In re Robert Earl WASHBURN, Debtor.
eCast Settlement Corporation, Creditor-Appellant,
v.
Robert Earl Washburn, Debtor-Appellee.
Joyce Bradley Babin, Trustee-Appellant,
v.
Robert Earl Washburn, Debtor-Appellee.
United States Court of Appeals, Eighth Circuit.
*935 William Andrew McNeal, argued, Malvern, PA, for Appellant.
Joyce Bradley Babin, Little Rock, AR, pro se.
P. Matthew Sutko and David A. Levine, DOJ, Washington, DC, Amicus Curiae.
O.C. Rusty Sparks, argued, Little Rock, AR, David Kelly Lester, on the brief, Cabot, AR, for appellee.
Before MELLOY and BENTON, Circuit Judges, and MAGNUSON, District Judge.[1]
MELLOY, Circuit Judge.
Creditor eCAST Settlement Corporation ("eCAST") and Trustee Joyce Bradley Babin (the "Trustee") appeal the bankruptcy court's[2] approval of Debtor Robert Earl Washburn's Chapter Thirteen reorganization plan. The appellants challenge the bankruptcy court's approval of a $471 monthly vehicle-ownership expense for a vehicle that the debtor owns outright and that is not encumbered by a lien. We granted eCAST's motion seeking a direct appeal to our court, and we now affirm the judgment of the bankruptcy court. In doing so, we join the Fifth and Seventh Circuits in construing the plain language of 11 U.S.C. § 707(b)(2)(A)(ii)(I) to permit a debtor with above-median income to claim a vehicle-ownership expense for a vehicle that the debtor owns outright and without encumbrance. In re Tate,
I. General Background
This case involves no disputed facts, and our review relates solely to a question of statutory interpretation. "Because we are reviewing only legal conclusions made by the bankruptcy court, our review is de novo." In re Frederickson,
*936 Washburn has above-median income. See 11 U.S.C. § 1325(b)(3). As such, Chapter Thirteen of the Bankruptcy Code requires that his reorganization plan include payment of his "projected disposable income," id. § 1325(b)(1)(B), to his unsecured creditors for an "applicable commitment period" of sixty months. Id.; see Frederickson,
The term "projected disposable income" is not defined. In a Chapter Thirteen reorganization, courts are to apply the Chapter Seven "means test" to determine "disposable income." 11 U.S.C. § 1325(b)(2)-(3) (defining "disposable income" in part as "current monthly income... less amounts reasonably necessary to be expended" for several purposes, and cross referencing 11 U.S.C. § 707(b)(2)(A) and (B) for determination of some of those "amounts"). As relevant to the presently disputed expense, the Chapter Seven means test contains a further cross reference to Internal Revenue Service ("IRS") National and Local Standards to define "applicable monthly expense amounts":
The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the [IRS's] National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the [IRS] for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent.... Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.
Id. § 707(b)(2)(A)(ii)(I) (emphasis added).
Section 707(b)(2)(A)(ii)(I) separately identifies "applicable monthly expense amounts" and "actual monthly expenses." The vehicle-ownership expense at issue in the present case is one of the "applicable monthly expense amounts" specified in the IRS's Local Standards as a transportation expense. It is undisputed that the separate term, "actual monthly expenses," refers to expenses that the debtor in fact incurs. The question we must resolve in the present case is whether "applicable monthly expense amounts" similarly means an expense that the debtor in fact incurs or whether this term means merely the IRS-designated expense amounts listed as Local Standards applicable in a given geographic region for a debtor's number of vehicles.
