Tuesday, January 27, 2009

Disability Insurance Benefits Are Included in "Current Monthly Income" Under the Means Test for Determining Presumption of Abuse

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Blausey v. US Trustee
Ninth Circuit Court of Appeals Case No. 07-15955
January 23, 2009

The Holding

The Ninth Circuit held that disability insurance benefit payments ARE included in Chapter 7 debtors' current monthly income ("CMI") under the means test in determining whether there is a presumption of abuse. This was an issue of first impression among the circuit courts, including the broader question of whether CMI is defined by reference to the Internal Revenue Code. In a split opinion, this three-judge panel upheld the bankruptcy court's dismissal of debtors' Chapter 7 case under § 707(b)(2), holding that, although the Internal Revenue Code explicitly excludes from "gross income" "amounts received through accident or health insurance . . . for personal injuries or sickness," the plain language of the Bankruptcy Code mandates that disability payments be included in CMI.

Statutory Context

As summarized nicely by the court:
Section 707(b)(2) provides a means test by which bankruptcy courts determine whether a case is presumed to be an abuse of Chapter 7. If the case is presumed abusive, it will be dismissed unless the debtor shows “special circumstances” rebutting the presumption. 11 U.S.C. § 707(b)(2)(B)(I). If the presumption does not arise, the bankruptcy court may still find abuse under § 707(b)(3) based on the totality of the circumstances.
The focus here was on whether there was presumptive abuse as determined by the means test, specifically whether or not the "current monthly income" (CMI) component of the means test includes the disability payments. If these disability payments are included in CMI in this case, that led to a presumption of abuse; without those payments being included, the calculations under § 707(b)(2) would have led to no presumption of abuse.

Since the Ninth Circuit panel determined that the disability payments were included in CMI and thus that a presumption of abuse existed, it did not need to address the totality of circumstances issue under § 707(b)(3).

The Code provides a two-part definition of CMI, under § 101(10A)(A) and (B). The term:
(A) means the average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income . . . ; and
B) includes any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor’s dependents . . . , but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism . . . or domestic terrorism . . . on account of their status as victims of such terrorism.

The Rationale
  • The Internal Revenue Code's definition of gross income is not applicable because the Bankruptcy Code's definition of CMI at § 101(10A)(A) explicitly states that its meaning is "without regard to whether such income is taxable income," which "reflects Congress’ judgment that the Internal Revenue Code’s method of determining taxable income does not apply to the Bankruptcy Code’s calculation of CMI."
  • "[W]here Congress wishes to define a term in the Bankruptcy code by reference to the Internal Revenue Code, it clearly knows how to do so."
  • "[T]he statute makes several specific exclusions from CMI but does not specifically exclude private disability insurance benefits. This indicates that Congress meant for the benefits to be included in CMI."
  • Standard definitions of income which base it on being derived from labor are not persuasive because "the purpose of the disability insurance plan is to replace the income that Mrs. Blausey lost due to her disability.".
  • According to the legislative history, the purpose of the means test is promoted by the inclusion of disability benefits in the CMI, that purpose being to "help the courts determine who can and who cannot repay their debts and, perhaps most importantly, how much they can afford to pay."
The bottom line: "Congress’s determination that a certain type of income should not be taxed does not reflect a determination that the income is not available to repay debts."

The Dissent and the Jurisdictional Issue

The dissenting judge indicated that he "admire[d] and agree[d] with the court's thoughtful treatment of the merits of this case." So the panel was unanimous on the substantive issue discussed above. The dissent simply believed that the Ninth Circuit did not have jurisdiction to hear the appeal. Indeed of the 14 pages of discussion in the opinion and dissent, only five pages addressed the merits of the case. In any event the holding on the merits will stand for a long time, since the case will not be appealed to the Supreme Court on these jurisdictional grounds because the U.S. Trustee had raised the jurisdictional issue but then won on the merits and so has no reason to appeal.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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