Shakespeare in bankruptcy

By Anna Christensen
on Jun 8, 2010 at 3:31 pm

Below, Stanford Law School’s Sina Kian recaps Monday’s opinion in Hamilton v. Lanning, No. 08-998. [DISCLOSURE: Howe & Russell and Akin Gump represented the respondent in the case, but Sina was not involved in the proceedings.] In March, Professor M. Jonathan Hayes, who writes the BankruptcyProf Blog, previewed and recapped the oral argument for SCOTUSblog. Check the Hamilton v. Lanning SCOTUSwiki page for additional information.

Whereas Chapter 7 bankruptcy requires debtors to liquidate their assets, Chapter 13 bankruptcy allows them to devise a schedule of payments under which they will keep their assets and pay creditors their projected disposable income (PDI) over a period of three or five years. The question before the Court in Hamilton v. Lanning was how a bankruptcy court should determine a debtor’s PDI when the debtor’s income or expenses change close to the date of confirmation – no small matter in today’s economy.

In defining projected disposable income, the Court had two choices. First, it could define the term “mechanically” – i.e., multiply the debtor’s past monthly disposable income, averaged over the preceding six months, by the number of months in a debtor’s plan. Second, the Court could define it in a “forward-looking way” – i.e., default to the mechanical approach, but provide bankruptcy courts with discretion to make appropriate adjustments “where significant changes in a debtor’s financial circumstances are known or virtually known.”  In this case, respondent Stephanie Lanning would owe approximately $144 per month for sixty months if the “forward-looking” approach were used.  By contrast, because of a one-time buy-out from a former employer, Lanning would have to pay $756 per month for sixty months – a sum that both parties agreed she could not possibly afford – if the “mechanical” approach were used.

The Court opted for the “forward looking” approach, with only Justice Scalia dissenting. The Court’s opinion took a disciplined structure that almost resembled a play, divided into parts like acts, with the conflicts presented cleanly in narrative form. The form, almost cookie-cutter for this term’s statutory interpretation cases (Hertz v. Friend, Jerman v. Carlisle), also repackaged and showcased the usual enigmas of statutory interpretation: a vague and (partially) undefined term, no clear congressional intent for those who look, and a trade-off between the simplest rule and a more flexible one. The sparknotes version of Hamilton v. Lanning is as follows:

Act I: The Applicable Text. The Court begins by focusing on the word “projected”; because Congress has not defined the term (either here or in other statutes using the word projected), the Court concludes that it should default to its ordinary meaning. In accounting, election coverage, and sports analysis, it reasons, a “projection” takes into account “other factors [beyond past events] that may affect the final outcome.” This conclusion is supported, the Court notes, by the fact that elsewhere in the Bankruptcy Code, Congress mandates the mechanical-type multiplication by using the term “multiplied,” rather than “projected.”

Act II: Prior Practice Regarding that Text. Prior to 2005 (when Congress enacted the current version of the statute), there was a “widely acknowledged and well-documented view that courts may take into account known or virtually certain changes to debtors’ income or expenses when projecting disposable income.” Had Congress intended to overturn this practice, it would have done so expressly.

Act III: The Surrounding Text. Section III(B) of the Court’s opinion then examines the context in which the term “projected disposable income” appears. The PDI is “to be received in the applicable commitment period”; it is to be determined “as of the effective date of the plan”; and it “will be applied to make payments.” The first and third clauses suggest that the PDI contemplates a dollar figure that the creditor will actually receive. But if the PDI does not account for changes, it could produce figures that the debtor is simply incapable of paying (because, as here, the debtor could be assigned a greatly overstated PDI for having enjoyed a one-time windfall in the six months prior to filing for Chapter 13). The second clause – by requiring bankruptcy courts to determine the value as of the filing date of the plan – implies that those courts can and should take advantage of all information up until the filing date.

Act IV: Policy. At this point, the case became about individual bankruptcy under Chapter 13. Statutory interpretation is, after all, not just a Sudoku, but the act of breathing life into legislation. The problem with the mechanical approach worked in both directions. In cases in which the debtor’s disposable income is substantially lower during the six-month look-back period, “the mechanical approach would deny creditors payments that the debtor could easily make.” By contrast, when the debtor’s disposable income is substantially higher during the six-month look-back period, the mechanical approach would create a figure too high, one that the debtor could not afford (as in this case); as a result of the artificially high number, the debtor will be denied Chapter 13 bankruptcy protection because under Section 1325(a)(6), a plan can only be confirmed if “the debtor will be able to make all payments under the plan.”

The Court considered and rejected the four ways suggested by the Trustee to mitigate this anomaly: delay filing (risky and sometimes impossible), seek leave to delay filing and petition the bankruptcy court to choose a more representative six-month period (undermines the mechanical approach in an unnecessarily more convoluted way), dismiss the petition and refile later (could violate bankruptcy’s good faith requirement), and seek relief under Chapter 7 instead of Chapter 13 (not clear how often it is actually possible, given the intricacies of Chapter 7).

Justice Scalia dissented. The Court’s textual argument, he wrote in dissent, “either renders superfluous text Congress included or requires adding text Congress did not.” The statutory definition of “disposable income” is superfluous, he contended, because bankruptcy courts are free to disregard it; the Court’s conclusion that “disposable income” is still useful as a starting point has “nothing in the text” to support it.  Moreover, even if the word “projected” could do that work, there is “no basis in the text” for authorizing forward-looking estimations only when the changes would be “significant” and either “known or virtually certain.” To Justice Scalia’s mind, Acts I through III act as a Trojan horse for Act IV, which bore “an understandable urge: Sometimes the best reading of a text yields results that one thinks must be a mistake, and bending that reading just a little bit will allow all the pieces to fit together.” But that bending and tweaking is, in Justice Scalia’s view, for Congress.