LEGAL TRENDS

The Fifth Circuit Speaks: Reasonably-Certain Future Income
Can Now Be Included In Bankruptcy Chapter 13 Plans

By Ann Zeigler

A very senior bankruptcy practitioner famously referred to the early years of practice under the Bankruptcy Code in the 1980’s as “the decade of adventure.” No one knew for sure what many of the law’s new provisions really meant.  We are now well into a new decade of adventure with the 2005 BAPCPA bankruptcy amendments, and indeed the adventures are continuing. The Fifth Circuit Court of Appeals has issued an opinion on a matter of first impression in Nowlin v. Peake, No. 08-200066, 2009 WL 2105356 (5th Cir. July 17, 2009), about calculation of “projected disposable income,” the amount the debtor must dedicate to payments in a Chapter 13 Plan.   

One of the troublesome provisions of the BAPCPA amendments calls for a debtor to dedicate all “projected disposable income” to payments under a Chapter 13 Plan. But that term is not defined.  Most calculations under BAPCPA are very rigid and mechanical—including the calculation of “current monthly income” and “disposable income,” which are calculated by looking backward six months and averaging.  Several federal courts of appeal have weighed in on whether “projected disposable income” is merely a mechanical projection forward of the “disposable income” calculated from the “current monthly income” and “current expenses” (taken from IRS tables, not from actual expenses) which had already been calculated as a gateway under the means test. 

In Pamela Nowlin’s case, projecting her pre-bankruptcy income and expenses would leave only $195.00 per month for creditors on her $89,046 income, due to deductions of $1,134 per month to repay a 401(k) loan, and $1,062 in new monthly contributions to the 401(k) plan. After an amendment related to payments due to the IRS, her Plan proposed to pay unsecured creditors a total over 60 months of $980.45.

However, at the confirmation hearing, Nowlin testified that her 401(k) loan would be paid off in two years, and her contributions to her 401(k) plan were capped at $15,000 per year, or $1,250 per month. The bankruptcy court denied confirmation of her amended Plan, holding that “projected monthly income” required her to dedicate the income freed up after paying off the 401(k) loan to her Plan, since the amount was reasonably certain to be available.

On appeal, the Fifth Circuit rejected Nowlin’s position that mechanical projection of pre-petition income, rather than reasonably-certain future financial events, is required by the BAPCPA language.  The court emphasized that the inclusion of reasonably-certain future changes to either income or expenses is not an invitation to speculation about likely or possible future events.

The Fifth Circuit has now joined the Eighth and Tenth Circuits in rejecting the Ninth Circuit’s mechanical projection of the pre-bankruptcy six months of income for the term of the Plan.  Instead, changes in income which are reasonably certain to occur should be included in the calculation of Plan payments. 

Ann Zeigler is a bankruptcy attorney and of counsel to the securities litigation and arbitration practice at Nelson S. Ebaugh, P.C.   She is the editor in chief of The Houston Lawyer.

What Constitutes the Last Word after Chemical Lime:
the Mandate or the Judgment?

By Dylan O. Drummond

Decades of conflicting statutes, Texas Supreme Court opinions, and procedural rules have left unclear whether an appellate court’s decision takes effect the moment the court issues its judgment, or later when the clerk issues the mandate.  This past June, the Texas Supreme Court issued its decision in Edwards Aquifer Authority v. Chemical Lime, Ltd., which presented the Court with the opportunity to finally settle the debate.1

 However, while the majority opinion authored by Justice Hecht decided the case on other grounds, both Justices Brister and Willett filed concurring opinions opining as to whether the mandate or the judgment should be the proper jurisprudential vehicle for the Court’s final action.

Both Justices Brister and Willett agreed with the majority that the Court’s decisions “can take effect whenever we say they do.”2  In the absence of such an explicit pronouncement, however, the Justices disagreed as to what the default rule should be.

In his concurrence, Justice Brister makes the argument that “[p]ostponing enforcement of our decisions is not the same as postponing when they are effective.”3  He begins by meticulously recounting seven reasons why the judgment matters more than the mandate.  Chief among these is his objection to lending precedence to the mandate, which is drafted and signed by the Clerk, instead of the judgment, which is rendered by the Court.4  Thus, Justice Brister concludes that decisions of the Texas Supreme Court “should take effect when the justices act, not the clerk.”5  Justice Brister also points to several rules of appellate procedure, statutes, and cases that either rely upon the judgment as the operative act binding the parties, or that otherwise give the appellate decision effect.6  He also points to instances in which the Court never issues a mandate at all—orders in mandamus proceedings and denials of petitions for review—as yet another reason why the mandate cannot serve as the act giving effect to a Court’s decision.7  Justice Brister’s final argument is perhaps the most intriguing.  He reasons that, because the Texas Constitution confers the power to suspend laws only to the Legislature, and the Court itself may only suspend a law it deems to be unconstitutional, the Court is likely without constitutional authority to keep a law suspended until the mandate issues after the Court has determined the law in question to be constitutional.8

