Stephani W. Humrickhouse, United States Bankruptcy Judge.
The matter before the court is the Bankruptcy Administrator's motion to dismiss this chapter 7 case for abuse pursuant to 11 U.S.C. § 707(b)(1), which turns on two competing interpretations of § 707(b)(2) and Official Form 22A-2, and the propriety of the debtors' means test deductions on Lines 9 and 13 of that form. The Bankruptcy Administrator ("BA") argues that the debtors may deduct only their actual housing and vehicle expenses or the applicable National or Local Standards, whichever is less. Under this view, the presumption of abuse would arise and require dismissal of the case. The debtors counter that their deduction of the standardized IRS allowances in both categories was appropriate, notwithstanding the fact that their actual costs are lower.
A hearing was held in Raleigh, North Carolina on August 7, 2015. After full consideration, and for the reasons set forth below, the court concludes that the debtors' use of the IRS Local Standard allowances for their housing and vehicle exemptions
The debtors, Gabriel Levar and Monte Nichole Jackson, filed a petition under chapter 7 of the Bankruptcy Code on April 6, 2015. Because the Jacksons qualify as above-median income debtors (their current monthly income, as calculated and annualized on Form 22A-1, is higher than the median family income for a family of four in North Carolina), they were required to complete the "Chapter 7 Means Test Calculation" set out in Form 22A-2.
The debtors were required by Form 22A-2 to take certain standard deductions, according to instructions provided in the form:
Form 22A-2 at 2 (emphasis by the court).
The form requires deduction of expenses for some categories (food, clothing, and other items; out of pocket health care allowances) according to the IRS National Standards, while other categories reflect IRS Local Standards, including those at issue here. Specifically, Lines 8 and 9 require that debtor deduct the Local Standard amount for a Wake County family of four for insurance and home operating expenses (Line 8) and for mortgage or rent expenses (Line 9). And, Lines 11 through 15 pertain to transportation and vehicle expenses, again requiring use of the Local Standards. Line 13 provides: "Vehicle ownership or lease expense: Using the IRS Local Standards, calculate the net ownership or lease expense for each vehicle below. You may not claim the expense if you do not make any loan or lease payments."
The debtors complied with these instructions, and completed the form as follows:
Debtors' Mem. of Law in Opp. to BA's Mot. to Dismiss at 14-15 (DE 32) (hereinafter "Debtors' Mem.").
Again, there is no dispute with respect to whether the Jacksons accurately interpreted and complied with the requirements of Form 22A-2; the BA readily agrees that they did so. Nor is there any pending question whether the totality of the debtors' financial circumstances demonstrate that relief under Chapter 7 would constitute an abuse, the BA having stated that absent the development of unforseen circumstances, she does not intend to pursue dismissal under § 707(b)(3). The sole question before this court is whether, as the BA contends, a chapter 7 debtor completing the Means Test is required to deduct the Local Standards or their actual expenses, whichever is less, notwithstanding the form's instructions to the contrary. In this case, that would require the Jacksons to replace their housing deduction of $678 with a deduction of $0, and their vehicle deductions of $406.00 and $426.50 with a deduction of $0. This would in turn give rise to a presumption of abuse, necessitating either dismissal of the case or its conversion to a case under chapter 13.
With these established facts in mind, the court turns to the statutory and policy-based underpinnings of both parties' arguments.
The starting point is 11 U.S.C. § 707(b)(1), which provides in relevant part that the court "may dismiss a case filed by an individual debtor under this chapter ... if it finds that the granting of relief would be an abuse of the provisions of this chapter." The statute goes on to establish the "means test" in § 707(b)(2), which provides, in relevant part, as follows:
11 U.S.C. §§ 707(b)(2)(A)(i)-(iv) (emphasis added).
As the BA acknowledges, the "previously near universal interpretation of 11 U.S.C. § 707(b)(2) ... permitted a debtor to claim the full amount of applicable deductions under the IRS's National and Local Standards on their Means Test regardless of whether the debtor's applicable expenses were lower than the amounts provided in the standards." Mem. in Support of BA's Mot. to Dismiss at 2 ¶ 5 (DE 31) (hereinafter "BA's Mem."). However, she argues, a new line of cases emerging in the wake of the Supreme Court's holding in Ransom v. FIA Card Services, including cases within this district, calls this interpretation into question. Id. (citing Ransom v. FIA Card Services, 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011)). In particular, the BA cites In re Harris, 522 B.R. 804 (Bankr.E.D.N.C.2014) (where debtor's vehicle ownership expense is less than the amount allowed by the IRS Local Standard, the debtor may claim only the lower, actual expense) and In re Fields, 534 B.R. 126 (Bankr. E.D.N.C.2015), which holds that "[w]hen the National and Local Standards are applicable, debtors shall be limited to deducting their actual expenses or the applicable Standard, whichever is less." Fields, 534 B.R. at 140.
