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Supreme Court Spotlight: Recent Developments In Consumer Bankruptcy Cases

Supreme Court Spotlight: Recent Developments In Consumer Bankruptcy Cases

The Supreme Court has been hard at work recently deciding two more bankruptcy issues of significant noteworthy interest. To me, anytime the Supreme Court hears a bankruptcy issue it is a noteworthy event. By this article, I summarize the two most recent decisions impacting the consumer bankruptcy practice. Although reading the decisions can be interesting, even more fascinating is reading the transcripts of the oral arguments regarding these appeals. Do yourself a favor and read a transcript, it will enlighten you.

1.Schwab v. Reilly, 130 S. Ct. 2652 (2010)

Effect of Claimed Exemption- In addressing the meaning of its decision in Taylor v. Freeland & Kronz, 502 U.S. 638 (1992), the Supreme Court decided what limitations as to value and effect are placed upon an ambiguous exemption claimed by a Debtor. When an exemption claimed by the Debtor is facially valid, the Trustee need not object to the exemption in order to liquidate property that has been claimed as exempt.

Opinion By: Thomas (joined by Stevens, Kennedy, Thomas, Sotomayor; and Alito; Ginsberg filed a dissenting opinion in which Roberts and Breyer joined)

On April 21, 2005, the Debtor, Nadejda Reilly, filed a Chapter 7 Bankruptcy petition. Upon her Schedule B, the Debtor included a detailed inventory listing of her business equipment which she valued at $10,718.00. Upon her Schedule C, applying the Federal Exemption scheme, the Debtor coincidentally exempted exactly $10,718.00 of the purported value of her business equipment. The exemption as applied was proper and within statutory limits. Debtor's 341 Meeting was concluded, but no objection to Debtor's claim of exemptions was filed within the 30 day deadline provided by Bankruptcy Rule 4003, by any party including the Chapter 7 trustee. On August 10, 2005, the Chapter 7 trustee filed an application seeking approval to employ an auctioneer and a motion seeking to sell the Debtor's business equipment. The Debtor filed an objection to the motion to sell upon the basis that because the business equipment was "fully exempted," that it could not be administered by the Chapter 7 trustee. The motion to sell did not attempt to vitiate the Debtor's claimed exemption in the business equipment; rather the motion sought only to sell equipment, so that any amounts received above and beyond the Debtor's exemption and the costs associated, could be distributed to Debtor's creditors.

The Bankruptcy Court denied the trustee's motion to sell upon the basis that the business equipment was fully exempt. In so ruling, the Bankruptcy Court reasoned that the fact that no objection was filed to Debtor's claim of exemption within the prescribed deadline precluded the trustee from administering the business equipment for the benefit of Debtor's creditors. The Chapter 7 trustee filed an appeal of this decision and the United States District Court for the Middle District of Pennsylvania affirmed the decision of the Bankruptcy Court. The Trustee then appealed the Order of the District Court to the Court of Appeals for the Third Circuit. On July 21, 2008, the Third Circuit affirmed the decision of the District Court. The Third Circuit reasoned that if a Debtor's estimation of the value of property is equal to the amount of the claimed exemption for that property, then the Debtor has stated an "intent" to exempt the property in full. A trustee should recognize this intent then either object to exemptions or contest valuations. If the trustee fails to do so within the 30-days deadline, then the trustee is not permitted to sell the property, because it has been exempted "in full."

The Supreme Court reversed and remanded, holding that when an exemption claimed by the Debtor is facially valid, the Trustee need not object to the exemption in order to liquidate property that has been claimed as exempt. The instant case is distinguishable from the case of Taylor v. Freeland & Kronz in which the Court held that where a Debtor has no colorable basis to claim an exemption, the Trustee must object to the exemption claimed by the Debtor within the 30 day period as dictated in Bankruptcy Rule 4003. An exemption in property is an interest up to a certain dollar amount as indicated by § 522(d) or the relevant state statute, and not in the property itself. The Court's ruling suggests that requiring a Trustee to object within 30 days would be too burdensome given the volume of cases Trustees administer. In addition, the Court clarifies what a Debtor can do to signal to the trustee that they intend to exempt the full market value of the property listed on Schedule B by simply listing the exempt value as either "fair market value (FMV)" or "100 percent of FMV". Such a designation would make it abundantly clear to the Trustee that the Debtor intends to fully protect the property at issue. The Court's ruling gives a clear path to Debtors and their counsel on how to complete a Schedule C, a far better result than resorting to exemption strategies that would be abusive at best and perjury at worst.

