Spears et al v. Reding

Filing 15

[AMENDED, SEE DOC. 17 FOR PDF.] OPINION. Signed by Honorable Myron H. Thompson on 9/24/2009. (dmn) Modified on 9/24/2009 (dmn).

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA, EASTERN DIVISION

IN RE: SAMUEL A. SPEARS and OLGA P. SPEARS Debtors. SAMUEL A. SPEARS and OLGA P. SPEARS, Appellants, v. CURTIS C. REDING, Appellee.

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CIVIL ACTION NO. 3:09cv31-MHT (WO)

OPINION The appellants (debtors Samuel A. and Olga P. Spears) appeal the decision by the Bankruptcy Court of the Middle District of Alabama that sustained the objection of the appellee (trustee Curtis C. Reding) to confirmation of their Chapter 13 bankruptcy plan. The bankruptcy court

agreed with the trustee that it would be improper to allow the debtors to subtract the full `standard vehicleownership deduction' when that deduction exceeds the

debtors'

actual

vehicle-debt

payment.

Appellate

jurisdiction over this case is proper under 28 U.S.C.A. § 158(a). For reasons that follow, the bankruptcy

court's decision will be vacated and this case remanded. To determine whether the bankruptcy court properly sustained the trustee's objection to the confirmation of the Spearses' Chapter 13 plan, this court must wind its Pursuant to

way through a thicket of bankruptcy law.

Title 11 U.S.C. § 1325, "If the trustee ... objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan­- ... (B) the plan provides that all of the debtor's projected disposable income to be received in the

applicable commitment period ... will be applied to make payments to unsecured creditors under the plan." U.S.C. § 1325(b)(1) (emphasis added.) 11

"`[D]isposable

income' means current monthly income received by the debtor ... less amounts reasonably necessary to be

expended-(A)(i) for the maintenance or support of the

2

debtor

or

a

dependent

of

the

debtor."

11

U.S.C.

§ 1325(b)(2) (emphasis added.)

For above-median-income

debtors (such as the debtors in this case), "[a]mounts reasonably necessary to be expended ... shall be

determined in accordance with subparagraphs (A) and (B) of 707(b)(2)." 11 U.S.C. 11 U.S.C. § 1325(b)(3) (emphasis added.) § 707(b)(2)(A)(ii)(I) expenses shall provides be the that a

"debtor's

monthly

debtor's

applicable monthly expense amount 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...." Allowable deductions for transportation

expenses, such as that claimed by the Spearses for their encumbered vehicle, are laid out in the "Local Standards" of the Internal Revenue Manual (IRM), printed by the Internal Revenue Service (IRS). Courts are split as to how these vehicle deductions should be calculated for an encumbered vehicle. See In

3

re Strickland, 2008 WL 205577 at *2 (Bankr. M.D. Ala. 2008) (Williams, B.J.) ("Courts that have considered this or variations of this issue are divided."). One judicial

camp has determined that debtors may deduct the full IRS allowance for vehicle ownership, regardless of their actual vehicle expense. This understanding is often See, e.g., Del. 2006)

referred to as the "plain language approach." In re Fowler, 349 B.R. 414 (Bankr. D.

(Walrath, B.J.).

The competing camp would find that, in

accordance with the IRM, the Local Standards serve as only a cap on what a debtor may deduct, so that

disposable income is determined based on the debtor's actual expenses. This understanding is often referred to

as the "IRM approach." See, e.g., In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) (Nelms, B.J.). Two appellate cases, In re Tate, 571 F.3d 423 (5th Cir. 2009), and In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008), have held that courts should use the plainlanguage approach in applying § 707(b)(2)(A)(ii)(I).

4

While these cases addressed debtors with unencumbered vehicles, this court believes that their reasoning

applies with equal force to cases, such as the instant one, where the debtors have encumbered vehicles. "Section 707(b)(2)(A)(ii)(I) refers only to `amounts specified' in the Local Standards. It does not incorporate the IRM or

the Financial Analysis Handbook into the statute or even refer to them." In re Tate, 571 F.3d at 427.

Thus, this court agrees with the Spearses that the plain-language approach should be used in interpreting § 707(b)(2)(A)(ii)(I), and, if the sole issue were the application of § 707(b)(2), this court would vacate the bankruptcy court's decision and direct that the Spearses receive the full vehicle deduction allowable under the Local Standards. However, because this is a Chapter 13, and not a Chapter 7, case, this court must return to 11 U.S.C. § 1325(b)(1), which requires that the plan reflect "all of the debtor's projected disposable income," with the

5

result that the is only the

§ 707(b)(2) vehicle-reduction allowance first step in determining "projected

disposable income." these various

In short, in winding its way through bankruptcy provisions, including

§ 707(b)(2), this court has attempted to determine how the bankruptcy court should have ultimately ascertained the Spearses' "projected disposable income." The question therefore arises whether the

determination of "projected disposable income" is merely a "mechanical" operation, so that the bankruptcy court is required to award the full allowable-vehicle deduction under § 707(b)(2) to the Spearses or whether, in

determining

"projected

disposable

income,"

this

calculation is merely preliminary and modifiable at the bankruptcy judge's discretion by reference to the

debtor's actual circumstances. F.3d 258, 261 (5th Cir. 2009). divided on this issue.

