In re Lopez

574 B.R. 159

IN RE Ellyn D. LOPEZ, Debtors.

Case No. 16–11072–B–13

United States Bankruptcy Court, E.D. California.

Signed August 30, 2017

Patrick Kavanagh, Bakersfield, CA, for Debtor

MEMORANDUM DECISION REGARDING OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

René Lastreto II, Judge United States Bankruptcy Court

Deanna Hazelton, Esq., appeared on behalf of the chapter 13 trustee, Michael H. Meyer, Esq. Patrick Kavanagh, Esq., appeared on behalf of the debtor, Ellyn D. Lopez (the "Debtor" or "Lopez").

Introduction.¹

The "cobra effect" is the unintended consequence of a blanket rule. The serpent slithers and coils around the allowable expenses debtors may use to determine their "projected disposable income" under 11 U.S.C §§ 1325(b)(2) and 707(b)(2)(A) and (B). When the broad sweep of a rule results in too much "human ingenuity," the cobra effect arises and the serpent strikes. The bankruptcy court then tames the snake, applies the law, and determines whether the debtor or creditor loses. This case shows the importance of the bankruptcy court keeping the keys to the cobra's den.

Background and Findings of Fact.

According to the record in the main docket and the related dischargeability complaint filed by a major unsecured creditor (AP# 16–01073),² the Debtor was propelled into this case by a series of internet financial transactions in 2015.³ The Debtor filed her chapter 13 bankruptcy case on March 30, 2016, with all schedules and a chapter 13 plan. The Debtor has worked as an LVN approximately 11 years for one employer, and now has a second job. From both jobs her gross income totals $6,561 per month, $5,046 after taxes, and her total expenses are $3,631. Her net income is $1,415, which is the amount she proposes as a monthly plan payment.

The Debtor's schedules show that her two young adult sons live with her as dependents, that she owns a home, three vehicles, and few other assets. She pays $775 per month on a loan secured by a first deed of trust encumbering her home with a balance of $53,687. Her home has a fair market value of approximately $190,000. She pays $462 per month on a loan secured by a second deed of trust which secures $86,179.⁴ The Automobile, a 2005 Toyota Highlander, is valued at $10,486. and is encumbered by the Automobile Loan in the amount of $13,586.⁵ The Debtor contends the Automobile is worth less.⁶ The Debtor's average monthly payment on the Automobile Loan over the 60 month term of the plan is $256.38.⁷ The other automobiles are unencumbered and are valued at less than $8,400. Her total personal and household items are valued at $1,400. and her total financial assets, including an annuity, are valued at $28,029.

The Debtor has general and priority unsecured debt. Her non-priority unsecured debt totals $286,971, virtually all of which are debts for personal loans.⁸ The Debtor has priority tax claims for the year 2015 owed to the California Franchise Tax Board in the amount of $9,985 and to the Internal Revenue Service in the amount of $33,730. Apparently both arise from the 2015 withdrawal of $68,225 from her pension fund. Also in 2015, the Debtor closed out six bank accounts which had a total balance of $23,889.

Issues Presented.

1. Whether a debtor has an "applicable amount" for purposes of the Means Test's vehicle-ownership expense deduction when the debt secured by the vehicle is a refinance loan and not a purchase-money loan.

2. Whether the vehicle-ownership expense of § 707(b) is a "cap" or an "allowance."

The Parties' Contentions.

The Debtor contends she has an "applicable amount" for "Means Test" purposes since she is required to make payments on a car loan, notwithstanding that the loan is not a purchase money loan. She also contends that the standard "vehicle ownership expense" is an allowance and available for those debtors with "applicable" expenses.

The chapter 13 trustee, Michael H. Meyer, Esq. (the "Trustee") objects to confirmation of the debtor's proposed chapter 13 plan (the "Objection"), based on the grounds that § 1325(b)(1)(B) requires all of the Debtor's "projected disposable income" to be applied to payments to unsecured creditors under the plan. The Objection hinges on whether payments on the loan (the "Automobile Loan") secured by the Debtor's automobile (the "Automobile") are a deductible "ownership expense." The Trustee's position raises two issues of apparently first impression in the Ninth CircuitB if the Automobile Loan was not used to purchase the Automobile, but instead was an equity loan secured by the Automobile, is the Debtor entitled to use the "vehicle-ownership expense" on Official Form 122C–1 (the "Official Form" or the "Means Test") as a deduction from her projected disposable income? If so, the Debtor's plan payments are sufficient. The second issue is should the amount specified as the vehicle-ownership expense provided for by § 707(b) be treated as a "cap" or as an "allowance?" If a "cap," then the Debtor may deduct only her actual payment. If an "allowance," then the full amount of the "vehicle-ownership expense" may be deducted.

