Drummond v. Luedtke (In re Luedtke)

• Decision Date: 09 April 2014
• Docket Number: BAP No. MT–13–1313–KuPaJu.,Bankruptcy No. 13–60098.
• Parties: In re Michael J. LUEDTKE and Katherine L. Luedtke, Debtors. Robert G. Drummond, Chapter 13 Trustee, Appellant, v. Michael J. Luedtke; Katherine L. Luedtke, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

508 B.R. 408

In re Michael J. LUEDTKE and Katherine L. Luedtke, Debtors.

Robert G. Drummond, Chapter 13 Trustee, Appellant,

v.Michael J. Luedtke; Katherine L. Luedtke, Appellees.

BAP No. MT–13–1313–KuPaJu.

Bankruptcy No. 13–60098.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on March 20, 2014.

Filed April 9, 2014.

Robert G. Drummond, Chapter 13 Trustee, Great Falls, MT, Pro Se; Edward Albert Murphy of Murphy Law Offices, PLLC, for Appellees Michael J. Luedtke and Katherine L. Luedtke.

Before KURTZ, PAPPAS and JURY, Bankruptcy Judges.

OPINION

KURTZ, Bankruptcy Judge.

INTRODUCTION

Robert G. Drummond, chapter 13 ¹ Trustee, objected to confirmation of Michael and Katherine Luedtkes' chapter 13 plan because, in calculating their disposable income for purposes of § 1325(b), the Luedtkes claimed as part of their monthly transportation expenses a $200 “older vehicle operating expense.” According to the trustee, this older vehicle operating expense is not part of the Internal Revenue Service's (“IRS's”) National Standards and Local Standards, which generally control what expenses above-median-income debtors may claim, and there was no other permissible basis for the Luedtkes to claim this expense.

The bankruptcy court overruled the trustee's objection and confirmed the Luedtkes' chapter 13 plan. The trustee has appealed, contending that the court erred when it permitted the debtors to claim the older vehicle operating expense.

Because we agree with the trustee that above-median-income debtors cannot claim the $200 older vehicle operating expense, we REVERSE and REMAND for further proceedings.

FACTS

The Luedtkes commenced their chapter 13 case in January 2013 and filed their proposed chapter 13 plan in February 2013. To fund their plan, the Luedtkes proposed to make payments of $150 per month for sixty months. The trustee objected to the Luedtkes' proposed plan on the sole ground that, in calculating their disposable income, the Luedtkes claimed not only the $472 standard vehicle operating expense allowed for above-median-income Montana debtors with two or more cars, but also an additional $200 “older vehicle operating expense.” Because the Luedtkes improperly claimed the older vehicle operating expense, the trustee asserted, they had understated their disposable income by $200 per month and, hence, they had failed to commit all of their projected disposable income to fund their plan payments, as required by § 1325(b)(1)(B).

In their response to the trustee's objection, the Luedtkes pointed out that one of their two automobiles was a 1993 Ford Taurus with 118,000 miles on the odometer. As a result, the Luedtkes argued, they were entitled to claim the older vehicle operating expense, in accordance with Chapter 8 of Part 5 of the IRS's Internal Revenue Manual (“IRM”). Chapter 8 sets forth the procedures IRS collection employees are directed “to follow when considering a taxpayer's proposal to compromise” tax liability. IRM 5.8.1.1 (2013). Part 5, Chapter 8, Section 5, of the IRM explains how IRS collection employees should analyze a taxpayers' financial condition for purposes of considering a taxpayer's compromise offer. See IRM 5.8.4.3 (2013). In relevant part, this section of the IRM provides that, when a taxpayer owns an automobile that is over six years old, or has mileage of at least 75,000 miles, “an additional monthly operating expense of $200 will generally be allowed....” IRM 5.8.5.22.3 (2013).

A person unfamiliar with the Bankruptcy Code, and specifically with the 2005 amendments thereto,² might be wondering why the IRM, an internal IRS procedures manual, has any relevance to the resolution of an issue regarding the Luedtkes' disposable income for chapter 13 plan confirmation purposes. A short answer will suffice. Before the enactment of the 2005 Bankruptcy Code amendments, bankruptcy courts enjoyed a significant degree of discretion in determining what expenses should be considered reasonably necessary for chapter 13 plan confirmation purposes. See Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1130 (9th Cir.2013). However, for above-median-income debtors, the Bankruptcy Code as amended in 2005 constrains bankruptcy court discretion on this issue by tying the determination of reasonably necessary expenses for chapter 13 plan confirmation purposes to specific benchmarks, in relevant part as follows:

The 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, as in effect on the date of the order for relief....

