In re Burbank

• Decision Date: 24 February 2009
• Docket Number: No. 08-11620.,08-11620.
• Citation: 401 B.R. 67
• Parties: In re Edward J. BURBANK and Donna M. Burbank, Debtor.
• Court: U.S. Bankruptcy Court — District of Rhode Island

401 B.R. 67

In re Edward J. BURBANK and Donna M. Burbank, Debtor.

No. 08-11620.

United States Bankruptcy Court, D. Rhode Island.

February 24, 2009.

COPYRIGHT MATERIAL OMITTED

Peter M. Iascone, Esq., Peter M. Iascone & Associates, Ltd., Newport, RI, Attorney for Debtors.

John Boyajian, Esq., Boyajian Harrington & Richardson, Providence, RI, Chapter 13 Trustee.

OPINION AND ORDER OVERRULING TRUSTEE'S OBJECTION TO PLAN CONFIRMATION

ARTHUR N. VOTOLATO, Bankruptcy Judge.

The Trustee objects to confirmation of the Debtors' Plan, on the grounds that: (1) the payments proposed under the Plan do not meet the requirements of the means test, and (2) the Plan does not provide that all of the Debtors' projected disposable income will be applied to plan payments.¹ Specifically, the Trustee objects to the deduction of "ownership expenses" for two vehicles on which the Debtors owe no secured debt or lease payments, and the deduction for mortgage payments on two parcels of real estate which the Debtors intend to surrender. At issue is the correct application, in Chapter 13 cases, of Sections 707(b)(2)(A)(ii)(I) and 707(b)(2)(A)(iii) of the Bankruptcy Code.² For the reasons discussed below, the Trustee's Objection to confirmation, as to both issues, is OVERRULED, and the claimed means test deductions are ALLOWED.

BACKGROUND

The Debtors filed this Chapter 13 case on May 30, 2008. Their Official Form 22C—the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (the "means test") shows monthly income of $11,273.84 (or $135,286 annually) which in Rhode Island is above the applicable median income limit for a family of three. The Debtors claim $978 per month of ownership expense for two automobiles that they own free and clear of any loans or lease payments. Their means test calculation also includes deductions for mortgage payments in the amount of $1,973 and $642 on two properties that the Debtors intend to surrender. Again, neither the Plan nor Schedule J provides for any payments regarding these secured claims. The Trustee objects to said deductions on the ground that the Debtors are not proposing to dedicate all of their projected disposable income to payments under the plan as required by Section 1325(b)(1) of the Bankruptcy Code. The Trustee argues that (1) the Debtors should not be allowed to deduct vehicle ownership expense where there will be no monthly car loan or lease payments, and (2) the Debtors should not be allowed to deduct mortgage payments on real property they intend to surrender.

DISCUSSION

I. Plan confirmation and the means test.

Section 1325(a) contains the requirements for confirmation in Chapter 13, and Section 1325(b)(1)(B) provides in relevant part that: "[i]f the trustee ... objects to the confirmation of the plan, then the court may not approve the plan, unless ... the plan provides that all of the debtor's projected disposable income ... will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. 1325(b)(1)(B).

Although the Bankruptcy Code does not explain the term "projected disposable income," "disposable income" is defined in Section 1325(b)(2), as: "current monthly income received by the debtor ... less amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." In turn, Section 1325(b)(3) directs that, for a family with an above-median income, the amounts "reasonably necessary to be expended" shall be determined in accordance with Section 707(b)(2)(A) and (B). Section 707(b)(2)(A) codifies the so-called "means test" and allows debtors to deduct from current monthly income their: (a) monthly expenses (exclusive of any payment of debts), and (b) expenses for monthly payments on account of secured debts. See Sections 707(b)(2)(A)(ii)(I) and 707(b)(2)(A)(iii) respectively.