Lower courts are split on this issue. See In re Ransom,
II. Fifth and Seventh Circuit Approach
The Fifth and Seventh Circuit Courts of Appeals have addressed this issue and determined that the plain language approach is the better-reasoned mode of analysis. In Ross-Tousey, the Seventh Circuit provided a comprehensive discussion of the statutory text, competing interpretations of the text, competing arguments regarding legislative intent, and policy-based arguments related to the practical consequences of the competing interpretations. See Ross-Tousey,
Having carefully considered the thorough analyses from these circuits and the arguments discussed by bankruptcy appellate panels and district courts that have considered this issue in their appellate capacities, we hold that the plain language approach adopted by the Fifth and Seventh Circuits results in the proper interpretation of 11 U.S.C. § 707(b)(2)(A)(ii)(I). We summarize this approach below and address arguments raised by the present appellants but not fully addressed by the Seventh Circuit in Ross-Tousey.
a. Statutory Text
The Seventh Circuit's analysis of the statutory text emphasized three points. First, the court noted Congress's election to use the separate terms "applicable" and "actual" in close proximity to one another and concluded simply that the two terms should not be deemed synonymous if all the words of the text were to be given effect. Ross-Tousey,
In order to give effect to all the 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 *938 with regard to the IRS's "Other Necessary Expenses;" they are not relevant to deductions taken under the Local Standards, including the transportation ownership deduction. Since "applicable" cannot be synonymous with "actual," applicable cannot reference what the debtor's actual expense is for a category, as courts favoring the IRM approach would interpret the word. We conclude that the better interpretation of "applicable" is that it references the selection of the debtor's geographic region and number of cars.
Ross-Tousey,
b. Legislative Intent and History
The Seventh Circuit noted that Congress had failed to pass an earlier version of the statute that would have expressly incorporated the IRM standards into § 707(b)(2)(A)(ii)(I). Id. at 1159. Instead, Congress ultimately passed the current statutory language that refers only to "amounts specified in the National and Local Standards." Id. (citing H.R. 3150, 105th Congress (1998)). The court stated, "This change indicates Congress's intent that courts not be bound by the financial analysis contained in the IRM and supports the conclusion that courts should look only to the numeric amounts set forth in the Local Standards." Id.
In addition, the court identified the reduction of judicial discretion and the incorporation of "a uniform and readily-applied formula," id. at 1160 (quotation omitted), for performing the means test as important aspects of Congressional intent surrounding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). The court found such intent inconsistent with the implied incorporation of the IRM standards because the IRM standards vest revenue officers with discretion, and use of the IRM standards in the context of the Chapter Seven means test would, necessarily, vest bankruptcy judges with similar discretion. Id.
Further, as noted by a Sixth Circuit Bankruptcy Appellate Panel in In re Kimbro,
Disclaimer: IRS Collection Financial Standards are intended for use in calculating repayment of delinquent taxes. These Standards are effective on March *939 1, 2008 for purposes of federal tax administration only. Expense information for use in bankruptcy calculations can be found on the website for the U.S. Trustee Program.
Id. (quoting http://www.irs.gov/individuals/ article/0,,id=96543,00.html). As such, the court in Kimbro found that the intent of the administrative body that formulated the IRM, as well as legislative intent, supported a refusal to incorporate the IRM into the means test for determination of disposable income. Id. at 526-27.
We, too, have recognized the reduction of judicial discretion as one aspect of Congress's intent surrounding BAPCPA. See Frederickson,
c. Policy Considerations
The court in Ross-Tousey noted that "[d]ebtors who own their cars outright would have ... potential need for vehicle replacement, so ... they are ... entitled to the deduction even though the deduction amount may exceed their actual costs."
To the extent that the appellants argue that the "applicable monthly expense amount" need not be limited to the precise amount of a debtor's vehicle payment but only that such a payment must in fact exist before the vehicle-ownership expense becomes "applicable," the arbitrariness of the result is particularly difficult to accept. *940 Such an approach would permit a debtor with a modest lease or loan payment (or a few remaining payments) to claim the much larger, entire categorical amount for their geographic region under the IRS Local Standards. The unlucky debtor who responsibly paid off his or her vehicle prior to bankruptcy, however, would be denied the same expense. When appellants argue that it would be unfair to creditors and contrary to legislative intent to permit debtors without vehicle payments to claim the expense, then, the purported unfairness and contravention of legislative intent is merely a matter of degree. Whether the claimed expense is, as characterized by appellants, a "phantom expense" or whether it is a categorical expense substantially greater in size than a debtor's vehicle payment, the net effect may be the denial of otherwise available funds to creditors based on application of a categorical rule.
