Thursday, September 17, 2009

BAPCPA Does Away With Chapter 7 Debtor's Option of Retaining Vehicle by Making Monthly Payments Without Reaffirming, Post-Discharge Repo is OK

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Dumont v. Ford Motor Credit Company (In re Dumont)

9th Circuit Court of Appeals Case No. 08-60002
September 15, 2009

One of the most controversial pre-BAPCPA consumer bankruptcy law issues was whether a debtor could keep possession of her vehicle (or other personal property collateral) as long as she kept current on the regular monthly payments, even without reaffirming the debt. The circuit courts were split five to four, with the Ninth Circuit and four others permitting this "ride-through" option, four others not. The rest of the courts and legal commentators reflected similar disagreement. "Because of confusing and contradictory statutory text, courts have struggled for decades to discern congressional intent on the answer to that simple question."

The post-BAPCPA conundrum, in the eyes of the dissenting opinion here: "When faced with confusing and contradictory amendments to already confusing and contradictory statutory text, what should we do?" The heart of the dispute between the majority and dissenting opinions here was whether through BAPCPA Congress intended to RESOLVE the judiciary's split on this issue or instead to PERPETUATE it. The majority here went with what appears to becoming the prevailing view, that BAPCPA eliminated the "ride-through" option. The amendments to the Bankruptcy Code language at issue, effectively overturned the Ninth Circuit's contrary precedent, McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. 1998).

The Essential Facts
Ford Motor Credit Company repossessed a Chapter 7 debtor's vehicle, without any warning, about three months after discharge, when she was current on her post-petition monthly payments. (The record is unclear whether she had ever defaulted on payments pre-petition.) The balance on the loan exceeded the value of the vehicle. The contract contained an "ipso facto" clause, stating that debtor's filing of a bankruptcy case would be in itself constitute a default of the contract. Her Statement of Intentions had stated that she would "retain the collateral and continue to make regular payments" The creditor sent a proposed reaffirmation agreement and then its attorney sent an email to debtor's attorney requesting reaffirmation, but debtor's attorney "declined the offer." (The terms of the reaffirmation offer were not clear from the record.) After the repossession, Debtor reopened the case and claimed that Ford Motor Credit had violated the discharge injunction. The bankruptcy court for the Southern District of California denied the motion, and the BAP (with Judge Randall Dunn on the panel but not the author of its opinion) affirmed without dissent.

The Majority Opinion
In essence, Judge Diarmuid O`Scannlain held that "BAPCPA wrought several changes in the Code" which now undercut and in some respects contradicted the rationale for Parker, the Ninth Circuit's pre-BAPCPA precedent. In an opinion with 28 footnotes, including some on every single page, he laid out a detailed analysis of the relevant statutory changes.

Statutory Changes with BAPCPA
First, § 521(a)(2)(C) now explicitly says that the debtor's rights about his or her property under the Statement of Intention subsection are not altered, "except as provided by section 362(h)." The new subsection referred to there says that the automatic stay is cut off and the property is no longer property of the estate if debtor does not timely file a Statement of Intention or fails to act timely as indicated in the Statement. (Note: all references here to Bankruptcy Code sections are as they were re-numbered after BAPCPA.)

Second, under the new § 521(a)(6) a debtor
shall . . . not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors . . .
A) enters into [a reaffirmation] agreement . . .; or
B) redeems such property . . . .
If the debtor fails to act within the 45-day period . . . the stay under section 362(a) is terminated with respect to the personal property of the estate or of the debtor which is affected, such property is no longer property of the estate, and the creditor may take whatever action as to such property as is permitted by applicable nonbankruptcy law . . . .
Third, under the new § 521(d), if a debtor fails to reaffirm or redeem as stated in § 521(a)(6) or to file the Statement of Intent or to act on it timely, then

nothing in this title shall prevent or limit the operation of a provision in the underlying lease or agreement that has the effect of placing the debtor in default under such lease or agreement by reason of the occurrence, pendency, or existence of a proceeding under this title or the insolvency of the debtor. Nothing in this subsection shall be deemed to justify limiting such a provision in any other circumstance.

