972 F.3d 713
5th Cir.2020Background
- The Western District of Texas adopted a district-wide Chapter 13 Local Plan (effective Nov. 1, 2017) whose Section 4.1 requires debtors to turn over any tax refund amounts received while the case is pending that exceed $2,000 to the Chapter 13 trustee as additional disposable income.
- Debtor Annette Diaz, a below-median-income single mother, filed Chapter 13 in 2017 and later amended her schedules to show a $3,261 federal tax refund, amortizing it on Schedule I and increasing Schedule J expenses; she attempted to strike Section 4.1 from her proposed plan.
- The trustee objected; the bankruptcy court denied confirmation of the amended plan (holding tax refunds are disposable income and Section 4.1 binding), then later confirmed a Revised Plan requiring $1,261 of Diaz’s refund be paid through the plan; the district court affirmed and Diaz appealed to the Fifth Circuit.
- Central legal question: whether the Local Plan’s categorical rule treating refunds over $2,000 as projected disposable income is consistent with 11 U.S.C. § 1325(b)(2) and the Supreme Court’s decision in Hamilton v. Lanning.
- The Fifth Circuit held Section 4.1 invalid as applied to below-median debtors because it abridges substantive rights under § 1325(b)(2) and Lanning; the court vacated confirmation of the Revised Plan and remanded to allow filing of a new plan.
Issues
| Issue | Plaintiff's Argument (Diaz) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Validity of Local Plan § 4.1 requiring turnover of tax refunds > $2,000 as projected disposable income | § 1325(b)(2) and Hamilton/Lanning permit below-median debtors to retain amounts reasonably necessary for maintenance and support; a categorical turnover rule abridges that substantive right | § 4.1 is a permissible local form balancing individualization and court efficiency; many districts adopt similar rules | § 4.1 invalid as applied to below-median debtors: it abridges substantive rights by categorically depriving debtors of refund amounts that may be reasonably necessary for maintenance and support; vacated confirmation and remanded |
| Legality of debtor’s amortizing the refund on Schedule I / alleged bad faith | Amortization was an effort to account for recurring benefit and to avoid an invalid local rule; allowed by the Code where appropriate | Trustee contends plan amendments were in bad faith and plan not feasible | Court did not decide amortization’s correctness and rejected Trustee’s bad-faith argument as forfeited; remand for new plan makes feasibility issues moot |
Key Cases Cited
- Hamilton v. Lanning, 560 U.S. 505 (2010) (explains calculation of disposable income under BAPCPA and permits courts in unusual cases to account for known or virtually certain future changes when projecting disposable income)
- In re Adams, 734 F.2d 1094 (5th Cir. 1984) (local bankruptcy rules must be procedural and may not abridge, enlarge, or modify substantive rights)
- Brown v. Viegelahn (In re Brown), 960 F.3d 711 (5th Cir. 2020) (debtors are not in bad faith merely for doing what the Bankruptcy Code permits)
- In re Steinacher, 283 B.R. 768 (B.A.P. 9th Cir. 2002) (invalidated local rule that conflicted with the Bankruptcy Code but declined to prescribe a specific remedial rule)