Does Hamilton v. Lanning Impact Individual Chapter 11 Cases?

By Robert J. Mendes

On June 7, 2010, the U.S. Supreme Court issued Hamilton v. Lanning, 2010 WL 2243704. The case holds that when calculating the "projected disposable income" of a Chapter 13 debtor, the bankruptcy court may take into consideration changes to income or expenses that are known or virtually certain. The question is whether Lanning has any impact on Chapter 11 debtors that are individuals.

I.  Why Would Chapter 13 Case Law Matter?

Over the last quarter century, there are many instances where the more voluminous case law about Chapter 13 cases impacts the analysis under Chapter 11. One good example is in the arena of cram down interest rates. However, beyond this, there is an additional reason why Lanning should matter to individual Chapter 11 debtor cases. Specifically, in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Congress amended section 1129. After the amendment, upon the objection of a single unsecured creditor, an individual Chapter 11 debtor must pay unsecured claims in full or the debtor must pay creditors all "projected disposable income" as defined in section 1325(b)(2) for the longer of the term of the plan or five years. In this way, confirming an individual Chapter 11 plan now expressly requires consideration of Chapter 13 case law regarding projected disposable income.

II.  What Was The Issue For The Supreme Court To Resolve?

The short answer is that colossally poor drafting by Congress created an issue that only the Supreme Court could resolve. Justice Alito described the issue more objectively at 2010 WL 2243704, *4:

We granted certiorari to decide how a bankruptcy court should calculate a debtor's "projected disposable income." Some lower courts have taken what the parties term the "mechanical approach," while most have adopted what has been called the "forward-looking approach."

Like the new section 1129(a)(15), section 1325 of the Code requires Chapter 13 debtors to fully repay creditors or dedicate all projected disposable income to unsecured creditors for a period of time. However, the Code did not define "projected disposable income." BAPCPA left the term undefined, but did specify how to determine "disposable income." Specifically, under BAPCPA, to determine "disposable income" required figuring out "current monthly income." And, in turn, "current monthly income" requires looking back at the debtor's average monthly income for the six months prior to filing bankruptcy. In this way, Congress created a scheme where "projected disposable income" is not defined, but "disposable income" appears to necessarily be driven by the debtor's average income prior to filing for bankruptcy protection. In a nutshell, the problem is whether one should look forward as suggested by the use of the word "projected" or mechanically look backward as suggested by the definition of "current monthly income."

III.  What Happened In Lanning?

In this case, the debtor "received a one-time buyout from her former employer" during the six months before her filing "and this payment greatly inflated her gross income." Id., at *5. The Chapter 13 trustee used the mechanical approach described above to calculate the debtor's projected disposable income for purposes the plan. This calculation was based on the average income that was inflated by the one-time payment before filing. There was no dispute that the debtor's actual income was too low to make plan payments in the amount indicated by the mechanical approach.

The debtor took the forward-looking approach. Under this approach, the Debtor calculated a monthly disposable income based on her expected income going forward during the term of the plan.

The bankruptcy court adopted the debtor's forward-looking approach. The bankruptcy court stated that this conclusion was warranted by the text of the Code and also "to avoid the absurd result of denying bankruptcy protection to individuals with deteriorating finances in the six months before filing." Id. The Tenth Circuit affirmed at 545 F.3d 1269, 1270 (2008). In doing so, the Tenth Circuit held that, in calculating projected disposable income, there should be a presumption that the number indicated by the mechanical approach is correct, but that the number could be rebutted by evidence of a substantial change in the debtor's circumstances. Id., at 1278-79. The Supreme Court affirmed:

We find petitioner's remaining arguments unpersuasive. Consistent with the text of §1325 and pre-BAPCPA practice, we hold that when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation. We therefore affirm the decision of the Court of Appeals.

Id., at *12.

In this way, the case law has been moved forward substantially. Future Chapter 13 litigation may center around what constitutes "a substantial change in the debtor's circumstances" or what types of changes are "known or virtually certain at the time of confirmation." But, there is more of an analytical framework in place now.

IV.  What Does Lanning Mean For Individual Chapter 11 Debtors?

Since Lanning is not a Chapter 11 case, litigants will no doubt take a variety of positions about what the case means, if anything, in the context of Chapter 11. For parties interested in the mechanical approach only, they might make note that section 1129(a)(15) requires individual Chapter 11 debtors to pay "projected disposable income of the debtor (as defined in section 1325(b)(2))..." (emphasis added) Such parties might further note that section 1325(b)(2) only defines "disposable income" (which in turn relies on "current monthly income," which in turn is backward looking only). Thus, some might argue that, given how section 1129(a)(15) cross-references with the apparently backward-looking section 1325(b)(2), the only reasonable reading of "projected disposable income" for Chapter 11 cases is the mechanical approach.

Unfortunately for such litigants, the Supreme Court addressed this argument in Lanning and rejected it:

Petitioner argues that only the mechanical approach is consistent with §1129(a)(15)(B), which refers to "projected disposable income of the debtor (as defined in section 1325(b)(2))." This cross-reference, petitioner argues, shows that Congress intended for the term "projected disposable income" to incorporate, presumably in all contexts, the defined term "disposable income." It is evident that §1129(a)(15)(B) refers to the defined term "disposable income," see §1325(b)(2), but that fact offers no insight into the meaning of the word "projected" in §§1129(a)(15)(B) and 1325(b)(1)(B). We fail to see how that word acquires a specialized meaning as a result of this cross-reference-particularly where both §§1129(a)(15)(B) and 1325(b)(1)(B) refer to projected disposable income "to be received" during the relevant period.

Id., at *9.

In this way, it seems at first blush like the Supreme Court would define "projected disposable income" the same in a Chapter 11 case as it now has done for Chapter 13 cases.

V.  Summary

Lanning makes it clear that, when calculating the "projected disposable income" of a Chapter 13 debtor, the bankruptcy court may take into consideration changes to income or expenses that are known or virtually certain. The holding of this ruling did not extend to individual Chapter 11 cases. However, the logic of Lanning would seem to apply equally in that context. As always, it will be interesting to see what arguments smart lawyers can make if they wish to see a different result.