I previously reviewed the case of In re Quezada, ___ B.R. ____, 2007 WL 438258 (Bkrtcy.S.D.Fla.)(Mark, J.) in which the court held that the trustee does not have the ability to administer exempt property for domestic support obligation (“DSO”) creditors pursuant to new section 522(c)(1). The Court in In re Duggan, Case No. 6:06-bk-02512 (Bankr.M.D.Fla. August 15, 2007)(Jennemann, J.) faced the same question and issued its opinion agreeing with In re Quezada . The court noted that to date at least five court have considered this issue and that each court concluded that section 522(c)(1) does not allow a trustee to administer exempt property for the benefit of a DSO creditor.
Archive for the ‘BAPCPA’ Category
Another Court Holds that Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors
August 29, 2007MD Fla on "Projected Disposable Income" and "Amounts Reasonably Necessary to be Expended"
August 11, 2007The recent case of In re Arsenault, ___ B.R. ___, 2007 WL 1956277 (Bkrtcy.M.D.Fla.)(Williamson, J.) held that the presumptive starting point to determine a Chapter 13 debtor’s “projected disposable income” under section 1325(b)(1)(B) is the number obtained from the Form B22C which makes this calculation based on the historical CMI. The court further held that this figure may be rebutted by evidence that Form B22C’s “historic snapshot” does not form a reasonable basis for projected income forward over the life of the Chapter 13 plan. In applying these conclusions in Arsenault, the court found that the debtors’ projected disposable income should not be determined solely by Form B22C and that the court should take into account the debtor husband’s future annual bonuses that were not reflected in the Form B22C.
The court noted that in general two lines of cases dealing with this issue have emerged. One line of cases which is typified by In re Alexander, 344 B.R. 742 (Bankr.E.D.N.C.2006) holds that disposable income is based on CMI and that disposable income is the same as projected disposable income. The determination of projected disposable income is basically a mechanical test using historical income data. The other line of cases, typified by In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex.2006) holds that the term “projected disposable income” is not the same as “disposable income” and that projected disposable income must be based on the debtor’s anticipated income during the term of the plan and not be merely an average of prepetition income. The court found that Hardacre line of cases to be the better-reasoned line of cases.
The court also addressed the manner of calculation of expenses for the above-median income Chapter 13 Debtor. The court held that per section 1325(b)(3), the expenses must be determined under Form B22C without resort to Schedule J. The court noted that this section uses the term “shall” in its direction to use 707(b)(2) for expenses and it meant to take away all judicial discretion in the specific deduction areas set forth in section 707(b)(2). e.g. In re Barr, 341 B.R. 181 (Bankr.M.D.N.C.2006). The court did note though that the plan is subject to being modified under section 1329 to increase or decrease payments if circumstances change resulting in different expense calculations than those under section 707(b)(2).
Another Means Test Decision Sides with Wilson and Hartwick
August 9, 2007In a previous post on August 4, 2007, I reviewed the Benedetti decision from the Southern District of Florida which sided with the Wilson and Hartwick line of cases and held that the Debtor was entitled to deduct her obligations on a motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments. In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.(Cristol, J.). On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.).
Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase “applicable monthly expenses” found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words “applicable” and “actual” as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor’s expenses “shall be” the “amounts specified” in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor’s actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
Another SD Fla Means Test Decision Sides with Wilson and Hartwick
August 9, 2007In a previous post on August 4, 2007, I reviewed the Benedetti decision from the Southern District of Florida which sided with the Wilson and Hartwick line of cases and held that the Debtor was entitled to deduct her obligations on a motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments. In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.(Cristol, J.).