In re Parker Effectively Overturned by These Amendments
Judge O'Scannlain observed that Parker had relied on the lack of any mandatory act for the debtor in § 521(a) beyond filing the Statement of Intention. But now these new provisions mean that the debtor is now not only required to file a Statement of Intention "but also [to] follow through with his expressed intent." Parker had also relied on the lack of ambiguity in § 521(a)(2)(C) in not altering debtor's rights "with regard to such property under this title." But now the phrase "except as provided in section 362(h)" immediately after makes "this conclusion . . . not only obsolete but actively contradicted."

When the debtor failed to reaffirm timely as required under the new provisions, the automatic stay expired and the vehicle was no longer the property of the estate. But, Judge O'Scannlain continued, that did not in itself authorize Ford Motor Credit to repossess, it "merely lifted one obstacle to its doing so." He acknowledged another obstacle: "§ 365(e)(1)(B) generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a bankruptcy case." The contract here had such a "ipso facto" clause, but § 365(e)(1)(B) seemed to block its use. However, the judge reasoned that § 521(d) provided a new way around that. As a consequence of the debtor not doing what that provision required--reaffirm or redeem, "nothing in [the Code] prevent[ed] or limit[ed] the operation of [the ipso facto] provision in the underlying [contract]." Thus, "our decision in Parker has been superseded by BAPCPA. Accordingly, Ford did not violate the discharge injunction in repossessing Dumont's vehicle."

In contrast, Judge Susan Graber reasoned that BAPCPA's "changes to the [statutory] text indicate an intent to perpetuate the extant circuit split, not resolve it." [Italicized in original.] The heart of the dispute, § 521(a)(2)(A), "remains entirely unchanged." The new § 362(h) addition to the automatic stay statute, on which the majority opinion relies so much, "suggests that, if anything, Congress intended no change to the existing circuit split." (Emphasis in original.] She focuses on the concluding phrase in that new subsection, which requires a debtor to follow of one of three options laid out in the Statement of Intention, "as applicable," She equates that to the "if applicable" phrase in § 521(2)(A) upon which Parker had focused in its rationale that reaffirmation was not mandatory in order to retain a vehicle.

The dissent cited this rule of statutory interpretation: " 'Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.' " In spite of the notoriety of the circuit split, "Congress did not amend § 521(a)(2)(A) or the critical phrase 'if applicable.' " Indeed, it "carried forward the important qualifier 'applicable'." So, "we should continue to read the statute as we did pre-BAPCPA." "Congress decided to do nothing--neither increasing nor decreasing access to ride-through," "thus perpetuating the circuit split."

After appealing to the "overarching guiding principle of statutory interpretation . . . [that] '[t]he principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor'," Judge Graber concluded that "we have already answered the question at hand [in] In re Parker. . . . Because the BAPCPA amendments add only confusion, I would not overrule In re Parker.

Limitations on the Holding
The majority opinion acknowledged some courts have allowed post-BAPCPA ride-through, but asserted that "in each of these cases there was 'substantial compliance with § 521(a)(2), § 521(a)(6), and § 362(h)'." In these cases the bankruptcy courts had not approved the reaffirmation agreements even though the debtors had sought for them to do so. Judge O'Scannlain also acknowledged not ruling on this creates uncertainty, but said the issue was not before the court.

