Projected Disposable Income: An Old-And-Bad Ruling From Eighth Circuit

 

By: Donald L Swanson

“Projected disposable income” is a plan confirmation provision appearing in all reorganization chapters of the Bankruptcy Code:

• in § 1129(a)(15) for Chapter 11;
• in § 1191(c)(2) for Subchapter V;         
• in § 1225(b)(1) for Chapter 12; and
• in § 1325(b)(1) for Chapter 13.

Here’s an example of such language from § 1191(c)(2)(a): “all of the projected disposable income of the debtor to be received [during the term of the plan] will be applied to make payments under the plan.”

Among the headwinds in applying such language in Subchapter V are two old-and-bad opinions from the Eighth Circuit Court of Appeals that:

• reject the plain meaning of “projected disposable income” as “absurd”; and
• transform the word “projected” into the word “actual.” 

These two opinions are from 1994 and are bad because, (i) a subsequent opinion from the U.S. Supreme Court rules otherwise under similar language in Chapter 13, and (ii) they are inconsistent with Subchapter V purposes and processes.

Such headwinds feel particularly strong in bankruptcy courts within the Eighth Circuit.   

Eighth Circuit Case Law

Back in 1994, the Eighth Circuit Court of Appeals construed Chapter 12’s “projected disposable income” requirement for plan confirmation, in two separate opinions.

–Rowley v. Yarnall

The first opinion is Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994).  The Eighth Circuit cites the § 1225(b) confirmation requirement that “all of the debtor’s projected disposable income . . . will be applied to make payments under the plan.” 

Debtors argue that the plain meaning of such language only obligates them to pay “projected” (i.e., “predicted” or “estimated”) disposable income.

The Eighth Circuit disagrees:

• “A plain reading . . . might appear to support” Debtor’s position, but such a reading “yields an absurd result” because it “would reduce Sec. 1225(b) to a nullity” by allowing farmers to confirm a plan over creditor objection by simply predicting that disposable income will be zero”—such an “emasculating reading . . . would fly directly in the face of the purpose of the statute”;
• “we cannot believe that the meaning advanced by [Debtors] is the one Congress intended; and
• “we hold that Sec. 1225(b)(1)(B) imposes a duty on debtors” to provide in their Chapter 12 plan a promise to pay “net disposable income received during the plan period to unsecured creditors.”

–In re Broken Bow Ranch, Inc.

A few months later, the Eighth Circuit issues its second opinion, In re Broken Bow Ranch, Inc., 33 F.3d 1005 (8th Cir. 1994).  The Court applies the same “projected disposable income” standard and declares:

• “Chapter 12 debtors must turn over disposable income during the course of their farm operations under a plan”; and
• “Creditors may also require a final disposable income determination at the end of the plan, prior to discharge, to ensure that debtor did not “accumulate an unreasonably large reserve of funds that would provide a windfall at the time of discharge” (emphasis added).

Subsequent & Contrary Supreme Court Opinion

In 2010, the U.S. Supreme Court issues an opinion on the meaning of the phrase “projected disposable income” in Chapter 13: Hamilton v. Lanning, 560 U.S. 505 (2010).

In this opinion, the Supreme Court applies Chapter 13’s “projected disposable income” requirement.  The Court has no problem with the plain meaning of the word “projected” and focuses, instead, on how disposable income is to be projected.

Moreover, the Supreme Court’s opinion emphasizes that the phrase “projected disposable income” in § 1325(b)(1) requires a “forward-looking” calculation that’s to be determined “as of the effective date of the plan”—not at a subsequent date.

Notably, Subchapter V’s “projected disposable income” requirement (in § 1191(c)) is also to be determined “as of the effective date of the plan.”  [Chapter 12, too, contains the same “effective date of the plan” language in § 1225(b)(1).]  

Such ruling is entirely inconsistent—and incompatible—with the Eighth Circuit’s directive that actual “disposable income” is to be computed at the end of the case, and not merely “projected” at plan confirmation.

Inconsistent Purpose of Subchapter V

Subchapter V places strong emphasis on achieving a consensual plan.  Examples include:

• One statutory duty of a Subchapter V trustee is to “facilitate the development of a consensual plan of reorganization” (§ 1183(b)(7)); and
• A consensual plan confirmation achieves benefits for both the debtor and its creditors, such as an early termination of trustee services (see § 1191(a) & § 1183(c)).  

Accordingly, the idea on how the “projected disposable income” process should work in Subchapter V is this:

• Debtor files a projection of future disposable income and proposes a plan that’s based on that projection;
• If a creditor believes the debtor’s projection is understated, the creditor objects to the projection and the plan;
• Whereupon, the parties attempt to negotiate a resolution—this happens regularly and is often successful; and
• If negotiation efforts don’t achieve agreement, the Bankruptcy Court takes evidence on the projection and objection and makes a ruling that resolves the dispute.

Such an approach is inconsistent—and incompatible—with the Eighth Circuit’s directives on “projected disposable income” for Chapter 12.

Conclusion

Hopefully, the Eighth Circuit’s old-and-bad rulings on “projected disposable income” will fail to gain traction, of any sort, in Subchapter V. 

More specifically, here’s hoping that bankruptcy Courts in the Eighth Circuit won’t feel bound by the Eighth Circuit’s Chapter 12 opinions, when they construe “projected disposable income” requirements in Subchapter V!

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