Debtor Need Not Commit All PDI in 100% Plan

Posted by NCBRC - January 8, 2014

It was not enough that the chapter 13 debtors committed to paying off their unsecured debts in their entirety, the trustee demanded that they comply with the disposable income test of section 1325(b)(1)(B). In re Bailey, No. 13-60782 (Bankr. E.D. Ky. Nov. 21, 2013). The debtors’ plan contemplated paying off two 401(k) loans and stepping up payments to the plan after the first 401(k) pay-off but not stepping up after the second pay-off. The trustee objected to confirmation arguing that if the debtors stepped up the payments after paying off the second 401(k) loan the plan could be completed in 43 months rather than the expected 53 months. The court confirmed the debtors’ plan.

The trustee relied on section 1325(b)(1)(B) which provides that when the trustee or holder of an allowed unsecured claim objects to plan confirmation the court will confirm only if the “plan provides that all of the debtor’s projected disposable income” is applied to the plan. However, to get to this argument the trustee had to leap over section 1325(b)(1)(A) which provides that a plan shall be confirmed if the “value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim.” The court found that because subparagraphs (A) and (B) are separated by the disjunctive “or,” if a plan complies with (A) the debtor need not comply with the projected disposable income test in (B).

In an attempt to inject ambiguity into the language of the statute, the trustee argued that subparagraph (A) should be divided into two alternative scenarios: 1) one in which the trustee objects to confirmation, or 2) one in which a claimant objects to the plan. Only in the latter case does the fact that the plan contemplates full payment of the claim render subparagraph (B) irrelevant. Where the trustee objects to the plan, the trustee’s argument goes, full payment of unsecured claims is no answer to the objection and only commitment of all of the debtor’s disposable income will support confirmation.

Finding the trustee’s proposed reading of the statute “nonsensical,” the court enumerated several problems with it including twenty-nine years of settled law in support of the debtors’ position, numerous amendments to section 1325 that did not clarify the law in the trustee’s favor, and Supreme Court dictum in Hamilton v. Lanning, 560 U.S. 505, 130 S. Ct. 2464 (2010), in which the Court said, “If an unsecured creditor or the bankruptcy trustee objects to confirmation, § 1325(b)(1) requires the debtor either to pay unsecured creditors in full or to pay all ‘projected disposable income’ to be received by the debtor over the duration of the plan.” In addition, the court found the structure of the statute supports a reading that applies subparagraphs (A) and (B) the same way regardless of whether the objection is made by the trustee or a creditor.

Although the court recognized that the statute’s reference in subparagraph (A) to the singular “such claim” is amenable to an interpretation in which it is only applicable to a specific claim rather than a general objection by the trustee, it found that this limiting interpretation was not warranted. Rather, “such claim” refers to type or kind of claim rather than a specific claim and may apply to claims in the plural.

The court made quick work of the trustee’s remaining arguments. First it found that even though there is more than one interpretation of “such claim” when one creditor objects but there are more than one unsecured claims, that issue was not before it and even if it were, its interpretation of the statute would satisfy that argument as well. Second, section 102(5), which directs interpretation of the word “or” in statutes as allowing a party to “do either or both” alternatives, does not undermine its conclusion that a debtor need not comply with subparagraph (A) when he or she has complied with subparagraph (B). Section 102(5) merely allows that the debtor may comply with both alternatives. Finally, the court rejected the trustee’s public policy argument that requiring application of the disposable income test would reduce the risk of failure of the plan. Though the court found the trustee’s concerns to be valid, they could not overcome the plain meaning of the statute.

Bailey opinion

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