In In re Wilkerson, for example, the bankruptcy court held that where an above-median income chapter 13 debtor's actual home ownership and transportation expenses were substantially less than the amounts listed in the IRS Standards, the debtor could claim only her lower, actual expenses for means test purposes, rather than the standard allowance. Pointing out that the Ransom court "expressly declined to reach the question of what amount the debtor could claim as a deduction if the debtor did, in fact, incur an expense in the relevant category but in an amount less than provided for in the relevant IRS Standard," the court elected to side with
More recently, in In re Fields, a chapter 13 case from this district, Judge Warren concluded that a chapter 13 debtor with home mortgage and vehicle loan obligations could not claim housing or vehicle expenses at all. Fields, 534 B.R. at 132. Instead, relying in large part on the "notwithstanding" sentence found in 11 U.S.C. § 707(b)(2)(A)(ii), he concluded, the "calculations under the National and Local Standards are only appropriate when a debtor has an applicable payment that is not in the form of a secured debt (such as a lease payment). Whenever the National and Local Standards are applicable, the Standard operates a cap on the deduction a debtor may take, and if a trustee can show that actual expenses are lower, a debtor will be limited to the actual amount." Id. Noting (as did the Harris court) that this interpretation of § 707 is at odds with the calculations required by Official Form 22C, the court concluded that Form 22C unfortunately does not comply with the language of the statute. Id.
Consistent with this line of reasoning, the BA concludes, the debtors may deduct nothing for home and vehicle ownership expenses on lines 9 and 3 of Form 22A-2. The BA does acknowledge that there is considerable existing authority to the contrary, and also that these cases are emerging in the context of chapter 13, not chapter 7. Still, she reasons, the court "must, regardless of the application, adopt one interpretation of 11 U.S.C. § 707(b)(2)(A)," and she believes the emerging "no deduction" or "actual expenses only" cases to be on the right side of the divide.
On the other hand, the debtor argues that both Ransom and Official Form 22A are entirely consistent with long-established interpretations of the statute, such that the debtors may claim their net housing and vehicle ownership expenses (i.e., the amount remaining after deducting their average monthly mortgage and lease payments from the IRS Local Standard amounts, as required on Form 22A). The debtors choose to focus on that form, and make the following points with respect to it:
Debtors' Resp. in Opp. to Mot. to Dismiss at 1-2 (DE 20). Based on the foregoing, the debtors conclude that by offsetting their actual mortgage and vehicle expenses (the "debts" to which § 707(b)(2)(A)(ii)(I) refers) against the applicable IRS Local Standard amounts provided for "Housing and utilities: Mortgage or rent expenses" and "Vehicle ownership or lease expense," they have both properly construed and fully complied with every provision of the means test.
With respect to cases cited by the BA interpreting the "notwithstanding" sentence to preclude debtors from claiming applicable standard deductions for housing or vehicle expenses if they have secured debts in those categories, the debtors argue that this view negates the purpose for which the means test was established. See Ransom, 562 U.S. at 70, 131 S.Ct. 716 (noting that "Congress intended the means test to approximate the debtor's reasonable expenditures on essential items"); In re Briscoe, 374 B.R. 1, 11 (D.D.C.2007) ("The use of fixed amounts under National and Local Standards relieves the court of the obligation to make largely subjective judgments regarding what is a reasonable expense."). Nor does the form allow any "double dipping": Because Form 22A deducts debtors' expenses for mortgages and vehicle loans from the standard allowances (Lines 9c, 13c, and 13e), those secured debts are factored only once into the means test equation — as "average monthly payments on account of secured debts" under clause (iii) of § 707(b)(2)(A), meaning they are excluded from the applicable monthly expense amounts a debtor "shall" claim under clause (ii). The point of the "notwithstanding" sentence, the debtors emphasize, is simply to require the subtraction of certain debts (i.e., actual amounts owing) from the standardized monthly expenses of the debtor addressed in clause (ii), because those payments are accounted for elsewhere. Under the new line of cases, they conclude, the underlying functionality of "a standardized formula like the means test," which is by its nature both "over- and under-inclusive," is defeated. Ransom, 562 U.S. at 78, 131 S.Ct. 716.
