In a recent U.S. Supreme Court decision, the Court held when a bankruptcy court calculates a debtor’s projected disposable income for the purposes of determining the required Chapter 13 plan payment, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.
In Hamilton v. Lanning, No. 08-998, 2010 WL 2243704 (U.S. June 7, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-998.pdf, the Debtor received a one-time buyout from her former employer that caused her current monthly income for the six months preceding her Chapter 13 filing to exceed her State’s median income. However, at the time of the filing, based upon the income from her new job which fell below the state median, she filed a plan that would require her to pay $144 per month for 36 months. The Bankruptcy Court endorsed a $144 payment over a 60-month period concluding that “projected” requires courts to consider a debtor’s actual income at the time of filing. The Tenth Circuit Bankruptcy Appellate Panel subsequently affirmed, as did the Tenth Circuit.
The Chapter 13 Trustee objected to the confirmation of the plan claiming the mechanical approach of the Bankruptcy Code, which calculates projected income from the past six months income, is the proper way to calculate projected disposable income, and using that approach, the Debtor should pay $756 per month for 60 months.
The Court found the Trustee’s arguments supporting the mechanical approach unpersuasive. “The claim that the Code’s detailed and precise disposable income definition would have no purpose without the mechanical approach overlooks the important role that this statutory formula plays under the forward-looking approach…”
Instead, the Court reasoned the mechanical approach clashes with §1325’s terms in that reference to disposable income in §1325(b)(1)(B) strongly favors the forward looking approach if the mechanical projection does not accurately reflect disposable income “to be received.” Furthermore, the Court found that §1325(b)(1) directs the courts to determine projected disposable income “as of the effective date of the plan.” Additionally, §1325(b)(1)(B)’s requirement that projected disposable income “will be applied to make payments” is made useless if the Debtor lacks the means to pay into the plan what the mechanical formula determines to be the proper amount.
The Supreme Court looked at this issue in a very practical way, and paved the way for flexibility in crafting Chapter 13 plans that have a better chance of succeeding. Nobody benefits from requiring a debtor to commit to a plan payment that is far in excess of that the debtor’s actual cash flow permits.
Wednesday, June 23, 2010
Electricity is Good
In a recent case of first impression in the First Circuit, Judge Boroff held that a creditor’s supply of electricity constitutes a sale of goods under § 503(b)(9), and therefore the supplier’s claim against the Debtor enjoys an administrative priority claim under the Bankruptcy Code.
Rejecting the Debtor’s claim that the provision of electricity, an intangible phenomenon or service, is not covered under § 2-105(1) of the UCC, Judge Boroff In re Erving Industries, Inc., ___ B.R. ___, 2010 WL 1416148 (Bankr. D. Mass. Apr. 7, 2010) (downloadable from http://www.hendelcollins.com/website_pdfs/erving_apr_2010_decision.pdf) first applied the scientific description of electricity concluding that “although the ultimate nature may be mystifying to most, electricity is tangible and does possess physical properties.” In distinguishing it from telecommunication signals, the court distinguished a marked difference between electricity and telecommunication signals in both physical attributes and the purposes for which they are purchased. Electricity is not “merely a medium of delivery, but is the thing the customer seeks when purchasing electricity.” Telecommunication signals are mechanisms by which non-goods like ideas, sounds, and images are sent from one location to another.
In addition, Judge Boroff found electricity easily meets the movability and identifiability requirement of § 2-105(1) of the UCC. In the debate whether electricity is movable at the time it is identified to the contract for sale, the Court disagreed with the Debtor’s conclusion that electricity is consumed at the same time it is identified by a meter and thereby no longer movable. In contrast, he found electricity continues to move past the meter, through the wiring, to the products seeking to be electrified, albeit at imperceptible speeds, and therefore is movable at the time it is identified to the contract.
The Court addressed the “predominant factor test”, in which the Court would view electricity as part-good, part-service, and decide which one is more predominant. Judge Boroff concluded the test to be irrelevant as to the value of the goods within the meaning of §503(b)(9).
The decision is on appeal as of this posting to the Bankruptcy Appellate Panel. Hendel & Collins, P.C. represents the Debtor. In the event this ruling stands, however, future debtors contemplating a trip through Title II will have to worry about one more expense that would have to be paid in full prior to emerging from Bankruptcy. An already expensive excursion through the Bankruptcy Court would get that much more expensive and risky.
Rejecting the Debtor’s claim that the provision of electricity, an intangible phenomenon or service, is not covered under § 2-105(1) of the UCC, Judge Boroff In re Erving Industries, Inc., ___ B.R. ___, 2010 WL 1416148 (Bankr. D. Mass. Apr. 7, 2010) (downloadable from http://www.hendelcollins.com/website_pdfs/erving_apr_2010_decision.pdf) first applied the scientific description of electricity concluding that “although the ultimate nature may be mystifying to most, electricity is tangible and does possess physical properties.” In distinguishing it from telecommunication signals, the court distinguished a marked difference between electricity and telecommunication signals in both physical attributes and the purposes for which they are purchased. Electricity is not “merely a medium of delivery, but is the thing the customer seeks when purchasing electricity.” Telecommunication signals are mechanisms by which non-goods like ideas, sounds, and images are sent from one location to another.
In addition, Judge Boroff found electricity easily meets the movability and identifiability requirement of § 2-105(1) of the UCC. In the debate whether electricity is movable at the time it is identified to the contract for sale, the Court disagreed with the Debtor’s conclusion that electricity is consumed at the same time it is identified by a meter and thereby no longer movable. In contrast, he found electricity continues to move past the meter, through the wiring, to the products seeking to be electrified, albeit at imperceptible speeds, and therefore is movable at the time it is identified to the contract.
The Court addressed the “predominant factor test”, in which the Court would view electricity as part-good, part-service, and decide which one is more predominant. Judge Boroff concluded the test to be irrelevant as to the value of the goods within the meaning of §503(b)(9).
The decision is on appeal as of this posting to the Bankruptcy Appellate Panel. Hendel & Collins, P.C. represents the Debtor. In the event this ruling stands, however, future debtors contemplating a trip through Title II will have to worry about one more expense that would have to be paid in full prior to emerging from Bankruptcy. An already expensive excursion through the Bankruptcy Court would get that much more expensive and risky.
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