June 07, 2010

Supreme Court Decides Hamilton v. Lanning

On June 7, the Supreme Court decided Hamilton v. Lanning, No. 08-998, holding that a bankruptcy court, when determining a debtor's "disposable income" for purposes of a bankruptcy plan, may properly consider evidence that the debtor's income or expenses have changed or are virtually certain to change in the future, compared to the amounts during the six months immediately before the bankruptcy petition was filed.

Debtors under Chapter 13 of the Bankruptcy Act must submit for court approval a plan to pay their creditors out of their future income. If the bankruptcy trustee or a creditor objects, a bankruptcy court may not approve a plan unless it provides either for full repayment of unsecured claims or devotes "all of the debtor's projected disposable income" during the plan's duration to payment of claims. "Disposable income" is defined as "current monthly income" less "amounts reasonably necessary to be expended" for the debtor's maintenance and support, and the statute directs that "current monthly income" be calculated based on the debtor's monthly income during the six months before the bankruptcy petition was filed. The question in this case was whether a court may take account of evidence showing that the debtor's future income would be significantly lower than the six-month period would indicate.

Stefanie Lanning's income in the six months immediately before she filed her bankruptcy petition had been significantly inflated by a one-time buyout from her former employer, and she was earning much less from her new job. She proposed a bankruptcy plan, based on her actual current income, providing for payments to her creditors of $144 per month for 36 months. The bankruptcy trustee objected, claiming that the plan should be based on her much higher income during the six months before she filed her petition and that, using that amount, she should make payments of $756 per month for 60 months. The bankruptcy court approved a plan requiring payments of $144 per month for 60 months, holding that the statute's requirement that the plan be based on "projected" income requires courts to consider the debtor's actual income at the time the plan is approved. The Tenth Circuit Bankruptcy Appeals Panel and the Tenth Circuit Court of Appeals affirmed, holding that, although a calculation of "projected disposable income" should begin with a presumption that the prior-six-month historical figure was correct, that figure could be rebutted by evidence of a substantial change in the debtor's circumstances.

The Supreme Court affirmed, holding that a bankruptcy court may properly consider changes in the debtor's income or expenses that are known or virtually certain to occur when the plan is confirmed. This holding was supported by the ordinary meaning of the term "projected disposable income." As the Court noted, future occurrences normally are not "projected" based on the assumption that the past will simply repeat itself. The term "projected" is used in many federal statutes in contexts that do not connote simple mathematical calculation from past data; specifically, in the bankruptcy context, when Congress required a simple mathematical calculation, it used words other than "projected," such as "multiplied." Moreover, courts before the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 generally recognized that a calculation based on past income was only the first step in determining projected disposable income and that they had discretion to account for changes in the debtor's circumstances. The Court declined to assume that the Act altered this practice without clear evidence of congressional intent to do so. Other language in the statute—including the requirement that the plan be based on disposable income "to be received" during the plan's duration and that the bankruptcy court determine disposable income "as of the effective date of the plan," i.e., the date on which it was confirmed, rather than as of the date of filing—also supported the Court's interpretation.

Justice Alito delivered the opinion of the Court, in which Chief Justice Roberts and Justices Stevens, Kennedy, Thomas, Ginsburg, Breyer, and Sotomayor joined. Justice Scalia filed a dissenting opinion.

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