American Express Bank, FSB v. Smith (In Re Smith)

surrender; however, reality of the ma-

jority’s interpretation of the statute is that will have courts the discretion

to make determinations about ex- what “reasonably necessary.”

While I sympathize with the majority’s

desire for a common-sense solution to the

problem created incorporating

means test into 13 above medi-

an-income debtor’s calculation disposa-

ble I do not believe it is the role of judiciary to remedy outcomes that do comport with our view of common (“If

sense. See Id. the changes

imposed by poor poli- BAPCPA arose from

cy choices that produced undesirable re-

sults, it up Congress, courts, not the statute.”).

to amend the

In re Timothy SMITH and Karrie Smith,

A. Debtors. Express Bank,

American FSB; Robert Miller, Jr.,

D. Acting United States

Trustee; Howe, Chapter M. David

Trustee, Appellants,

Timothy and Karrie Smith Smith, Appellees.

A.

BAP Nos. WW-08-1311-MoJuH,

WW-08-1312-MoJuH, WW-

08-1313-MoJuH.

Bankruptcy No. 07-43853-PBS.

United Bankruptcy States Appellate Panel

of the Ninth Circuit.

5,Oct. Weisman, B. A.

William McNeal/Gilbert Malvern, PA, Lee, for American Becket & Bank. Express WA, for Raleigh, Seattle Marjorie S. Trustee. U.S. Vancouver, WA, Pederson, R.

Gerald Howe, David M. trustee.

Stanley Horak, Vancouver, WA, F. faith. In particular, in calculating their Timothy & Karrie Smith. “projected disposable income,” debtors de- (two ducted for collateral houses MONTALI, Before: JURY vehicle) and a which were surrender- HOLLOWELL, Bankruptcy Judges. ing under their plan. Holding that Congress OPINION removed the flex- ibility of courts to consider whether the MONTALI, Bankruptcy Judge: expenses of above-median income debtors In this case we decide issue that has “reasonably necessary” and that many come before throughout courts fixed formula of the means test under sec- country, but not before this Panel or the 707(b)(2) (as incorporated by section United States Court Appeals of 1325(b)(3)) permitted debtors to deduct problem Ninth Circuit. It is a that has they were contractually ob- vexed the bankruptcy bench and bar since ligated to make as of petition date even changed the law was in may 2005: a debt- though they intended to surrender the col- or “deduct” secured debt payments not lateral, the court overruled the being paid because the property has been objections. All three objecting parties ap- surrendered? part company We with sev- pealed. eral of colleagues our and conclude that (b)(2) (b)(3) Subsections of section debtors not take those deductions.1 1325, together, read provide that if аn Our conclusion is persua- reinforced expense is not reasonably necessary for a and compelling sive statement from our dependants’ maintenance and/or court appeals just own a few ago: weeks support, it is not included in the calcu- “Ironic would be indeed to diminish pay- disposable lation of If income. the ex- ments to unsecured in creditors this con- pense reasonably necessary, and the text of a basis fictitious expense not is an debtor, above-median income a debtor.” Ransom v. MBNA incurred (b)(3) requires subsection the court to de- (In Ransom), Am. Bank re termine the amount (9th accordance with Cir.2009). words, In other subsec- trustee, The chapter 13 the United tions require a two- States Trustee and an unsecured creditor inquiry. part objected to confirmation debtors’ chap- plan, ter 132 arguing that debtors had Becаuse we that a bankruptcy believe failed to devote all of “projected their dis- court must consider whether debtors posable income” to payment of unsecured themselves treat “reasonably 1325(b) creditors required by necessary” for dependents’ their and their and that the plan was proposed good not maintenance and support under section separate opinion indicated, In a issuing we are con chapter, 2. Unless otherwise all sec- currently with this one we reach a similar tion and rule Bankrupt- are to the references regarding attempted conclusion deductions Code, 101-1532, cy §§ 11 U.S.C. and to the from income be Procedure, Bankruptcy Federal Rules of ing underlying made because the property has 1001-9037, Rules promulgat- as enacted and zero, leaving any been valued at remaining ed Bankruptcy after the effective date of The wholly no claim more than unsecured. Yar Abuse Prevention Consumer Protection (In Martinez), nall No. NV-08- Martinez 109-8, Act of Pub.L. 119 Stat. 23 2009 WL 3338405 Cir. BAP Oct. ("BAPCPA”). 2009). expense administrative ‍​​‌‌​‌‌​‌‌​‌​‌‌‌‌​‌‌‌‌​​‌​‌​‌‌‌‌‌​​​‌‌‌‌​‌‌​​‌​​‍determining $89 before month. under subsection

