Cutting the Gordian Knot: The Ninth Circuit Bankruptcy Appellate Panel's In Re Pak Decision Attempts a Logical Definition of "Projected Disposable Income" Despite the Tangled Language of 11 U.S.C. Section 1325(b)
By Albert, Honorable Theodor C.*
The Gordian Knot1 was reportedly beyond any mortal’s
ability to unravel until Alexander the Great in 333 BCE provided the
simple solution of cleaving the knot with his sword, as Judge Albert
explains in footnote 1, below. In In Re Pak the 9th Circuit BAP solved a
similar conundrum -- what is “projected disposable income” -- albeit in a
less dramatic fashion. Ed.]
Or, seen from another side, is an earnest debtor prevented from
confirming a “best efforts” plan merely because he had a higher income in
the months immediately preceding the petition but (for example) has lost
his job? One would have thought that BAPCPA stood, if anything, clearly
for the proposition that debtors must pay what they reasonably can. But in
attempting the close-in work of statutory construction for post BAPCPA
Chapter 13’s, a conundrum has emerged concerning what Congress had in mind
for determining debtors’ minimum requirements.
Giving new meaning to “projected disposable income” post BAPCPA has bedeviled some fifty bankruptcy courts across the country. Courts have struggled in various ways to bring a logical and consistent meaning to this term resulting in a near even split of authority.3 The issue is an important one in Chapter 13 practice. In the event of an objection, §1325(b)(1)(B) now requires that the court can only confirm a Chapter 13 plan if it provides that “all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” (Emphasis added.)
Before BAPCPA, bankruptcy courts usually subtracted Schedule J expenses from Schedule I income to determine “projected disposable income” as the minimum payments due under the plan, consistent with debtor’s “best efforts.” However, under BAPCPA, a new formula-driven approach was inserted in various key areas in the Code, such as in determining which individual Chapter 7 cases constituted “abuse” under §707(b) for failure of the debtor to pay all that he could reasonably afford to pay to his creditors.4
BAPCPA seemingly evidenced an overall determination of Congress to replace the traditional discretion of bankruptcy judges with an arithmetic formula.5 However, as explained below and as observed in In re Pak, to the extent that elimination of judicial discretion and maximization of debtor’s best efforts was Congress’ intent in determining the minimum payments required under a Chapter 13 plan as well, the language actually used in BAPCPA created thorny and even contradictory issues of statutory construction.
In re Pak is additionally noteworthy because it shows the BAP panel’s struggle to harmonize the “plain meaning” doctrine of statutory construction found in cases such as Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023 (2004) with the commands that context is important and statutory interpretation is a “holistic” endeavor. See, e.g., Hough v. Fry (In re Hough), 239 B.R. 412, 414 (9th Cir BAP 1999) quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S. Ct. 843 (1999) and United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 371,108 S. Ct. 626 (1988).
Upon motion of the United States Trustee for dismissal of the petition as abusive under §707(b)(3), the debtor converted to Chapter 13. His revised Schedules I and J showed net monthly income of $989.70; however, his plan proposed payments of only $300 per month for 36 months, which would have paid less than 7% of his $172,931 of unsecured debts, whereas 36 months at $989.70 would have yielded more than 20%. Creditors objected to confirmation but the debtor countered that $300 was more than his “disposable income” as that term is defined under §1325 and therefore he met the statutory requirements because he had devoted all “projected disposable income” as required under §1325(b)(1)(B).
The problem is created because the phrase “projected disposable income” existed in the statute before the BAPCPA amendments, but is not defined under the Code. However, under the BAPCPA amendments “disposable income” is defined in the immediately adjoining part of the subsection, i.e.: “ (2) For purposes of this subsection, the term ‘disposable income’ means current monthly income received by the debtor…less amounts reasonably necessary to be expended [for certain enumerated expenses].” §1325(b)(2) (emphasis added).
Of course, “current monthly income” is, in turn, newly defined in §101(10A) as all of the money debtor receives from any source (whether or not it is taxable income) within the six months preceding the petition divided by six. However, wags have observed that this definition makes clear that “current monthly income” is neither current, nor monthly nor income.6
THE DEBTOR’S ARGUMENT
Therefore, as many other courts have observed, unless “disposable income” is a meaningless “floating definition with no apparent purpose,”7 then “projected disposable income” must reference “disposable income”8 for the duration of the plan period. Since under this approach “disposable income” is a fixed number calculated historically, the debtor’s argument is that the “projected” part of the language must mean merely a simple arithmetic calculation, i.e. that historical number multiplied by the number of months of the plan.
THE BAP’S ANALYSIS
Or, as stated in slightly different contexts, the courts are not free to rescue Congress from its “drafting errors” in favor of what the courts might think is the preferred result. Lamie, supra, 540 U.S. 526 at 542, 124 S. Ct. 1023 at 1034, quoting United States v. Granderson, 511 U.S. 39, 68, 114 S. Ct. 1259 (1994)(concurring opinion) and “The fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning.” Union Bank v. Wolas, 502 U.S. 151, 158, 112 S. Ct. 527, 531 (1991).