Section 707(b)(2) was added to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, Pub.L. No. 109-8, 119 Stat. 37 ("BAPCPA"), and as one court bluntly put it, "[t]he enactment of BAPCPA threw a large monkey wrench into the well established and well understood process of determining projected disposable income." In re Thomas, 395 B.R. 914, 921 (6th Cir. BAP 2008). Prior to BAPCPA, disposable income was determined by subtracting the debtor's expenses listed on Schedule J from the income listed on Schedule I, and multiplying that figure by the number of months in the plan. In re Frederickson, 545 F.3d 652, 658 (8th Cir. 2008). Under the former process, courts were able to make adjustments where the amounts claimed were unsubstantiated, or were determined to be unreasonable, unnecessary or excessive. In re Degrosseilliers, No. 08-10942-SSM, 2008 WL 2725808 at *2 (Bankr.E.D.Va. July 11, 2008). Such adjustments were, of course, subjective, with some courts allowing expenses that other courts would disallow. Id. Congress, however, was clearly determined to eliminate a perceived (but unwarranted and unsubstantiated) judicial abuse of the system, by curtailing the subjectivity and discretion of bankruptcy courts when calculating "disposable income," Frederickson, 545 F.3d at 658, and it did so by mandating a rigid definition of the term "disposable income," in Section 1325(b)(2). Id. For debtors with below median income, the process remains the same as it was pre-BAPCPA. Id. The new "BAPCPA" approach is a departure from the prior treatment of "disposable income," in that it requires the application of a rigid formula, instead of a determination based on the facts and circumstances of each case. In re Kagenveama, 541 F.3d 868, 874. (9th Cir.2008).

Congress designed the means test to serve two purposes. First, to determine whether the grant of a Chapter 7 discharge would be an abuse of Chapter 7, i.e., if the Debtor's income is greater than certain levels set by Congress, the case will either be dismissed or, with the consent of the debtor, converted to a case under Chapter 13. In Chapter 13, the debtor is obligated to devote all of his or her projected disposable income to payment of unsecured claims. Second, Chapter 13 incorporates the means test by reference in order to determine what "disposable income" is, and Official Form 22C implements the means test for Chapter 13 debtors. Fed. R. Bankr.P. 1007(b)(6). With that as background, we will address the two issues raised in this case.

II. May Debtors deduct car ownership expenses, on their means test, where there is no secured debt on the motor vehicle?

Section 707(b)(2)(A)(ii)(I) states in relevant part:

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 ... Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.

11 U.S.C. 707(b)(2)(A)(ii)(I). The National and Local Standards referred to in the statute are derived from the IRS Financial Analysis Handbook, which is a part of the IRS Internal Revenue Manual. Car ownership costs for specific census regions are in "IRS Local Transportation Expense Standards." For the Northeast Census Region, those are listed as $489.00 for the first car and $489.00 for the second car.³

As mentioned above, Section 707(b)(2)(A)(ii)(I) was added to the Bankruptcy Code by BAPCPA in 2005 and, as with many other provisions of this Act, it has generated much litigation and disagreement among bankruptcy and appellate courts throughout the country. As Judge Haines said recently: "[t]o say there is a split of authority on this point would be an understatement." In re Coffin, 396 B.R. 804, 807 (Bankr.D.Me.2008). See also, In re Young, 392 B.R. 6 (Bankr. D.Mass.2008) (discussing the division of authority, the various rationales advanced by courts, and concluding that no clear majority view has emerged). Of the four bankruptcy appellate panels that have considered this issue, two have permitted the deduction, see In re Pearson, 390 B.R. 706 (10th Cir. BAP 2008), vacated as moot, 2009 WL 205408 (10th Cir. Jan. 22, 2009), and In re Kimbro, 389 B.R. 518 (6th Cir. BAP 2008), and two have disallowed it, see In re Wilson, 383 B.R. 729 (8th Cir. BAP 2008) and In re Ransom, 380 B.R. 799 (9th Cir. BAP 2007). There is disagreement among the bankruptcy courts in the First Circuit, with the majority, to date, ruling in favor of allowing the ownership deduction where the debtor has no loan or lease payments on the automobile. See In re Lane, 394 B.R. 248 (Bankr.D.Mass.2008), In re Young, 392 B.R. 6 (Bankr.D.Mass. 2008), and In re Mati, 390 B.R. 11 (Bankr. D.Mass.2008), while the Maine Bankruptcy Court reached the opposite conclusion in Coffin. The only circuit court that has addressed this issue ruled that the debtor could deduct ownership expenses for a vehicle he owned outright. See In re Ross-Tousey, 549 F.3d 1148 (7th Cir.2008).

The Trustee urges this Court to adopt the position that a particular expense amount must first be applicable to the debtor before it may be deducted on the means test, arguing, in effect, that "applicable" expense means "actual" expense of the debtor.

Although it is not an easy call, I respectfully disagree with the Trustee, and adopt the reasoning and conclusion of the Seventh Circuit in Ross-Tousey, where the court held that the plain language of the statute clearly differentiates between "applicable" expenses and "actual" expenses, as follows:

In order to give effect to all words of the statute, the term "applicable monthly expense amounts" cannot mean the same thing as "actual monthly expenses." Under the statute, a debtor's "actual monthly expenses" are only relevant with regard to IRS's "Other Necessary...