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Ransom v. MBNA, America Bank, N.A.

2010-11 preview of the U.S. Supreme Court

577 F.3d 1026 (9th Cir. 2009), cert. granted, 130 S. Ct. 2097 (April 19, 2010) (No. 09-907)

 In calculating the debtor's "projected disposable income" during the plan period, may the bankruptcy court allow an ownership cost deduction for vehicles only if the debtor is actually making payments on the vehicles?

This case addresses how to calculate disposable income under the Bankruptcy Abuse Prevention and Consumer Protection Act's (BAPCPA) means test. Specifically, the Supreme Court will decide whether an above-median-income debtor who has filed Chapter 13 bankruptcy may claim a vehicle "ownership cost" deduction from the projected disposable income available to pay creditors, even though the debtor owns the vehicle free and clear. While seemingly technical, at stake is whether debtors seeking bankruptcy protection may file under either Chapter 7 or Chapter 13 and whether debtors emerging from bankruptcy will have sufficient income to pay their basic living expenses.

In July 2006, Jason Ransom filed a Chapter 13 bankruptcy petition along with a plan to repay his creditors. As part of his repayment plan, Ransom filed a Statement of Current Monthly Income. Because his total income is above the median income for his household size in his state of residence, the court is required to calculate his disposable income pursuant to a statutory "means" test.  See 11 U.S.C. § 1326(b)(3) (2006). Under the means test, the debtor's disposable income per month is calculated by taking the debtor's total monthly income and subtracting certain statutorily enumerated amounts for various expenses. 11 U.S.C. § 707(b)(2) (2006). Following the Bankruptcy Court's instructions, he claimed $471 per month in vehicle ownership expenses, the established expense deduction for one vehicle. 

One of Ransom's unsecured creditors, MBNA America Bank, objected to Ransom's repayment plan, alleging that he had improperly deducted vehicle ownership expenses from his available income because he owned the car free and clear of any debt.[1]  As a result, the court did not approve the repayment plan because the plan did not provide for payment to his unsecured creditors in full or direct all of his projected disposable income toward repaying such creditors. 11 U.S.C. § 1325(b)(1) (2006).

Ransom appealed the court's rejection of his repayment plan to the Bankruptcy Appellate Panel of the Ninth Circuit, arguing that the bankruptcy code permitted him to take a vehicle ownership expense, regardless of whether he owns his car free and clear. The appellate panel rejected Ransom's argument, but also authorized an appeal to the Court of Appeals for the Ninth Circuit.

On appeal, the Ninth Circuit also rejected Ransom's view. Adopting the reasoning of the Bankruptcy Appellate Panel, the Ninth Circuit concluded that "the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards," 11 U.S.C. § 707(b)(2) (2006) (emphasis added), means only those allowances "capable of being applied." The court rejected Ransom's argument that the difference between the use of the words "applicable" and "actual" in the statute meant that debtors were entitled to deduct the full ownership allowance for a car so long as they owned a car. The Ninth Circuit did not find the difference in language to be dispositive of congressional intent and held that the ownership expense deduction was not "applicable" to Ransom. Since Ransom did not make any payments on his vehicle, he was not permitted to take the deduction in the calculation of his projected disposable income.

The Ninth Circuit also agreed with the Bankruptcy Appellate Panel in observing that the result in this case was not inequitable because there were other safeguards to protect debtors who own their cars free and clear from having their disposable income overstated. For example, debtors could claim an extra $200 in operating expenses if they owned old or high mileage cars free and clear and that courts can grant additional expenses based on a debtor's special circumstances.

Finally, the court agreed with the Bankruptcy Appellate Panel that rejecting Ransom's deduction was most consistent with one of the main policies that led to the BAPCPA: "to ensure that debtors repay as much of their debt as reasonably possible." Ransom v. MBNA Am. Bank, N.A., 577 F.3d 1026, 1032 (9th Cir. 2009) (quoting Ransom, 380 B.R. 799, 807-08 (B.A.P 9th Cir. 2007)). The court found its approach consistent with the purpose underlying the means test because disallowing the deduction would likely result in higher payments to creditors.

Because of a split in the circuits on this issue, the Supreme Court granted the petition for certiorari.

The Bankruptcy Code provides that an above median income debtor's living expenses "shall be" a combination of (1) "the debtor's applicable monthly expense amounts specified under the [Internal Revenue Service's] National Standards and Local Standards" and (2) "the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . ." 11 U.S.C. § 707(b)(2)(A)(ii)(I)(2006). In the bankruptcy context, the standards are used as deductions from the debtor's total monthly income to determine their projected disposable income. For filers with income above their state median, the result determines how much must be paid to unsecured creditors. At issue in the present case are two allowances for vehicles that are included under the IRS Local Financial Standards, which vary by region. The first of these allowances is an allowance for ownership costs (i.e., car loan or lease payments) of up to two cars. The second allowance is for operating costs, which "include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls." Id.

Unfortunately, it is not clear how Congress intended courts to apply the IRS Financial Standards when calculating the debtor's disposable income. The Fifth, Seventh and Eight Circuits treat the reference to the stated allowance as a set amount that debtors may deduct from their total income, considering the correct combination of national and local expenses for their region, family size and number of cars owned, regardless of their actual expenses. In these courts' view, the statutory language referencing the "applicable monthly expense amounts specified under the . . . Local Standards" meant that vehicle ownership costs were determined by selecting the "applicable" costs relevant to the debtor based on the geographic location of the debtor's residence and the number of cars the debtor owned. This method is also consistent with the different statutory framework applicable to debtors with income above median compared with below median. For debtors with below-median income, courts calculate the income available to pay unsecured creditors based on their actual expenses. See 11 U.S.C. § 1325(b)(2)-(3) (2006). This statutory framework suggests that actual expenses are not to be used for above-median debtors subject to the means test. Finally, the Bankruptcy Court forms themselves instruct filers to use this approach.

Alternatively, if Congress is deemed to have incorporated the IRS Financial Standards into the Bankruptcy Code by reference, debtors would be entitled to deduct only actual expenses, or the maximum allowance, whichever is less, just as the IRS does when it is calculating income to recover delinquent taxes. This was the method followed by the bankruptcy court in determining Ransom's disposable income.

Although there are arguments in favor of both possible statutory interpretations, the Supreme Court's recent decision in Milavetz, Gallop & Milavetz, P.A. v. United States, 130 S. Ct. 1324 (2009), may prove instructive. There, despite noting flaws in the statute, the court found it should be interpreted to achieve sensible results. 

The outcome of this case may have serious consequences for consumers struggling to make ends meet, including older people who are still working and are more likely to earn an above-median income. Bankruptcy filings for people 50 and older are increasing at a faster rate than for any other age group, with unaffordable medical expenses often cited as a precipitating cause. Deborah Thorne, Elizabeth Warren and Teresa A. Sullivan, AARP Public Policy Institute, "Generations of Struggle" (PDF) [R1] (2008), available at (discussing increase in bankruptcy petitions filed by people 55 or older from 1991 to 2007). Given the combined effects of the recession and the increasingly unaffordable debt burdens facing older people, having sufficient disposable income to meet their basic living expenses is vital to their well-being and their ability to meet their ongoing financial obligations.

[1] The United States Trustee and Chase Manhattan Bank USA, NA, also filed objections on the same grounds, but only MBNA has continued litigating the issue in Ransom's case.

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