“amount” result, this (b)(3), Given we REVERSE. B 22A Form particular, both whether need to decide we do not B showed a current Form 22C rejecting erred bankruptcy court (for $12,906 income of annual objections. good faith agree was in $154,872), parties which all median applicable state excess I. FACTS from this income come. Debtors deducted (“Debtors”) Timothy and Karrie Smith $14,655,resulting in a monthly expenses - on No- voluntary chapter petition filed a monthly disposable income of negative also filed 2007. Debtors vember included $1,749.00. Debtors’ Monthly Income of Current $7,185 monthly Statement on two houses payments 22A”). (“Form B they proposed Calculation to sur- Means Test and a vehiсle which (“UST”) chap- their States Trustee to section of pursuant After the United render resulting dispos- plan. the case under section Because the to dismiss ter 13 moved consent, figure, a Debtors 707(b), negative Debtors’ able income was and with five-year plan but propose an order con- not a bankruptcy court entered did plan plan with proposed The con- a six-month chapter case to 13. stead verting the month, unse- providing that for the reasons $889 version order states $4,300.60 for a a total of ruling, “the cured creditors in the court’s oral set forth percent. four yield approximately financial sit- circumstances of the debtors’ abuse, justifying dis- uation demonstrates If on the surrendered consent, or, con- the debtors’ missal deducted, not Debtors could property were chapter 13[.]” version housing allow statutorily allowed claim $1,2453 positivе have a and would ance I re- post-conversion Debtors’ Schedule $4,191. monthly disposable income actual, monthly gross in- projected flected event, the sched pay Debtors could $10,417, payroll deductions of come of less in full debt4 over uled unsecured $7,607. $2,810, a net income of (if ap income were disposable months all sup- I reflects that Debtors Schedule also month) inor full plied plan to the each aged 15 and under. port three children (if applied less 60 months Debtors over re- Schedule J post-conversion Debtors’ income to the than half of their amount of living expenses flected month). each plan $6,718. Chapter Debtors also filed their Monthly Income Bank, (“Amex”), 13 Statement Current Express American FSB Period and Calculation of Commitment chapter 13 trustee the UST and the (“Form 22C”), (“Trustee”)5 B Disposable (collectively, “Appellants”) Income plan. financial infor- of Debtors’ objected which contained same to confirmation if did not They in their Form B contended that Debtors mation as that disclosed property 22A, payments for surrendered that Form B included a deduct except 22C brief, ority credit card debts and claims reflects five According opening to Debtors' $2,100 currently renting a house for bill. one medical month. chapter Forsythe 13 trustee 5.Karla was $101,256.00 in unse- 4. Debtors scheduled filed; appeal on Feb- when the was notice however, debt, does cured debt. This 2009, ruary we entered an order substitut- deficiency follow- include whatever remains ap- ing trustee David M. Howe as successor ing houses and the vehi- surrender of the two pellant. nonpri- schedule of unsecured cle. Debtors' their calculating monthly disposable when findings of fact and conclusions of law. pay Debtors wоuld be able to Smith, (Bankr. See In re 401 B.R. 469 percent dividend to all creditors.6 W.D.Wash.2008). Amex and the UST filed Both the UST and Amex asserted timely notices of appeal on November plan proposed good Debtors’ was not 2008, commencing BAP Nos. 08-1311 and (thus 1325(a)(3)) faith violating section 1312, respectively. predecessor Trustee’s that the deduction of surren- filed a appeal notice of on November dered contrary Congress’ collateral was 2008, commencing BAP No. 08-1313.7 in enacting intent BAPCPA. con- Trustee No order confirming plan Debtors’ has tended that section requires a entered, been so the order on appeal court to determine whether an interlocutory. February On we “reasonably necessary” and that section sponte sua entered an order granting Ap- 1325(b)(3)’s incorporation of the means test pellants appeal leave tо the interlocutory calculation of section for deter- overruling objections order to confir- mining permissible the “amounts” of ex- mation of Debtors’ plan.8 We penses simply supplements section also allowed Debtors to a joint file brief for replace supersede does not it. The all three appeals. UST contended that section does not the permit deduction of payments The argued case was before us May on by on debts secured property surrendered 14, 2009, 2009. August On the Ninth or to by be surrendered Debtors. Circuit its Ransom issued decision. 14, 2008, On November bankruptcy the II. ISSUE court an overruling Appel- entered order objections In calculating lants’ to their disposable confirmation and a income to memorandum decision setting forth its be paid their plans, may under above- objection, 6.In support of its Amex attached backward-looking determined on a In- basis. stead, three memorandum decisions issued the calculating "projected disposable bankruptcy August come,” court in before the a court must use the "current month- Maney Ninth issued Circuit its decision ly 101(10A), income” as defined in section (In Kagenveama Kagenveama), re requires which consideration of historical (9th Cir.2008). decisions, In those the facts: the debtor’s income based on aver- court held that the means test under age of he or she what earned over the six 707(b) gauge; though is a historical a even preceding petition Postpeti- months the date. collateral, may intend to surrender the adjustments to income are not relevant. underlying "contractually debt is due” on the petition date and could be included as an appeal timely 7. Trustee’s was under Rule expense in the means test That calculatiоn. 8002(a), provides party that which if one files said, bankruptcy the court held that the timely appeal, "any a of party” notice other just "starting point means test was in deter- may appeal file a days notice of within ten of mining projected disposable the amount of appeal. the first of notice income available to unsecured creditors.” Reviewing "projected disposable the income” light significance 8. In pre of the of the issue language 1325(b)(1), bankrupt- of section the appeals, concurrently sented these we are cy required court concluded that courts were issuing appeal a certification for of inter this employ forward-looking to analysis for both Circuit, locutory order to the Ninth as we did expenses, income and for his or her recently in impression. two other cases of first positive resulting and thus cash flow from (In Ransom), Ransom v. MBNA Am. Bank re surrender of collateral had to be allocated (9th 2007); 380 B.R. BAP Cir. Assn. Int'l repayment of unsecured creditors. (In Firefighters, City Vallejo Local 1186 v. Thereafter, City Vallejo), Kagen- Ninth Circuit re held 408 B.R. n. 3 Cir. "projected 2009). veama that is BAP income” V.DISCUSSION 13 debtors deduct chapter median they are surren- for collateral A. Overview dering? 1325(b)(1)(B) if a provides objects to trustee or unsecured creditor III.JURISDICTION plan, chapter confirmation of unless, approve plan court jurisdiction had court The date, plan “provides of its effective 157(b)(2)(L) 28 U.S.C. under disposa- projected that all of the debtor’s under 28 U.S.C. jurisdiction have We applicable received in the ble income 158(a)(3), granted leave to as we have period beginning commitment date interlocutory or- appeal the Appellants to is due under payment the first objeсtions to Debtors’ overruling their der plan applied will be to make plan. chapter 13 plan.” creditors under the unsecured 1325(b)(1)(B). U.S.C. OF REVIEW IV.STANDARD Kagenveama, the Ninth Circuit held ap in these presented The issue disposable income” “projected a debtor’s statutory purely one of law and peals 1325(b)(1)(B) of section purposes construction; dispute factual exists. no “disposable the debtor’s income” as de- statutory construc ‘We review issues out “projected fined in subsection ” law, inter including tion and conclusions ‘applicable period.’ over the commitment Kagenveama, provisions Bankruptcy pretation 541 F.3d at 872. The Ninth (In novo.” Mendez v. Salven Code, rejected specifically de Circuit Mendez), (9th 109, BAP argument B.R. 113 Cir. that section 367 trustee’s 2007) 1325(b)(1)(B) Bagel Corp. v. (citing requires forward-looking a Einstein/Noah (In W., L.P.), in- re BCE “projected disposable 319 F.3d determination of Smith 9 Cir.2003)). (9th Id. 1166, 1170 Thе Ninth Circuit come.” 873-74. issuance, reorgani- Kagenveama’s approval plan and of a of four other mission 9. Since Sometimes as in this case the cred- rejected reasoning zation. appeal have its courts of itors will benefit from the new information. holding. particular, In the Seventh Cir- But in other cases it will be the debtor.... Turner, (7th re 349 cuit held in In 574 F.3d date, which The use of the later is consis- Cir.2009), chapter 13 above-median that a language though statutory the tent with deduct as an income debtor could not it, compelled by is more sensible. mortgage property on that he his (In also v. Peake re Id. at 355. See Nowlin reaching to surrender. its hold- intended Nowlin), Cir.2009) (5th (holding 576 F.3d 258 ing, apply a the Seventh Circuit refused to "projected” disposable permits that ex- mechanical calculation that considers "reasonably of certain” future consideration date, noting рetition that exist on the stating events and that the Circuit em- Ninth appropriate that a mechanical test is for such phasized "disposa- the modified definition of par- determining eligibility proceed under recognizing indepen- ble income” without the chapters. ticular "projected”); significance dent of the word object Chapter a 13 bank- (In Since the of Lanning Lanning), re 545 F.3d Hamilton cert, ruptcy (10th Cir.2008), to balance the need of the debtor filed, petn. 77 1269 for living expenses against (Feb. 2009) to cover his the in- (Supreme Court U.S.L.W. 3449 in recover- requested briefing by terest of the unsecured creditors has the Solicitor Gener- -, (- ing of what the debtor owes them petition as much al the U.S. 129 S.Ct. 288)) possible, (holding we cannot see the merit in L.Ed.2d that 174 information, point calculating chapter throwing undisputed starting out bear- for 13 projected disposable pre- ing can afford to dеbtor’s income is on how much the debtor income, monthly pay, light to be debtor’s current that comes to between the sub- sumed rejected argument also that the “dis- above-median “amounts reason- posable income” calculation of section ably necessary expended to be para- under presumptive (2) was a starting ... graph shall be” calculated in accor- point supplemented by which could be evi- (B). dance with section dence of future or actual “finances U.S.C. Section 874, overruling debtor.” Id. at Pak v. is the chapter 7 provision, “means test” (In Pak), Corp. eCast Settlement re (b)(2)(A)(iii) and subsection provides that (9th 2007). B.R. BAP Cir. average monthly payments on account of secured shall debts be calculat- “disposable defines in- (then 60) ed as the sum divided come” as the debtor’s current (I) the total of all amounts scheduled as come less the reasonably amounts neces- contractually due to secured in for, alia, creditors sary expended inter each month of the 60 months following support of the debtor and or his her de- petition; date of the 1325(b)(2).10 pendents. 11 U.S.C. Sec- 1325(b)(3),however, (II) restricts the abili- any additional to secured ty a bankruptcy court to determine the debtor, creditors for the in reasonably “amounts necessary to be ex- filing plan chapter under 13 of this pended” title, when the debtor has an above- possession maintain of the debt- median income.11 For a debtor primary residence, or’s vehicle, motor subject showing change 548(d)(3) substantial bution” under qual- ato circumstances); (In Coop v. religious Frederickson ified entity or charitable or or- Cir.2008), Frederickson), (as ganization defined - denied, -, 548(d)(4))) rt. U.S. 129 S.Ct. in an amount not to ce exceed 15 (2009) 173 L.Ed.2d (holding percent gross incomе of the debtor for only starting point means test is year in which the contributions are made; determining 13 debtor’s income). (B)if business, final "[T]he calculation can take engaged the debtor is changes into consideration payment have oc expenditures neces- continuation, curred in the debtor's sary financial circumstances preservation, well as the debtor’s operation actual income and of such business. reported as on Schedules I and J.” 1325(b)(3)

