Means Test Does Not Apply to Individual Chapter 11 Cases

By: Steven Saal

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

The case of In re Roedemeier

[1]

holds that the section 707(b) “means test” expense allowances are not incorporated into the calculation of disposable income for individual chapter 11 debtors.

[2]

  Instead, a chapter 11 debtor’s “projected disposable income” under section 1129(a)(15) is calculated by the court through “a judicial determination of the expenses that are reasonably necessary for the support of the debtor and his or her dependents.”

[3]

  Since the means test applies to the calculation of “projected disposable income” in chapter 13 cases, this decision creates a difference between the two chapters.   Use of the “means test” involves a stricter formula of determining income that in many cases would require the debtor to contribute more income to funding the plan, thus creating an incentive for debtors to file chapter 11 in order to use the more flexible judicial calculation.

The creditor’s argument was based largely on the BAPCPA policy reflected in the mechanical means test analysis.  The Courts’ analysis, which is consistent with Collier’s view,

[4]

was based on a close reading of the statutory language.  Although section 1129(a)(15) refers to chapter 13 for its projected disposable income calculation, the cross reference is to section 1325(b)(2), which merely requires expenses to be “reasonably necessary.”

[5]

  Section 1325(b)(2) does not incorporate the section 707(b) means test.  That test is brought into chapter 13 by section 1325(b)(3), which says that the “reasonably necessary” determination in (b)(2) for above-median income debtors shall be based on the means test.

[6]

  The creditor’s argument was that the reference in section 1129(a)(15) to section 1325(b)(2) and its discussion of “disposable income” impliedly cross-references paragraph (3) of the section as well.

[7]

  This result in chapter 11 cases, however, seems unlikely.  As the Roedemeier Court reasoned, Congress would have made the cross reference explicit if that were its intention, and the lack of such specification indicates that the section 707(b) means test is inapplicable in a chapter 11.

[8]

 

 

The effect on debtors moving from chapter 13 to chapter 11 will depend on what type of treatment courts ultimately decide is appropriate.  The Roedemeier court’s overall analysis in determining that the means test was inappropriate appears sound as it is based overwhelmingly on the wording of the Bankruptcy Code and the BAPCPA.

[9]

  Attempting to cross-reference paragraphs in separate sections under the title, like the creditor in Roedemeier, requires too much of a leap to be sensible.

[10]

  However, the BAPCPA was clearly drafted with a purpose, and that purpose was to prevent the abuse of the system that occurred when debtors filed for chapter 11 specifically to avoid the means test.  Therefore, the understanding of what expenses are going to be excluded and included under the reasonable judicial determination employed by the Roedemeier court is what will define this new standard.

[11]

Individual business debtors, such as in the Roedemeier case, should be allotted increased flexibility when submitting a plan that is feasible, economical, and serves the goal of providing the creditors with appropriate relief.  Respectable business debtors following this model should receive the same benefit.  Stricter standards to prevent abuse will be most appropriate when dealing with individual debtors without sound plans who are only attempting to protect more assets.