Wednesday, September 3, 2008

The Most Important 9th Circuit B'cy Opinion of the Summer: Above-Median Income Ch. 13 Debtors Can Have 0%, Shorter-than 5-Year Plans




by Andrew Toth-Fejel, of Bankruptcy Litigation Support for Attorneys,
Andy@BLSforAttorneys.com


Maney v. Kagenveama, 527 F.3d 990 (9th Cir. 2008)
June 5, 2008, amended June 23, 2008

The Ninth Circuit has applied a strict reading to BAPCPA's new terms, "projected disposable income" and "applicable commitment period," with the result that an above-median income debtor who had a negative income on Form B22C, and thus no "projected disposable income," had no requirement to pay unsecured creditors and no requirement to pay into the Chapter 13 plan for 5 years, or for any other particular period of time. However, under-median income debtors do not benefit from this ruling. How could all this be?

With this opinion the Ninth Circuit became the first Circuit in the country to strictly interpret "projected disposable income," a term not defined in the Code, to mean "disposable income" projected out over the "applicable commitment period." The consequences of this statutory construction are huge. So we need to walk carefully through the Court's semantics.

The Court's Analysis

"Projected disposable income" is a pre-BAPCPA term, "applicable commitment period" is a BAPCPA term. "Disposable income" is defined in § 1325(b)(2) as "current monthly income . . . less amounts reasonably necessary to be expended--for the maintenance and support of the debtor or a dependent [and appropriate charitable and business expenses] . . . ." And "current monthly income" is a BAPCPA term involving a calculation of income and expenses of the prior 6 months, and, under § 1325(b)(3), requires over-median debtors to determine expenses according to § 707(b)(2), the number-crunching involved in the expense portion of Form B22C. So
if, as in this case, the "disposable income," as reflected in Form B22C, is zero dollars or less, projecting that amount over the "applicable commitment period" yields a "projected disposable income" amount also of zero dollars. The Court's critical sentence in this statutory interpretation: ". . . to give meaning to every word of § 1325(b), 'disposable income,' as defined in 1325(b)(2), must be 'projected' in order to derive 'projected disposable income'."

The Court rejected the trustee's arguments for "a forward-looking determination of 'projected disposable income' " (instead of the Court's focus on prepetition income via Form B22C) with two arguments: 1) The view that "projected disposable income" must be based on the debtor's anticipated income during the life of the plan violates the plain language link of "disposable income" (i.e., the Form B22C amount) to "projected disposable income." 2) The view that this calculation under § 1325(b)(2) (again, the Form B22C amount) is merely a starting point for deriving the "projected disposable income," and can be rebutted or supplemented by other evidence of the debtor's past and future finances, has no support in the Code and flies in the face of BAPCPA's formulaic approach instead of the prior flexible one. (The Court here cites but does not discuss the details of a recent 9th Circ. BAP opinion, In re Pak, 378 B.R. 257, 267 (9th Cir. BAP 2007), as part of the "unpersuasive" line of case supporting this second erroneous view.)

The Court pointedly explained that the results from its "plain reading" of § 1325(b) are not absurd simply because unsecured creditors get less in some circumstances, and [i]f the changes imposed by BAPCPA arose from poor policy choices that produced undesirable results, it is up to Congress, not the courts, to amend the statute." Even more pointedly, "Chapter 13 trustees were aware of the change in the law and notified Congress of their concerns before BAPCPA was passed but Congress failed to act", so "we presume that it was aware of the new result, and the decision not to amend the statute was intentional."

The Court then addressed the "applicable commitment period" requirement, holding that although the trustee was correct that this term generally "denotes the time by which a debtor is obligated to pay unsecured creditors," but that "the 'applicable commitment period' requirement is inapplicable to a plan submitted voluntarily by a debtor with no 'projected disposable income'.". Its rationale: upon objection to a plan by trustee or creditor, the debtor must propose a plan in which all "projected disposable income" is submitted to make payments during the "applicable commitment period," but if, as here, there is no "projected disposable income" there is no "applicable commitment period."

So why does all this benefit the above-median income debtor and not the below-median one? Recall that a below-median income debtor completes Form B22C only so far as to show that her income is below the median. It is only above median debtors who must recalculate his expenses on Form B22C pursuant to § 707(b)(2) and thus has an opportunity to have a negative "disposable income."


Appeal?

According to a deputy clerk at the 9th Circuit, no timely petition for rehearing was filed in this case and so as of July 15, 2008, it is final. It may yet be appealed to the Supreme Court but the 9th Circuit has not received notice of this as of the date of this Bulletin.


The Bottom Line

Best articulated by the dissenting opinion: "So long as the debtor can calculate no “disposable income” at the time his creditor plan is confirmed, he can rest easy. The debtor can propose as short a time period as he wants
: a day, a week or a month." And "[u]nder the majority's rule, a debtor could mischievously 'game the system' and avoid repaying debt to his unsecured creditors by inflating his pre-plan confirmation expenses and deferring income until after plan confirmation. He could gain confirmation of his plan with a short commitment period and then reduce his actual expenses and accept his deferred income. Unsecured creditors who discover the debtor's improved financial situation would be limited to seek modification of the debtor's plan only within the short commitment period . . . ".



by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

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