Frederickson, provides: 11. Section F.3d (3) reasonably necessary Amounts to be ex- 1325(b)(2) provides: 10. (2), pended paragraph under other than (2) subsection, purposes (A)(ii) For subparagraph (2), this the paragraph shall “disposable term income” means current be determined in subpara- accordance with monthly (A) (B) graphs 707(b)(2), received the debtor and of section if (other support payments, income, than child foster the dеbtor has current payments, disability care payments or multiplied by for a greater when than— dependent (A) child made in accordance with in the case of a debtor in a household applicable nonbankruptcy law to person, the extent family of 1 the median income of expended earner; applicable to be for the State for 1 child) reasonably (B) such less amounts neces- in the case of a debtor in household sary 2, 3, expended- individuals, highest or 4 the medi- (A)(i) support for the maintenance or family applicable an income of the State debtor, dependent the debtor or a family for a of the same number or fewer individuals; support obligation, or for a domestic payable (C) first becomes after the date the in the case of a debtor in a household filed; petition individuals, exceeding 4 highest medi- (ii) (thаt for charitable family contributions an applicable income of the State individuals, meet the definition of "charitable family contri- of 4 or fewer Kagenvea- interprets decision. The court necessary sup- property other the debtor’s de- if requiring symmetry the debtor and such that we port of ma as as collateral for that serves pendents, we look backward to calculate debts[.] secured not look forward to measure ex- should equates doing other- 707(b)(2)(A)(ill). penses.12 The court 11 U.S.C. using two sets of books to ac- wise Bankruptcy Court’s Decision B. The But we company’s count for a finances.13 decision, reasoned thorough In a ultimately disagree reasoning with this be- whether, analyzed court bankruptcy accounting practices have noth- good cause 1325(b) section light Kagenveama, ing to do with the doctrine of stare deсisis 707(b) in- an above-median permit section statutory con- or with the familiar rules of debtor, calculating when come struction. plan, paid income to be under debt even to deduct on secured Kagenveama The Dicta C. does not intend to make

