In re Ragle

• Decision Date: 29 September 2008
• Docket Number: Civil Action No. 3:07-CV-26-KKC.
• Citation: 395 B.R. 387
• Parties: In re Michael J. RAGLE and Tammy J. Ragle, Debtors. Richard F. Clippard, United States Trustee, Appellant, v. Michael J. Ragle and Tammy J. Ragle, Appellees.
• Court: U.S. District Court — Eastern District of Kentucky

395 B.R. 387

In re Michael J. RAGLE and Tammy J. Ragle, Debtors Richard F. Clippard, United States Trustee, Appellant, v. Michael J. Ragle and Tammy J. Ragle, Appellees.

Civil Action No. 3:07-CV-26-KKC.

United States District Court, E.D. Kentucky, Central Division, at Frankfort.

September 29, 2008.

John L. Daugherty, U.S. Department of Justice, Rachelle Cathleen Williams, Office of U.S. Trustee, Lexington, KY, for Appellant.

Julie Ann O'Bryan, Tracy L. Hirsch, O'Bryan Law Office, Louisville, KY, for Appellees.

OPINION AND ORDER

KAREN K. CALDWELL, District Judge.

At issue in this action is whether the United States Bankruptcy Court for the Eastern District of Kentucky erred in determining that, under the bankruptcy "means test," a debtor may deduct from his monthly income "Ownership Costs," for a car he owns free and clear of any debt.

The matter is now before the Court on the Motion for Rehearing (Rec. No. 10) filed by the United States Trustee. In his motion, the Trustee asks the Court to reconsider its Opinion and Order (Rec. No. 9) in which this Court dismissed the Trustee's appeal of the Bankruptcy Court order for lack of jurisdiction.

For the following reasons, the Court will GRANT the motion for rehearing and will AFFIRM the Bankruptcy Court.

I. FACTS.

A. The Means Test for Abusive Bankruptcies.

The Bankruptcy Code (the "Code") authorizes bankruptcy courts to dismiss a Chapter 7 bankruptcy case upon a finding of abuse. Section 707(b) of the Code, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-8, 119 Stat. 23 (Apr. 20, 2005), provides, in pertinent part, the following:

(b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.

11 U.S.C. § 707(b)(1).

Section 707 also provides that the court must presume abuse exists if the debtor's disposable income exceeds a specified amount. The debtor's disposable income is determined by his current monthly income reduced by certain allowed expenses. 11 U.S.C. § 707(b)(2)(A)(I). The provision containing the formula for making this determination is commonly referred to as the "means test" and it was added to the Bankruptcy Code by BAPCPA. If, under the means test, a presumption of abuse applies to a debtor's bankruptcy petition, the debtor may rebut that presumption by demonstrating "special circumstances" under 11 U.S.C. § 707(b)(2)(B). However, even where there is no presumption of abuse or where the presumption is rebutted, the court may still dismiss a case where the debtor's petition was filed in bad faith or the "totality of the circumstances" of the debtor's financial situation demonstrates abuse. 11 U.S.C. § 707(b)(3). See In Re Zaporski, 366 B.R. 758, 762-63 (Bankr.E.D.Mich. 2007).

B. The Deduction for Monthly Expenses under the National and Local Standards.

Specifically at issue in this case is the provision permitting debtors to deduct from their current monthly income:

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.

11 U.S.C. § 707(b)(2)(A)(ii)(I).

The National and Local Standards referenced in the statute are issued by the IRS as part of its Collection Financial Standards and are set forth in a series of tables that are only available on the Internet. The directions for accessing the tables are found in the Financial Analysis Handbook which is contained in the IRS's Internal Revenue Manual (the "IRM"). The IRM can be found on the IRS's website at www. irs.gov/irm. The Financial Analysis Handbook is found at part 5.15.1 of the IRM. The directions for accessing the Local and National Standards tables are contained in Exhibit 5.15.1-2 of the Financial Analysis Handbook.

On the web page where the tables are located, www.irs.gov/individuals/article/0,, id=96543,00.html, the IRS explains that the Collection Financial Standards are used by the IRS to help determine a taxpayer's ability to pay a delinquent tax liability. The page contains the following disclaimer:

IRS Collection Financial Standards are intended for use in calculating repayment of delinquent taxes ... Expense information for use in bankruptcy calculations can be found on the website for the U.S. Trustee Program.

