Kramer v. Bankowski

505 B.R. 614

Ross KRAMER and Susan Kramer, Debtors.Ross Kramer and Susan Kramer, Appellants,

v.Carolyn A. Bankowski, Chapter 13 Trustee, Appellee.

BAP No. 13–037.

Bankruptcy No. 12–17674–FJB.

United States Bankruptcy Appellate Panel of the First Circuit.

March 3, 2014.

Robert W. Kovacs, Jr., Esq., on brief, Worcester, MA, for Appellants.

Carolyn A. Bankowski, Esq., and Patricia A. Remer, Esq., on brief for Appellee.

Before KORNREICH, TESTER, and FINKLE, United States Bankruptcy Appellate Panel Judges.

FINKLE, Bankruptcy Judge.

The debtors, Ross and Susan Kramer, appeal the bankruptcy court's order sustaining the objection of Carolyn A. Bankowski, chapter 13 trustee, to confirmation of their chapter 13 plan, and ordering the debtors to file an amended plan. For the reasons discussed below, the Panel AFFIRMS.

BACKGROUND

A. Factual Background

The material facts are undisputed. The debtors filed a chapter 13 petition in September 2012. At the time of the bankruptcy filing, the debtors owned real property encumbered by a first mortgage lien held by Everhome Mortgage Co., and a second mortgage lien held by Bank of America/Bank of New York Mellon (“Bank of America”).

On their bankruptcy Schedules I and J, the debtors listed joint income of $9,302.48 and joint expenses of $8,102.56, leaving them “monthly net income” of $1,199.92. They did not list any expense related to the Bank of America mortgage on their Schedule J. In addition to Schedules I and J, the debtors were required to file a Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (“Form B22C”), which indicated that they had above-median income—income greater than the state median income for a household of their size. As above-median income debtors they were required to complete Part IV of Form B22C, which calculated their allowable expense deductions from their income. Such “allowable” expenses for above-median income debtors are those expenses “reasonably necessary” as provided under § 707(b)(2)(A)-(B), the so-called “means test.” In completing this section of the form, the debtors deducted $813.00 for monthly scheduled payments on the Bank of America mortgage. After applying their total allowable monthly expense deductions against their current monthly income, their “monthly disposable income” as reflected on Form B22C was $653.29.

In their chapter 13 plan, the debtors proposed to make monthly payments of $1,200.00 for 60 months, with a projected 24.59 percent dividend to general unsecured creditors. The debtors also proposed to continue making payments on the secured claims of Everhome Mortgage Co. (the first mortgagee) and Fifth Third Bank and Eastern Bank (each the holder of a lien against a vehicle of the debtors). The plan further provided that Bank of America's second mortgage would be stripped off, regular payments on the mortgage loan would cease, and Bank of America would be treated entirely as a general unsecured creditor.

The chapter 13 trustee objected to confirmation of the plan, arguing that it did not meet the best efforts test required under § 1325(b)(1)(B).¹ According to the trustee, the debtors were not entitled to deduct the Bank of America mortgage payment when calculating their disposable income on Form B22C as they did not actually intend to make such payments under their chapter 13 plan. In response, the debtors asserted that although they were stripping off the mortgage and ceasing payments to Bank of America, they were entitled to deduct the second mortgage payment on their Form B22C according to the plain language of § 707(b)(2)(A)(iii)(I) because it was a payment “scheduled as contractually due” to a secured creditor. The debtors cited Morse v. Rudler ( In re Rudler ), 576 F.3d 37 (1st Cir.2009), in which the First Circuit held that a chapter 7 debtor is permitted to deduct mortgage payments under § 707(b)(2)(A)(iii)(I) when calculating disposable income on Form B22C for purposes of means testing, despite the fact that the debtor intended to surrender his home to the mortgagee and would not be making these payments. Moreover, the debtors maintained that they were contributing their projected disposable income to their plan as required by § 1325(b)(1)(B), arriving at that figure by subtracting their monthly expenses listed on their Schedule J from their monthly income shown on their Schedule I. The debtors stressed that the resulting figure represented their true projected disposable income for plan purposes because they did not include the monthly mortgage payment to Bank of America as an expense on Schedule J. They further relied upon In re Marshall, 407 B.R. 1 (Bankr.D.Mass.2009), which extended the reasoning in Rudler to chapter 13 cases on facts similar to those here, allowing chapter 13 co-debtors to deduct payments on a mortgage they intended to strip off under their plan when determining projected disposable income pursuant to § 1325(b)(1)(B).

