Friday, October 31, 2008

Eighth Circuit Declines to Follow Ninth Circuit's Kagenveama Opinion, Determines that Above-Median Income Ch. 13 Debtor Must Pay Plan for Full 5 Years

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Coop v. Frederickson (In re Frederickson)
8th Circuit Court of Appeals, Case No. 07-3391

Decided 10/27/08

Although this Bulletin usually does not venture much outside the 9th Circuit for opinions to highlight, this 8th Circuit Frederickson opinion warrants an exception because its holding is so directly opposed to the very important Kagenveama opinion decided by the 9th Circuit this last June, thus setting up an eventual BANCPA-settling showdown at the U.S. Supreme Court.

In an earlier Bulletin in this website on Kagenveama, I called that opinion The Most Important 9th Circuit B'cy Opinion of the Summer. In that opinion the Ninth Circuit 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 length of time.

In contrast, here in Frederickson the 8th Circuit ruled that for an above-median income chapter 13 debtor whose Form B22C disposable income was nevertheless negative, the debtor was required to propose either a full payment plan, or a sixty month plan which paid creditors claims at least in part. In so ruling it overturned both the bankruptcy court and the BAP. Interestingly, the BAP opinion which Frederickson directly overturned (Coop v. Frederickson (In re Frederickson), 375 B.R. 829 (B.A.P. 8th Cir 2007)) is one that the 9th Circuit in Kagenveama had cited favorably.

The 8th Circuit gets to the opposite conclusion than Kagenveama by starting with the opposite first step: asserting that BAPCPA's new terms, "projected disposable income" and "applicable commitment period," cannot be enforced as plain language because the "text leads to a result that is seemingly at odds with the congressional intent of the text." So instead of just enforcing the plain language of the statute, "in determining the true congressional intent of a statute it can be appropriate to consider all available evidence of that intent rather than limiting analysis to the text of the statute." From this consideration of "all available evidence of that intent" the 8th Circuit perceived that congressional intent was "to eliminate what it perceived as widespread abuse of the system by curtailing the bankruptcy courts’ discretion and requiring debtors to pay more to their unsecured creditors."

The Court also asserted that the statute was simply not clear, that there were different "possible interpretations of the text that are supported by authority," as evidenced by the opposing positions of the Chapter 13 debtor and the trustee in this very dispute, and by "the differing outcomes of the bankruptcy courts that have examined this issue to date."

Then after acknowledging that Congress clearly and rigidly defined "disposable income" in § 1325(b)(2) but did not define “projected disposable income” as used in § 1325(b)(1)(B), the Court asserted that if "a distinction [is] drawn between a debtor’s 'disposable income,'
which is calculated solely on the basis of historical numbers and regional averages, and a debtor’s 'projected disposable income,' which necessarily contemplates a forward-looking number," then bankruptcy courts will continue to have some discretion over the calculations of each individual debtor’s financial situation, with the result that the debtor’s 'projected disposable income' will end up more closely aligning with reality. "

The Court seems to go so far as to explicitly rewrite the statute: "If we read the word 'projected' out of 11 U.S.C. § 1325(b)(1)(B) and rely solely on the calculation of 'disposable income' on Form 22C, the
outcome involves anomalous, and perhaps even absurd, results."
Accordingly, we adopt the view shared by many bankruptcy courts that a debtor’s “disposable income” calculation on Form 22C is a starting point for determining the debtor’s “projected disposable income,” but that the final calculation can take into consideration changes that have occurred in the debtor’s financial circumstances as well as the debtor’s actual income and expenses as reported on Schedules I and J. . . . . Additionally, under this interpretation, the 'applicable commitment period' is logically a temporal requirement that does not lead to anomalous or absurd results. . . . . Thus, we conclude that the bankruptcy court erred by confirming [debtor's] plan because [debtor] actually does have projected disposable income and therefore the plan cannot be confirmed over the trustee’s objection unless it extends for the entire sixty-month applicable commitment period.
The 8th Circuit ended with direct rejection of Kagenveama:
In arriving at our holding, we have given careful consideration to the Ninth Circuit’s recent decision in In re Kagenveama, 541 F.3d 868 (9th Cir. 2008), which found persuasive the Eighth Circuit Bankruptcy Appellate Panel’s decision in this case. With all due respect to the Ninth Circuit’s opinion, we believe that the approach we have taken will more fully accomplish that which Congress intended to achieve through the enactment of BAPCPA.
Stay tuned as to whether the debtor here appeals this case to the Supreme Court. Note that the National Association of Consumer Bankruptcy Attorneys (NACBA) had filed an amicus brief on behalf of the debtor, and therefor may well be willing to give continued assistance to bring this contentious issue to national resolution. Until then, Kagenveama is the law of the Ninth Circuit, with opposite law in the Eighth.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

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 provide and 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.

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