having courts use their discretion to say what debtors can reasonably afford, but having means testing and then judicial discretion to do something else seems like the worst possible outcome.

From Karen Cordry,
Then I'll just throw my two cents in.  I think it is unlikely in the extreme that Congress intended to have the law they wrote result in 80% of Chapter 13 debtors paying less than they paid before.  I think it is also extremely unlikely that it intended to have people continuing to deduct for 401(k) loans that had been paid off (the 5th Cir. Nowlin case) or for secured debts where the collateral had been surrendered (the 7th Cir. Turner case).  Nor do I think that when they wrote statutes with sections with titles like "restoring the basis for secured credit," that, in fact, they meant to ensure that only debtors had rights and creditors didn't.  And, if they did, I think the American public -- much of which doesn't even like people getting mortgage foreclosure relief even in the middle of this recession -- would oppose such scenarios. 

The statute is very badly written -- and many of the policy choices in it are flawed -- but I think it is unrealistic to make arguments based on the notion that Congress intended to write a law to make it easier for debtors to pay less to their creditors. 

Karen Cordry, Bankruptcy Counsel


From Ken Doran,
Karen Cordry asks, "What takes care of the creditors' problem if the debtor has increased income? Or will stop having an expense after filing the case ?"  I would note that in my 30 years of doing this, attempts by creditors to pursue anything like that have been vanishingly rare, under any of the many variations of the statutes.  I believe that this reflects a considered and correct decision that such micromanaging is simply not worth their while.  I infer that Ms. Cordry believes that trustees should be tasked with doing this for the benefit of creditors, paid by commissions on the debtors' payments (practice currently varies considerably in this regard).  If my assumption is correct, my question is: Would trustees be equally tasked with finding grounds to decrease payments, with a similar absence of obliging debtors to employ their own counsel for that purpose?

Kenneth J. Doran / Doran Law Offices / Madison, Wis. / W.D.Wis. /


From Karen Cordry,
I wasn't suggesting trustees would do it -- this is more in the nature of the objections that get raised to plan confirmation by creditors based on those sort of factors.  In addition, though, I think the amendments did require debtors to update income and expenses annually precisely so creditors could do this if they want to.

Karen Cordry, Bankruptcy Counsel

From Jon Hayes,
Jean,
This is such a great thread!  I am going to file an amicus brief in Lanning for a consumer organization in Los Angeles - cdcbaa - www.bklawyers.org.  That is if I can get some consensus about which way we, as an organization, want it to go.  I was on the amicus brief in Kagenveama although Tara Twomey wrote it and graciously added my name to the brief.

It seems to me that if the court is not going to follow Kagenveama, then they are going to have to rule that the scheme in the code for over-median debtors is to be ignored.  The code makes it very specific how to compute the plan payment.  It is a ridiculous scheme but we either follow it or ignore it would be my argument.  Its better to have some unfortunate people like Lanning not be able to file than to simply ignore what Congress wrote.

Does anyone mind if I post this whole thread on my blog?   www.lawprofessorblogs.com.  My blog is BankruptcyProf on the right hand side.

Jon Hayes

From Diane Kerns,
That is a perplexing comment.  I read Kagenveama the exact opposite.  But I couldn't agree more that we should follow the statute as written.  Trustees, however, have no consensus, as you know.

Dianne Crandell Kerns
Chapter 13 Trustee

November 8, 2009 in Current Affairs | Permalink

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Comments

I filed chapter 13 with my wife that I am no longer with, she is still in the home. We attended Debtors Courts and under Chptr. 13 about $90, 000 can I return to debtors Court and covert to chapter 7?

Posted by: Jerry Mcdowell | Jan 7, 2010 5:19:24 PM

I filed Chapter 13 along with my wife that I am no longer with, although she is still in the house. We have about $90, 000 in Chapter13 and I have move out but can't aford to live. Because most of the bills is hers before we got married, Can I go back to court and convert to chapter 7? Because I've been had.

Posted by: Jerry Mcdowell | Jan 7, 2010 5:24:54 PM

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