Justice Willett, as is fast becoming his hallmark, relies upon such varied authority as Yogi Berra and Jerry Seinfeld—“[n]ot that there’s anything wrong with that”—as well as more traditionally precedential sources to argue that the better default effective date is the date upon which the mandate issues, not the judgment.9  Justice Willett explains that the “mandate under our rules is not a mere ministerial postscript or duplicative reminder,” because the Court is required by Texas procedural rules “to prepare a mandate, without which an appellate-court judgment cannot be enforced.”10  If “the mandate served no meaningful purpose,” he reasons, “there would be no need to require one.”11  Building upon this point, Justice Willett questions “what is the mandate of a mandate,” if the “judgment is operative for all purposes upon issuance?”12  He also points to the fact that, until the mandate issues, the court ordinarily has “authority . . . to modify its own opinion or judgment . . ., regardless of whether the judgment awards monetary, injunctive, or declaratory relief.”13  Justice Willett concludes that this debate “warrants the Court’s rulemaking attention” to “deliver bright-line guidance going forward.”14

So, it appears the Court’s last word on whether the judgment or the mandate is the final effective and operative act of an appellate court is . . . “perhaps.”  More specifically, Justice Hecht’s majority opinion alluded that “this is an aspect of Texas appellate procedure that could well benefit from more definite rules and procedures.”15  As it is Justice Hecht who represents the Court on the Texas Supreme Court Rules Advisory Committee and who oversees the Court’s Rules Attorney, there is at least a substantial likelihood that this decades-long quandary will not endure much longer.

Dylan O. Drummond is an attorney with Kane Russell Coleman & Logan P.C. Drummond served as a law clerk for Justice Nathan Hecht with the Texas Supreme Court from 2003-2004.

Endnotes

1. 52 Tex. Sup. Ct. J. 929, No. 06-0911, 2009 WL 1817239 (Tex. June 26, 2009).   2. Id. at *9, *16.   3. Id. at *12.   4. Id. at *9.   5. Id.  6. Id. at *9-10.   7. Id. at *11.   8. Id. at *12.   9. See, e.g., id. at *13 n.2, *16 n.27.   10. Id. at *13.   11. Id.   12. Id. at *16.   13. Id. at *15.   14. Id. at *13, *16.   15. Id. at *6.

Alaska Electrical Pension Fund et. al., v. Flowserve
Corporation et. al.

By Nicole K. Sain

The first issue that the Fifth Circuit addressed was the district court’s denial of the class certification sought by the plaintiffs under the Alaska Exchange Act. The court began with the requisite that in order to establish a class, the plaintiff must prove that questions of law or fact common to class members predominate over any questions affecting only individuals. Predominance can be established through the rebuttable presumption of reliance using the fraud on the market theory of collective reliance which requires proof of loss causation. The district court found that plaintiff-appellants failed to show loss causation and denied the class certification. The Fifth Circuit engaged in an analysis of the standard of proof for loss causation and ultimately reversed and remanded the cause.

Loss causation must be established at the class certification stage of a case by a preponderance of all admissible evidence. The trial court must find the facts favoring class certification, and not inquire as to whether a jury reasonably could find such facts. Loss causation is established through proof of a causal connection between a misstatement and a subsequent decline in a stock’s price. More specifically, the plaintiff must establish that after the purchase of the stock and before the loss in value, truthful information was disclosed, and that information was related to an allegedly false, no-confirmatory, positive statement made earlier. The test is neither a fact-for-fact conveyance of information to correct former mistakes, nor the disclosure of a company’s true financial condition unrelated to whether that disclosure corrects past misstatements. The relevant information must be disclosed and must cause a market loss, distinguishable from a loss caused by changed economic circumstances, changed investor expectations, new industry or firm specific facts, or other factors independent of the fraud. A loss is not created if merely confirmatory statements are made and the market price is not actually affected by reliance on the statement. According to the Fifth Circuit, if statements increased the value of the stock and produced a positive actual effect, the statement is not merely confirmatory and may constitute proof of loss causation. This position seems to implicate forward looking earnings projections which are followed by lower earnings and a decline in market value, and allows for a finding of loss causation when a defendant is unable to point to a simultaneous and unrelated event that could have caused the decline.

Finally, the court noted that a holding as to loss causation at the class certification level does not resolve the loss causation issues on the merits, even when those issues are identical. Loss causation is presumed once a plaintiff establishes a price facie case under the securities act; the defendant has an affirmative defense available in that it can show that the loss was caused by something other than the information. To get summary judgment on this defense, the defendant must show that no reasonable juror could believe that any of the losses were the result of the misstatements.

Nicole Sain graduated from Pitzer College, one of the Claremont Colleges, in 1999 with a degree in psychology. She enrolled in the University of Houston Law Center in September of 2001, graduated in December of 2003 and was licensed in May 2004. She is now a partner at Ostrom/Sain, LLP, a boutique focusing on probate litigation and estate planning.

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