though in the future. The bank- such goes saying It that we must without ruptcy court held that section circuit, binding precedent in our as follow supersedes supplements —not —subsection do bankruptcy court felt must. We when debtors have above-median Kagenveama binding prece- not read comes: respect dent with to the calculation of ex- income,” the term “disposable As with penses under sections necessary reasonably to be ex- “amounts (b)(3). Consequently, only are bound we 1325; §in appears only twice pended” directive to follow Supreme Court’s ‍​​‌‌​‌‌​‌‌​‌​‌‌‌‌​‌‌‌‌​​‌​‌​‌‌‌‌‌​​​‌‌‌‌​‌‌​​‌​​‍then in once in meaning of the of a statute plain words If the were to re- Court unless lead to absurd result.14 requirement that the quire an additional necessary be for a debtor’s expense also the Ninth The issue before Circuit support,” “maintenance or it would like- Kagenveama did not involve either clear di- surplusage wise render as what are proper expenses determination of to how rection (under 1325(b)(2)) or the measure- reasonably “amounts to be ex- (under (b)(3)). ment of them Its pended” shall be determined. only meaningful allusion Smith, 401 B.R. at 474. from income is a refer- passing deducted subsections, any ence to those two without certainly temptation There is thoughtful analysis: affirm the court’s Inc., Enterprises, plus per $575 for each individual 14. U.S. v. Ron Pair 489 U.S. month 242, 1026, 235, 109 S.Ct. 103 L.Ed.2d 290 in excess of 4. (1989) (plain meaning legislation should be Smith, ("After Kagen B.R. at 474 conclusive, 12. See 401 except in rare cases in which liter veama, apply it would also be inconsistent to application produce al of statute will result backward-looking yet approach a to demonstrably at odds with intention of its adopt forward-looking approach drafters; cases, drafters, deter in such intention of mining expenses[.]”). controls); language, rather than strict Lamie 526, 534, Trustee, v. U.S. 540 U.S. 124 S.Ct. 1023, (2004) (when backward-looking approach (applying 13. Id. 157 L.Ed.2d 1024 stat language forward-looking approach plain, to is sole function of to income but a ute's courts, having disposition required expenses "would be similar to a busi- at least where the absurd, employ accounting sys- by text is not is to enforce ness two different statute's terms). tems”). according statute to its