Before embarking on its own discussion, the court confirms its agreement with a position shared by both sides: The rationale underlying the Ransom Court's discussion of expenses a debtor may claim under the IRS National and Local Standards in the context of payments toward a vehicle loan or lease, applies with equal
Id. at *2, quoting In re Sturm, 483 B.R. 312, 324 (Bankr.N.D.Ohio 2012) (construing Ransom, 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603)).
Further, while the means test analysis required by § 707(b)(2) applies on its face to chapter 7 cases, the "applicable monthly expense amounts specified under the National Standards and Local Standards," as well as "the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses" are part of the means test analysis for above-median income chapter 13 debtors as well. 11 U.S.C. § 1325(b)(3). The court can perceive of conceptual differences in the purposes of the means test as between Chapters 7 and 13, but the statutory language of § 707(b)(2) remains the same, so chapter 13 cases discussing that language are instructive in the chapter 7 context as well.
The starting line for the court's analysis is, of course, the language of the statute. That language being set out above, along with the parties' conflicting interpretations of it, this court will pick up precisely where they leave off: The court
A relatively recent bankruptcy court decision out of the Southern District of Illinois covers all these bases, and is worthy of examining at length. In In re Scott, 457 B.R. 740 (Bankr.S.D.Ill.2011), the chapter 13 trustee moved to dismiss under § 707(b) where (as in the instant case) above-median-income debtors sought to claim their full standardized vehicle deductions, although their actual payments were lower.
Turning first to Official Form B22C, the court made a number of telling points:
Id. In a footnote, the court elaborated further, noting that the authority of the Conference to devise the forms comes from 11 U.S.C. § 331, and finally that pursuant to Rule 9009 of the Federal Rules of Bankruptcy Procedure, "the Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate.... The forms shall be construed to be consistent with [the Rules of Bankruptcy Procedure] and the Code." Id. fn.3
The trustee's reading, the Scott court wrote, would require rejection of a portion of the form as "incorrectly designed," based upon a reading of the statute that failed to harmonize its various components. Because § 707(b)(2)(A)(iii) "specifically addresses how secured debt payments are to
This court agrees with the Scott court's analysis and also with the views expressed in Collier, which are that reading the provision to preclude a debtor from claiming housing or transportation ownership expense on grounds that they constitute payments for secured debt, and therefore are excluded by the "notwithstanding" sentence, goes too far. Arguments based on the "notwithstanding" sentence do not withstand "textual or policy scrutiny," Collier states, because the language of that sentence
6 Collier on Bankruptcy ¶ 707.04[3][c] at 707-32 to 707-33 (16th ed., Alan J. Resnick & Henry Sommer, eds.) (emphasis added).
Thus, the better interpretation of the statutory language, which aligns completely with Official Form 22A as drafted and completed by the debtor here, is simply to recognize that the National and Local Standards addressed in clause (ii) include no "debt" because said "debt" is dealt with elsewhere: in clauses (iii) and (iv). So, in implementing the directives set out in clause (ii), the forms expressly deduct the total average monthly payment made by a debtor for "all mortgages and other debts secured by your home," and for amounts contractually due to each secured creditor for debts secured by the vehicles for which a debtor claims an ownership expense; again, these are accounted for in clause (iii). See Official Form 22A-2 lines 9a-9c, lines 13a-13f. An example of this math in action is set out quite plainly in In re Sisler, where the court considered vehicle deductions in a chapter 13 case using Official Form 22C:
That is exactly how the debtors arrived at their deductions in this case: By beginning with the applicable Local Standards for housing and for vehicle ownership and lease expenses, deducting from those amounts the average monthly payments due to secured creditors for their home and two vehicles, and then claiming the difference between those amounts as their housing and vehicle ownership expense. As the district court wrote in Musselman v. eCast Settlement Corp. (In re Musselman), 394 B.R. 801 (E.D.N.C.2008): "Having considered carefully the language of the statute and thoroughly reviewed relevant case law, this court is persuaded that a debtor who has housing or transportation expenses may include the full amount provided by the IRS Local Standards for those expense categories, even when his actual expenses are less than those amounts." Id. at 816 (discussing the "significant divide" among courts regarding application of the Local Standards; though there are "only two basic outcomes, numerous distinct rationales and nuances arise within both lines of cases").
