Hamilton, Chapter 13 Trustee v. Lanning
From ScotusWiki
Argued March 22, 2010. Decided June 7, 2010.
Authorship: This page is under the management of M. Jonathan Hayes and his BankruptcyProf Blog. Sina Kian of Stanford Law School recapped the opinion in the case.
Note: Akin Gump now represents the respondent in this case.
Docket: 08-998
Issue: The Court limited the question presented to the following: “Whether in calculating the debtor’s ‘projected disposable income’ during the plan period, the bankruptcy court may consider evidence suggesting that the debtor’s income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”
Contents |
Briefs and Documents
Decision
AFFIRMED in an 8-1 decision with an opinion written by Justice Alito. Justice Scalia dissented.
Oral Argument
Transcript (March 22, 2010)
Merits Briefs
- Brief for Petitioner Jan Hamilton, Chapter 13 Trustee
- Brief for Respondent Stephanie Kay Lanning
- Reply Brief for Petitioner Jan Hamilton, Chapter 13 Trustee
Amicus Briefs
- Brief for the National Association of Consumer Bankruptcy Attorneys in Support of Neither Party
- Brief for Professor Ned W. Waxman in Support of Respondent
- Brief for the United States in Support of the Respondent
Certiorari-Stage Documents
- Opinion below (10th Circuit)
- Petition for certiorari
- Amicus brief of the United States (recommending that cert. be granted)
Opinion Recap
Sina Kian originally wrote the following for SCOTUSblog:
Whereas Chapter 7 bankruptcy requires debtors to liquidate their assets, Chapter 13 bankruptcy allows them to devise a schedule of payments under which they will keep their assets and pay creditors their projected disposable income (PDI) over a period of three or five years. The question before the Court in Hamilton v. Lanning was how a bankruptcy court should determine a debtor’s PDI when the debtor’s income or expenses change close to the date of confirmation – no small matter in today’s economy.
In defining projected disposable income, the Court had two choices. First, it could define the term “mechanically” – i.e., multiply the debtor’s past monthly disposable income, averaged over the preceding six months, by the number of months in a debtor’s plan. Second, the Court could define it in a “forward-looking way” – i.e., default to the mechanical approach, but provide bankruptcy courts with discretion to make appropriate adjustments “where significant changes in a debtor’s financial circumstances are known or virtually known.” In this case, respondent Stephanie Lanning would owe approximately $144 per month for sixty months if the “forward-looking” approach were used. By contrast, because of a one-time buy-out from a former employer, Lanning would have to pay $756 per month for sixty months – a sum that both parties agreed she could not possibly afford – if the “mechanical” approach were used.
The Court opted for the “forward looking” approach, with only Justice Scalia dissenting. The Court’s opinion took a disciplined structure that almost resembled a play, divided into parts like acts, with the conflicts presented cleanly in narrative form. The form, almost cookie-cutter for this term’s statutory interpretation cases (Hertz v. Friend, Jerman v. Carlisle), also repackaged and showcased the usual enigmas of statutory interpretation: a vague and (partially) undefined term, no clear congressional intent for those who look, and a trade-off between the simplest rule and a more flexible one. The sparknotes version of Hamilton v. Lanning is as follows:
Act I: The Applicable Text. The Court begins by focusing on the word “projected”; because Congress has not defined the term (either here or in other statutes using the word projected), the Court concludes that it should default to its ordinary meaning. In accounting, election coverage, and sports analysis, it reasons, a “projection” takes into account “other factors [beyond past events] that may affect the final outcome.” This conclusion is supported, the Court notes, by the fact that elsewhere in the Bankruptcy Code, Congress mandates the mechanical-type multiplication by using the term “multiplied,” rather than “projected.”
Act II: Prior Practice Regarding that Text. Prior to 2005 (when Congress enacted the current version of the statute), there was a “widely acknowledged and well-documented view that courts may take into account known or virtually certain changes to debtors’ income or expenses when projecting disposable income.” Had Congress intended to overturn this practice, it would have done so expressly.