367 (b)(2) “disposable triggers specifically, The revised income” test it. More there analysis is no uses a to determine what ex or discussion whether or how formula operate thе subsections reasonably necessary. are See determine de- 1325(b)(2)-(3). expenses.16 ductible ap 11 U.S.C. This proach represents depar a deliberate It is true that out figuring “projected “disposable ture from the old income” disposable necessarily income” involves calculation, up which was bound with the proper consideration of expenses to sub- circumstances of facts and the debtor’s tract monthly from “current income”. But Winokur, financial affairs. In re 364 the court in Kagenveama struggling was (Bankr.E.D.Va.2007); B.R. 206 In with competing views about how to on, re B.R. Farrar-Johns “projected” define respect with “in- (Bankr.N.D.Ill.2006) (stating come” half equation and was not “[eliminating flexibility point: was the addressing whether the deducted obligations [C]hapter 13 debtors were support.17 subject clear, would be defined stan Thus, while Kagenveama directs us to dards, longer no left to the whim of a “look backward” to define the income to be (internal judicial proceeding”) quotations projected throughout applicable com- omitted). period, mitment it did not address the Kagenveama, 541 (emphasis F.3d definition of expenses or the measurement added).15 Simply put, opinion of them. does not

If those brief statements even rise to the direct how courts are to calculate the “dis- dicta, they binding posable” portion level are still not “projected disposable (income absolutely analysis us because there is no x income” minus expenses tempo- = (b)(3) of whether sections ral period years of three or five amount one, creditors). operate redundantly, albeit or in to paid be to unsecured For sequence, operative only if opinion this reason the does not bind us to footnotеs, (9th Cir.2007) ("we opinion, Elsewhere in the in two 1n. are not bound holding casually analysis, the subsections cited: ‘made are without passing ... uttered in without due consider Disposable income defined as "current alternatives, merely ation of the or where it is monthly income received ... prelude legal to another issue that com reasonably necessary less amounts to be ’ ”), panel’s quot mands the full attention ... 1325(b)(2).... expended[.]” 11 U.S.C. Johnson, ing United States v. 256 F.3d 1325(b)(3) requires that if a debt- (9th Cir.2001); see also Pakootas v. Teck or's annualized current income is Metals, Ltd., Cominco 452 F.3d greater family than the median income of Johnson, (9th Cir.2006) (quoting holding that households, similarly-sized then "amounts statements made without a deliberate consid expended” presented binding eration of the issues are not 707(b)(2). determined in accordance with re-visited). Kagenveama, 541 F.3d at 872 n. 1. replaced holding "projected disposable BAPCPA the old definition of what 17. In in income,” "reasonably necessary” "disposable come” was with a formu- same as approach laic the Ninth Circuit relied on Anderson v. Satter for above-median debtors. (In Anderson), lee sig- 11 U.S.C. This formula Cir.1994) case, (pre-BAPCPA determining nificantly changed way the the in which "dis- "disposable pro posable debtor's income” and then income” is calculated. jecting that sum into the future for the re Id. at 873 n. 2. quired plan). duration of the This is how the Gatos-Saratoga 16. V.S.ex rel. A.O. v. “projected" Los Joint court defined the term within the Dist., High phrase "projected disposable Union School 484 F.3d 1232 income.” 368 Ransom, (emphasis expenses to determine the add-

a rule of how ed). applied to the income side of that must be compel does it us to equation, the nor Analysis D. Two-Part Sections of neglects the reali- symmetry impose 1325(b)(2) (b)(3) ‍​​‌‌​‌‌​‌‌​‌​‌‌‌‌​‌‌‌‌​​‌​‌​‌‌‌‌‌​​​‌‌‌‌​‌‌​​‌​​‍us, viz., that Dеbtors ty the case before statute, may the a debtor Under their extra they did not need decided expenses rea- deduct from income those their two houses. We violate

vehicle or sonably necessary “for the maintenance or by applying interpretation nothing support dependent of the debtor or a that teaches that if statutory the scheme the debtor.” U.S.C. necessary not for a debtor’s an item is 1325(b)(2)(A)(i).19 Thus, we read sec- maintenance, a debtor cannot support or 1325(b)(2) (b)(3) sequence, tions pretending pay fiction of to engage the expense reasonably follows: if an is not for it. necessary depen- for the debtor’s and/or support, inqui- dants’ maintenance and the of the statute even apply We words ry ends at section as there is no doing so leaves with a backward though us “amount” to determine in section lоoking projected disposable definition of otherwise, via Stated (because Kagenveama) and a income corresponding there is no amount to sub- (because definition of which get tract component from statute) takes into plain wording “disposable” what is for the above-median occurring post- account financial realities income debtor. incorporated into a debtor’s petition and citing Kagen- plan.18 Without If the is anywhere in Ran- opinion, veama its dependants’ main- and/or thinking quoted som court our Panel’s support, tenance then very point: this requires the court to determine the amount in accordance with section However, in making that calculation 707(b)(2).20 words, In other sections pay debtors can afford to their [what require two-step creditors], important pay- is is the what inquiry. make, actually that dеbtors ments own, many us, how cars because Turning to the facts before payments that debtors make are what debtors found their two houses and one actually ability pay- unnecessary affect their to make vehicle so to their mainte support they ments to their nance and surrendered them creditors. disappear we 18.While this be labeled a "forward-look- a fixed debt that know will ing” approach expenses, actually Chapter con- plan approved. before the is sideration of "a fixed debt that we know will Id. disappear Chapter plan ap- before the Turner, 1325(b)(2)(B) proved.” Judge 574 F.3d at 356. adds deduction As Posner stated in Turner: from current income for engaged for a debtor in business. [BJankruptcy judges engage must not speculation about the future income or ex- 1325(b)(2) begins 20. This is because section Chapter 13 debtor. That subsection, purpоses "For of this the term delay Chapter would unsettle and 'disposable income' means....” Then subsec- process exaggerate as well as how accurate- (b)(3) begins reasonably ly "Amounts neces- person’s economic in five situation (2) sary expended paragraph years predicted. under shall can be But in this case speculation; there is no all that is at issue is be determined....” decision, They essary to the lenders. made that support for debtor’s and mainte- payments not the court. Thus had no nance. in in