See In re Nowlin, 576 The courts are also

See In re Frederickson, 545 F.3d

652, 656 (8th Cir. 2008) ("[T]he differing outcomes of

6

the bankruptcy courts that have examined this issue to date indicate that the language of § 11 U.S.C. § 1325(b) is not at all clear."). This court rejects the mechanical approach to income determination and reads "projected" disposable income to mean "anticipated" income. "[A]n above-median Chapter 13 debtor's `projected disposable income' presumptively

consists of his statutorily defined `disposable income' mechanically projected into the future for the duration of the plan." presumption may In re Nowlin, 576 F.3d at 260. be rebutted during the "This

confirmation

hearing with evidence of present or reasonably certain future events that will affect the debtor's income or expenses." Id. See also In re Frederickson, 545 F.3d at

659 ("[A] distinction can be drawn between a debtor's `disposable income,' which is calculated solely on the basis of historical numbers and regional averages, and a debtor's `projected disposable income,' which necessarily contemplates a forward-looking number. Under this

7

interpretation, bankruptcy courts will continue to have some discretion over the calculations of each individual debtor's financial situation, with the result that the debtor's `projected disposable income' will end up more closely aligning with reality."); In re Lanning, 545 F.3d 1269 (10th Cir. 2008) (noting the judicial conflict over the statutory interpretation of § 1325(b), the court held that "[t]he second reading, i.e., the forward-looking approach, strikes us as the better one"); but see In re Kagenveama, 541 F.3d 868, 874 (9th Cir. 2008) (holding that "no text in the Bankruptcy Code creates a

presumptively correct definition of `disposable income' subject to modification based on anticipated changes in income or expenses."). Therefore, the bankruptcy court here properly

rejected the Spearses' argument that under § 1325(b) they were mechanically, or automatically, entitled to the full vehicle deduction as determined pursuant to In ascertaining the debtors' "projected § 707(b)(2). disposable

8

income," § 1325(b) required the bankruptcy court to view the full-vehicle deduction as merely a presumptive

calculation of disposable income, subject to rebuttal "during the confirmation hearing with evidence of present or reasonably certain future events that will affect the debtor's income or expenses," In re Nowlin, 576 F.3d at 260, so that the "`projected disposable income' will end up more closely aligning with reality." In re

Frederickson, 545 F.3d at 659. Nevertheless, for three reasons, this court cannot uphold the decision of the bankruptcy court to sustain the trustee's objection to the Spearses' plan. First, in

sustaining the trustee's objection, the bankruptcy judge stated that, in order to maintain uniformity within the district, "I am going to follow Judge Williams' decision in Strickland and for the reasons set forth in

Strickland ."

In Strickland, Judge Dwight H. Williams,

Jr., pretermitted reaching the § 707(b)(2) issue and, instead, held that, because "projected disposable income"

9

has a "forward-looking flavor," the debtors' "deduction is inconsistent with their expected costs for ownership over the term of the plan." 205577 at *3. This court rejects the Strickland approach as In re Strickland, 2008 WL

unfaithful to § 1325(b).

Section 1325(b) clearly draws

a distinction between "projected disposable income" and "disposable income." is "the starting The disposable-income calculation which can be rebutted by

point,"

information concerning "changes that have occurred in the debtor's financial circumstances as well as the debtor's actual income and expenses." 659. Frederickson, 545 F.3d at

In other words, the disposable-income calculation § 707(b)(2) calculation) informs the determination. "Such an

(which includes the

projected-disposable-income

interpretation respects the distinction between projected disposable income and disposable income that Congress must have intended based on the differing language." Nowlin, 576 F.3d at 264 (citations omitted). By jumping

10

straight to the projected-disposable-income determination without making the disposable-income calculation

(including the § 707(b)(2) calculation), the bankruptcy court here rendered the disposable-income calculation superfluous and, more importantly, was not informed by it as required by § 1325(b). Second, in its one sentence sustaining the trustee's objection to the Spearses' plan, the bankruptcy court made no findings and offered no reason as to why the Spearses' specific circumstances warranted the rejection. This court therefore cannot tell whether the bankruptcy court exercised the required § 1325(b) discretion at all. Indeed, the fact that the bankruptcy court never made the preliminary disposable-income calculation strongly

suggests that the court acted mechanically (by implying that a debtor's actual vehicle-debt payment will always trump when the full standard vehicle-ownership deduction is higher) rather than in the exercise of its discretion

11

after having considered the totality of the debtors' circumstances. Finally, even if the bankruptcy court did exercise discretion rather than act mechanically, this court would still be unable to determine whether the bankruptcy court exercised its discretion properly, for the current record is void of any findings and detailed reasoning tailored to the overall factual circumstances presented in this case. *** The decision of the bankruptcy court sustaining the objection of the trustee to confirmation of the Spearses' Chapter 13 bankruptcy plan must therefore be vacated and this case remanded so that the bankruptcy court can properly apply § 1325(b) and, in the process, make

§ 707(b)(2) e findings and offer reasons for it action. An appropriate judgment will be entered. DONE, this the 24th day of September, 2009.

/s/ Myron H. Thompson UNITED STATES DISTRICT JUDGE