Although some other courts have construed the "notwithstanding sentence" more broadly, this court perceives no grounds upon which it can or should do so. In sum, § 707(b)(2)(A)(i) directs that the amounts by which a debtor's current monthly income is to be reduced must be "determined under clauses (ii), (iii) and (iv), from which this court concludes that by the statute's own self-referential definition, each of those subsections is a "clause" within the meaning of this particular statute and, significantly, the three of them together determine the nature and extent of reductions. In Ransom, the petitioner took this view: "The car-ownership deduction cannot comprise only loan and lease payments, Ransom contends, because those payments are always debts." To this, the Court responded:
Ransom, 562 U.S. at 77, 131 S.Ct. 716.
The Court did not consider the question further because the petitioner made no payments on his car. As the Court explained, "we need not and do not resolve how the `notwithstanding' sentence affects the vehicle-ownership deduction when a debtor has a loan or lease expense." Id. at 78, 131 S.Ct. 716 n. 11. Nor does the court believe that Ransom, considered in a more general sense, can support the BA's position. First, the court notes that the Ransom Court did not consider the exact issue currently before this court, although the parties presented the question:
Id. at 76, 131 S.Ct. 716 n.8.
The Court did, however, discuss the parameters of what makes an expense deduction "applicable" to a particular debtor; i.e., what would make a deduction "appropriate, relevant, suitable or fit." Id. at 69, 131 S.Ct. 716. Here, the court again agrees with Judge Grandy's analysis in Scott: "In light of the Ransom decision, which only authorizes a debtor to claim a vehicle ownership expense deduction if they have a vehicle payment, it seems ridiculous that the Court even undertook to decide what is `applicable' if that section is not even relevant. The Court did not `throw out' lines 28 and 29, as the Trustee suggests that we do." Scott, 457 B.R. at 745-46. The court finds nothing in Ransom to suggest a new, more restrictive approach to the standardized operation of the means test.
Instead, this court has more confidence in the majority view. See, e.g., In re Uhlig, 504 B.R. 916, 920 (Bankr.E.D.WI.2014) ("Courts have consistently held that above-median income chapter 13 debtors are entitled to take the standard deductions, notwithstanding their actual expenses."); In re Christianson, 2015 WL 4761265 (Bankr. D.Or.2015) (chapter 13 debtors may claim full Local Standards expense although actual car payments lower; neither Hamilton v. Lanning nor Ransom require a different result); In re Miranda, 449 B.R. 182 (Bankr.D. Puerto Rico 2011) (same; Hamilton v. Lanning "dealt with the income side of the formula, not the expense side," and Ransom is consistent with debtor claiming standardized exemptions despite lower actual costs); In re Egbert, 384 B.R. 818 (Bankr.E.D.Ark.2008) (debtors may take standard housing and vehicle deductions despite fact that average monthly payments were lower than average).
Finally, the court observes that its conclusions here are in keeping with the policy-based underpinnings of the Bankruptcy Code and, in that respect,
For the foregoing reasons, the court concludes that the Jacksons' applicable monthly expenses for home and vehicle ownership costs, as recorded on Lines 9c, 13 c, and 13e of Official Form 22A-2, appropriately and accurately reflect expenses the Jacksons were required to report under § 707(b)(2)(A). The presumption of abuse does not arise, and the BA's motion to dismiss under § 707(b)(2) therefore is
In re Miranda, 449 B.R. 182, 191-92 (Bankr. D.P.R.2011) (citing cases).
The court went on to outline the Government's discussion of its second rationale, with respect to IRS statements regarding its collection policies and methodologies, the upshot of which is that the Government believes the position it takes in the amicus brief to be consistent with the statute and IRS policies, and also to be "in conformity with the consensus view among the bankruptcy courts and with the view of the Advisory Committee on the Federal Rules of Civil Procedure." Id. at 192-93. Ultimately, the Miranda court wrote, it "agrees with the rationale and analysis taken by the Government in Ransom and determines that a debtor who has expenses lower than the Local Standards may claim the full amount specified in the standards." Id. at 194 & 191-94.