d. Countervailing Arguments
The countervailing arguments and the present appellants' arguments depend largely on broad statements of legislative intent. As described by an Eighth Circuit Bankruptcy Appellate Panel in In re Wilson,
Our case, however, arises under Chapter Thirteen rather than Chapter Seven, and the same issues of presumptive abusive or non-presumptive abuse are not directly in play. Still, the question before us today is how to properly interpret a provision of Chapter Seven, and we do not believe it is appropriate to give § 707(b)(2)(A)(ii)(I) one meaning when applied in a Chapter Seven proceeding and another when applied in a Chapter Thirteen proceeding without a legislative basis for doing so. Accordingly, even though the argument based on BAPCPA's intent to make more funds available to creditors is more compelling in the present case than in Chapter Seven cases such as Ross-Tousey or Tate, we find the Seventh and Fifth Circuits' balancing of competing legislative intentions convincing. Accordingly, we hold that a debtor need not in fact owe a vehicle loan or lease payment to claim a vehicle-ownership expense in accordance with § 707(b)(2)(A)(ii)(I).
III. "Disposable Income" and "Projected Disposable Income"
Our court issued Frederickson after the parties submitted their briefs in the present case, and the appellants subsequently identified Frederickson as supplemental authority. eCAST asserts Frederickson as controlling precedent requiring reversal because Frederickson recognized the existence of judicial discretion in determining *941 projected disposable income,
While eCAST is correct in its characterization of Frederickson as recognizing discretion in determining projected disposable income, the question in Frederickson was different than the question at hand. There, we recognized a distinction between disposable income and projected disposable income. Id. We found the latter to be a forward-looking term rather than merely a mechanically derived and strictly defined term like disposable income. We ultimately recognized the existence of "some" judicial discretion to look beyond disposable income calculations in determining projected disposable income. Id. In doing so, we stated:
Thus, 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 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. This interpretation also comports with the congressional intent that above-median debtors pay the maximum they can afford....
Accordingly, we adopt the view shared by many bankruptcy courts that a debtor's "disposable income" calculation ... is a starting point for determining the debtor's "projected disposable income," but that the final calculation can take into consideration changes that have occurred in the debtor's financial circumstances as well as the debtor's actual income and expenses....
Id. (emphasis added). Subsequently, the Seventh, Fifth, and Tenth Circuits have agreed with our conclusion. See In re Turner,
Neither our opinion in Frederickson nor the other circuits' opinions regarding projected disposable income characterize the discretion under § 1325(b)(1)(B) as unfettered, and none discuss discretion in the context of applying § 707(b)(2)(A)(ii)(I) to calculate disposable income. In Frederickson, we faced no question regarding how to interpret the Chapter Seven provisions expressly incorporated into Chapter Thirteen. Rather, we called the determination of disposable income a process based on "historical numbers and regional averages" and disposable income itself a "starting point" for determining projected disposable income. Frederickson,
In a more recent Rule 28(j) letter citing Nowlin, the appellants urge us to apply Nowlin and other circuit-level cases that agree with Frederickson as separate and independent bases for reversing the bankruptcy court in the present case. The appellants appear to argue that, even if our application of the Chapter Seven means test results in allowance of the $471 categorical expense, we should direct the bankruptcy court to depart from the disposable income "starting point" and disregard this expense when determining projected disposable income.
We are not inclined to do so in the present case for several reasons. First, there is no indication that the parties made any such arguments to the bankruptcy *942 court, and despite the fact that Frederickson is a later-decided case, we believe the appellants needed to make some argument to the bankruptcy court attempting to distinguish projected disposable income from disposable income to now receive relief based on this theory. Further, we are not inclined to appropriate for ourselves in the first instance the fact-intensive analysis required to apply Frederickson and assess the propriety of any such distinction in the present case.
