Thursday, June 5, 2008

Ninth Circuit Court of Appeals Rejects Approaches of Hardacre and Jass

The Ninth Circuit Court of Appeals issued its decision in In re Kagenveama, 2008 WL 2278681 (Ninth Circuit, June 5, 2008)(Silver, J. sitting by designation) and upheld the Arizona Bankruptcy Court's decision that "projected disposable income" means "disposable income" projected over the "applicable commitment period" and that the five-year "applicable commitment period" was inapplicable as the debtor's "projected disposable income" was a negative number. The court rejected the trustee's argument that the phrase "projected disposable income" indicates a "forward looking concept" that uses the "disposable income" calculation only as a starting point. The debtor in this case was an above-median income debtor. The debtor's schedules I and J reflected a net surplus amount of about $1,500.00 but the debtor's Form B22C showed a "disposable income" of -$4.04. The debtor proposed a chapter 13 plan paying $1,000.00 a month for 36 months.

The court noted that "projected disposable income" is not a defined term in the Bankruptcy Code but that "disposable income" is defined in section 1325(b)(2). The court stated that reading the statute as requiring "disposable income" to be projected out over the "applicable commitment period" to derive the "projected disposable income" amount is the "most nature reading of the statute."

The court rejected the In re Hardacre and In re Jass lines of authority. The Hardacre court held that the calculation of "projected disposable income" must be based on the debtor's anticipated income during the term of the plan and that "projected disposable income" is not related to "disposable income". In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006). The Jass court held that the calculation of section 1325(b)(2) for "disposable income" was merely a presumptively correct starting point for deriving "projected disposable income" that can be rebutted or supplemented by other evidence of historical or future finances to arrive at "projected disposable income." In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006).

Although the court agreed with the chapter 13 trustee that the term "applicable commitment period" is a temporal measure of the time in which the debtor is required to pay his unsecured creditors, the court held that if the debtor's "projected disposable income" is zero or below, the "applicable commitment period" requirement is not applicable. The court held that only "projected disposable income" is subject to the "applicable commitment period" requirement. The funds that the debtor proposed to pay over the proposed 36 month plan were not "projected disposable income." The court stated that there is no provision in the Bankruptcy Code that requires a chapter 13 plan to be held open for the entire "applicable commitment period" and that the "applicable commitment period" is not a plan length requirement but that its purpose is solely to perform the section 1325 (b)(1)(B) calculation of the amount required to be paid to unsecured creditors. The court noted that the Eight Circuit BAP's decision in In re Frederickson, 375 B.R. 829 (2007) supports its interpretation.

The court did note that if the debtor's income increases after confirmation of the plan, a trustee may seek plan modification under section 1329.
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