Joseph Bledsoe, III v. Cheryl CookJoseph Bledsoe, III v. Cheryl Cook
On Appeal from the United States Bankruptcy Court for the Eastern District of North Carolina, at Wilmington. Stephani W. Humrickhouse, Bankruptcy Judge. (21-01059-5-DMW)
Argued: May 4, 2023
Decided: June 14, 2023
Before THACKER and HEYTENS, Circuit Judges, and KEENAN, Senior Circuit Judge.
Affirmed by published opinion. Judge Heytens wrote the opinion, in which Judge Thacker and Judge Keenan joined.
TOBY HEYTENS, Circuit Judge:
Can Chapter 13 bankruptcy filers who earn more than the median income use their actual mortgage payments when calculating how much they can afford to pay unsecured creditors? Joining the Sixth and Ninth Circuits, we hold the answer is yes.
I.
In 2021, Robert and Cheryl Cook filed a voluntary petition under Chapter 13 of the Bankruptcy Code. That type of bankruptcy allows individual debtors “to obtain a discharge” so long as they pay their “creditors a portion of [their] monthly income in accordance with a court-approved plan.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 64 (2011). “To determine how much income” debtors are “capable of paying, Chapter 13 uses a statutory formula known as the means test” to calculate debtors’ “disposable income.” Id. (quotation marks omitted).
Thе Cooks calculated their disposable income using Official Form 122C-2. As the form instructs, the Cooks entered the relevant “National and Local Standards” for their monthly costs for food, clothing, utilities, out-of-pocket healthcare, and vehicles.1 The Cooks next listed the monthly amounts they pay fоr “Other Necessary Expenses” (as relevant here, taxes and life insurance). Finally, the Cooks recorded two “Deductions for Debt Payments” to secured creditors, including, crucially, their monthly mortgage payment. After subtracting these amounts, the Cooks reported a monthly disposable income of $253.27, which would be used to repay unsecured creditors.
The bankruptcy trustee objected to the Cooks’ proposed Chapter 13 plan. The trustee acknowledged the Cooks followed the instructions on Official Form 122C-2. The trustee maintained, however, that the form was wrong because thе Bankruptcy Code only allowed the Cooks to claim the relevant Local Standards amount for their “Mortgage/Rent” deduction ($1,098) rather than their actual monthly payment ($2,233.34). Thus, the trustee reasoned, the Cooks’ plan shortchanged unsecured creditors by $1,135.34 each month.
The bankruptcy court disаgreed. “By correctly filling out Form 122C-2 and listing their entire mortgage payment,” the court stated, the Cooks “followed the plain language of the Bankruptcy Code.” JA 98. The court overruled the trustee‘s objection and confirmed the Cooks’ plan.
The trustee asked the bankruptcy court to certify аn appeal directly to this Court under
II.
We join the Sixth and Ninth Circuits in holding the Chapter 13 means test permits above-median income debtors to deduct the actual costs of their mortgage payments whеn calculating their disposable income. See In re Welsh, 711 F.3d 1120, 1130 (9th Cir. 2013); Baud v. Carroll, 634 F.3d 327, 349 (6th Cir. 2011). We thus affirm.
A.
The relevant statutory provisions—though intricate—are straightforward. Because of the trustee‘s objection, the bankruptcy court could only approve the Cooks’ proposed Chapter 13 plan if the plan made all “projected disposable income” available to unsecured creditors.
We thus turn to Section 707(b)(2). The first provision of subparagraph A—which we will call Clause One—provides:
In considering under paragraph (1) whether the grаnting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor‘s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of [two specified thresholds].
Now apply those rules here. Everyone agrees the mortgage on the Cooks’ house is a “secured debt[].”
B.
The trustee offers a flurry of arguments against this straightforward reading. We are unpersuaded.
In essence, the trustee asserts the critical provision here is Clause Two—specifically, the first sentence of Clause Two‘s five subparts about how to calculate “[t]he debtor‘s monthly expenses.”
The debtor‘s monthly expenses shall be the debtor‘s applicable monthly expense amounts specified under the National Standards and Local Standards issued by the Internal Revеnue Service for the area in which the debtor resides, as in effect on the date of the order for relief[.]
