by In a significant win for debtors, the Fourth Circuit today held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘projected disposable income,’ but that such income nevertheless must be considered in the evaluation of a plan’s feasibility.” Ranta v. Gorman (In re Ranta), No. 12-2017 (July 1, 2013).
The means test revealed that the debtor had negative disposable income, yet he proposed a chapter 13 plan in which he would use his social security income to pay off his mortgage arrears, his joint credit card account and less than one percent of his other credit card account. The trustee objected to confirmation arguing that if the debtor’s social security income is not included in his projected disposable income, the plan is infeasible, and that, in the alternative, if it is included, the plan does not pay enough to unsecured creditors. The Bankruptcy Court found that income that is not included in projected disposable income cannot be used to achieve feasibility. The District Court affirmed.
The Fourth Circuit reversed.
The court noted that when Congress enacted BAPCPA in 2005, it redefined “disposable income” to exclude social security income. 11 U.S.C. § 101(10A) (defining “current monthly income”) and §1325(b)(2) (defining “disposable income” with reference to current monthly income). The court reasoned that Hamilton v. Lanning, 130 S. Ct. 2464, 2469 (2010), further compels the finding that projected disposable income is based on the disposable income calculation (subject to changes that are “virtually certain” to occur), and therefore cannot be made to include social security income. In so holding, the court joined with the appellate courts in the Fifth, Sixth, Ninth, and Tenth Circuits, See In re Welsh, 711 F.3d 1120 (9th Cir. 2013) (noting that the statute clearly excludes Social Security income); In re Ragos, 700 F.3d 220, 223 (5th Cir. 2012); In re Cranmer, 697 F.3d 1314, 1317-18 (10th Cir. 2012); Baud v. Carroll, 634 F.3d 327, 347 (6th Cir. 2011). The court rejected as unsupported by the language of the Code the trustee’s argument that, like the calculation of expenses, the definition of disposable income differs in application between above-median and below-median debtors.
While the court appeared to crack open the door to inclusion of social security income under the “best interests of creditors” test or the “good faith” requirement, it slammed that door in a footnote in which it agreed with Ragos and Cranmer “that the exclusion of Social Security income from disposable income, as required by statute, by itself, does not constitute bad faith.”
The court then turned to the issue of feasibility and found that nothing in the Code supports the bankruptcy court’s holding that if social security income is not part of disposable income, it cannot be used to support feasibility. To the contrary, the court cited a string of cases, legislative history, and treatises in support of its finding that social security income has historically been used to support feasibility. “We therefore hold, in agreement with the Sixth Circuit, that ‘a debtor with zero or negative projected disposable income may propose a confirmable plan by making available income that falls outside of the definition of disposable income—such as . . . benefits under the Social Security Act—to make payments under the plan.’” (citing Baud, 634 F.3d at 352 n.19).
Prior to addressing the merits of the appeal, the court devoted considerable time to an examination of the basis for the appeal noting that when a debtor seeks to appeal an order denying confirmation without dismissing the case, courts are split as to whether that order is “final.” Adopting a pragmatic approach, the court found that it is. When it denied the debtor’s original plan and ordered that he propose another in conformity with the court’s findings with respect to the social security income, the bankruptcy court decided a discrete issue that the Fourth Circuit found was final for purposes of appeal. In so holding, the court disagreed with its sister courts which have found such orders to be interlocutory. See, e.g., In re Lievsay, 118 F.3d 661, 662 (9th Cir. 1997) (per curiam); Lewis v. United States, Farmers Home Admin., 992 F.2d 767, 773 (8th Cir. 1993); In re Simons, 908 F.2d 643, 645 (10th Cir. 1990) (per curiam). The court found that the “flexible” approach to finality allowed for a finding that orders denying confirmation may be “final” for purposes of appeal when, based on the terms of the order, it would be futile for the debtor to propose a new plan that did not conform to the findings which provided the basis for appeal. Permitting the appeal at the denial stage avoids the waste of judicial resources, as well as the potential standing issues, of forcing a debtor to file a plan in conformance with the court’s order and then appealing his own plan. See also In re Bartee, 212 F.3d 277 (5th Cir. 2000). Judge Faber dissented from this portion of the opinion agreeing with the majority of courts that denial of confirmation is an interlocutory order and rejecting the court’s application of the “flexible finality” standard to this case.
Congratulations to Daniel Press on this win.
NCBRC filed an amicus brief on behalf of the NACBA membership in this case.