to make. As Ransom a situation 1325(b)(2) therefore re having precisely the same economic effect quires the court to necessity look at the (no there; lien at all no secured debt to as determined the debtor here), pay the court’s words are instruc- real-time, basis, on a forward-looking while tive: 1325(b)(3) incorporates seс —which BAP, As did our we decide this issue 707(b)-requires static, tion backwards- manual, not on the IRS’s but instead on 707(b) looking inquiry, since itself requires read, statutory plainly language, See, analysis. such an e.g., Morse Ru which we believe does not allow a debtor (In Rudler), (1st dler F.3d Cir. (as to deduct an “ownership cost” dis- 2009). Here, 1325(b)(3) does not cost”) tinct from an “operating that the play, come into so we are not bound debtor does not have. An “ownership backwards-looking inquiry. “expense” cost” is not an actual —either applicable exist, or peri- does not This interpretation is consistent —if od. plain with the language of the statute. The Kagenveama Ninth Circuit ac (citation 577 F.3d at 1030 and internal knowledged that language when a statute’s omitted). quotation marks plain, the court should enforce it accord bankruptcy The court believed that Ka- ing to its Kagenveama, terms. genveama requires bankruptcy court to at 872. To the extent that sections apply a “snapshot” petition-date analysis in (b)(3) ambiguous, are this calculating prongs disposable both interpretation avoids an absurd result and come: expenses and income. In other is consistent with the intent of the statute’s words, court felt it could drafters. post-petition consider events deter- Purely expenses historical mining whether which will reasonably are paid never be under or necessary plan for the outside of the support maintenance and (phantom expenses) reasonably of debtors cannot be dependants. and their We dis- because, noted, necessary for a agree support or main- the clear lan- tenance. To guage include them in the calcula- requires of section tion of ignores the dif- ferent functions of support sections and maintenance. In In re (b)(3). (b)(2) Martinez, keyed we Subsection to what holding are necessary; for collateral debtor determines to be stripped that has been of its (b)(3) done, here, once that is value are not subsection necessary support governs expenses, the amounts of these maintenance. not the determination of whether such ex- too, So here. Items that a debtor has place. the first surrendered or intends to surrender are not necessary for his or support her To prove point sections maintenance. The concepts conjoined, are not but —surrender necessity mutually exclusive perform different functions and must be —are one another. Phantom sequence, considered in consider the situa- us)21 surrendered item are not reasonably nec- (admittedly not the case before 21. The hypothetical. dissent refers to our "reliance” on this That is not the case. As noted 1325(b)(2)when calculat- mitted section engaged debtor income

of an above-median 1325(b)(3) however, If, sec- gov- income. ing disposable If section in business.22 deductible, 707(b)(2) 1325(b)(3) as govern are expenses what and section erned tion expenses, of those the amount such ex- opposed to of whether determination in business engaged (as 13 debtors chapter gov- to opposed are as expenses business deduct could not sec- expenses), the amount of erning found in specifically are not expenses those 1325(b)(2)(B) meaningless rendered tion (and incorporat- not thus section expenses are no business there because 1325(b)(3)), though sec- even ed section deduct. 1325(b)(2)(B) permits otherwise tion the error of illustrates foregoing The expenses. Thus we of business dеduction determinations that assuming mechanical allowable to discover are sent (B) 707(b)(2)(A) ap- & must of section Service.23 the Internal Revenue from income debtors re- plied for above-median Revenue Ser- on the Internal Relying reasonably neces- of their actual gardless the an- provide not vice’s handbook does personal for expenses, whether sary all, specific no offers after because swer purposes. business expenses. We for business dollar amounts us, Debtors cannot In the case before debtor to what the necessarily circle back they determine ways. it both Once subject have necessary expenditures, claims as by liens are not assets challenging that certain secured any party-in-interest the debtor those as- necessary, Even surrender of them. reasonableness as amounts spеcific sets, disappear claimed debts Wiegand corresponding there was whether quarrel proper; and there is no from deductions, but when proper they were its need to resort they should be subtracted. formulas of sec- to the mechanical dispatch (B). sug- The dissent & tion analysis of sec- two-prong our

