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June 13, 2010

Supreme Court Approves "Forward Looking Test" in Computing Chapter 13 Plan Payments


Hamilton v. Lanning, --- U.S. ---, 2010 WL ------- (2010)

Issue:  May a Bankruptcy Court stray from the rigid formula in the Bankruptcy Code for computing the amount of a chapter 13 plan payment?   

Holding:  Yes, in “exceptional cases.”   

Justice Samuel Alito for 8-1 court,
Scalia dissented

This chapter 13 debtor proposed a plan to pay her creditors $144 per month for 36 months.  That amount, according to the debtor was her “projected disposable income” under section 1325(b) for that period.  The chapter 13 trustee, Jan Hamilton, objected arguing that her “projected disposable income” was some $1,700 per month and should be paid for 60 months.  Since that was more than the amount required to pay all debts, the trustee proposed that the debtor pay $756 per month for 60 months.  The trustee conceded that this was more than the debtor could afford based on her current income.  The bankruptcy court confirmed the plan at $144 but for 60 months.  The trustee appealed.  The 10th Circuit BAP and the 10th Circuit Court of Appeals affirmed.

The Supreme Court also affirmed.  The issue of how long the plan should be was not before the Supreme Court.  The Bankruptcy Code requires that the plan payment must be the debtor’s “projected disposable income.”  But while the Code does not define “projected disposable income” it “specifie(s) in some detail how ‘disposable income’ is to be calculated.”

"The parties differ sharply in their interpretation of §1325's reference to ‘projected disposable income.’ [The trustee], advocating the mechanical approach, contends that ‘projected disposable income’ means past average monthly disposable income multiplied by the number of months in a debtor's plan.  [The debtor], who favors the forward-looking approach, agrees that the method outlined by [the trustee] should be determinative in most cases, but she argues that in exceptional cases, where significant changes in a debtor's financial circumstances are known or virtually certain, a bankruptcy court has discretion to make an appropriate adjustment.  [The debtor] has the stronger argument."

Justice Alito focused first on the meaning of the word “projected” since that word is not defined in the code.  “While a projection takes past events into account, adjustments are often made based on other factors that may affect the final outcome.”  “[T]he word ‘projected’ appears in many federal statutes, yet Congress rarely has used it to mean simple multiplication.”  He points out that the Bankruptcy Code uses the words “multiplied by” in various places and therefore Congress would have said “disposable income” “multiplied by” by some time period if that is what it meant.  Also, bankruptcy courts were permitted to look to the future to determine the appropriate amount of the monthly payment before BAPCPA, the amendments in 2005, and the Court should not “read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”

Justice Alito writes that the “mechanical approach” “clashes repeatedly” with other parts of section 1325.  “Section 1325(b)(1)(B)'s reference to projected disposable income ‘to be received in the applicable commitment period’ strongly favors the forward-looking approach.”  “Section §1325(b)(1) directs courts to determine projected disposable income ‘as of the effective date of the plan.’"  It requires “that projected disposable income ‘will be applied to make [the plan] payments.’” “In cases in which a debtor's disposable income during the 6-month look-back period is either substantially lower or higher than the debtor's disposable income during the plan period, the mechanical approach would produce senseless results that we do not think Congress intended.”   Justice Alito discusses the arguments for the mechanical test and the trustee’s offer of strategies that the debtor could have used to overcome the problem she finds herself in, i.e., she cannot get a plan confirmed, but discards them as “unsatisfactory.”   

In his dissent, Scalia writes “the Court concludes, in determining ‘projected disposable income’ a bankruptcy court may depart from §1325(b)(2)'s inflexible formula, at least in ‘exceptional cases,’ to account for ‘significant changes’ in the debtor's circumstances, either actual or anticipated.”  “That interpretation runs aground because it either renders superfluous text Congress included or requires adding text Congress did not.  It would be pointless to define disposable income in such detail, based on data during a specific 6-month period, if a court were free to set the resulting figure aside whenever it appears to be a poor predictor.  And since ‘disposable income’ appears nowhere else in §1325(b), then unless §1325(b)(2)'s definition applies to ‘projected disposable income’ in §1325(b)(1)(B), it does not apply at all.”  He says that under the Court’s ruling, “[a] bankruptcy court must still begin with that figure, but is simply free to fiddle with it if a ‘significant’ change in the debtor's circumstances is ‘known or virtually certain.’  That construction conveniently avoids superfluity, but only by utterly abandoning the text the Court purports to construe.”

Note:  My book Bankruptcy Jurisprudence From the Supreme Court can be purchased on Amazon.com.  Supreme Court Cover

June 13, 2010 in Supreme Court | Permalink

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