Act III: The Surrounding Text. Section III(B) of the Court’s opinion then examines the context in which the term “projected disposable income” appears. The PDI is “to be received in the applicable commitment period”; it is to be determined “as of the effective date of the plan”; and it “will be applied to make payments.” The first and third clauses suggest that the PDI contemplates a dollar figure that the creditor will actually receive. But if the PDI does not account for changes, it could produce figures that the debtor is simply incapable of paying (because, as here, the debtor could be assigned a greatly overstated PDI for having enjoyed a one-time windfall in the six months prior to filing for Chapter 13). The second clause – by requiring bankruptcy courts to determine the value as of the filing date of the plan – implies that those courts can and should take advantage of all information up until the filing date.
Act IV: Policy. At this point, the case became about individual bankruptcy under Chapter 13. Statutory interpretation is, after all, not just a Sudoku, but the act of breathing life into legislation. The problem with the mechanical approach worked in both directions. In cases in which the debtor’s disposable income is substantially lower during the six-month look-back period, “the mechanical approach would deny creditors payments that the debtor could easily make.” By contrast, when the debtor’s disposable income is substantially higher during the six-month look-back period, the mechanical approach would create a figure too high, one that the debtor could not afford (as in this case); as a result of the artificially high number, the debtor will be denied Chapter 13 bankruptcy protection because under Section 1325(a)(6), a plan can only be confirmed if “the debtor will be able to make all payments under the plan.”
The Court considered and rejected the four ways suggested by the Trustee to mitigate this anomaly: delay filing (risky and sometimes impossible), seek leave to delay filing and petition the bankruptcy court to choose a more representative six-month period (undermines the mechanical approach in an unnecessarily more convoluted way), dismiss the petition and refile later (could violate bankruptcy’s good faith requirement), and seek relief under Chapter 7 instead of Chapter 13 (not clear how often it is actually possible, given the intricacies of Chapter 7).
Justice Scalia dissented. The Court’s textual argument, he wrote in dissent, “either renders superfluous text Congress included or requires adding text Congress did not.” The statutory definition of “disposable income” is superfluous, he contended, because bankruptcy courts are free to disregard it; the Court’s conclusion that “disposable income” is still useful as a starting point has “nothing in the text” to support it. Moreover, even if the word “projected” could do that work, there is “no basis in the text” for authorizing forward-looking estimations only when the changes would be “significant” and either “known or virtually certain.” To Justice Scalia’s mind, Acts I through III act as a Trojan horse for Act IV, which bore “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 that bending and tweaking is, in Justice Scalia’s view, for Congress.
Oral Argument Recap
At oral argument in Hamilton v. Lanning, the petitioner – chapter 13 trustee Jan Hamilton – faced questions from the outset regarding when, if ever, the Bankruptcy Court can deviate from the specific statutory formula set forth in the Bankruptcy Code.
Justice Alito’s questions captured the Court’s sentiment: he emphasized that the argument that Congress devised a specific framework for computing the plan payment but then allowed for modification of that payment by using the word “projected” was “strange.” But following Hamilton’s interpretation, he continued, would lead to an absurd result. He inquired about the reverse of Ms. Lanning’s situation – that is, one in which the prior six months’ income would lead to payments that were less than the debtor can afford. Hamilton responded that the Code’s “good faith” requirement would militate against such a scenario.
Justice Sotomayor also appeared skeptical, asking Hamilton, “why go through all these machinations?” Instead, she suggested, shouldn’t the Court just find “narrow circumstances” in which the bankruptcy court “can deviate from the statutory formula?” Hamilton’s argument over and over was that Congress established a specific formula, which should be followed even if, as here, the debtor cannot get a plan confirmed. Responding to the concern, chiefly raised by Justice Ginsburg, that Lanning could not get a plan confirmed, Hamilton suggested that the debtor could use section 101(10A) to change the computation of current monthly income, or she could have filed at a different time (which would have changed the computations), or she could dismiss and refile. The Chief and Justices Scalia and Kennedy chided Hamilton for suggesting that the bankruptcy court could make changes or modifications or adjustments in some areas but not others. Any “reasonable” adjustments, for practical purposes, would change the statutory result by allowing the bankruptcy court to determine what a reasonable payment would be – seemingly the opposite of what Congress intended.
