Originally published June 7, 2010

Keywords: bankruptcy, disposable income, corporate defendant, limitations period

Today the Supreme Court issued two decisions, described below, of interest to the business community.

  • Bankruptcy—Calculation of Debtor's "Projected Disposable Income"
  • Fed. R. Civ. P. 15—"Mistake" in Naming Proper Corporate Defendant—Limitations Period

Bankruptcy—Calculation of Debtor's "Projected Disposable Income"

Hamilton v. Lanning, No. 08-998 (previously discussed in the November 2, 2009 Docket Report).

A debtor who files for bankruptcy under Chapter 13 must agree to a court-approved repayment plan for making installment payments to creditors. If the bankruptcy trustee objects to the repayment plan, the plan can be confirmed only if it provides that all of the debtor's "projected disposable income" during the applicable period "will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. § 1325(b)(1)(B). Congress has defined a formula for calculating "disposable income" based on the debtor's average monthly income over the six-month period before the bankruptcy petition was filed, id. § 1325(b)(2)(A)(i), but it has not provided a separate definition of "projected disposable income."

Today, in a decision by Justice Alito, the Supreme Court held that when a bankruptcy court calculates a debtor's projected disposable income, it may account for changes in the debtor's income or expenses that are "known or virtually certain" at the time of confirmation. In doing so, the court rejected what has become known as the "mechanical approach," which would require courts to apply the rigid formula in Section 1325(b)(2)(A)(i), and instead adopted the so-called "forward-looking approach," which allows the bankruptcy court to deviate from that formula if there are special circumstances that affect the debtor's income or expenses.

The Court began by explaining that the ordinary usage of the word "projected" allows many factors to be taken into account, and it does not assume that the past will necessarily repeat itself. This understanding is consistent with how the term is used in other federal statutes, some of which expressly recognize that future projections may deviate from historical averages for a variety of reasons. The Court also explained that courts traditionally exercised discretion when projecting future income in the years before Congress codified these practices in the Bankruptcy Code, and that if Congress had intended to overrule longstanding practice, it presumably would have said so expressly. The Court cautioned, however, that—consistent with historical practice—the bankruptcy court's calculation of projected disposable income should depart from the historical average "only in unusual cases," and that it should take into account only "known or virtually certain information" about the debtor's future income or expenses. Slip op. 12.

Justice Scalia dissented, arguing that because the only mention of "disposable income" in Section 1325(b) is as part of the phrase "projected disposable income," the statutory definition of disposable income must also be used as the formula for projected disposable income. Under the Court's interpretation, he explained, the statutory definition is rendered entirely superfluous.

Today's decision will be important to any companies that make loans to individuals. Bankruptcy courts now have greater discretion to determine how much a debtor must commit to repaying unsecured creditors, and a greater number of Chapter 13 repayment plans will likely be confirmed even over the objection of the bankruptcy trustee.

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Fed. R. Civ. P. 15—"Mistake" in Naming Proper Corporate Defendant—Limitations Period

Krupski v. Costa Crociere S. p. A., No. 09-337 (previously discussed in the January 15, 2010 Docket Report)

Under Federal Rule of Civil Procedure 15(c)(1)(C), an amended complaint "relates back to the date of the original" complaint—i.e., is considered filed on the date of the original complaint for statute of limitations purposes—when, among other things, the amended complaint asserts a claim arising from the same occurrence and corrects a "mistake concerning the proper" defendant's "identity." In a decision of significance to the business community because it clarifies plaintiffs' responsibility for identifying the proper corporate defendant to a suit, the Supreme Court ruled today in Krupski v. Costa Crociere S. p. A., No. 09-337, that whether an otherwise untimely amended complaint "relates back" to the original filing date under Rule 15(c)(1)(C) depends on what the defendant to be added knew or should have known during the period for service, rather than on the amending plaintiff's knowledge or diligence.

Petitioner Krupski, the plaintiff below, was injured on a cruise ship and sued Costa Cruise, a company that serves as the sales agent for the proper defendant, Costa Crociere. Costa Cruise was ultimately dismissed from the case, and Krupski filed an amended complaint correctly naming Costa Crociere as the defendant, albeit after the statute of limitations would ordinarily have expired. The district court held that the amended complaint did not "relate back" to the original complaint, and that Krupski's claim against Costa Crociere was therefore time-barred. The Eleventh Circuit affirmed, holding that knowledge of Costa Crociere as a potential defendant had to be imputed to Krupski as of the time she filed her original complaint because the company was identified as the "carrier" on her passenger ticket. Concluding that the naming of Costa Cruise, rather than Costa Crociere, was not a "mistake" for purposes of Rule 15(c)(1)(C), but rather a "deliberate decision," the court held Krupski's claim time-barred.

In an opinion by Justice Sotomayor, the Supreme Court reversed. The Court reasoned that the text of Rule 15(c)(1)(C) "asks what the prospective defendant knew or should have known" (slip op. 8), and that information in the plaintiff's possession, such as knowledge of a potential party's existence, "is relevant only if it bears on the defendant's understanding of whether the plaintiff made a mistake regarding the proper party's identity." Id. at 9. The Court found that its reading of Rule 15(c) "is consistent with the purpose of relation back: to balance the interests of the defendant protected by the statute of limitations with the preference expressed in the Federal Rules of Civil Procedure in general, and Rule 15 in particular, for resolving disputes on their merits." Id. at 10. Finally, the Court held that the Court of Appeals' reliance on Krupski's delay in filing an amended complaint was misplaced, as Rule 15(c) "plainly sets forth an exclusive list of requirements for relation back, and the amending party's diligence is not among them." Id. at 13. The Court's opinion was unanimous, except for portions of the opinion that were joined by all members of the Court but Justice Scalia, who wrote a one-paragraph concurrence.

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