Dec. 5 (Westlaw Journals) - A U.S. trustee who blocked a bankrupt couple’s initial creditor repayment plan has joined in asking the Supreme Court to resolve a dispute among federal courts over whether bankruptcy laws require a minimum duration for plans under Chapter 13.
Baud et al. v. Carroll, No. 11-27, respondent’s brief in support ofcertiorarifiled (U.S. Nov. 16, 2011).
The 6th U.S. Circuit Court of Appeals sided with the trustee in February when it ruled that the couple had to remain in bankruptcy for a minimum of five years. The court said the law mandates a 60-month repayment plan when a debtor has above-median income and proposes to give unsecured creditors less than full value for their claims.
In a July 1 petition, the couple, Richard and Marlene Baud, told the Supreme Court they could have exited bankruptcy faster had their case not been under the jurisdiction of the 6th Circuit. Other appellate courts have allowed debtors in similar circumstances to exit in three years, they said.
Even though the trustee won the appeal before the 6th Circuit, he has now joined the Bauds in asking the high court to resolve a three-way split among U.S. circuit courts over whether above-median debtors with negative or zero disposable income may exit Chapter 13 in fewer than five years.
The Bauds filed their Chapter 13 petition in the U.S. Bankruptcy Court for the Eastern District of Michigan in September 2008.
They reported a monthly income of more than $7,000, making them above-median-income debtors, court records say. But after subtracting allowable expenses, they claimed a negative amount of monthly disposable income.
The couple eventually proposed a plan to use discretionary income to repay their unsecured creditors over three years.
The trustee, Krispen S. Carroll, objected, arguing the plan ran afoul of 11 U.S.C. § 1325(b)(1)(B) because it did not propose either to repay unsecured creditors in full or to extend for 60 months.
Section 1325 bars confirmation of a Chapter 13 plan that gives unsecured creditors less than full value for their claims, unless it pays creditors all of the debtor’s projected disposable income during the applicable commitment period, Carroll said.
The Bauds responded that the law does not impose a minimum plan length and that, even if it did, it does not apply to debtors like them who have no projected disposable income.
The Bankruptcy Court ruled in favor of the trustee and gave the Bauds an opportunity to propose an amended plan rather than face dismissal of their petition.
The couple filed an amended plan that provided for a five-year repayment period, subject to their continued challenge to the court’s time requirement.
The Bankruptcy Court confirmed the amended plan in February 2009.
The U.S. District Court for the Eastern District of Michigan later reversed the Bankruptcy Court on appeal by the debtors.
But the 6th Circuit reinstated the Bankruptcy Court’s decision on appeal by the trustee, holding the original plan could not be confirmed over objection because it did not provide for payments over a five-year period.
The 6th Circuit’s decision finds support in rulings by the 11th Circuit and bankruptcy judges in Virginia, Texas, Colorado, Kansas, Illinois and North Carolina, the Bauds say in their Supreme Court petition.
But decisions from the 9th Circuit, the 8th Circuit Bankruptcy Appellate Panel, and bankruptcy judges in Idaho, Pennsylvania, New York and Utah support the Bauds’ position, the petition says.
A third group of courts has held that Section 1325 requires a minimum duration only for debtors with positive projected disposable income, according to the petition.
In a recent brief the trustee has urged the Supreme Court to step in to resolve the conflicting case law.
“Where the courts of appeals disagree, generating a three-way circuit split, is whether above-median-income debtors … must propose five-year plans where they have zero or negative disposable income,” the brief says.
The trustee says that while the 6th Circuit got it right, Supreme Court review is warranted because the number of Chapter 13 cases continues to climb.
“In light of the proliferation of Chapter 13 cases and the recurrence of this issue in case after case, the resolution of this issue by this court is critical to the day-to-day activities of Chapter 13 trustees,” the brief says.
The Supreme Court docket does not indicate when a decision on the petition is expected.
Attorneys:
Trustee: G. Eric Brunstad Jr., Dechert LLP, Hartford, Conn.
(Reporting by Chip Giambrone, Westlaw Journal Bankruptcy)