In re Smith

401 B.R. 469

In re Timothy J. SMITH and Karrie A. Smith, Debtors.

No. 07-43853.

United States Bankruptcy Court, W.D. Washington, at Tacoma.

November 14, 2008.

COPYRIGHT MATERIAL OMITTED

Stanley F. Horak, Law Office of Stanley F. Horak, Vancouver, WA, for Debtors.

Marjorie S. Raleigh, Thomas A. Buford, US Trustee, Seattle, WA, Recovery Management Systems Corp., Miami, FL, for Trustees.

Christine Ford, Lakewood, WA, for Creditor.

MEMORANDUM DECISION

PAUL B. SNYDER, Bankruptcy Judge.

THIS MATTER came before the Court on October 7, 2008, on objections to confirmation of Timothy and Karrie Smith's (Debtors) Chapter 13 Plan by the Chapter 13 Trustee (Trustee), the United States Trustee (UST) and creditor American Express Bank, FSB (American Express) (collectively referred to herein as "Objecting Parties"). A response was filed by the Debtors. At the conclusion of the hearing, the Court took the matter under advisement. This Memorandum Decision shall constitute Findings of Fact and Conclusions of Law as required by Fed. R. Bankr.P. 7052. This is a core proceeding under 28 U.S.C. § 157(b)(2).¹

I FINDINGS OF FACT

The Debtors filed a voluntary Chapter 7 petition on November 14, 2007. The UST filed a motion to dismiss under § 707(b) on January 24, 2008. On May 6, 2008, the Court orally granted the UST's motion based on the totality of the circumstances under § 707(b)(3). An agreed order was entered on the UST's motion on June 13, 2008.

On June 12, 2008, an order was entered granting the Debtors' motion to convert to Chapter 13. The Debtors filed a Chapter 13 Plan (Plan) on June 19, 2008, that proposes monthly payments of $889 for an applicable commitment period of six months, and an approximate dividend of four percent to creditors. Debtors list a liquidation amount of zero.

On Form 22C, the Debtors calculate their Monthly Disposable Income at negative $1,748.90. On Form 22C, the Debtors claim deductions for two homes and a car that they propose to surrender in their Chapter 13 Plan. These deductions add $7,185 to the Debtors' monthly expenses. If the expenses were disallowed, the Trustee calculates that the Debtors would have $4,191.10 available each month to pay unsecured creditors. Over a 60 month commitment period, such funds would be sufficient to pay all claims in full. The Objecting Parties claim that the Debtors have not committed all of their disposable income for 60 months as required by § 1325(b) and that the Plan has not been proposed in good faith as required by § 1325(a)(3). The issue in this case is whether the Debtors can confirm a Chapter 13 plan that asserts deductions for expenses related to property the Debtors intend to surrender in light of the Ninth Circuit Court of Appeals (Ninth Circuit) decision in In re Kagenveama, 541 F.3d 868 (9th Cir.2008).

II

CONCLUSIONS OF LAW

A. 11 U.S.C. § 1325(b)

The Objecting Parties argue that the Debtors' proposed Plan fails to commit all of their projected disposable income to the Plan for the applicable commitment period.

11 U.S.C. § 1325(b)(1) provides that if the trustee or holder of an allowed unsecured claim objects to confirmation of a plan, the court "may not approve the plan unless, as of the effective date of the plan ... (B) the plan 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)(2) provides, in relevant part:

(2) For purposes of this subsection, the term "disposable income" means current monthly income received by the debtor ... less amounts reasonably necessary to be expended—

(A)(i) "for the maintenance or support of the debtor or a dependent of the debtor ... that first becomes payable after the date the petition is filed."

11 U.S.C. § 1325(b)(3) provides that for an above median debtor, "[a]mounts reasonably necessary to be expended under paragraph (2) ... shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)."

The Objecting Parties argue that in order for the Debtors to deduct the car and home payments, they must first establish under this section that such expenses are for their "maintenance or support." In other words, the Objecting Parties argue that even for an above median debtor, § 1325(b)(2) is a threshold requirement that determines what expenses are allowed. Under their theory, a court would not even consider § 1325(b)(3), unless the expense is first allowed under § 1325(b)(2). According to the Objecting Parties, payments on two homes and a car that the Debtors are surrendering or have surrendered are not allowed expenses in determining disposable income because such expenses are not reasonably necessary for the maintenance or support of the debtors. The position of the Objecting Parties finds support in cases such as In re Gonzalez, 388 B.R. 292, 303 (Bankr.S.D.Tex.2008); In re Spurgeon, 378 B.R. 197, 202 (Bankr. E.D.Tenn.2007); In re McGillis, 370 B.R. 720, 730 (Bankr.W.D.Mich.2007).

