Wednesday, April 19, 2006

Chapter 13 Plans, Substantial Abuse and Related Issues Addressed

Much of the pre-effective date discussion about BAPCPA focused on the impact of the new "means-testing" provisions -- providing a mechanical formula for determining whether a Chapter 7 filing is an "abuse" subject to dismissal, and setting forth a minimum standard for disposable income which must be contributed to Chapter 13 plans. Yet there has thus far been minimal case law addressing their implementation. We highlighted one such decision a couple weeks ago in the post "Questions on Means Testing Answered," which discussed the Hardacre case, 2006 WL 541028. Now a couple more decisions can be added to the discussion.

One of the issues addressed in Hardacre was whether a debtor's "projected disposable income," which must be devoted to a Chapter 13 plan under Section 1325(b), is the same thing as the "disposable income" calculated based on the debtor's income for the six months prior to the petition date. The definition of "disposable income" used in 1325(b)(2) incorporates the term "current monthly income," which in turn is defined under Section 101(10A) based on the 6-month pre-filing period. The Hardacre court concluded that "projected disposable income" meant something different from "disposable income," and necessarily requires review of the debtor's current income at time of confirmation rather than the prepetition income.

In In re Jass, 2006 WL 871235 (Bankr. D. Utah 3/22/06), Judge Thurman agreed. In so doing, Judge Thurman provides a useful roadmap for statutory interpretation:

In interpreting a new statute, the Court must begin with the language of the statute itself, asking whether the language of the statute is plain. If so, the Court should generally enforce that language, giving each word its common usage. The Court's inquiry should end with the language of the statute unless 1) a literal application of the statutory language would be at odds with the manifest intent of the legislature; 2) a literal application of the statutory language would produce an absurd result; or 3) the statutory language is ambiguous.
Following this roadmap, Judge Thurman looked first to the language of the amended Code. He applied two assumptions: first, that the Court should give meaning to every word in a statute; and second, that the Court should presume that Congress acts "intentionally and purposefully when it includes particular language in one section of a statute but omits it in another." Applying these assumptions, Judge Thurman found Section 1325(b)(1)(B) to be clear: "projected disposable income" has to mean something different than "disposable income", because otherwise the word "projected" would have no meaning. The word "projected" is future-oriented and necessarily modifies the term "disposable income," requiring the court to consider both future and historical finances of the debtor.

Although Judge Thurman did not believe it necessary to go beyond the statutory language to reach this result, he nonetheless considered alternative methods of statutory interpretation. Where necessary to interpret a statute, Judge Thurman noted, courts can also consider a clear manifestation of congressional intent, the policy underlying a statute, and a preference against surplusage. None of these considerations would have altered the Jass holding. As for a clear expression of Congressional intent, Judge Thurman noted that the first place to look is in the Congressional record - however, the record for the BAPCPA amendments is "little more than a gloss of the statutory language of BAPCPA." Looking to what changes were in fact made, though, Judge Thurman noted that the concepts of "projected disposable income" and the term "disposable income" were not new to BAPCPA; rather, the only thing new was the specific definition of "disposable income". Under pre-BAPCPA practice, courts had previously held that "disposable income" was merely a starting point for determining "projected disposable income" for purposes of 1325. Since Congress did not remove the word "projected' from Section 1325(b)(1)(B), nor add it to the definition of "disposable income" in 1325(b)(2), the Court concluded that Congress did not intend to alter pre-BAPCPA law recognizing a difference between "disposable income" and "projected disposable income".

A contrary interpretation, he found, would be inconsistent with the overarching policy of the Bankruptcy Code to provide a debtor with a fresh start -- a policy which he found still existed, even if "the changes to the Code under the BAPCPA serve to benefit creditors." Moreover, to not interpret "projected disposable income" as something different from "disposable income" would render the word "projected" to be surplusage -- an interpretation which should be avoided.

Consistent with this interpretation, the Court found that the debtor's disposable income during the six months prior to filing was merely a "starting point" for determining the "projected disposable income" for purposes of 1325(b). Although the "disposable income" would be presumed to be accurate, the debtor could overcome that presumption by showing a substantial change in circumstances. To determine whether circumstances existed to justify consideration of "projected disposable income" other than the established "disposable income," the Jass court looks to 11 U.S.C. 707(b)(2)(B), which lays out the circumstances which can overcome a presumption of "abuse" for purposes of a Chapter 7 filing. On this point, the Jass decision puts some more meat on the bones of the Hardacre decision, and provides a specific mechanism for determining whether, as a matter of fact, the debtor's "projected disposable income" is indeed different from his or her "disposable income" for the six months prior to filing.