Both Judge O'Scannlain and Judge Graber are based out of the Portland branch of the Ninth Circuit Court of Appeals in Pioneer Courthouse, and both formerly practiced law in Portland. Judge Graber also had been on the Oregon Court of Appeals and then the Oregon Supreme Court, before starting at the Ninth Circuit in 1998. Judge O'Scannlain has been at the Ninth Circuit since 1986.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Thursday, September 10, 2009

Above-Median Income Ch. 13 Debtor Can't Deduct Vehicle "Ownership Cost" on Vehicle Owned Free and Clear: 9th Circuit Affirms Judge Dunn's BAP Opinion

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Ransom v. MBNA America Bank (In re Ransom)

Ninth Circuit Court of Appeals, Case No. 08-15066
August 14, 2009

The Issue and Decision

The first two sentences of this opinion state the Issue and decision clearly:
Does an above-median income debtor seeking bankruptcy relief under chapter 13 get to deduct from his projected disposable income (that otherwise would be available to unsecured creditors) a vehicle “ownership cost” for a vehicle he owns free and clear? Based upon our interpretation of the controlling statute, 11 U.S.C. § 707(b)(2)(A)(ii)(I), our answer is “no.”
Old News Packaged into an Intriguing Opinion

This opinion upheld the nearly two-year old published decision of the same name of the Ninth Circuit Bankruptcy Appellate Panel,380 B.R. 799 (BAP 9th Cir. 2007). So most practitioners presumably have already been abiding by this holding, and thus in practical terms this Ninth Circuit opinion is old news. Indeed this has been the law in Oregon even longer, since a published decision by Judge Radcliffe in August, 2006, In re Carlin, 348 B.R. 795.

Nevertheless, this new Ninth Circuit opinion is still tantalizing, particularly in Oregon, because:
1. Not only was Oregon's Judge Randall Dunn the author of the affirmed BAP opinion, the Ninth Circuit took the somewhat unusual step of excerpting and adopting more than two full pages of the "cogent reasoning of our BAP."
2. The Ninth Circuit's decision put it "in the uncomfortable position" of explicitly rejecting the rationale and conclusion of "two of our sister circuits," instead following what it called "roughly half of the courts to address the issue," including one other BAP opinion and Judge Dunn's underlying BAP opinion.
3. In the excerpted portion of his BAP opinion, Judge Dunn relied most heavily on ,and quoted a paragraph from, a Wisconsin district court decision ,which was subsequently overturned by the Seventh Circuit Court of Appeals. This Seventh Circuit opinion was published a full half-year before oral arguments on this Ninth Circuit appeal, and was discussed by the Ninth Circuit in its opinion. The Ninth Circuit not only included this paragraph from the overturned Wisconsin opinion in its excerpt, it even mistakenly attributed it to Judge Dunn's opinion. That put the Ninth Circuit in the position of quoting an overturned lower court opinion in support of the heart of its own rationale, while inadvertently or possibly intentionally making it look as if that quote was written by its BAP.
4. The case was deemed sufficiently important to merit two amicus curiae, one from the Executive Office of the U.S. Trustees, and the other from the National Association of Consumer Bankruptcy Attorneys (NACBA).
5. The courts also apparently agreed that this was an urgent case: the debtor received "leave to appeal the bankruptcy court's interlocutory order to our BAP," which, upon issuing its decision "certified its disposition of the case to this circuit for possible review of the non-final order," and then the Ninth Circuit "authorized this interlocutory appeal to go forward."
6. For those readers easily entertained by appellate judges' subtle humor, the Ninth Circuit rejected the "plain language approach" of the Fifth and Seventh Circuits and instead embraced what it called the "statutory language, plainly read" approach of Judge Dunn's opinion. Perhaps this is less funny than it is unhelpful.
7.The Ninth Circuit concluded with what it characterized as an "unusual step": after complaining about "the unnecessary cost of thousands of hours of valuable judicial time" spent struggling with this question, the court explicitly asked Congress to clarify the conundrum through legislation, and did so by "directing the Clerk of the Court to forward a copy of this opinion to the Senate and House Judiciary Committees."
Statutory Context