The Debtors' position is that an above median debtor is not required to establish that an expense is reasonably necessary for his maintenance and support under § 1325(b)(2). Instead, based on the plain language of § 1325(b)(3), "amounts reasonably necessary to be expended" in determining disposable income are determined solely by reference to § 707(b)(2). The position of the Debtors finds support in cases such as In re Musselman, 394 B.R. 801, 817-19 (E.D.N.C.2008); In re Quigley, 391 B.R. 294, 311 (Bankr.N.D.W.Va. 2008); In re Turner, 384 B.R. 537, 544-45 (Bankr.S.D.Ind.2008).

The interrelationship of these code sections is an issue that currently divides the courts and a topic on which an abundance of case law has been written. Important to this decision is the recent ruling of the Ninth Circuit in Kagenveama. In Kagenveama, the debtor argued that the term "projected disposable income" as used in § 1325(b)(1), "means `disposable income,' as defined by § 1325(b)(2), projected over the `applicable commitment period.'" Kagenveama, 541 F.3d at 871-72. The Chapter 13 trustee took the position that the phrase instead "connotes a forward-looking concept that only uses the `disposable income' calculation as a starting point." Kagenveama, 541 F.3d at 872. The Ninth Circuit agreed with the debtor's interpretation and held that the term "projected disposable income" as used in 11 U.S.C. § 1325(b)(1), means "disposable income," as defined by 11 U.S.C. § 1325(b)(2). Kagenveama, 541 F.3d at 872.

The Objecting Parties are correct that the Kagenveama decision dealt solely with income, and the meaning of the phrase "amounts reasonably necessary to be expended" was not before the Ninth Circuit. The decision is instructive, however, as to the approach the Ninth Circuit is taking in its interpretation of § 1325 post-BAPCPA.

The Ninth Circuit's analysis focused on a basic tenet of statutory construction that, when the statute's language is plain, "`the sole function of the courts— at least where the disposition required by the text is not absurd—is to enforce it according to its terms.'" Kagenveama, 541 F.3d at 872 (quoting Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)). The Ninth Circuit determined that interpreting the statute to require "`disposable income,' as defined in subsection (b)(2), to be projected out over the `applicable commitment period' to derive the `projected disposable income' amount is the most natural reading of the statute." Kagenveama, 541 F.3d at 872.

This Court has reviewed the statutory language of § 1325 and the opposing schools of thought and concludes that the most natural reading of the statute in this case is the one advanced by the Debtors. Although the code sections are not a model of clarity, the Objecting Parties' position misinterprets the plain language of § 1325(b)(2). The plain language of the statute defines "disposable income" as income received by the debtor "less amounts reasonably necessary to be expended." For an above median debtor, as previously stated, § 1325(b)(3) provides: "[a]mounts reasonably necessary to be expended under paragraph (2) ... shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)." (emphasis added). The statute is not ambiguous and for an above median debtor, expenses are to be determined solely by § 707(b)(2). Thus, if a given expenditure is allowed by § 707(b)(2), it is by definition "reasonably necessary to be expended" for purposes of calculating "disposable income" under § 1325(b)(2).

The Court is unwilling to read into the language of § 1325(b)(3) an additional threshold requirement that the expenses also be reasonably necessary, or for a debtor's maintenance or support. Although such an interpretation will surely lead to a more equitable result in this case and in the future provide greater discretion to bankruptcy courts, in light of Kagenveama this Court will not apply a strained interpretation when the language of § 1325(b)(3) is clear and unambiguous.

In concluding that the phrase "projected disposable income" is not a forward-looking concept, the Ninth Circuit also focused on the fact that the term "disposable income" appears only twice in § 1325; once in § 1325(b)(1)(B) ("projected disposable income"), and then in § 1325(b)(2) (defining "disposable income"). Kagenveama, 541 F.3d at 872. The Ninth Circuit concluded that "[t]he substitution of any data not covered by the § 1325(b)(2) definition in the `projected disposable income' calculation would render as surplusage the definition of `disposable income' found in § 1325(b)(2)." Kagenveama, 541 F.3d at 872-73. As with "disposable income," the term "amounts reasonably necessary to be expended" appears only twice in § 1325; once in § 1325(b)(2) and then in § 1325(b)(3). If the Court were to require an additional requirement that the expense also be necessary for a...