Differing with a decision by a district judge in Florida 16 months before, Bankruptcy Judge Christopher G. Bradley of Austin, Texas, found “no general requirement for a subchapter V debtor to ‘true up’ its payments to its creditors when its actual income exceeds its projected disposable income.”

The corporate debtor in Subchapter V of chapter 11 proposed a “cramdown” plan requiring payments starting out at $36,000 in the first year and rising to $216,000 in the fifth and last year of the plan. The Subchapter V trustee did not object to the debtor’s calculation of “projected disposable income.”

The Subchapter V trustee did object to confirmation because, as Judge Bradley said in his April 30 opinion, the plan “did not provide that the debtor had to pay more if actual disposable income exceeded projections.”

There was a non-accepting class of unsecured creditors, meaning that the plan must comply with the cramdown requirements in Section 1191(b). The subsection permits confirmation if “the plan does not discriminate unfairly, and is fair and equitable.” Under Section 1191(c)(2)(A), the plan is “fair and equitable” if, “as of the effective date of the plan,” the “plan provides that all of the projected disposable income of the debtor . . . will be applied to make payments under the plan.”

Judge Bradley paraphrased the statute as requiring “the debtor to devote its projected disposable income . . . to plan payments for three to five years.” [Emphasis in original.] He went on to say that projected disposable income “accords with the ‘forward-looking approach’ that the Supreme Court has endorsed” in Hamilton v. Lanning, 560 U.S. 505, 519 (2010).

“To require a ‘true up,’” Judge Bradley said, would “eliminate the future-looking element indicated by the word ‘projected’” and “read the word ‘projected’ out of the statute.” He found only one case requiring a “true up,” In re Staples, 22-157, 2023 WL 119431 (M.D. Fla. Jan. 6, 2023). To read ABI’s report on Staples, click here.

Judge Bradley observed that the district court in Staples found authority for a true-up in the All Writs Act and Section 105(a), which enables the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” He nonetheless said that the “Staples opinion does not support imposition of a true up either as a general rule or in this case.”

First, Judge Bradley said that “the Staples opinion does not purport to announce a general rule requiring true ups.” Second, he said that “the Staples opinion simply does not provide enough factual detail about that case to assess its similarities or differences with this Debtor’s situation.” He concluded that Staples does not provide “persuasive weight in favor of imposition of a true up.”

Judge Bradley found support for his conclusion in cases under chapters 12 and 13, where, he said, the definition of “disposable income” is “substantially the same.” In chapter 13, where there is “much more case law,” he said that courts have “overwhelmingly ratified a prospective interpretation, that is, an interpretation requiring debtors to devote their projected income to plan payments, but not to ‘true it up’ if their actual income proves to be higher.”

Judge Bradley cited the Eighth Circuit for taking a contrary position in a chapter 12 case, Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994). He said that the “Rowley court admitted that its result was contrary to the text’s plain meaning.”

Citing “numerous courts and commentators,” Judge Bradley said that Rowley “is not convincing.” Furthermore, he said that Rowley “runs contrary to the Supreme Court’s 2010 decision in Hamilton v. Lanning.”

Judge Bradley also found it “telling that subchapter V provides no opportunity for any party other than the debtor to seek to modify the plan . . . . The debtor may be able to modify the plan to decrease the payments if reality falls short of expectations, but the projected income may be the ceiling for creditors in subchapter V cases.”

Closing the opinion, Judge Bradley said that his decision “does not necessarily rule out the possibility that circumstances could arise under which a court would have the power to impose a true up.” He saw no reason to address the question because “[n]o special circumstances have been alleged, and therefore no true up is warranted.”

Judge Bradley overruled the objection and confirmed the plan.