Finally, to the extent it is appropriate to employ a less-mechanistic method for calculating projected disposable income when compared to disposable income, it is by no means clear that attempted prediction of future vehicle-ownership expense could serve as a sufficiently certain basis for departing from the disposable income definition in the present case. We stated in Frederickson that the discretion held by bankruptcy courts was to permit projected disposable income to "more closely align[ ] with reality." Id. at 659. We did not, however, suggest that it would be appropriate to engage in speculation.
In Nowlin, the Fifth Circuit went farther, stating that disposable income "is presumptively the debtor's `projected disposable income' under § 1325(b)(1)(B), but that any party may rebut this presumption by presenting evidence of present or reasonably certain future events that substantially change the debtor's financial situation." Nowlin,
We note that our current holding, coupled with Frederickson, comports with the Seventh Circuit's holdings in both Turner and Ross-Tousey: determination of a vehicle-ownership expense for the purpose of determining disposable income is categorical under § 707(b)(2)(A)(ii)(I), but "some discretion" exists for bankruptcy courts to consider the debtor's actual financial situation in determining projected disposable income for the purpose of § 1325(b)(1)(B). Lasowski recognized that this discretion must be based on reasonably certain future events, and we leave for another day the question of whether the requisite certainty is present when addressing questions of vehicle expenses.
*943 For the foregoing reasons, we affirm the judgment of the bankruptcy court.
MAGNUSON, District Judge, dissenting.
When unsecured creditor eCAST and the bankruptcy Trustee objected to the confirmation of Washburn's proposed Chapter 13 plan in this case, section 1325(b) prohibited the bankruptcy court from confirming that plan "unless, as of the effective date of the plan ... the plan provides that all of the debtor's projected disposable income ... beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. § 1325(b)(2)(B). Because Washburn's plan did not provide that all of his projected disposable income would go to pay unsecured creditors, I believe that the Bankruptcy Court's decision affirming the plan should be reversed.
As the majority acknowledges, there is a split of authority as to the proper reading of the dense and confusingly written Bankruptcy Code with respect to the deduction at issue here. The majority contends that the so-called "plain language approach" requires the Court to define section 707(b)(2)(A)(ii)(I)'s "applicable monthly expense amounts" differently from that section's "actual monthly expenses." I agree with the Ninth Circuit Court of Appeals, however, that the "statutory language, plainly read" mandates a different result. In re Ransom,
a debtor [is not allowed] to deduct an "ownership cost" (as opposed to an "operating cost") that the debtor does not have. An "ownership cost" is not an "expense"either actual or applicable if it does not exist, period. Ironic it would be indeed to diminish payments to unsecured creditors in this context on the basis of a fictitious expense not incurred by a debtor.
Id.
Only this approach comports with Congress's intent in enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-8, 119 Stat. 23, 202-03. The reforms enacted were intended "to ensure that debtors repay creditors the maximum they can afford." H.R. Rep. 109-31(I), at 1, reprinted in 2005 U.S.C.C.A.N. 88, 89; see also supra at 8-9 (citing In re Frederickson,
Accordingly, I dissent.
NOTES
Notes
[1] The Honorable Paul A. Magnuson, United States District Judge for the District of Minnesota, sitting by designation.
[2] The Honorable Audrey R. Evans, United States Bankruptcy Judge for the Eastern District of Arkansas.
[3] At oral argument, the separate appellants offered different explanations as to whether the IRM approach would grant debtors an expense equal to their vehicle payment or whether it merely conditioned use of the categorical expense on the existence of some vehicle payment.
[4] Shortly before oral argument, appellant eCast submitted a letter of authority under Eighth Circuit Rule of Appellate Procedure 28(j) citing Frederickson,
[5] The record reflects that the debtor's vehicle is a 1996 pickup, but does not reflect the condition of the vehicle. It is not the role of an appellate court to speculate as to the debtor's likely need to replace that vehicle in the course of the next sixty months.