Id. Because the Local Standards contain allowances for “[h]ousing expenses“—and define that term to include “mortgage (including interest),” Internal Revenue Manual § 5.15.1.10.1 (Nov. 22, 2021); see note 1, supra—the trustee insists the Cooks must use the lower, Local Standard number rather than their actual mortgage payment.
The trustee‘s argument fails multiple times over. To start, it violates “the first rule of ... statutory interpretation,” which is: “Read on.” Arkansas Game & Fish Comm‘n v. United States, 568 U.S. 23, 36 (2012). Just two sentences after the language the trustee relies on, Clausе Two states: “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”
The trustee gamely insists the “notwithstanding” clause precludes the Cooks from deducting their actual mortgage payments under Clause Three. But the trustee does not explain how a directive limited to “this clause” (that is, Clause Two) somehow extends to Clause Three. Nor does the trustee clarify how an instruction about “monthly expenses” should apply to Clause Three, which never uses that term.
Making matters worse, the trustee‘s argument also finds no support in the text of Clauses One and Three. Nothing in Clause One says debtors may “reduc[e]” their current monthly inсome “by the amount[] determined under” Clause Three only if that amount turns out to be less than the Local Standard referenced in Clause Two.
The trustee asserts Clause Three merely tells debtors how to calculate their average monthly payments on secured debts but does not authorize debtors to deduct the resulting amount from their gross monthly income. True, nothing in Clause Three itself allows the Cooks to subtract the calculated amounts from their monthly income. But Clause One does. Indeed, Clause One tells debtors to deduct “the amounts determined under” Clause Three from their monthly income in the same sentence and with the same language in which it tells debtors to do the same for Clauses Two and Four. See
The trustee‘s “Clause Threе as calculator” theory faces another problem: It is not obvious why Clause Three would tell debtors to calculate a figure (and how to do it) unless the resulting number had some real-world purpose. Undeterred, the trustee responds that those calculations do have practical effect—they provide the maximum amount the Cooks may deduct if they prove to the bankruptcy court the amount above the relevant Local Standard is “reasonable.” Oral Arg. 4:40-5:04; see id. at 1:07-10. As support for this view, the trustee points to a provision—which we will call Subparagraph B—stating a debtor may “rebut[]” a “presumption of abuse” generated under Subparagraph A “by demonstrating special circumstances” that “justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”
That view comes with its own host of problems. For one thing, saying a debtor may rebut a presumption of abuse by showing special circumstances is different from saying a bankruptcy court may permit deductions for any debts the court concludes are reasonable. What is more, Subparagraph B only allows bankruptcy courts to assess a debtоr‘s special circumstances if their petition is shown to be presumptively abusive under Subparagraph A; it does not alter whether and how much a debtor may deduct for secured debts as a matter of course. And nothing in Clause Three suggests there is “any qualification or limitation on the kind of secured debt that is deducted from current monthly income.” Welsh, 711 F.3d at 1134.
At bottom, the trustee‘s plea for a reasonableness limitation sounds in public policy. Like the Ninth Circuit, we recognize our interpretation of Clause Three means “debtors could make secured payments on luxury or comfort items“—or expensive
“As usual,” however, “there are (at least) two sides to the policy question before us,” and “a rational Congress could reach the policy judgment the statutory text suggests it did.” Niz-Chavez v. Garland, 141 S. Ct. 1474, 1486 (2021). The current statutory regime was introduced in the Bankruptcy Abuse Prevention and Cоnsumer Protection Act of 2005, which sought “to correct perceived abuses of the bankruptcy system.” Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 231 (2010). In particular, the means test “supplants the [previous] practice of calculating debtors’ reasonable expenses on a case-by-case basis“—a regime that “led to vаrying and often inconsistent determinations.” Ransom, 562 U.S. at 65. Because “Congress made a conscious effort to cabin the discretion of bankruptcy judges” by removing the power to determine “what is or is not ‘reasonably necessary,‘” Welsh, 711 F.3d at 1130, 1134 (some quotation marks omitted), we decline to interpret the statute to restore the very power Congress removed.
* * *
The Cooks were entitled to use their average monthly mortgage payments when calculating their disposable income. The order of the bankruptcy court is thus
AFFIRMED.
TOBY HEYTENS
UNITED STATES CIRCUIT JUDGE