This interpretation of one ingredient of BAPCPA's means test is one of first impression in this Circuit. To meet the "disposable income" requirement of a Chapter 13 plan under § 1325(b)2)(A)(i), a debtor must pay into the plan all "current monthly income . . . less amounts reasonably necessary to be expended for the maintenance and support of the debtor . . . ." § 1325(b)(3) requires an above-median income debtor to determine the "amounts reasonably necessary to be expended" under the means test of § 707(b)(2). The sentence at issue is the means test's definition of a debtor's "monthly expenses" at § 707(b)(2)(A)(ii)(I):
a debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . . [Emphasis added.]
The IRS's Local Standards' transportation costs include "operating costs" and "ownership costs." The specific issue of statutory interpretation is whether a debtor may deduct the IRS's Local Standard for "ownership costs" as an "applicable monthly expense" on a vehicle if debtor makes no loan or lease payments on that vehicle.

The "ownership cost" for one vehicle under the Local Standards in this case was $471 per month, so in a 60 month plan this amounted to a difference of $28,260 paid or not paid into the plan.

The Ninth Circuit's Rationale

The two circuits which had already addressed this issue--the Fifth and Seventh--both held that a debtor in this situation IS entitled to include the Local Standard "ownership cost" as an expense. They interpreted the word "applicable" in the phrase "applicable monthly expense amounts specified under the National Standards and Local Standards" to mean that specific "ownership cost" in the IRS' Local Standards which applied to the debtor's geographical region and number of vehicles.

In contrast the Ninth Circuit here in Ransom held that " 'applicable' means that a debtor actually is making a loan or lease payment." The court acknowledged but did NOT adopt the "IRM approach" (from the Internal Revenue Manual in which the Standards are located), That approach reasons that Congress must have intended by its use of the IRS' Standards to have courts look at how the IRS interprets the expense categories. The IRM and other IRS publications do not allow the use of the "ownership cost" expense unless a taxpayer is making loan or lease payments on the vehicle.

Instead of relying on this IRM approach, the court reached the same result but by a different rationale by adopting what it called Judge Dunn's BAP opinion's "statutory language, plainly read" approach. Under this, according to the Ninth Circuit, "[a]n 'ownership cost" is not an 'expense'--either actual or applicable--if it does not exist, period." The core of this BAP opinion's rationale, excerpted in the Ninth Circult opinion, is that:
[a]s set forth in the statute, the adjective “applicable” modifies the meaning of the noun “monthly expense amounts;” it indicates that the deduction of the monthly expense amount specified under the Local Standard for the expense becomes relevant to the debtor (i.e., appropriate or applicable to the debtor) when he or she in fact has such an expense.
The adopted BAP excerpt finished with three points:

1) "[t]he ordinary, common meaning of 'applicable' "--"capable of being applied"--makes no sense if there is no loan or lease payment to which the "ownership cost" could be applied;
2) there are mechanisms for allowing additional operating expenses for older vehicles or for other special circumstances in § 707(b)(3)(B);
3) the result of this interpretation is "consistent with the underlying goals of BAPCPA": "to ensure that debtors repay as much of their debt as reasonably possible."


As Judge Dunn said in footnote in his 2007 BAP opinion, already by that time fifty different courts had ruled on this issue, "
many of which set forth variations on the prevailing rationales." This demonstrates yet again the dreadfully unclear drafting of BAPCPA. In its final paragraph in this Ransom opinion, the Ninth Circuit expressed its frustration with this reference to Greek mythology: "We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering [the] straightforward policy question [at issue in this opinion]."

To save you a trip to Wikipedia, Sisyphus was the first king of Corinth who was punished by Zeus--for acting like he was more clever than the gods--by being forced to roll a large boulder up a steep hill only to have it roll all the way down just as he almost got to the top, and then to repeat this forever. Although the Supreme Court may eventually tell us which of the diametrically opposed circuit courts happen to be right on this present issue, an eternity of frustration is ahead of us unless Congress returns to clean up the many confusions of BAPCPA. Until then, keep on rolling.

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys