In re Martinez

418 B.R. 347

In re Francisco J. MARTINEZ; Melissa J. Stine; Alex Wathen, Debtors Rick A. Yarnall, Chapter 13 Trustee, Appellant Francisco J. Martinez; Melissa J. Stine; Alex Wathen; Haines & Kreiger, LLC, Appellees.

BAP No. NV-08-1332-MoJuH.

BAP No. NV-08-1335-MoJuH.

BAP No. NV-08-1340-MoJuH.

BAP No. Bk. No. 08-14571-BAM.

BAP No. 08-15414-LBR,

BAP No. 08-15133-MKN.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted by Videoconference on May 19, 2009.

Filed October 5, 2009.

Marianne Gatti, Las Vegas, NV, for Rick A. Yarnell.

Before: MONTALI, JURY and HOLLOWELL, Bankruptcy Judges.

OPINION

MONTALI, Bankruptcy Judge:

In cases pending before three different bankruptcy courts, above-median income chapter 13¹ debtors obtained orders valuing and "stripping off" wholly unsecured junior liens against their residences.² The debtors also proposed chapter 13 plans that deducted the expenses associated with those stripped liens from their "disposable income" devoted to plan payments. The chapter 13 trustee objected to confirmation of the three plans, and the three bankruptcy judges held a consolidated hearing on the objections. The bankruptcy judges overruled the objections and entered orders confirming the plans. The chapter 13 trustee appealed each order. We REVERSE without reaching the trustee's good faith objections.³ Our conclusion is reinforced by a persuasive and compelling statement from our own court of appeals just a few weeks ago: "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." Ransom v. MBNA Am. Bank (In re Ransom), 577 F.3d 1026, 1030 (9th Cir. 2009).

I. FACTS

In May 2008, appellees Francisco J. Martinez ("Martinez"), Melissa J. Stine ("Stine"), and Alex Wathen ("Wathen") (collectively, "Debtors") filed separate chapter 13 petitions and filed their respective Statements of Current Monthly Income and Calculation of Commitment Period and Disposable Income ("Form B 22C"). They each filed a motion to value collateral, to strip off liens, and to modify rights of the holders of junior liens on their respective residences, alleging in each instance that no equity existed in the property beyond the secured claim of the holder of the first priority lien. Significantly, in each case, the Debtors alleged that "on the date the instant bankruptcy was filed," no equity existed in the subject properties, and that the affected junior lienholders were "wholly unsecured on the petition date."

In each case, the bankruptcy court entered an order stripping the lien of the junior lienholder, finding that "on the filing date of the instant chapter 13 petition," the claim was "wholly unsecured." The courts therefore ordered that the junior lienholders' "secured claims (sic) is `stripped off' and shall be treated as a `general unsecured claim' pursuant to [section] 506(a) . . .", that each junior lienholders' claim "be reclassified as a general unsecured claim," and that the junior lienholders' "secured rights and/or lien-holder rights in the Subject Property are hereby terminated."

Because the Debtors were above-median income debtors, they calculated their "disposable income" for the purposes of plan payments by utilizing the means test formula set forth in section 707(b)(2)(A)(iii), which allows debtors to deduct from their gross monthly income payments "contractually due to secured creditors." See 11 U.S.C. §§ 1325(b)(3) and 707(b)(2)(A)(iii). In each case, on the Form B 22C, the Debtors deducted from their gross income the amounts due under the relevant contracts with the respective junior lienholders, even though they were not making these payments postpetition and even though they obtained orders stripping off the relevant liens based upon petition date values.

Consequently, Martinez's Form B 22C reflected a negative disposable monthly income of $104.90, even though the disposable income would have been $352.10 a month if the phantom payments to the junior lienholder were excluded from the deductions. Similarly, Stine's Amended Form B 22C reflected a disposable income of $22.50 a month if the payments for the stripped mortgage were deducted. Removing the stripped mortgage payments from the means test calculation leaves Stine's monthly disposable income at $377.50 a month. Wathen's Form B 22C reflected a negative disposable income of $390.67, even though his monthly disposable income would have been $209.33 if the payments on the stripped junior lien were not included in the means test calculation.

Appellant Rick A. Yarnall, the chapter 13 trustee ("Trustee"), objected to confirmation in each of the cases, arguing that the Debtors had failed to devote all of their projected disposable income to payment of unsecured creditors as required by section 1325(b) and that their plans were not proposed in good faith. Following extensive briefing by Trustee and the Debtors, the three assigned bankruptcy judges held a consolidated hearing on the Trustee's objections to confirmation of the Debtors' plans.⁴

Applying Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir.2008), the bankruptcy courts each held that an above-median income debtor's disposable income is determined as of the effective date, and that the fixed formula of the means test under section 707(b)(2) (as incorporated by section 1325(b)(3)) permitted the Debtors to deduct payments to the junior lienholders, even though the Debtors intended to (and did) strip the liens of those lienholders and would not (and did not) make any postpetition payments to those lienholders.

On December 5, 2008, the courts in Martinez's and Stine's cases entered orders confirming the chapter 13 plans and orders overruling the Trustee's objections to confirmation. On December 8, 2008, the court in Wathen's case entered an order confirming the chapter 13 plan. Trustee timely appealed.

We did not consolidate the appeals. Instead we authorized a joint brief from appellees but they did not appear in these appeals.⁵

The case was argued before us on May 19, 2009. On August 14, 2009, the Ninth Circuit issued its Ransom decision.

II. ISSUE

In calculating their disposable income to be paid under their plans, may chapter 13 debtors deduct payments to junior lienholders to whom they will not be making payments under their plans because their liens have been stripped (viz., valued at zero)?

III. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b)(2)(L) and § 1334. We have jurisdiction under 28 U.S.C. § 158.

IV. STANDARD OF REVIEW

The issue presented in these appeals is purely one of law and statutory construction; no factual dispute exists. "We review issues of statutory construction and conclusions of law, including interpretation of provisions of the Bankruptcy Code, de novo." Mendez v. Salven (In re Mendez), 367 B.R. 109, 113 (9th Cir. BAP 2007) (citing Einstein/Noah Bagel Corp. v. Smith (In re BCE W., L.P.), 319 F.3d 1166, 1170 (9th Cir.2003)).

V. DISCUSSION⁶

A. Overview.

Section 1325(b)(1)(B) provides that if a trustee or unsecured creditor objects to confirmation of a chapter 13 plan, the court may not approve the plan unless, as of its effective date, the plan "provides that all of the debtor's projected disposable income to be received in the applicable commitment period 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)(1)(B).

In Kagenveama, the Ninth Circuit held a debtor's "projected disposable income" for the purposes of section 1325(b)(1)(B) is the debtor's "disposable income" as defined in subsection (b)(2) "projected out over the `applicable commitment period.'" Kagenveama, 541 F.3d at 872. The Ninth Circuit specifically rejected the chapter 13 trustee's argument that section 1325(b)(1)(B) requires a forward-looking determination of "projected disposable income."⁷ Id. at 873-74. The Ninth Circuit also rejected the argument that the "disposable income" calculation of section 1325(b)(2) was a presumptive starting point which could be supplemented by evidence of future or actual "finances of the debtor." Id. at 874, overruling Pak v. eCast Settlement Corp. (In re Pak), 378 B.R. 257, 267 (9th Cir. BAP 2007).

Section 1325(b)(2) defines "disposable income" as the debtor's current monthly income less the amounts reasonably necessary to be expended for, inter alia, the support of the debtor and his or her dependents. 11 U.S.C. § 1325(b)(2).⁸ Section 1325(b)(3), however, restricts the ability of a bankruptcy court to determine the "amounts reasonably necessary to be expended" when the debtor has an above-median income.⁹

For a debtor with above-median income, "amounts reasonably necessary to be expended under paragraph (2) . . . shall be" calculated in accordance with section 707(b)(2)(A) and (B). 11 U.S.C. § 1325(b)(3). Section 707(b)(2) is the chapter 7 "means test" provision, and subsection (b)(2)(A)(iii) provides that the debtor's average monthly payments on account of secured debts shall be calculated as the sum (then divided by 60) of

(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and

(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts[.]

11 U.S.C. § 707(b)(2)(A)(iii).

B. The Expenses Are Not Necessary for Debtors' Support.

Holding that Kagenveama requires application of a backward-looking or static measurement of an above-median income debtor's expenses in determining projected disposable income, the bankruptcy courts held...