9th Circuit Stiffens Its View of Chapter 13 Plans
(CN) - Chapter 13 debtors with above-average incomes must pay unsecured creditors for at least five years, even if they lack disposable income, the full 9th Circuit held Thursday, overruling a 2008 panel decision.
The en banc ruling puts the 9th Circuit in line with other courts that have refused to carve out a Bankruptcy Code exception for debtors with no projected disposable income.
For a bankruptcy court to "confirm" a debtor's proposed Chapter 13 bankruptcy plan, the debtor must agree to pay all of his or her disposable income "in the applicable commitment period" to unsecured creditors.
The Bankruptcy Code defines the "applicable commitment period" as three years or at least five years for debtors whose annual projected income is at or above the state's median family income.
Some plans could be less than three years, however, provided that the debtor pays his or her unsecured creditors in full in that shorter time frame.
In the underlying lawsuit, debtors Cesar and Ana Flores filed for Chapter 13 bankruptcy and proposed a reorganization plan under which they would pay their unsecured creditors $122 per month, or 1 percent, for three years.
Their incomes were above average at the time, but they had no projected disposable income.
Chapter 13 trustee Rod Danielson objected, citing the bankruptcy code's five-year minimum duration for debtors in their financial circumstances.
The bankruptcy court agreed with him and confirmed a five-year plan instead of a three-year plan.
The Floreses appealed and persuaded a divided 9th Circuit panel to reverse the bankruptcy court's decision. That panel relied on the 9th Circuit's 2008 ruling in Maney v. Kagenveama, which rejected the notion of a minimum duration for a Chapter 13 plan for debtors with no projected disposable income.
After an en banc rehearing, the full 9th Circuit determined that Kagenveama was "clearly irreconcilable" with Supreme Court precedent.
"The structure of Chapter 13 confirms that [the Bankruptcy Code] establishes a minimum plan duration even if the debtor has no projected disposable income," Judge Susan Graber wrote for the 9-2 majority.
She said the applicable commitment period "is expressly incorporated as a temporal limit for purposes of plan modification" under the law.
This serves the "important purpose" of allowing unsecured creditors to seek higher payments if a debtor's financial circumstances improve unexpectedly, the court explained.
Creditors' opportunity to do so would be "undermined" by an interpretation that allowed debtors to duck the minimum duration merely because they lacked projected disposable income at the outset, the panel said.
The majority said its interpretation relies on the Supreme Court's logic in Hamilton v. Lanning, in which the justices adopted a forward-looking approach to calculating projected disposable income.
"The statute is meant to allow creditors to receive increased payments from debtors whose earnings happen to increase," whether before or after their plans are confirmed, Graber wrote.
She and eight of her colleagues overruled Kagenveama and upheld the bankruptcy court's imposition of a five-year plan for the Floreses.
In a dissenting opinion joined by Chief Judge Alex Kozinski, Judge Harry Pregerson said the majority's interpretation "promotes goals that are at odds with Congress's purpose when it enacted Chapter 13 to 'provide the debtor with a fresh start.'"