The bankruptcy court held a hearing on January 31, 2013. At the hearing, the debtors restated their argument that Rudler, as expanded by Marshall, permitted them to claim the mortgage expense on the Form B22C as a contractually due expense on a secured claim despite their intention to strip off Bank of America's lien. The trustee countered that the Supreme Court's rulings in Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), and Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011),² overruled Marshall, and that the majority of courts have agreed that under Lanning and Ransom, this type of expense is not an allowable deduction on the Form B22C when a debtor intends to strip off a lien securing a claim and treat the claim as unsecured.

B. The Bankruptcy Court's Decision

Ultimately, the bankruptcy court agreed with the trustee and concluded that the debtors were not contributing their projected disposable income to their plan, and on July 12, 2013, entered an order sustaining the trustee's objection and ordering the debtors to file an amended chapter 13 plan. In its written decision, the bankruptcy court framed the issue as follows:

Whether the Trustee's objection should be sustained turns on whether Debtors may deduct from their income their monthly mortgage payments to Bank of America under § 707(b)(2)(A)(iii)(I) as incorporated by § 1325(b), notwithstanding the Debtors' intent to treat Bank of America as an unsecured creditor under their plan. Given the interrelation of § 1325 and § 707, the question of whether the Debtors should be permitted to claim this deduction implicates two distinct inquiries. The first is whether the claimed deduction is allowable under the § 707 means test. The second is whether the claimed deduction, even if so allowable, should be excluded from the Debtors' projected disposable income calculation under § 1325. This Court holds that although the Debtors' deduction survives § 707 analysis, it must nevertheless be excluded under the forward-looking calculation of § 1325.

In re Kramer, 495 B.R. 121, 123–24 (Bankr.D.Mass.2013).

With respect to the first inquiry, the bankruptcy court determined that, under the First Circuit's holding in Rudler, the debtors could claim a deduction for scheduled payments on their Bank of America mortgage under § 707(b)(2)(A)(iii)(I). The bankruptcy court reasoned:

[In Rudler ], the First Circuit sided with the vast majority of bankruptcy courts and held that the “plain language of section 707(b)(2) permits a Chapter 7 debtor to deduct payments on a secured debt even when the debtor plans to surrender the collateral underlying that debt.” [Rudler, 576 F.3d] at 45. While Rudler dealt with a planned surrender of collateral rather than the lien-stripping at issue in the instant case, “a determination that [a] claim is unsecured has the same practical effect as a surrender of property to a mortgagee. In both instances, debtors are no longer required to make monthly payments to secured creditors. Accordingly, the decisions involving surrender of secured property are apposite[.]” In re Marshall, 407 B.R. at 4. While the Debtors do not intend to make payments on their Bank of America mortgage loan under the plan, those payments remain scheduled as contractually due as of the bankruptcy filing. The statute unambiguously indicates “that the debtor may deduct all payments owed at the time of the bankruptcy filing [.]” Rudler, 576 F.3d at 48.

Id. at 124.

In so holding, the bankruptcy court rejected the argument asserted by the trustee that the Supreme Court's decisions in Lanning and Ransom require a forward-looking analysis of the debtors' second mortgage payment for purposes of the § 707 means test. Id. The court noted that Lanning 's reasoning turned on the use of the word “projected” in the text of § 1325(b)(1)(B), holding that the presence of the word in the statute demanded a forward-looking approach to assessing a chapter 13 debtor's income. Id. at 125. According to the Lanning Court, the absence of that statutory language from § 707 indicates that a distinction should be made between the § 707 means test and the § 1325 analysis at issue in that case. Id. Thus, the bankruptcy court determined that Lanning 's forward-looking approach should be applied only to chapter 13 calculations of projected disposable income at the time of plan confirmation. Id. at 126.

With respect to the second inquiry, however, the bankruptcy court stated that “while § 707(b) permits the deduction claimed by the Debtors, Lanning requires the exclusion of the deduction at the level of the § 1325(b)(1) projected disposable income calculation.” Id. The court explained:

In chapter 13, courts must apply a forward-looking analysis. “[W]hen a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” Lann...