The IRS web page contains a link to the website for the U.S. Trustee Program, www.usdoj.gov/ust/. From the U.S. Trustee Program website, a debtor can access the data required for making the calculations required under the means test including the Local and National Standards in effect at the time the debtors filed their bankruptcy action. The National Standards are a series of tables which contains the following categories of expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. The applicable table depends upon the number of persons in the debtors' home. The applicable expense amount depends upon the debtors' gross monthly income.

As to the Local Standards, the U.S. Trustee Program website explains that these standards published by the IRS consist of two primary expense categories: "Housing and Utilities" and "Transportation." The website further explains that the Transportation Standards consist of two components: the "Operating Costs & Public Transportation Costs" component and the "Ownership Costs" component. At issue here is the Ownership Costs component. On the web page, the U.S. Trustee Program explains that the Ownership Costs are "published on a national basis, by number of cars."

The Ownership Costs table consists of two columns—titled "First Car" and "Second Car"—and one row titled "National." The Ownership Costs table applicable to debtors who filed a bankruptcy action at the time that the Debtors filed their action provided an ownership cost of $471 for the first car and $332 for the second car.

The "Other Necessary Expenses" referenced by the statute are other expenses allowed by the IRS "if they meet the necessary expense test—they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income." Financial Analysis Handbook, § 5.15.1.10. The Financial Analysis Handbook lists specific categories of "other expenses" and describes when those expenses are considered necessary. Financial Analysis Handbook, § 5.15.1.10 at ¶ 3. "The IRS does not promulgate caps for Other Necessary Expenses, but allows the actual expenses incurred for those categories." Wieland v. Thomas, 382 B.R. 793, 798 (D.Kan.2008).

On its web page containing the Collection Financial Standards, the IRS explains that "[t]axpayers are allowed the total National Standards amount for their family size, without questioning the amount actually spent." As to the Local Standards, however, the IRS explains that "[i]n most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less." The IRS also explains that the Local Standards for Ownership Costs consist of "nationwide figures for monthly loan or lease payments."

In the Opinion under review, the Bankruptcy Court determined that the Debtors could deduct from their current monthly income Ownership Costs for their 1987 Honda Accord even though the Debtors owned the car free and clear of any debt. In re Ragle, 2007 WL 1119632, at *4-5 (Bankr.E.D.Ky. March 23, 2007). There was no dispute before the Bankruptcy Court, and there is no dispute here that, with this deduction, the presumption of abuse does not arise with regards to the Debtors' bankruptcy petition. Thus, the Bankruptcy Court denied the Trustee's motion to dismiss which argued only that the petition should be dismissed as abusive under 11 U.S.C. § 707(b)(1).

On appeal, the Trustee argues that the Debtors should not be permitted to deduct Ownership Costs for the Honda because they had no such costs since the car was not subject to a loan or lease payment. The Debtors, on the other hand, argue that a debtor may take the deduction even where he owns his vehicle free and clear of any debt.

This is an issue that has been heavily litigated since the enactment of BAPCPA with a close split among the courts that have addressed it. See In re Sawicki, 2008 WL 410229, at *2 (Bankr.D.Ariz. Feb. 12, 2008); In re Canales, 377 B.R. 658, 662 (Bankr.C.D.Cal.2007) (citing cases). See also In re Brown, 376 B.R. 601, 604-05 (Bankr.S.D.Tex.2007) (stating "[t]he case law is so evenly divided that neither position can fairly be characterized as the majority").

In this judicial circuit, the courts that have addressed this issue have sided with the debtor, allowing him to take the deduction even where he owes no debt on his vehicle. See In re May, 390 B.R. 338 (S.D.Ohio 2008); In re Smith, 2007 WL 1836874, at *6 (Bankr.N.D.Ohio, June 22, 2007); In re Zaporski, 366 B.R. 758, 766 (Bankr.E.D.Mich.2007); In re Billie, 367 B.R. 586, 592 (Bankr.N.D.Ohio 2007); In re Crews, 2007 WL 626041, at *3 (Bankr. N.D.Ohio, Feb. 23, 2007); In re Zak, 361 B.R. 481, 488 (Bankr.N.D.Ohio 2007); In re McIvor, 2006 WL 3949172, at *4 (Bankr.E.D.Mich. Nov. 15, 2006). The Bankruptcy Appellate Panel of the Sixth Circuit has also ruled that the debtor may take the deduction even where he has no debt or lease payment. Hildebrand v. Kimbro (In re Kimbro), 389 B.R. 518, 521 (6th Cir. BAP 2008)(noting that "[a]t least twenty eight published decisions have addressed...