On another Chapter 13 issue, the court in In re Clay, 2006 WL 768812 (Bankr. D. Utah 3/15/06) (again Judge Thurman) held that the pre-BAPCPA practice of paying secured creditors "outside the plan" remains viable in the BAPCPA regime. Before BAPCPA, it was generally accepted that a debtor could choose to pay a secured creditor directly, rather than through a plan, so long as the creditor was paid pursuant to its contract terms. The Chapter 13 trustee in Clay attempted to argue that the BAPCPA amendments precluded that practice. Judge Thurman determined that he would only stray from the pre-BAPCPA practice, which was confirmed in published opinions, if the BAPCPA changes required a new rule of law. He found they did not.

The Trustee argued first that the provisions of 1325(a)(5) require that a plan provide for payments of secured creditors' claims through the plan in equal monthly amounts. The court rejected the notion that this requirement was intended to preclude the pre-BAPCPA practice of paying creditors directly, consistent with prior rulings that it only applied to secured claims "provided for by the plan" (language which is still used in the BAPCPA provisions).

He also rejected the argument that amendments to Section 1326(a)(1) evidenced an intent to overrule the practice. The amendments require a debtor to pay adequate protection payments to a creditor secured by personal property, and to provide the trustee with evidence of such payment. Indeed, the court found that the provision, which requires adequate protection payments to be made "directly to a creditor," evidenced a Congressional intent to allow debtors to continue making payments to secured creditors directly under the terms of their contract.

Other changes as well ratified the Court's conclusion. For instance, the Code had already provided that a residential mortgage could not be "stripped down," with courts universally recognizing in response that debtors could pay mortgage creditors directly. With this background, in BAPCPA, Congress implemented a similar restriction on strip-down of certain purchase money vehicle loans, with the apparent intention that the debtor could still elect to pay the loan directly according to its terms.

Accordingly, the court in Clay held that the practice of paying secured creditors directly, rather than through a Chapter 13 plan, remains alive and well -- much to the chagrin of Chapter 13 trustees who would rather make the disbursements themselves.

On a final note we'll mention a case which addresses a pre-BAPCPA "substantial abuse" issue, but looks to the BAPCPA amendments for guidance. In re Mars, 2006 WL 861663 (Bankr. W. D. Mich. 3/28/06). Mr. Mars was retired, and between social security and part-time earnings received $1,475 per month net of taxes. His wife was a 64-year old minister who earned$1,900 per month net of taxes and also was provided a parsonage, with a value of $400 per month. She was hoping to retire in a year and had chronic health problems. The debtors' monthly expenses were $3,384 per month, which probably underestimated unreimbursed business expenses. Although their monthly expenses were equal to their net cash earnings, the US Trustee moved to dismiss the case under 11 U.S.C. 707(b) alleging that the filing was a "substantial abuse" because the debtors, by doing some "modest belt tightening" and taking advantage of some Chapter 13 benefits, could supposedly pay a $5,800 dividend to unsecured creditors over 36 months.

In BAPCPA, Congress replaced the 707(b) "substantial abuse" provisions, which typically required an evaluation of the totality of the circumstances, with a more mechanical evaluation of whether "abuse" exists, creating a presumption of abuse if the debtor's monthly income exceeds certain aggregate allowed expenses. The Mars court found that BAPCPA was helpful in offering "clues" as to what Congress meant when it referred to "substantial abuse" in the predecessor version of the statute. In particular, it indicated that if a filing is presumed abusive under BAPCPA if income exceeds the allowed budget by more than $166 / month, then presumably "some multiple of that different must exist in order for the abuse to be deemed substantial" for purposes of the predecessor version.

In comparing the old and new versions of 707(b), the court made three observations: (1) under the old version (perhaps unlike the new), the court is not precluded from looking at factors other than the ability to confirm a Chapter 13 plan; (2) a debtor's income must be "significantly higher" than the statutory budget under the new regime to constitute a "substantial abuse" under the old version; and (3) it is appropriate to focus on the debtor's total income in excess of the expenses of a theoretical "similarly situated person in the debtor's community" (i.e., what the means test tries to capture) rather than on the particular spending choices the particular debtor has actually made. Such a focus appropriately "remove[s] the court from the private lives of those who appear before it," and permits a general determination of a fair division of future income between creditors and the debtor, instead of a subjective scrutiny of a debtor's personal choices as to how he spends his share of that allotment.

Applying this approach to the case before it, the court found that the circumstances did not present a case of "substantial abuse," and denied the US Trustee's motion to dismiss. Such flexibility may well not exist under the BAPCPA regime.

1 comment:

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