On August 8, 2007, the Bankruptcy Court for the Southern District of Florida issued another case siding with this line of cases in In re Morgan, Case No. 06-11263-BKC-AJC (Bankr.S.D.Fla. August 8, 2007)(Cristol, J.). Morgan involved an over-median income debtor whose real property was not subject to a mortgage. The Debtor claimed a deduction for mortgage/rent under the Local Standards even though he did not actually have a mortgage payment. The chapter 13 Trustee argued that the Debtor was not entitled to this deduction as he did not actually have a mortgage payment. In accordance with the Wilson and Hartwick line of cases, the court agreed with the Debtor and held that the plain meaning of the phrase “applicable monthly expenses” found in section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code entitled the Debtor to deduct from CMI the Local Standard allowance without regard to whether the Debtor actually pays a housing/rental expense. The court noted the distinction in the use of the words “applicable” and “actual” as used by the Bankruptcy Code. The court found that section 707(b)(2)(A)(ii)(I) provides that a debtor’s expenses “shall be” the “amounts specified” in the Local Standards and that the statute makes no provision for reducing the specified amounts to the debtor’s actual expenses.
The court noted that while few courts have addressed the Local Standard deduction with regard to housing, that bankruptcy courts across the country have faced the same issue with regards to the transportation deduction under the Local Standards and noted the split in authority. The court cited with approval other housing expense cases of In re Farrar-Johnson, 353 B.R. 224 (Bankr.N.D.Ill.2006) and In re Naslund, 359 B.R. 781 (Bankr.D.Mont.2006).
Means Test Decision – SD Florida Case Sides with Wilson and Hartwick
August 4, 2007In a previous post on April 10, 2007, I reviewed In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Bkrtcy.E.D.Wis)(Pepper J.) in which the court concluded that the debtors were entitled to deduct on their Form B22C “means test” the IRS Local Standard expense amount for vehicle ownership even though they owned their vehicle outright and did not make monthly note or lease payments. The court noted that two distinct lines of decisions had emerged on this issue. One was represented by In re Hardacre, 338 B.R. 718 (N.D.Tex.2006) and In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), which held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. The opposite position was adopted in the In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006) cases which held that the debtor can deduct the vehicle ownership whether or not a debtor actually has a note or lease payment.
On July 13, 2007, apparently the first decision on this issue in the Southern District of Florida was issued in In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.)(Cristol J.). The court sided with the Wilson and Hartwick position and held that the debtor was entitled to deduct her obligations on the motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments.
The court concluded that the application of the provisions of 707(b)(2) “involves an evaluation of the Debtor’s financial condition on the petition date such that a post-petition surrender of the collateral is irrelevant and inconsequential. The means test is statutorily defined as a mechanism for determining whether a presumption of abuse arises in a Chapter 7 case, with reference to expenses ‘as in effect on the date of the order for relief.’”
Means Test Decision – SD Fla Case Sides with Wilson and Hartwick
August 4, 2007In a previous post on April 10, 2007, I reviewed In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Bkrtcy.E.D.Wis)(Pepper, J.) in which the court concluded that the debtors were entitled to deduct on their Form B22C “means test” the IRS Local Standard expense amount for vehicle ownership even though they owned their vehicle outright and did not make monthly note or lease payments. The court noted that two distinct lines of decisions had emerged on this issue. One was represented by In re Hardacre, 338 B.R. 718 (N.D.Tex.2006) and In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), which held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. The opposite position was adopted in the In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006) cases which held that the debtor can deduct the vehicle ownership whether or not a debtor actually has a note or lease payment.
On July 13, 2007, apparently the first decision on this issue in the Southern District of Florida was issued in In re Benedetti, ___ B.R. ___, 2007 WL 2083576 (Bkrtcy.S.D.Fla.)(Cristol, J.). The court sided with the Wilson and Hartwick position and held that the debtor was entitled to deduct her obligations on the motor vehicle lease in calculating the “means test” even though she intended to surrender the vehicle and would not be making the lease payments.
The court concluded that the application of the provisions of 707(b)(2) “involves an evaluation of the Debtor’s financial condition on the petition date such that a post-petition surrender of the collateral is irrelevant and inconsequential. The means test is statutorily defined as a mechanism for determining whether a presumption of abuse arises in a Chapter 7 case, with reference to expenses ‘as in effect on the date of the order for relief.’”
