By: Donald L Swanson
The opinion is In re Phil Kean Designs, Inc., Case No. 25-07667, Middle Florida Bankruptcy Court (decided June 29, 2026; Doc. 154).
Subchapter V says that a plan must be fair and equitable, which requires devotion of debtor’s projected disposable income over the plan’s term (§ 1191(b)&(c)).
Debtor’s Plan, (i) pays projected disposable income to creditors, and (ii) also provides a semi-annual true-up.
Creditors object to Debtor’s Plan, saying that the Plan pays too little to them, despite inclusion in the Plan of a true-up mechanism that pays them more when Debtor’s actual income is greater than the projections.
The Bankruptcy Court overrules Creditors’ objection and confirms Debtor’s Plan—but NOT because of the true-up.
Facts
Debtor provides construction services for custom, luxury homes.
Debtor files a voluntary Subchapter V Petition and files a Plan. The Plan provides for payment of Debtor’s projected disposable income over a 3-years term, based on projections attached to the Plan.
The Plan also requires Debtor to remit its “Surplus Income” for pro rata distribution to unsecured claimants on a semiannual basis. The Plan defines “Surplus Income” as “the amount by which Debtor’s actual disposable income exceeds Debtor’s projected disposable income for such period .” Debtor must submit quarterly financial statements to support the calculation.
“Fair and Equitable” Requirements of § 1191
Subchapter V requires that a debtor’s payment of projected disposable income under the Plan must be “fair and equitable” (§ 1191(b)).
To satisfy the fair and equitable requirement, Debtor must show:
- “the plan provides that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix” (§ 1191(c)(2)(A)).
And “disposable income” is defined as the portion of debtor’s income that is not reasonably necessary “for the continuation, preservation, or operation of the business of the debtor” (§ 1191(d)).
Arguments
Creditors argue that Debtor’s Plan is not “fair and equitable” because Debtor is underestimating its projected disposable income.
Debtor disputes such argument and counters that, in any event, the Plan’s “Surplus Income” provision cures any deficiency by increasing payments to creditors, if Debtor’s actual disposable income exceeds projections.
True-Up
Debtor’s “Surplus Income” is akin to what many courts have termed a true-up – a mechanism to adjust payments under a plan when a debtor’s actual net disposable income exceeds its projections.
Debtor’s argument raises the question of what role a true-up plays, if any, in confirmation of a plan under § 1191(b) when the statute expressly requires projected disposable income.
Other Cases
Other bankruptcy courts have examined the relationship between § 1191 and true-up mechanisms, focusing on two similar questions:
- first, whether § 1191(b) requires a true-up in addition to projected disposable income; and
- second, whether a bankruptcy court has authority to require a true-up.
In one case, the Subchapter V trustee argued that a debtor must include a true-up for the plan to be fair and equitable. The court overruled that argument, because:
- the projected disposable income requirement in § 1191(b) mandates a forward-looking analysis; and
- whereas, a true-up requirement would be backward-looking and contrary to the express language of the statute.
Another court agrees that § 1191(c)(2)(A) requires only a prospective calculation but insists that §§ 1191(c) and 105(a) allow for a look-back to determine what is fair and equitable.
[Editorial Question: Why is it that discussions of “true-up” provisions never seem to include the possibility of a “true-down” in the event of less-than-projected income?]
True-Up Can Can Supplement, but Not Substitute for, Projected Disposable Income
This case presents a slightly different question.
Creditors, here, are not advocating for the inclusion of a true-up. Instead, they argue a true-up cannot replace the requirement that Debtor devote its projected disposable income under the Plan.
On this point, the Court agrees.
Granted, a true-up adds a benefit to creditors when actual performance exceeds projections. So, a true-up is attractive, superficially, considering that creditors have little or no recourse should a debtor outperform projections. Still, such a provision does not alleviate Debtor’s statutory obligation to devote its projected disposable income to plan payments.
Requiring post-petition adjustment of plan payments would read the word “projected” out of the statute.”
Under a plain reading of § 1191, a true-up cannot cure a debtor’s failure to reasonably estimate its projected disposable income in the first instance. The “projected disposable income” requirement under § 1191(c)(2)(A) is a baseline that must be met.
A true-up provision may supplement the projected disposable income requirement by capturing additional income if debtor exceeds expectations, but it cannot substitute for, relax, or reduce this baseline requirement.
Findings
Debtor’s “Surplus Income” provision alone cannot satisfy the fair and equitable requirement of § 1191(b) because:
- § 1191(c) requires payment of projected disposable income, not a true-up; and
- the “Surplus Income” is only triggered if Creditors are not paid in full by insurance.
Still, the Court finds that Debtor has met its burden under §1191(b) and § 1191(c)(2)(A), regardless of the Plan’s “Surplus Income” provision.
At trial, Debtor presented the following evidence to support its projections:
- Debtor works six to eight ongoing construction projects at a time valued around $30 million total;
- each project takes three to four years to complete;
- Debtor signs two or three new contracts each year;
- on average, Debtor collects about 20% of the overall construction costs as a builder’s fee, resulting in around $2 million a year in gross profit.
Creditors present no evidence to contradict Debtor’s projections, which appear consistent with Debtor’s performance in the monthly operating reports filed during this case.
Evidence also shows that the bankruptcy filing affects Debtor’s ability to obtain additional contracts because parties question Debtor’s ability to perform.
Based on the evidence, the Court finds that Debtor’s Plan devotes its projected disposable income over the life of the Plan as required by § 1191(c).
Conclusion
Projected disposable income requirements of § 1191 must be satisfied by actual projections, and true-up provisions cannot replace the projection requirement.
[Note: This is the first of two articles on the In re Phil Kean Designs, Inc., opinion.]
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Leave a comment