2010 Supreme Court Cases
Law Office of Jeffrey Solomon
2010 Supreme Court Consumer Bankruptcy Cases: Less confusion?
There have been several Supreme Court cases in 2010 that consumer bankruptcy attorneys must review and analyze and that will affect practicing in this field.
Hamilton v Lanning
The most important unresolved issue under BAPCPA was how controlling was the means test. Was the result of the means test dispositive of whether the debtor qualified for chapter 7? Did the means test determine how much had to be paid during a chapter 13 to unsecured creditors?
If the means tests showed that the debtor could afford $600 per month, the debtor would have to pay that amount times 60 months to unsecured creditors. This would be the case if the means test determined the plan payments. The means test would reward a debtor who now has higher income because the 6 months average prior to filing bankruptcy is lower. The means test would penalize a debtor who has a reduction in income because he is stuck with the higher pre-bankruptcy income.
Another possible interpretation was that the means test created the minimum of what had to be paid, but the amount could be greater, but not lower. Consider the possibilities if the “real budget”, the Schedule I –J, showed the debtor could only afford $300 instead of the means test figure of $600, or now could pay $900. Which figure determined the required plan payment? Does the means test create a mathematical formula which controls the case, or must we look at projected disposable income and consider changes in future expected ability to pay? Forgetting about the issue of whether the means test has reasonable expense allowances, the main point here has to do how to deal with change of circumstances.
The Supreme Court determined that the debtor is not locked into the means test calculation of disposable monthly income. Instead, we must consider the actual income and expenses that may have changed as of confirmation of the chapter 13 plan. If there is a known or virtually certain change, the means test figure would be adjusted up or down. The court was cognizant of the dilemma that chapter 13 relief would be unavailable to a debtor who could no longer make the payments the means test would require if income had decreased. On the other hand, creditors would be unfairly prejudiced if debtors could afford to pay more than would be required by the mechanical means test approach. According to the court, the mechanical approach leads to “senseless results”.
Though the major means test issue has been resolved, there will continue to be significant issues regarding how to interpret Lanning. What evidence will be necessary and sufficient to prove the changed circumstances? What is necessary to establish the change in income? Consider a debtor who received a large bonus during the 6 months means test period. The debtor might claim this was a onetime bonus so this should not count against his income. Perhaps a debtor had worked a lot of overtime, but is no longer able (or willing) to do so. Sufficient explanation or proof is needed to provide the trustee or ultimately the judge to justify a change from the means test. What notice to creditors might be necessary to submit a plan based on changed circumstances? We can expect different trustees and judges to apply Lanning in different ways over the next several years.
United Student Aid Funds, Inc v. Espinosa
Another significant case is United Student Aid Funds, Inc v. Espinosa , 130 S. Ct. 1367, 176 L Ed 2d 158, 2010 Lexis US 270 (2010). This is not a decision interpreting BAPCPA but is an important case for chapter 13 attorneys. In that case, the debtor inserted a provision in the chapter 13 Plan that a student loan debt was discharged due to undue hardship. The plan was confirmed without an express finding by the bankruptcy judge that there was undue hardship. Additionally, the student loan company had not been served by an adversary complaint. It did, however, received notice of the chapter 13 Plan and never objected. Espinosa, the debtor, completed the plan and received his discharge. After discharge, the student loan creditor attempted to collect on the student loan. The debtor filed a motion in bankruptcy court to enforce the plan and the discharge. United Student Aid Funds filed a motion to determine that the plan was void. The Supreme Court concluded that even though the chapter 13 plan was confirmed in error due to failure to find undue hardship, the confirmation order was binding and enforceable because the creditor had notice of the error and failed to object.
Creditor attorneys are clearly on notice that they need to review the plans and make sure they submit correct proof of claim figures because they might be stuck with the terms of a confirmation order. Chapter 13 Plans are approved my judges as a matter of course without judicial oversight if nobody objects to the plan. As a practical matter, chapter 13 trustees will be reviewing and potentially objecting to plan terms to bring issues before the court. Espinosa must be kept in the arsenal for debtor attorneys to enforce terms of confirmed plans.