Counsel for the debtor, Thomas Goldstein, made a fairly lengthy statement at the outset of his presentation without interruption by the Court. Chief Justice Roberts offered a few questions, joined by Scalia, agreeing that “disposable income” is defined but “projected disposable income” is not. Goldstein pointed out that the word “multiplied” is used in other areas of the bankruptcy code but is not here. Also, because Congress provided that the debtor must pay her income “to be received,” Congress intended the Bankruptcy Court to look into the future.
Arguing for the government as an amicus in support of the debtor, Assistant to the Solicitor General Sarah Harrington fielded questions about how the bankruptcy court is supposed to look into the future to determine the debtor’s disposable income.
Mr. Hamilton had a very short rebuttal, with no additional questions from the Court. Justices Breyer, Stevens, and Thomas did not ask any questions during the argument.
Pre-Argument Articles
Argument Preview
Hamilton v. Lanning will be argued on March 22, 2010. In it, the Supreme Court will consider the issue of whether a bankruptcy court “may consider evidence suggesting that [a chapter 13] debtor’s income or expenses during [the plan period] are likely to be different from her income or expenses during the pre-filing period.”
Respondent Stephanie Lanning filed a chapter 13 bankruptcy petition in October 2006. Shortly thereafter, as required by the Bankruptcy Code, she filed a chapter 13 Plan that proposed to pay the chapter 13 trustee (petitioner Jan Hamilton) monthly payments of $144 for thirty-six months – an amount based on her actual salary at the time of filing less her actual monthly living expenses.
Hamilton objected to the confirmation of the plan, arguing that the plain language of section 1325(b) of the Bankruptcy Code requires Ms. Lanning to make payments of $1,115 for sixty months. That provision provides a specific framework for computing the debtor’s “disposable income,” which is then projected for the plan period. Because such a plan would pay all creditors in full over approximately thirty-seven months, the trustee proposed that the debtor make payments of $756 for sixty months, although acknowledging that Ms. Lanning currently had no ability to make those payments. The difference between the debtor’s plan payment and the trustee’s plan payment arises from section 1325(b), which provides that the debtor’s income for plan purposes is her actual income for the previous six months and not her actual income at the time of filing the plan. Here, Ms. Lanning had received a bonus in the past six months that artificially increased her “income.”
The bankruptcy court agreed with Hamilton on the sixty-month requirement but overruled his objection with regard to the amount of the payment. Both the Bankruptcy Appellate Panel and Tenth Circuit affirmed. Hamilton then filed a petition for certiorari, which the Supreme Court granted on November 2, 2009.
Hamilton argues that section 1325(b) provides a specific “mechanical test” for computing how much chapter 13 debtors must pay. The payment must be based on the debtor’s “current monthly income,” a term defined in section 101(10A) as all income for the past six months, not on the debtor’s current ability to pay. Why? Because that is what Congress said in the statute. He argues that the legislative history leaves “no question” but that Congress specifically intended to “reduce judicial discretion” by requiring the use of the mechanical test. By contrast, the “well intentioned” “forward-looking test” that Lanning urges the Court to adopt is “result driven” and ignores the plain language of the Bankruptcy Code. Holding that the application of the mechanical test is not required in every case, and therefore a court may – as the Tenth Circuit held – consider a “substantial change in circumstances,” would add language and concepts to the Code that are simply not there. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the amount that a chapter 13 debtor was required to pay was determined using a simple “ability to pay” test, and that amount was then multiplied, i.e., “projected,” by the number of months in the payment plan. Congress changed that in 2005 by redefining disposable income. According to the trustee, the Code now says that the court “shall” approve a plan such as the debtor’s only if the plan payment is computed using the mechanical test. Nothing in the Code permits the court to modify the computation by looking at “special circumstances.”
Finally, Hamilton argues that the mechanical test does not lead to a harsh result here because the debtor could have waited to file her petition (which would have changed the calculation of disposable income because there would then be a different prior six months) or could have simply filed under chapter 7 instead. It also does not lead to an absurd result simply because this debtor cannot get a plan confirmed. Someone is always disadvantaged by the limits placed in a statute.
