Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

• Publication year: 2011

Bankruptcy

by Hon. James D. Walker, Jr.* and Amber Nickell**

I. Introduction

The past few years have been somewhat uneventful in terms of the development of bankruptcy law in Eleventh Circuit courts.¹ The year 2010 was no exception. The lack of significant cases in the lower courts, however, has been offset by notable activity in the Supreme Court ofthe United States, which has decided five bankruptcy cases since last year's Survey.

II. The Supreme Court Meets BAPCPA

Five years after Congress overhauled the Bankruptcy Code² by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),³ the language of those amendments has finally made its way to the Supreme Court for interpretation. The Court decided three BAPCPA cases in 2010: one case dealing with the regulation of bankruptcy attorneys and two cases providing guidance for computing a Chapter 13⁴ debtor's projected disposable income.

* U.S. Bankruptcy Judge, Middle District of Georgia. Augusta State University (B.A., 1970); University of South Carolina School of Law (J.D., 1974). Member, State Bar of Georgia.

** Law Clerk, The Honorable James D. Walker, Jr. Chapman University (B.A., 1993); Mercer University, Walter F. George School of Law (J.D., 2001). Member, State Bar of Georgia.

1. For analysis of Eleventh Circuit bankruptcy law during the prior survey period, see Hon. James D. Walker, Jr. & Amber Nickell, Bankruptcy, 2009 Eleventh Circuit Survey, 61 Mercer L. Rev. 1033 (2010).

2. U.S.C. tit. 11 (2006 & Supp. III 2009). Unless otherwise specified, all statutory

references are to Title 11 of the United States Code, which is known as the Bankruptcy

Code.

3. Pub. L. No. 109-8, 119 Stat. 23.

4. 11 U.S.C ch. 13 (2006 & Supp. III 2009).

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A. Debt Relief Agencies

Milavetz, Gallop & Milavetz, P.A. v. United States⁵ arrived at the Court on a First Amendment⁶ theory and resulted in a unanimous decision.⁷ BAPCPA created a new entity called "a debt relief agency," which is defined in § 101(12A)⁸ as anyone "who provides any bankruptcy assistance" to a consumer debtor in exchange for compensation.⁹ Sections 526, 527, and 528¹⁰ set forth a combination of duties and restrictions applicable to debt relief agencies, including a disclosure requirement for advertisements¹¹ and a prohibition from advising debtors "to incur more debt in contemplation of. . . filing [for] bankrupt-

cy."¹²

The case was brought by a law firm that represented consumer debtors. As a threshold matter, the firm argued that attorneys are not debt relief agencies; therefore, the provisions regulating debt relief agencies did not apply to the firm.¹³ The Court disagreed.¹⁴ Debt relief agencies include people who provide bankruptcy assistance.¹⁵ "Bankruptcy assistance" is itself a defined term that includes "providing legal representation" and other services offered by attorneys.¹⁶ Based on this language, and the fact that attorneys are not expressly excluded from the definition of debt relief agency, the Court concluded that "the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons."¹⁷

Having determined that debt relief agency regulations apply to attorneys, the Court next decided whether specific regulations unconstitutionally restricted speech.¹⁸ Under § 526(a)(4), "[a] debt relief agency shall not . . . advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this

5. 130 S. Ct. 1324 (2010).

6. U.S. Const. amend. I.

7. Milavetz, 130 S. Ct. at 1329.

8. 11 U.S.C. § 101(12A) (2006).

9. Id.

10. 11 U.S.C. §§ 526-528 (2006).

11. Id. § 528(b)(2)(B).

12. Id. § 526(a)(4).

13. Milavetz, 130 S. Ct. at 1330-31.

14. Id. at 1331.

15. 11 U.S.C. § 101(12A).

16. 11 U.S.C. § 101(4A) (2006).

17. Milavetz, 130 S. Ct. at 1332.

18. Id. at 1334.

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title."¹⁹ The law firm argued that this language bars "any advice given to a debtor with the awareness that he might soon file for bankruptcy, even if the advice seeks to obviate the need to file."²⁰ The Court disagreed, opting for a more narrow reading.²¹ The Court noted the phrase "in contemplation of" is commonly used to refer to abusive conduct.²² In this case, however, the phrase applies to a limited category of abuse: "[W]e think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system. ... § 526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose."²³ Under this interpretation, advice to incur debt for the purposes of improving the debtor's financial condition, such as refinancing a mortgage, or for the purpose of making reasonably necessary purchases, such as food or medical services, would pass muster.²⁴ The statute prohibits only "advice to 'load up' on debt with the expectation of obtaining its discharge."²⁵ By applying this narrow interpretation, the statute is neither unconsitutionally overbroad nor impermissibly vague.²⁶

The law firm in Milavetz also challenged § 528(a) and (b)(2),²⁷ which require advertisements for debt relief agencies to contain language similar to the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."²⁸ The Court held that the provisions did not unconstitutionally limit commercial speech because they are intended to prevent misleading advertisements ("the promise of debt relief without any reference to the possibility of filing for bankruptcy"), they only require the disclosure of accurate information, and they do not prohibit the disclosure of additional information.²⁹

19. 11 U.S.C. § 526(a)(4) (emphasis added).