Battle: Florida Opt-Out Statute Not Applicable to Non-Resident
July 20, 2007In In re Battle, ___ B.R. ___, 2006 WL 3702734 (Bkrtcy.W.D.Tex.)(Lief J.), the debtor filed for chapter 13 relief in Texas. Since she had lived in more than one state during the 730 day period preceding the bankruptcy filing, per section 522(b)(3)(A) the applicable exemption law is that of state where the debtor was domiciled longest for the 180 day period prior to the 730 day period. The court held that since the debtor had “resided” [sic] in Florida for the entire 180 day period, the exemption laws of Florida apply.
The issue before the court was whether the debtor must use Florida exemption laws or may elect to use the federal exemptions of section 522(d). The trustee aruged that since Florida is an opt-out state, the debtor was not allowed to use the federal exemptions.
The court held that the debtor was allowed to claim the federal exemptions since the Florida opt-out statute by its own terms applies only to Florida “residents.” The court reasoned that since the debtor was not a resident of Florida on the filing date, the Florida opt-out statute did not bar the debtor from claiming the federal exemptions. Section 222.20, Florida Statutes (the opt-out statute) provides that “residents of this state shall not be entitled to the federal exemptions provided in s. 522(d) of the Bankruptcy Code of 1978..” The court noted the holding in In re Schulz, 101 B.R. 301 (Bankr.N.D.Florida1989).
There is a line of cases that would appear to give strength to the position opposite to that of the Court’s ruling. See e.g. In re Arrol, 207.B.R. 662 (Bankr.N.D.Calif.1997), In re Drentell, 403 F.3d 611 (8th Cir. 2005).
Furthermore, the court may not have given sufficient emphasis to the structure of section 522(b) and given a misplaced position to the Florida opt-out statute in the stautory scheme and structure of 522(b). It is also unclear why section 222.20, Florida Statutes refers to “residents of this state” as section 522(b) only refers to “domicile” which is a similar but different concept. The court’s logic may be puzzling, as section 522(b)(3) directed the debtor to use the applicable law of the particular 180 day state. Section 522(b)(3) inherently contemplates that the debtor will not be a domicile of that state any longer, but nonetheless directs the debtor to use its law. Furthermore, if the Florida legislature had properly used the word “domiciles” instead of “residents” in section 222.20, it is unclear whether the court could have reached the same result.
In re Tegeder: Per BAPCPA Absolute Priority Rule No Longer Applicable to the Rentention of Property by Individual Chapter 11 Debtor
June 11, 2007As previously mentioned, one Bankruptcy Judge in the Southern District of Florida held in the Gosman decision (pre-BAPCPA) that the retention of exempt property by an individual debtor in a chapter 11 plan violates the absolute priority rule unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002). Also as previously noted, some courts disagree with the Gosman decision and hold that a chapter 11 debtor’s retention of his exempt property is not subject to the absolute priority rule. See e.g. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor’s junior interest in property).
Since the passage of BAPCPA and its amendments to 11 USC 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon. Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor’s retention of property. Judge Saladino’s decision in In re Tegeder, ___ B.R. ____, 2007 WL 1549067 (Bkrtcy.D.Neb.) is apparently the first decision to end this speculation – at least in his courtroom.
The court in Tegeder held that the new amendments to 1129(b)(2)(B)(ii) provide an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the “absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115″. BAPCPA added the following to 1129(b)(2)(B)(ii) “except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section”. New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition.
The court states that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.
It should be noted the Tegeder decision is broader than the Bullard decision as it holds that the absolute priority rule is inapplicable to the rentention of all types of property by the chapter 11 debtor. The Bullard case was limited to the retention of exempt property by the chapter 11 debtor.