Hamilton v. Lanning, 130 S. Ct. 2463 (2010)

B22C Means Test Income v. Schedule I & J Net Income in Chapter 13 - With BAPCPA, sweeping changes were made to the method of calculating how much "over median" income Ddebtors must pay to their unsecured creditors. The Supreme Court has decided that when calculating Debtor's "projected disposeable income" the bankruptcy court may invoke a "forward looking approach" which accounts for changes in the Debtor's income or expenses that are known or virtually certain at the time of confirmation.

Opinion By: Alito, (joined by Roberts, Stevens, Kennedy, Thomas, Ginsburg, Breyer, and Sotomayor; Scalia filed a dissenting opinion)

Debtor, Stephanie Lanning, filed her Chapter 13 Bankruptcy Case on October 16, 2006. Since the Debtor's 6 month gross income figure prior to filing annualized equaled $36,631.00, she was over the median income level for her household size and was required to complete the rest of the test. Per form B22C, the Debtor's monthly disposeable income was calculated to be $1,146.00. Debtor's Schedule I income was only $1,922.00 per month, when annualized equaled $23,064.00. When subtracting Debtor's actual monthly expenses on Schedule J, the Debtor's monthly disposeable income was $149.03, substantially less then as reflected on Debtor's B22C Form. Because the Debtor received two substantial buyout payments during the 6 month period prior to filing her case, the B22C Form dictated that she pay an amount that could not be supported by her current monthly budget at the time her case was filed. The Debtor then filed a Motion for Determination that Chapter 13 Statement of Current Monthly and Disposeable Income (Form B22C) Does Not Determine Plan Payment. By this motion, the Debtor reported the above facts and the Chapter 13 Trustee opposed the motion, stating basically that the motion as filed cites no statutory authority to act in a manner other than as proscribed by the Code.

The Bankruptcy Court granted the Debtor's motion in part, ruling that the "net income number obtained from Form B22C is the Debtor's 'projected disposeable income unless the debtor can show that there has been a substantial change in circumstances such that the numbers contained in that form are not commensurate with a fair projection of Debtor's income in the future." The Bankruptcy Appellate Panel affirmed the Bankruptcy Court's decision. The Tenth Circuit Court of Appeals found that the Chapter 13 version of the "means test" is a "starting point" for determining what a debtor should pay to her creditors. The Tenth Circuit Court of Appeals also found that if there was a "substantial change in circumstance" not reflected in the B22C formula, the Court should refer to Schedules I & J in order to divine what should be paid to unsecured creditors. In so holding, the Court recognized it was "reading into the statute a presumption" as the phrases "starting point" and "substantial change in circumstances" are nowhere found in the statute.

At issue was whether or not the "mechanical approach", the formulaic B22 test, should apply in determining Debtor's projected disposeable income or whether the "forward looking approach", the look at I & J, should apply in determining the Debtor's projected disposeable income. The Supreme Court affirmed the Tenth Circuit's holding that a court should apply a forward-looking test rather than a mechanical test in determining a Debtor's projected disposable income, ruling 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." The Supreme Court reasoned that the mechanical approach rendered superfluous the statutory mandate that the disposable income applied to the plan payments be the income that is "to be received" during the plan period. In addition, the Court reasoned that the ordinary meaning of the word "projected" supports a forward-looking approach. The Court also found that the mechanical approach could lead to absurd results both when the Debtor's actual income during the plan period would be less than the income received in the six months prior to her bankruptcy filing and when her actual income would be more than her pre-bankruptcy income.

Stay tuned for future articles as the Supreme Court continues analyzing bankruptcy issues with its next edition, In re Ransom, 577 F.3d 1026 (9th Cir. 2009), cert granted, 2010 U.S. LEXIS 3359 (2010), where the Court is asked to once again rectify a split in the Circuits. The issue in Ransom is whether, when calculating the debtor's "projected disposable income" during the plan period on the means test, the bankruptcy court may allow an ownership cost deduction for a vehicle only if the debtor is actually making payment on the vehicle. The Ninth Circuit held that a debtor could only claim a vehicle ownership expense on the means test if she had a debt or lease payment. The Fifth, Seventh and Eighth Circuits, and the Sixth Circuit BAP have all ruled that the ownership expense on the means test is available regardless of whether there is an actual payment or not. In re Washburn, 579 F.3d 934 (8th Cir. 2009)(with dissenting opinion); Tate v. Bolen, 571 F.3d 423 (5th Cir. 2009); In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008); In re Kimbro, 389 B.R. 518 (6th Cir. BAP 2008). Stay tuned as the Supreme Court decides whether the IRS guidelines that mandate that the ownership expense can only be deducted if the person has an actual payment on the vehicle or whether or the not plain meaning of the means test which makes no reference as to whether an actual payment must exist wins out or not.