Under restored to the bank- that we have gests (b)(3), a court can tions discretion pre-BAPCPA ruptcy court the debtor to income permit an above-median expenses. reasonable to decide what are expenses per- necessary business deduct 707(b)’s "directly at text, odds analogous test—is simply means we look to in the 1325(b)(2)(B). Id. at 241 to bolster our view under the statute with” section situation con- Kagenveama of the issue before us. not address the does 243. 1325(b)(2)(B)and Form flicts between section monthly Disposable is current 22. B 22C. reasonably necessary to be come less amоunts engaged suggested in busi- above-median debtors expended “if the debtor We ness, expenditures payment for the neces- Stan- Internal Revenue should refer to the continuation, preservation, sary Necessary Expenses” "Other ‍​​‌‌​‌‌​‌‌​‌​‌‌‌‌​‌‌‌‌​​‌​‌​‌‌‌‌‌​​​‌‌‌‌​‌‌​​‌​​‍dards for operation business.” 11 U.S.C. of such Fi- specified in the revenue Service Internal 1325(b)(2)(B). Wiegand Drummond v. See Wiegand, Analysis nancial Handbook. (In Wiegand), B.R. 238 Cir. BAP likely lists as n. 11. resource B.R. at 243 That 2008). debts”, "Unsecured business items "[p]ayments example re- given as with an Wiegand, held that we production such quired of income engaged not deduct business suppliers and on lines payments to purposes expenses for the of calcu- business Int. Rev. needed business....” of credit lating but such current Handbook, Analysis Man. Financial to be deducted from current (available http://www.irs.gov/ 5.15.1.10 calculating “disposable monthly income when irm[). holding, we noted that Form In so incоme.” calculating form for sec- B 22C—which is the non-uniformity. made the decision discretion and Not so—the debtors See Mar they about what assets retained and what White, ianne B. Culhane & Michaela M. they our anal- assets surrendered. Under Catching Can-Pay Debtors: Is the Means ysis the role of the court is Only Way, Test the 13 Am. Bankr.Inst. simply consequences to hold them the (2005); L.Rev. 677-683 Maney v. Ka their decision. (In genveama re Kagenveama), 541 F.3d foregoing disagree For the reasons we Alexander, Cir.2008); 875 In re the decision of the bankruptcy with court. (Bankr.E.D.N.C. 344 B.R. 747-48 2006) (Congress intentionally acted when it VI. CONCLUSION inserted the test means into the calculation reasons, foregoing For we RE- payment plans). 13 VERSE. Circuit,

The Ninth in Kagenveama, de- HOLLOWELL, J., dissenting. clined to “override the definition pro- cess for calculating disposable income un- guise plain meaning Under the of a stat- 1325(b)(2)-(3) § der as being absurd” even utory analysis, majority holds that § if produced a less must be read se- favorable result for quentially, thereby arriving at a “common unsecured creditors. only permits

sense” result which an (9th Cir.2008). above contrast, In the Ninth Cir- median-income debtor to use the means recently determined, cuit Ransom test to calculate expenses the debtor (In Ransom), after MBNA Am. Bank re reasonably demonstrates (9th Cir.2009) F.3d 1026 that in order to necessary. sympathize While I with the reach a result consistent with BAPCPA’s majority’s desire to achieve a common goal ensuring repay that debtors credi- result, agree sense I cannot with its con- possible, tors much statutory analysis. torted 707(b)(2)(A)(ii)(I) § only could be inter- 1325(b)(3) provides when preted “apply” expense standards debtor has an above-median pay cases where in fact debtors such ex- reasonably necessary expenses to be de penses. ducted from сurrent income course, notes, majority Of as the (“CMI”) “shall be” calculated in accor holdings Kagen- somewhat inconsistent (B), § dance with other binding veama and Ransom are not as to wise known as the means test. U.S.C. they the resolution of this case since did added). § (emphasis The word presented not address the issue here Therefore, mandatory. “shall” is However, appeal. majori- I part with the debtor, above-median income ty’s contention that Kagenveama must be calculated under In (Bankr. Farrar-Johnson, statutory analysis B.R. 224 court’s and discussion N.D.Ill.2006). about projected disposable how casually should be calculated was “made