Kibbe 1st Circuit BAP Decision – Chapter 13 "Projected Disposable Income"
April 8, 2007On February 20, 2007, the 1st Circuit BAP issued its decision in the Kibbe case. In re Kibbe, ___ B.R. ___, 2007 WL 512753 (1st Cir. BAP (N.H.)). The issue in the case involved the income component of the “projected disposable income” calculation under section 1325(b)(1)(B).
The Debtor’s present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income (“CMI”) as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor’s actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.
The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that “disposable income” as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.
The BAP Court further noted that this apparent inconsistency within the term “projected disposable income” has produced two competing interpretations. One camp construes that “projected” simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term “projected” was intended to signal a reexamination of income potential over the life of the plan with the consequence that “disposable income” and “projected disposable income” have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).
In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined “disposable income” in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these “Income Exclusions” are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new “disposable income” definition of section 1322(b)(2).
The BAP agreed with the Kibbe Bankruptcy Court that “projected disposable income” must be grounded in the Debtor’s anticipated income (less the noted “Income Exclusions”). The Court held that Form B22C must at least be the starting point for the determination of “projected disposable income”. If the debtor’s CMI is substantially the same as the actual current income (less the “Income Exclusions”) at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor’s actual current income (less the “Income Exclusions”), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any “artificial measure”. The Court held that the income component of “projected disposable income” is the anticipated actual income of the Debtor, subject to the “Income Exclusions” during the plan commitment period. Where the debtor’s income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor’s “disposable income” the court must depart from the Form B22C calculation.
The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term “disposable income” and also fail to account for reasonably anticipated changes in the debtor’s circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the “Income Exclusions”) and J accurately portray the debtor’s income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.
The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.
Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors
March 18, 2007In the recent case of Quezada, ___ B.R. ___, 2007 WL 438258 (Bkrtcy.S.D. Fla.)(Mark J.), the Court issued an important decision explicating the new DSO provision in section 522(c)(1). In this case, the Court overruled the chapter 7 trustee’s objection to exemption of the homestead property and denied the trustee’s motion for authority to sell the property to satisfy a domestic support obligation (“DSO”).
The Court explained that section 522(c)(1) was amended by BAPCPA to provide that property deemed exempt in the bankruptcy case will remain liable for DSO debts even if the exempt property would not be reachable to satisfy these claims under applicable state law.
The first issue disposed of by the Court was whether the trustee or DSO creditor can object to the debtor’s exemption to the extent of the DSO claim. The Court explained that although section 522(c)(1) renders exempt property liable for DSO claim, it does not limit a debtor’s right to claim exemptions otherwise available under section 522. The Court therefore overruled the trustee objection to the exemption of the debtor’s homestead.
The second issue dealt with by the Court was whether a trustee may administer exempt property to pay DSO claims. The Court answered this question in the negative and denied the trustee’s motion for authority to sell the homestead property. The Court reasoned that under section 704(a)(1), the trustee only has the authority to “collect and reduce to money the property of the estate” and once the claim of exemption is allowed, exempt property is no longer part of the estate. Furthermore, section 726 only refers to the distribution of the property of the estate.
The Court went on to explain though that the exempt property may be subject to execution by a DSO creditor pursuant to a newly created “federal right” under section 522(c)(2) even though those assets would otherwise be protected from execution under state law. The Court suggested that the bankruptcy court has the jurisdiction to enforce a DSO claim against exempt property in its forum. The Court stated that Section 522(c)(1) grants DSO creditors a “federal right of action” against exempt propeorty. This federal right trumps state law which may otherwise shield the asset from execution. Since this federal right is provided in the Bankruptcy Code, a proceeding to enforce that right would be a proceeding “arising under” title 11, therefore creating non-exclusive jurisdiction in the bankruptcy court under 28 USC 1334 (b).
The Court noted that a state court judge is capable of applying this federal right of action, but in practical terms, it may appear awkward for a DSO creditor to seek relief in state court to pursue assets which are exempt from execution under state law.