Lanning responds that the Court must look to the statute as a whole. Congress intended that chapter 13 debtors pay as much as they can afford, and that has been the test since chapter 13 was originally enacted. Language in the Code supports the arguments: the debtor must pay projected disposable income “to be received” in the future; courts are permitted to modify plans without using a mechanical test; and courts must look at the debtor’s projected disposable income “as of the effective date of the plan.” All of these statutory provisions lead to the conclusion that courts must be able to consider factors other than those which existed on the petition date. It makes no sense to allow the court to consider something the day after the plan is confirmed but not the day before. Moreover, the term “projected” must mean to look into the future. To “project” the debtor’s disposable income, the court must be permitted to consider changed circumstances. If Congress meant disposable income “multiplied” by x months, it would have said so.
Lanning concedes that the mechanical test is usually the starting point for the determination of the plan payment and usually also the end. That said, Congress could not have intended “significant anomalies” to contravene the structure of chapter 13. The plan must be feasible and proposed in good faith. Debtors whose prior six months of earnings are lower than their current earnings “as of the effective date” will be able to confirm a plan paying less than they can afford using the mechanical test, i.e., the opposite of this case. Also, the trustee’s arguments encourage debtors to manipulate the system by timing the petition date to coincide with the ability to propose artificially low payments.
In his reply, Hamilton counters that Lanning concedes that the word “projected” means computing some monthly amount and multiplying that by some number of months. Here, he argues, she is simply unhappy with the amount required to be multiplied. He asserts again that section 1325 mandates the use of “current monthly income” as defined in section 101(10A) and reasserts that Lanning could have changed the results by filing at a different time or asking the court to use a different period. He reminds the court that in the Ninth Circuit case, Haney v. Kagenveama (In re Kagenveama), it was the chapter 13 trustee arguing for the forward-looking test, and therefore the mechanical test does not result in a blanket benefit for either side. It is a matter of what Congress intended, not which side benefits the most.
Commentary
In chapter 13, the debtors files a plan either with the petition or shortly thereafter. The plan proposes to pay creditors in a certain way and if various tests are met, the plan is confirmed by the court about two months after the petition is filed. One requirement is that the plan pay "all of the debtor's PROJECTED disposable income" for the plan period, usually either three years or five years, Section 1325(b)(1)(B). Therein lies the problem that Lanning will deal with.
"Disposable income" is defined but not "projected disposable income." Computing "disposable income" depends on whether the debtor is an "above median debtor" or "below median debtor." The median is the median income in the debtor's state.
If the debtor is a below median debtor, disposable income is the debtor's "current monthly income" "less amounts reasonably necessary" for the debtor and her family, Section 1325(b)(2)(A). When the debtor is an above median income, we have a mess. Disposable income then is the debtor's current monthly income less the deductions set forth in Section 707(b)(2)(A) and (B), generally known as the means test. Current monthly income is defined in the bankruptcy code as the debtor's actual income for the 6 months prior to the bankruptcy filing. The deductions on the means test come largely from IRS charts which "allow" certain monthly living expenses. So the disposable income for an above median debtor is the debtor's average income for the past six months less the amounts in a bunch of charts. The computations often result in a meaningless number and often in a negative number.
In any event, the debtor's plan must pay PROJECTED disposable income. After computing the disposable income using the means test, does the above-median debtor have to pay that amount times a certain number of months even if the amount is undoable, unrealistic, silly, or absurd such as a negative number? This is known as the mechanical approach. Or does the court look at reality, look at projections, i.e., the forward looking approach.
In Lanning, the above-median debtor's income for the previous six months was unrealistically high because she received a bonus during the six months. Therefore her disposable income was an amount she could not pay, therefore the plan could not be confirmed because it was not feasible. The plan she filed proposed to pay a realistic amount which the chapter 13 trustee objected to but the court approved over her objection. The BAP and the 10th Circuit affirmed.
The difficulty the Supreme Court will have is that the "forward looking" approach essentially ignores the plain words of the statute. On the other hand, the plain words of the statute are silly.
