In re Amidon

423 B.R. 546

In re Harold AMIDON and Yvonne Amidon, Debtors.

No. 09-02445-JDP.

United States Bankruptcy Court, D. Idaho.

February 2, 2010.

Joseph Ammirati, Nampa, ID, Attorney for Debtors.

Kathleen McCallister, Kuna, ID, Chapter 13 Trustee.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Bankruptcy Judge.

Introduction

On August 17, 2009, Debtors Harold and Yvonne Amidon ("Debtors") filed a petition for relief under chapter 13¹ of the Bankruptcy Code. Docket No. 1. The chapter 13 trustee, Kathleen McCallister ("Trustee"), objected to confirmation of Debtors' proposed plan, citing a host of issues. Docket No. 21. However, the parties agree that one, hotly-debated, threshold question must be resolved before the other confirmation issues should be addressed: whether, in calculating Debtors' monthly disposable income, they may deduct certain mortgage expenses on a home which they intend to surrender. See Docket No. 26.

Following a hearing on December 1, 2009, as agreed, the parties submitted a stipulation of material facts and written briefs outlining their legal arguments. Having reviewed the record, the arguments of the parties, and the applicable law, the Court concludes that in determining Debtors' monthly disposable income, they may not deduct mortgage expenses for a home they intend to surrender.²

Facts³

On the same day that Debtors filed their petition, they filed a Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, or Form B22C. Docket No. 5. In this form, Debtors list current monthly income of $6,959 (for an annual income of $83,508), which all parties agree is in excess of the applicable Idaho median income for a two-person household.⁴ From this income, Debtors deducted a number of expenses, including $3,807⁵ representing the total of payments on their first and second home mortgages. By their math, Debtors suggest they have a negative monthly disposable income of $337.

Debtors also filed their proposed chapter 13 plan on August 17, 2009. Docket No. 9. Although Debtors checked the box at the top of their Form B22C indicating that the applicable commitment period was five years, their plan proposes only 36 monthly payments of $1,200.⁶ Under § 4.3 of their plan, Debtors propose to surrender their interest in their primary residence. In their bankruptcy schedules, Debtors indicate that the home has a current value of $350,000, and that it is secured by first and second mortgages with balances of $399,437 and $96,516, respectively.

Trustee contends that in calculating their monthly disposable income, Debtors should not be allowed to deduct the $3,807 mortgage payments on a house which they intend to surrender, and that instead, they should be limited to the $1,012 statutory housing allowance.⁷ With those adjustments, Trustee asserts Debtors' Form B22C would reflect a positive monthly disposable income of $2,458. Debtors disagree with Trustee's position, contending that, under the Code, they may deduct the mortgage payments, and as a result may propose a 36 month plan.

Decision

Trustee does not challenge Debtors' calculations regarding their current monthly income. Rather, Trustee targets Debtors' expense deductions. Trustee insists Debtors' plan cannot be confirmed.

Because Trustee has objected, and Debtors' plan does not propose to pay creditor claims in full, the Court cannot confirm their plan unless it 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." 11 U.S.C. § 1325(b)(1)(B). Although the Code does not define "projected disposable income," it defines "disposable income" as "current monthly income ... less amounts reasonably necessary to be expended" for the support and maintenance of the debtor. 11 U.S.C. § 1325(b)(2). Furthermore, for above-median income debtors, the Code requires that "[a]mounts reasonably necessary to be expended ... shall be determined in accordance with subsections (A) and (B) of section 707(b)(2)[.]" 11 U.S.C. § 1325(b)(3).

Under § 1325(a)(5)(C), a chapter 13 debtor may, under a plan, propose to treat an allowed secured claim by "surrender[ing] the property securing such claim to such holder[.]" In calculating monthly disposable income, bankruptcy courts have split on the propriety of deductions for secured debt payments that will not exist on a "going-forward basis" under a debtor's plan, i.e., when the collateral securing the debt is being surrendered through that plan. See generally Hon. Ray C. Mullins & Elizabeth B. Rose, Perfectly Clear or Clear as Mud? A Review of Selected BAPCPA Consumer Issues, 2008 Norton Annual Survey of Bankr.Law Part II, § 1 n. 23 (collecting cases). This division in authority has been profound in this Circuit.

