Ninth Circuit en Banc Decision Overrules Kagenveama

Posted by NCBRC - August 29, 2013

In a blow to debtors, the Ninth Circuit, in an en banc decision, has reversed its position with respect to the applicable commitment period when the debtor has less than or equal to zero disposable income. Danielson v. Flores (In re Flores), No. 11-55452 (9th Cir. Aug. 29, 2013). The case reaffirmed that aspect of Kagenveama that decided that the applicable commitment period was a temporal rather than monetary requirement. Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir. 2008). See also Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011), cert. denied, 132 S. Ct. 997 (2012); Whaley v. Tennyson (In re Tennyson), 611 F.3d 873 (11th Cir. 2010); Coop v. Frederickson (In re Frederickson), 545 F.3d 652 (8th Cir. 2008) (all finding temporal requirement), but overruled that aspect of Kagenveama that found the temporal requirement inapplicable when the debtor has no disposable income. Creating a split in the circuits, Kagenveama had found that the “applicable commitment period” and “projected disposable income” were inextricably linked and that where there was none of the latter, the former did not come into play. See Baud, 634 F.3d at 327 and Tennyson, 611 F.3d at 873 (reaching the opposite conclusion).

The Flores court found that neither section 1325(b)(4) (establishing the “applicable commitment periods), nor section 1325(b)(1)(B) (requiring that the plan provide for debtor’s projected disposable income to be received during the applicable commitment period), were contingent upon the existence of disposable income. Where Kagenveama had found that the applicable commitment period was “exclusively” linked to projected disposable income, the en banc court found that this was not so: it was also linked to plan modification under section 1329 by precluding modification of a plan beyond the applicable commitment period. The court reasoned that the reference to the applicable commitment period in section 1329 would make no sense if it was a period that could be altered. The court also found support in the legislative history of BAPCPA. Finding that, like the ultimate statutes, the legislative history is “confusingly worded,” and evidently disregarding the phrase “in Certain Cases,” the court took instruction from the heading; “Chapter 13 Plans To Have a 5-Year Duration in Certain Cases.” H.R. Rep. No. 109–31(I), § 318, at 79 (2005), reprinted in 2005 U.S.C.C.A.N. 88,146, to find support for its holding. Finally, the court found that while one purpose of bankruptcy is the debtor’s fresh start, its countervailing purpose—repayment of creditors—lent further support to its interpretation. The court then stretched the holding of Hamilton v. Lanning, 130 S. Ct. 2464 (2010), beyond the bounds set forth by the Supreme Court, stating: “But the same logic [as that applied in Lanning] persuades us that Congress intended § 1325(b)(1)(B) to ensure a plan duration that gives meaning to § 1329’s modification procedure as a mechanism for post-confirmation adjustments for unforeseen increases in a debtor’s income. . . . Accordingly, the policy that underlies Lanning also supports our reading of § 1325(b)(1)(B).”

Flores majority opinion

Judge Pregerson and Chief Judge Kosinski dissented. “The majority’s interpretation of 11 U.S.C.§ 1325(b)(1)(B) promotes goals that are at odds with Congress’s purpose when it enacted Chapter 13 to ‘provide the debtor with a fresh start.’ [citation omitted]. The majority also reads language into Chapter 13 bankruptcy law that is not present in the plain text of § 1325(b)(1)(B).” The dissent reasons that the majority misinterprets the language of section 1325(b)(1)(B) which provides that confirmation of a plan requires that “the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period . . . will be applied to make payments to unsecured creditors under the plan.” The majority, instead of tying “projected disposable income” to “applicable commitment period” as set forth in the statute, mistakenly ties “play payments” to “applicable commitment period.” The dissent maintains that Congress deliberately differentiated between projected disposable income and plan payments in this section and it is error to ignore that distinction. The dissent concludes that “[b]ecause the Floreses have no projected disposable income to distribute to unsecured creditors during the applicable commitment period, there is no applicable commitment period that applies to them. Thus, the § 1325(b)(4)(B) exception has no bearing on the length of the plan the Floreses may propose.” Contrary to the majority opinion, this does not deprive the creditors of significant benefits. Debtors must still propose plans in good faith, they must comply with the terms of their plans, and creditors must obtain more than they would in a chapter 7 bankruptcy. Additionally, the plan may be modified to incorporate debtor’s increase in income within the plan period.

Flores dissent

The identical issue is currently pending before another panel of the Ninth Circuit. American Express v. Henderson, No. 11-35864, 11-35865.

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