Presumably, Congress believed the analysis,” and without and can be dis- clusion of the means test into the calcula- Instead, I missed as mere dicta. believe tion of an above median-income debtor’s statutory anаlysis undertaken was the through CMI mechanism which im- Kagenveama provides Ninth Circuit goals debtors would meet BAPCPA’s portant guidance interpretation ensuring repay debtors creditors the maxi- (b)(3). judicial mum reducing can afford and reasonably the Ninth Circuit Kagenveama, was “amounts to be ex- confronted, here, pended” shall be determined. interpret as we are 1325(b) ing a subsection of contains Smith, (Bankr. In re 401 B.R. following in a sub imbedded definition W.D.Wash.2008). section. It did not read the sections se “ noted, As another court Rather, court that quentially. the held the states that the amounts determined to be “disposable definition of income” in 1325(b)(2) § reasonably necessary under 1825(b)(2) § gave meaning phrase to the shall be determined in accordance with “projected disposable income” 707(b)(2)(A) § (B) period. and The term — 1325(b)(1)(B). § 541 F.3d at 873. The Ka 1325(b)(3) § ‘reasonably necessary’ in genveama to “de-couple court refused ‘dis not superfluous very is the term that —it posable ‘projected dispos income’ from the reason, this section defines. For that ... simply able income’ calculation to arrive at may courts a separate [not] conduct ‘rea- a more favorable result for unsecured sonably necessary’ analysis beyond creditors, especially plain when the text 707(b)(2):” Smith, § In Bodegom re Van precedent linkage dictate[d] (Bankr.E.D.Wis.2008) B.R. 383 448 two terms.” at Id. (ultimately holding that on sur- rendered collateral are not “scheduled as I agree with the courts that find the contractually due” under 1325(b)(3) § reading most natural “com 707(b)(2)(A)(iii)(I)and, therefore, § cannot application mands of Section be deducted in a debtor’s means test calcu- (B) to determine the lation). meaning ‘reasonably of the amounts neces ” 1325(b)(2) I agree § do not 1325(b)(2). sary § to be expended’ under sequentially should be read amand Burbank, (Bankr. In re 401 B.R. unswayed by majority’s reliance aon D.R.I.2009) (citing Quigley, 391 B.R. hypothetical situation of an above-median (Bankr.N.D.W.Va.2008)). Be engaged sup- debtor business to § cause contains the definition port its contention that this is the correct reasonably necessary of “amounts way to read statute. expended,” give must be read to mean 707(b)(2)(A)(ii) provides that a “debtor’s ing to what is to be deducted above monthly expenses shall be the debtor’s median-income debtor in order to deter applicable monthly expense speci- amounts mine income. bankruptcy The fied under the National Standards and Lo- correctly analyzed § court Standards, cal and the debtor’s actual (b)(3): monthly expenses categories speci- fied as Other Necessary Expenses issued income,”

As “disposable the term [IRS]....” U.S.C. “amounts to bе ex- 707(b)(2)(A)(ii)(I). § 1325; pended” appears only §in twice once in and then in Business are considered Other If the Court were to re- Necessary Expenses specified in the quire requirement an additional that the Analysis IRS Financial Handbook. necessary also for a debtor’s (In Wiegand Drummond v. re Wiegand), support,” “maintenance or it would like- 386 B.R. 243 n. Cir. BAP wise render as surplusage 2008); the clear di- Arnold, In re B.R. 654-55 (Bankr.M.D.Tenn.2Ó07). rection how The IRS Finan- clear, standards, subject Analysis provides for ex- defined no cial Handbook judicial pro- the whim of a necessary production longer left to penses that are (citation omitted)). ceeding” majority The taxpayer of income: substantiates “[i]f contends the discretion of the minimum justifies expense, court, analysis, only under its to hold may be allowed. The payment consequences debtors to the of their deci- of health and welfare expense test and/or sions about what assets retain or production of income must be met....” surrender; however, reality of the ma- Handbook, Analysis Int. Rev. Man. Fin. jority’s interpretation of the statute is (available http://www.irs.gov/ 5.15.1.10 will bankruptcy courts have the discretion irm/). Therefore, an above-median income to make determinations about what ex- engaged in business deduct his “reasonably necessary.” are Necessary Expenses her actual Other (via 1325(b)(3)’s § to reference sympathize majority’s I with the While 707(b)(2)(A)) § long expenses as those desire for a commonsense solution to the necessary. are As a substantiated problem by incorporating created result, require do not business means test into above medi- necessity in separate determination of disposa- an-income debtor’s calculation of majority § as the asserts. Sec-' ble I do not believe it is the role of 1325(b)(2)(B) is not rendered ‍​​‌‌​‌‌​‌‌​‌​‌‌‌‌​‌‌‌‌​​‌​‌​‌‌‌‌‌​​​‌‌‌‌​‌‌​​‌​​‍mean- judiciary remedy outcomes that do apply ingless but continues to to below- not with our view of common comport median income debtors who have business (“If changes at sense. See Id. expenses. from imposed poor poli- BAPCPA arose cy produced choices that undesirable re- statutory analysis put The forth sults, courts, up Congress, it is not the (3) majority, which reads statute.”). to amend the sequentially, essentially language adds to read it is determined “after reasonably necessary, then the amounts

expended shall be determined accor- 707(b)(2).”

dance with Such strained “reasonably

analysis also reads out the

necessary” language calculations under Necessary Ex- for Other

penses. join my colleagues

I cannot in an inter

pretation upends statutory inclu in chapter

sion of the means test re WAAG, Debtor. re Matthew verting pre-BAPCPA judicial back to the discretion as to what of debtor Waag, Appellant, Matthew reasonably necessary. Kagenvea See (deliberate

ma, departure F.3d pre-BAPCPA disposable from the Permann and John calculation was so that debtors would “be DeVonna

Case Details

Case Name: American Express Bank, FSB v. Smith (In Re Smith)

Court Name: United States Bankruptcy Appellate Panel for the Ninth Circuit

Date Published: Oct 5, 2009

Citation: 418 B.R. 359

Docket Number: BAP Nos. WW-08-1311-MoJuH, WW-08-1312-MoJuH, WW-08-1313-MoJuH. Bankruptcy No. 07-43853-PBS

Court Abbreviation: 9th Cir. BAP