Bankruptcy courts not held by past

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An issue that has divided bankruptcy courts since enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has finally been resolved by the U.S. Supreme Court.

Adopting what has become known as the “forward-looking approach,” the court held that, when debtors with above-median income file for Chapter 13 protection, the court may look to their actual income and expenses in determining how much they must pay back creditors.

Most Wisconsin courts that have considered the issue have adopted what is known as the “mechanical approach” — holding that projected disposable income must be determined solely by looking to the debtor’s income during the six months prior to filing.

The Code defines disposable income by reference to “currently monthly income,” defined in turn as “the average monthly income from all sources that the debtor receives … during the 6-month period ending on” the filing date.

That posed a problem for Stephanie Kay Lanning when she filed for bankruptcy in Kansas in 2006. During the previous six months, she had received a one-time buyout from her former employer, greatly inflating her income during that period.

As a result of the buyout, her “current monthly income,” as calculated on Form 22C, was more than $5,000. Her actual monthly income was less than $2,000.

She filed a plan based on her actual income, but the trustee objected, arguing that projected disposable income must be determined solely by reference to Form 22C, even though it was undisputed that Lanning’s actual income was insufficient to make payments in that amount.

The bankruptcy court sided with Lanning, and the Tenth Circuit affirmed. The Supreme Court granted certiorari and affirmed in an opinion by Justice Samuel Alito. Justice Antonin Scalia dissented.

The court held that while looking to the previous six months should be dispositive in setting projected disposable income in most cases, “the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.”

First, the court found that this interpretation is supported by the ordinary meaning of the term “projected.” The court noted that when a corporation’s cash flow is “projected,” it is not based on an assumption that the past will necessarily repeat itself.

Second, the court cited other statutes using the word “projected” that account for adjustment of historical averages based on any significant changes.

Third, the court noted that pre-BAPCPA case law looked to actual circumstances.

Had such a radical departure been intended by Congress, the court concluded that it would have clearly indicated that intent. “In light of this historical practice, we would expect that, had Congress intended for ‘projected’ to carry a specialized — and indeed, unusual — meaning in Chapter 13, Congress would have said so expressly.”

The court further found that use of the “mechanical approach” would be inconsistent with the terms of 11 U.S.C. 1325. “[T]he requirement that projected disposable income ‘will be applied to make payments’ is most naturally read to contemplate that the debtor will actually pay creditors in the calculated monthly amounts. But when, as of the effective date of a plan, the debtor lacks the means to do so, this language is rendered a hollow command.”

Justice Scalia penned a lone dissent, opining, “Underlying the Court’s interpretation is an understandable urge: Sometimes the best reading of a text yields results that one thinks must be a mistake, and bending that reading just a little bit will allow all the pieces to fit together. … But it is in the hard cases, even more than the easy ones, that we should faithfully apply our settled interpretive principles, and trust that Congress will correct the law if what it previously prescribed is wrong.”

Claire Ann Resop, an attorney with von Briesen & Roper, s.c., and Chair of the State Bar’s Bankruptcy, Insolvency, and Creditors’ Rights Section, praised the majority’s holding as sensible.

“Although the statute may say the mechanical approach should be used, it doesn’t work and it creates absurdities,” she said.

Resop noted that the opinion cuts both ways — a debtor whose income is higher at the time of confirmation of the plan than it was during the six months before filing must pay more under the forward-looking approach.

“When the term ‘projected’ is undefined in the statute, it doesn’t make sense to interpret ‘projected disposable income’ to mean ‘past disposable income,’” Resop said.

Case analysis

The opinion overrules several Wisconsin opinions that address the issue.

The first Wisconsin case to do so was In re Guzman, 345 B.R. 640 (E.D.Wis.2006), in which Bankruptcy Judge Susan V. Kelley concluded that the unambiguous language of the statutes, and legislative history, require that “disposable income” be based solely by reference to Form B22C.

Judge Kelley wrote, “While this provision of the new statute does not perform as advertised, perhaps prompting trustees, unsecured creditors and even some bankruptcy judges to long for the ‘good old days’ of reviewing Schedules I and J and determining whether private school, high speed internet access, and a pack-a-day habit were reasonable and necessary for the debtor’s maintenance and support, the mandate of new sec. 1325(b)(3) is clear. The court must decide the ‘amounts reasonably necessary to be expended’ for above-median debtors based solely on … Form B22C, not on excess income over expenses.” Id., 345 B.R. at 646.

The second case was In re Long, 372 B.R. 467 (W.D.Wis.2007), in which Bankruptcy Judge Robert D. Martin adopted the reasoning in Guzman.

That pattern was broken by Bankruptcy Judge Thomas S. Utschig, in In re Mancl, 375 B.R. 514 (W.D.Wis.2007). Rejecting the reasoning in Guzman, Judge Utschig wrote, “Blind adherence to the Form B22C for determination of a debtor’s income could lead to arbitrary results based solely on the timing of a petition, potentially penalizing both debtors and creditors unfairly.” Mancl, 375 B.R. at 517.

However, U.S. District Court Judge Barbara B. Crabb reversed Judge Utschig. In re Mancl, 381 B.R. 357 (W.D.Wis.2008).

The court’s opinion could have ramifications in other cases interpreting the BAPCPA.

The court explicitly wrote, “the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation (emphasis added).”

Next term, the court will hear Ransom v. MBNA, America Bank, N.A., No. 09-907.

The issue is whether, in calculating the debtor’s “projected disposable income” during the plan period, the bankruptcy court may allow an ownership cost deduction for vehicles only if the debtor is actually making payments on the vehicles.

The Seventh Circuit’s view is that, because the statute refers to the “amount specified” in the local standards, rather than a
ctual expenses, a debtor may claim a deduction, even if he has no actual car payments. Ross-Tousey v. Neary, 549 F.3d 1148 (7th Cir. 2008).

The opinion in the case at bar may not dictate that this interpretation is incorrect, but it suggests that it might be.