The court is not persuaded by the Trustee's arguments and authority and holds that in this case, the Debtor can use the "vehicle-ownership expense." The court also holds that the "vehicle-ownership expense" is an "allowance" and not a "cap."

There is no disagreement as to the material facts, including that the Debtor properly completed the Official Form. The Trustee argues that the instructions are inconsistent with the Bankruptcy Code and that the Official Form should be completed in a different manner. Because the court is required to interpret the Official Form to be consistent with the Code and Ninth Circuit authority and because this interpretation results in a reasonable conclusion that is not inconsistent with any binding authority, the Objection will be overruled.

Analysis and Conclusions of Law.

In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109–8, Apr. 20, 2005, 119 Stat. 23 ("BAPCPA") was enacted "to correct perceived abuses of the bankruptcy system." Milavetz, Gallop & Milavetz, P.A. v. United States , 559 U.S. 229, 231–32, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010). BAPCPA changed prior law by requiring chapter 13 debtors with incomes that are "above-median" to calculate the amount of disposable income available for repayment of unsecured creditors differently than "below-median" income debtors. After calculating their monthly income, the "above-median" income debtor subtracts expenses and payments on secured debt to arrive at "disposable income" available as a dividend to unsecured creditors. Under BAPCPA, some of the expenses deducted from the debtor's income are actual expenses, while others are drawn instead from an external schedule of "allowable " expenses devised by the Internal Revenue Service. These "allowable" expenses have been deemed by BAPCPA to be "necessary" to the support of the debtor and the debtor's dependents. The "allowable" expenses relevant here are those for transportation.

This "external schedule" is used for both the "presumed abuse" test for chapter 7, and the "projected disposable income" plan payment test in chapter 13. The "external schedule" is a table of expenses developed and updated by the Internal Revenue Service Agency ("National Standards," "Local Standards," or "Standards"). These Standards were developed for use by IRS agents when evaluating offers in compromise from tax payers. The IRS also created guidelines for the agents' use of the Standards. These are set forth in Internal Revenue Manual, Financial Analysis Handbook § 5.15.1.7B5.15.1.10 (the "IRM") https://www.irs.gov/irm/part5/irm_05–015–001.html (all websites last visited August 26, 2017).

The Means Test "result" may cause a chapter 7 bankruptcy case to be dismissed for "presumed abuse,"⁹ or for abuse under the "totality of the circumstances."¹⁰ A chapter 7 or 13 case can be dismissed for bad faith,¹¹ and a chapter 13 plan can be denied confirmation for bad faith¹² or for failure to provide payment of all projected disposable income during the term of the plan.¹³

In the decade-plus since the enactment of BAPCPA, many of the issues that have arisen under § 707(b) have been resolved through statutory amendment and precedential case law. For this reason it should be seldom necessary to go further than the Code, the rules, the Official Form, and case law to decide the presumption of abuse or projected disposable income issues. Likewise, unless it is strictly necessary to do so, resort to the IRM for guidance is seldom appropriate and rarely helpful. Here, the court has found it unnecessary to venture beyond the plain meaning of § 707(b), the Official Form supplemented with corroborating legislative materials, and court decisions.

I. Introduction to the BAPCPA Means Test.

Much has been written about the inner workings of § 707(b)(2) which was implemented as part of BAPCPA, including many published opinions within the Ninth Circuit.¹⁴ In chapter 7 bankruptcy cases debtors turn over all non-exempt property to a chapter 7 trustee for sale and distribution to unsecured creditors and walk away with their exempt property and a fresh start. Prior to BAPCPA, the expenses of all chapter 7 debtors were examined under a "reasonable and necessary" standard. The determination of whether a case had been filed in good faith, or whether granting a chapter 7 discharge would be a "substantial abuse" of the Bankruptcy Code, was delegated by the Code to the discretion of the bankruptcy court.¹⁵ If the court determined that the chapter 7 debtors had, or should have had, a net income that could be devoted in a chapter 13 to repaying creditors, then those debtors were faced with the choice of dismissal of their chapter 7 case or voluntary conversion of their cases to chapter 13. In the case of a chapter 13 reorganization, the issue before the court was whether or not the amount devoted to plan payments was sufficient...