20. Milavetz, 130 S. Ct. at 1334.

21. Id. at 1335.

22. Id. (internal quotation marks omitted).

23. Id. at 1336.

24. Id. at 1339 n.6.

25. Id. at 1336.

26. Id. at 1338-39.

27. 130 S. Ct. at 1339-41.

28. 11 U.S.C. § 528(a)(4), (b)(2)(B) (internal quotation marks omitted); see also Milavetz,

130 S. Ct. at 1330.

29. Milavetz, 130 S. Ct. at 1340.

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B. Projected Disposable Income

The Court's two other BAPCPA cases, Hamilton v. Lanning³⁰ and Ransom v. FIA Card Services, N.A.,³¹ involved the calculation of a Chapter 13 debtor's projected disposable income.³² Both were 8-1 decisions, with Justice Scalia dissenting.³³ Prior to BAPCPA, the term "projected disposable income" was undefined and was typically calculated by subtracting monthly expenses (Schedule J) from monthly income (Schedule I), and multiplying the result by the number of months in the

plan.³⁴

BAPCPA changed the landscape by defining "disposable income" as "current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent of the debtor."³⁵ The Code further defines "current monthly income" (CMI)³⁶ and "amounts reasonably necessary to be expended."³⁷ CMI is calculated as the debtor's average monthly income in the six months prior to filing.³⁸ Expenses for above-median-income debtors are calculated in accordance with the means test,³⁹ which provides the following: "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the [IRS] National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary

Expenses."⁴⁰

The interpretation of "applicable monthly expense amounts"⁴¹ was at issue in Ransom.⁴² The IRS standards provide an allowance for transportation expenses, divided into two subcategories: vehicle

30. 130 S. Ct. 2464 (2010).

31. 131 S. Ct. 716 (2011).

32. Ransom, 131 S. Ct. at 721; Lanning, 130 S. Ct. at 2469.

33. Ransom, 131 S. Ct. at 720; Lanning, 130 S. Ct. at 2468. Ransom also had the distinction of being Justice Kagan's first opinion as a member of the Court. Nat'l L.J., Kagan Issues First Opinion, Fulton Cnty. Daily Rep., Jan. 13, 2011, available at 2011 WLNR 783746.

34. See Lanning, 130 S. Ct. at 2472.

35. 11 U.S.C. § 1325(b)(2) (2006).

36. 11 U.S.C. § 101(10A) (2006).

37. Id. § 1325(b)(2)-(3) (2006).

38. Id. § 101(10A).

39. Id. § 1325(b)(3). The means test, set forth in 11 U.S.C. § 707(b)(2) (2006), is used

to determine whether a Chapter 7 debtor's petition is presumptively abusive due to the ability to repay creditors. See id.

40. 11 U.S.C. § 707(b)(2)(A)(ii)(I) (2006).

41. Id.

42. 131 S. Ct. at 724-25.

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ownership costs and vehicle operating costs. In Ransom the debtor owned his car free of any debt and therefore made no monthly loan or lease payment. Nevertheless, he included the allowance of $471 for ownership costs when calculating his expenses.⁴³ The Court disallowed

the expense.⁴⁴

The Court keyed in on the word "applicable," finding that applicable means "appropriate, relevant, suitable, or fit."⁴⁵ An expense is applicable "only if the debtor will incur that kind of expense during the life of the plan."⁴⁶ The Court noted that its interpretation was consistent with Congress's purpose in enacting BAPCPA.⁴⁷ BAPCPA prevents abuse by allowing debtors to deduct only the type of expenses they actually incur.⁴⁸ The Court further determined that ownership expenses apply only to "the costs of a car loan or lease and nothing more."⁴⁹ Consequently, the Court held that the debtor was not entitled to the ownership expense.⁵⁰

Once a Chapter 13 debtor calculates his CMI and determines the extent of his expenses, he can calculate his disposable income. For purposes of confirming a plan, however, he needs to know his projected disposable income (PDI). Although BAPCPA defined "disposable income," it did not define "projected disposable income."⁵¹ In Lanning the Court considered how to define projected disposable income.⁵² Lower courts supported one oftwo approaches: the mechanical approach,...