For example, just prior to Debtors' bankruptcy filing, in a case factually similar to this one, this Court addressed this very issue. See In re Varner, 09.2 I.B.C.R. 52 (Bankr.D.Idaho 2009). In a thoughtful, reasoned decision, Chief Judge Myers ultimately concluded the debtor in that case could deduct payments for secured debt when calculating her disposable income, despite her intention to surrender the property securing the debt and discontinue making payments under her chapter 13 plan. In re Varner, 09.2 I.B.C.R. at 54. In reaching that conclusion, Chief Judge Myers noted that even after the Ninth Circuit decision in Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir.2008), there was arguably room to hold that expenses should be viewed through a forward-looking, rather than historical lens.⁸ In re Varner, 09.2 I.B.C.R. at 54. At least one bankruptcy court had taken that approach, see In re Reyes, 401 B.R. 910, 913-14 (Bankr.C.D.Cal.2009), while another bankruptcy court disagreed, opting for a consistent approach to both the income and the expense side of the calculus. See In re Smith, 401 B.R. 469, 474 (Bankr.W.D.Wash.2008) (noting "it would ... be inconsistent to apply a backward-looking approach to income, yet adopt a forward-looking approach in determining expenses."). Chief Judge Myers found the analysis in Smith to be more persuasive, and reached the same conclusion as that court.⁹ In re Varner, 09.2 I.B.C.R. at 54.

However, following this Court's decision in Varner, the Ninth Circuit issued its decision in Ransom v. MBNA, America Bank, N.A. (In re Ransom), 577 F.3d 1026 (9th Cir.2009). In Ransom, the issue was whether a debtor who owned his auto free and clear of encumbrances or lease obligations could nonetheless take a vehicle ownership deduction when calculating his disposable income. The Ninth Circuit held that he could not, noting how ironic it would be if a debtor were allowed to diminish payments to unsecured creditors based on a fictitious expense that was not incurred by that debtor. Ransom, 577 F.3d at 1026.

Then, shortly thereafter, the Ninth Circuit Bankruptcy Appellate Panel issued its decision concerning the Washington case in which the Panel reversed the bankruptcy court decision in the debtor's favor. Smith, 418 B.R. at 359. In Smith, the majority explained that it would "not read Kagenveama as binding precedent with respect to the calculation of expenses under sections 1325(b)(2) and (b)(3)." Id. at 366. As a result, it reasoned "the [Kagenveama] opinion does not bind us to a rule of how to determine the expenses that must be applied to the income side of the equation, nor does it compel us to impose a symmetry that neglects the reality of the case before us[.]" Id. at 367-68.

In Smith, the majority explained that § 1325(b)(2) and (b)(3) perform distinct functions and must be viewed in sequence. Subsection (b)(2) focuses on what expenses the debtor determines are necessary, and once that is established, subsection (b)(3) governs what amount of those expenses may be deducted from a debtor's current monthly income. Smith, 418 B.R. at 369. Viewed in this manner, these subsections require a two-step inquiry:

[I]f an expense is not reasonably necessary for the debtor's and/or dependants' maintenance and support, the inquiry ends at section 1325(b)(2) as there is no "amount" to determine in section 707(b)(2) via section 1325(b)(3)....

If the expense is reasonably necessary for the debtor's and/or dependants' maintenance and support, then section 1325(b)(3) requires the court to determine the amount in accordance with section 707(b)(2).

Smith, 418 B.R. at 368 (emphasis in original). In Smith, the debtors proposed to surrender two houses and one vehicle. The majority reasoned that by virtue of their decision to surrender that property, the debtors had themselves determined that the associated expenses were not reasonably necessary for their support and maintenance, and as a result, § 1325(b)(3) never came into play.¹⁰

Aside from the amount of property being surrendered and the amounts involved, there are no real factual distinctions between this case and Varner. Indeed, were it not for the Ransom and Smith¹¹ decisions, there would be little reason for this Court to deviate from the teachings of Varner. However, these appellate decisions significantly altered the existing chapter 13 landscape. Is Varner good law after Ransom? Smith indicates the later Ninth Circuit decision compels a re-examination of the issues, and a different result.

At bottom, this Court need not indulge in extensive statutory construction and analysis, since the respective virtues and limitations of the parties' positions have been amply explored in these and other reported decisions concerning this issue. While the analysis in Varner and the dissent in Smith are both highly defensible, under the circumstances, this Court is persuaded to follow the approach taken by the Smith majority.¹² At the end of the day, the Court prefers the common-sense interpretation given to the Code in Smith, an approach that is seemingly encouraged in Ransom,...