But the BAP in In re Pak was not so sure that this construction of “projected disposable income” was that easily susceptible to a “plain meaning” analysis. First, the BAP observed that “projected disposable income” existed in §1325(b)(1) before the BAPCPA amendments and that Congress had not amended the §1322(a)(1) requirement that the debtor commit “such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan.” In re Pak, 378 B.R. at 262.
Then there was Congress’ retention of the word “projected,” a word in plain English that is essentially forward-looking “to calculate, estimate or predict (something in the future) based on present data or trends.” Id. at 264, citing In re Slusher, 359 B.R. 290, 297 (Bankr. D. Nev. 2007) quoting The American Heritage College Dictionary 1115 (4th Ed. 2002). There is the §1325(b)(1) requirement that “projected disposable income” be applied “as of the effective date of the plan” another undefined term, but most logically associated with date of confirmation which might not occur until months after the petition date. The BAP in In re Pak observed that it made “little sense” to tie the determination of “projected” to what presumably in most cases is at least 6 months old and maybe even much older information. In re Pak, 378 B.R. at 265.
“Projected disposable income” is used in five other parts of the Code other than §1325(b)(1)(B)9 although none of these other sections purport to define it. However, at least in the sections of Chapter 12 which reference the term, §§1225(b)(1)(B) and (C), its meaning is not constrained by cross reference to the “disposable income” definition found in §1325(b)(2) which incorporates “current monthly income,” and so these sections are rather obviously forward-looking.10 But the BAP in In re Pak could not determine whether this meant that Congress intended a wholly different approach in Chapter 13 while using the same language because of the explicit cross reference to “current monthly income” in §1325(b)(2), and so concluded that none of the provisions of the Code provided definitive guidance. In re Pak, 378 B.R. at 264-65 n.7.
Further, the BAP in In re Pak observed that the formulistic interpretation of “projected disposable income” would lead to arbitrary and even bizarre results whenever income changes dramatically, whether because of change in employment status or otherwise, in the six months preceding the petition.
For example, the opposite problem from In re Pak was also posited, i.e., where the debtor faced a decrease in income from the “disposable income” calculation based on historical data. A formulistic approach would prevent such an earnest debtor from proposing any confirmable Chapter 13 plan by arbitrarily fixing “the debtor’s obligations during the life of the plan regardless of a change in circumstances.” See, e.g., In re Warren, 2007 WL 2683837 at *2 (Bankr. M.D. Ala.); In re Jass, 340 B.R. 411, 415 (Bankr. D. Utah 2006).
Moreover, although BAPCPA legislative history is not helpful in shedding light on these particular terms, there can be no doubt that the overall thrust of the BAPCPA amendments was to compel debtors to pay what they can reasonably afford on their debts.11 It would therefore be absurd and anomalous to interpret “projected disposable income” in such a way as to allow either a debtor like Mr. Pak to leave substantial money on the table in calculating “disposable income,” or alternatively, to prevent an earnest debtor from proposing any plan based on current “best efforts” only because he is constrained by income enjoyed within the six months preceding bankruptcy but no longer available after a job loss or similar calamity, the BAP reasoned.
Consequently, based on the “holistic” approach to statutory
interpretation, and mindful that context is important, the BAP in In re
Pak determined that “projected disposable income” was not susceptible to a
“plain meaning” analysis and was vague and ambiguous. In reaching this
conclusion, the BAP in In re Pak joined with dozens of other
courts who have held that Congress’ retention of the term “projected” to
modify “disposable income” has created an ambiguity.12
Moreover, it is merely one example of numerous problems with the BAPCPA language generally facing courts, who must continue to try to square what Congress may have intended with what it actually said. It also underscores the problems faced when Congress attempts to circumscribe judicial discretion with “one size fits all” formulas that will lead, as in Mr. Pak’s case, to anomalies and even to the “delicious irony”13 of a debtor evading under the formula what he surely would have been forced to pay had the basic old-fashioned discretion of the judge been trusted. The “Gordian Knot” metaphor was all too appropriate. Where the language used under BAPCPA is not susceptible to a coherent, logical and consistent interpretation, the courts must continue to use their interpretive swords in order to bring about a workable resolution.
*The Honorable Theodor C. Albert was appointed judge of the United States Bankruptcy Court for the Central District of California by the Ninth Circuit United States Court of Appeals on June 1, 2005. Judge Albert brought more than 25 years of private practice experience in bankruptcy and financial law to the bench, and formerly served as a United States Bankruptcy Trustee. He is a recipient of the Peter M. Elliot Award for highest standards of ethics and scholarship. Judge Albert sits in the Santa Ana division of the Court.
1 This was Judge Klein’s allusion from his concurring opinion in In re
Pak, 378 B.R. 257 (9th Cir. BAP 2007). “The Gordian Knot” was reportedly
beyond any mortal’s ability to unravel until Alexander the Great in 333
BCE provided the simple solution of cleaving the knot with his sword. The
resulting metaphor describes any decisive and swift solutioin to an
otherwise intractable problem.