§ 707(b)(2)(A)(ii)(I) (emphasis added); see also§ 1325(b). In short, the National Standards and Local Standards issued by the IRS, also known as the IRS's “Collection Financial Standards” and as the “Allowable Living Expense (ALE) Standards,” seeIRM 5.15.1.1 (2012) & 5.15.1.7 (2012), now largely control the determination of what are reasonably necessary expenses for above-median-income debtors seeking to confirm chapter 13 plans.

While they claim an older vehicle operating expense, the Luedtkes concede that it is not to be found in the IRS's Financial Analysis Handbook (IRM 5.15.1), the portion of the IRM which identifies, describes and interprets the IRS's National Standards and Local Standards. SeeIRM 5.15.1.1, 5.15.1.7–5.15.1.10 (2012). As described in the Financial Analysis Handbook, the National Standards and Local Standards consist of expense tables that guide IRS revenue officers to assist them in determining the financial condition of delinquent taxpayers, which in turn is meant to facilitate their performance of all of the collections procedures set forth in Part 5 of the IRM. SeeIRM 5.15.1.

Even though the older vehicle operating expense is not mentioned in the National Standards, the Local Standards or in the Financial Analysis Handbook, the Luedtkes assert that a broad interpretation of the phrase “National Standards and Local Standards ... issued by the Internal Revenue Service” contained in § 707(b)(2)(A)(ii)(I) should include the older vehicle operating expense.

The bankruptcy court agreed with the Luedtkes. The bankruptcy court in essence held that the “use and incorporation” of IRM Chapter 8 into the Collection Financial Standards, particularly Chapter 8's $200 older vehicle operating expense, was “not at odds” with § 707(b)(2)(A)(ii)(I) and that the older vehicle operating expense should be considered part of the IRS's Collection Financial Standards. The bankruptcy court explained that its holding was a logical extension of the reasoning set forth in two Supreme Court cases, Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), and Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). The bankruptcy court further explained that its holding also was consistent with statements made in Ransom v. MBNA Am. Bank, N.A. (In re Ransom), 380 B.R. 799, 808 (9th Cir. BAP 2007), aff'd and partially adopted577 F.3d 1026, 1031 (9th Cir.2009), aff'd––– U.S. ––––, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), regarding the general propriety of older vehicle operating expense claims when determining the disposable income of chapter 13 debtors.

On June 17, 2013, the bankruptcy court entered an order overruling the trustee's objection and a separate order confirming the Luedtkes' chapter 13 plan. On July 1, 2013, the trustee timely filed a notice of appeal.³

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(L). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err when it held that the older vehicle operating expense should be considered part of the IRS's Collection Financial Standards for purposes of determining chapter 13 debtors' disposable income?

STANDARD OF REVIEW

The sole issue on appeal requires us to interpret the Bankruptcy Code, which is a question of law we consider de novo. See Samson v. W. Capital Partners (In re Blixseth), 454 B.R. 92, 96 (9th Cir. BAP 2011), aff'd & adopted684 F.3d 865 (9th Cir.2012).

DISCUSSION

1. Overview

When the trustee or an unsecured creditor objects to a proposed chapter 13 plan, the bankruptcy court may not confirm that plan unless the plan will pay the objecting creditor in full or all of the debtors' “projected disposable income” will be committed to the payment of the debtors' unsecured creditors during the course of the plan. See§ 1325(b)(1). The debtors have the burden of proof on all plan confirmation issues. Drummond v. Welsh (In re Welsh), 465 B.R. 843, 847 (9th Cir. BAP 2012), aff'd711 F.3d 1120 (9th Cir.2013).

To determine their projected disposable income, the debtors must first calculate their “disposable income,” which term is defined in the Bankruptcy Code as generally meaning the debtors' current monthly income, less their reasonably necessary expenses. See§ 1325(b)(2). As indicated above, prior to BAPCPA, the Bankruptcy Code afforded bankruptcy courts with substantial discretion in determining debtors' reasonably necessary expenses in accordance with the particular circumstances presented in each case. See In re Welsh, 711 F.3d at 1130. But BAPCPA replaced this discretion with the “means test”—a formulaic and mechanical method of assessing debtors' ability to pay. See id. The means test is set forth in § 707(b)(2)(A)(ii) and is made applicable to above-median-income debtors seeking to confirm chapter 13 plans by § 1325(b)(3). In relevant part, the means test provides:

The 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...