Milavetz, Gallop & Milavetz, PA v United States
Consumer debtor attorneys are “debt relief agencies”. I never thought of myself as an agency, but BAPCPA said I was. BAPCPA created definitions for debt relief agencies, bankruptcy assistance, consumer debtors, and established disclosure requirements, obligations and restrictions. See 11 USC Sec 101(3), (4A,),12(A), Sec. 526 (a)(4), 528(a) and (b)(2.) Conflicting court opinions attempted to determine the validity of restrictions upon attorneys. These cases discuss the central tenets of BAPCPA regulation. The above statutory provisions were summarized and analyzed in Milavetz, Gallop & Milavetz, PA v United States, 130 S.Ct. 1324, 176 L. Ed. 2d. 79, 2010 Lexis US 2206(2010), which resolved the conflicting court decisions. The Supreme Court concluded that consumer debtor attorneys were within the definition of debt relief agencies. Advertising disclosure requirements were a reasonable regulation of commercial speech. The Court rejected constitutional challenges but did narrowly construe the statute as to its restrictions on the advice that attorneys can provide to clients. This merits longer discussion here for practitioners.
Section 526(a)(4) prohibits a debt relief agency “from advising an assisted person or prospective assisted person to incur more debt in contemplation of bankruptcy.” This statute could be viewed as preventing an attorney from advising a client to obtain a new car loan to reduce the current high payment on a different vehicle, or to refinance a home to reduce mortgage payments. According to the Court, clearly an attorney cannot advise a client to load up to obtain a discharge of newly acquired debt. However, general advice to assist family budgeting would not be prohibited. Attorneys can provide information as to the application of meaning of the law.
Perhaps the main issue where this arises for chapter 13 attorneys has to do with motor vehicles. Consider a debtor who owns a free and clear old vehicle. This vehicle might not last until the end of a 5 year chapter 13 plan. It may well be in the debtor’s best interest to obtain financing prior to filing an anticipated bankruptcy. Additionally, depending on local judicial rulings, the debtor has a larger means test deduction only if a car is financed. May an attorney explain the law without advising to incur debt for means test purposes to reduce payments to unsecured creditors? Milavetz distinguished between advising and providing information, so attorneys certainly should be able to use appropriate language to “inform” clients. (The availability of the means test owner’s allowance deduction is pending before the Supreme Court in Ransom v MBNA, Am Bank, NA, 577 F. 3d 1026(9th Cir 2009), writ cert granted 130 S. Ct. 2097, 176 L. Ed. 721, 2010 US Lexis 3359).
Schwab v Reilly
The Supreme Court case of Schwab v Reilly, 130 S. Ct. 2652, 177 L Ed 2d 2301, 2010 US Lexis 4974 (2010) is a most curious case. The case involves a chapter 7, but the same issue is relevant to properly scheduling exempt assets in a chapter 13. Frankly, the issue seems to be quite surprising that it was ever litigated, especially since the solution as suggested by the court is so simple. This is not a case based on the changes in BAPCPA.
Bankruptcy exemptions often contain a dollar limit. Reilly had a catering business with cooking and kitchen equipment in the amount of $10,718. She utilized the federal tools of trade exemption of $1850 and wildcard exemption of $10,225. The chapter 7 trustee did not object to the exemptions within 30 days as required by Fed. Rule Bankruptcy Proc. 4003(b). Once the deadline had passed to object, it would appear as if the trustee could no longer take any action against the property. However, an appraisal showed the property to be worth $17,200.00, and the trustee sought to force a sale of the assets.
One would certainly suspect that the debtor was exempting the full amount of the business equipment, not just up to the value of $10,718.00. The Supreme Court disagreed. The Supreme Court held that the trustee did not have to object to the exemptions to be able to auction the property. What must debtor attorneys do to fully protect a claimed exemption that has a monetary limit? The Court expressly provides that its decision will encourage debtors to list these exemptions by also providing that the value is “full market value”, “FMV”, or “100% of FMV”. Simply adding these words helps preserve the claim of exemption.