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.

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