Thomas Ruben Reyes and Denise Marie Reyes

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Case 6:08-bk-28740-PC Doc 25 Filed 02/26/09 Entered 02/27/09 10:34:40 Desc
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FILED _ U.S. BANKRUPTCY COURT
ENTERED

UNITED STATES BANKRUPTCY COURT
0 FEB 27 2009

cgittncsner OF canesiINA

CENTRAL DISTRICT OF CALIFORNIA

RIVERSIDE DIVISION
Case No. 6:08-bk-28740-PC

4 Inre:

Chapter 13

AMENDED
MEMORANDUM DECISION

THOMAS RUBEN REYES and
DENISE MARIE REYES,

Date: February 4, 2009

Time: 1:30 p.m.

Place: United States Bankruptcy Court
Courtroom # 304

Debtors. 3420 Twelfth Street

10 _) Riverside, CA 92501

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11 Thomas Ruben Reyes and Denise Maries Reyes (“Debtors”) seek confirmation of their

12 proposed chapter 13 plan. Rod Danielson, chapter 13 trustee (“Danielson”) objects to

13 konfirmation. At the hearing, Pam Lacey appeared for the Debtors and Elizabeth Schneider

14 bppeared for Danielson. The court, having considered the pleadings, evidentiary record, and

15 prguments of counsel, makes the following findings of fact and conclusions of law' pursuant to
16 F.R.Civ.P. 52, as incorporated into FRBP 7052 and applied to contested matters by FRBP

17 p014(c).

18 I. STATEMENT OF FACTS

19 On December 31, 2008, Debtors filed their voluntary chapter 13 petition. In the schedules
20 Filed with the petition, Debtors disclosed real and personal property valued at $385,720. Debtors’
21 ktatement of financial affairs reveals that Debtors had gross income of $108,684 and $104,755 in

22

23 | To the extent that any finding of fact is construed to be a conclusion of law, it is hereby
adopted as such. To the extent that any conclusion of law is construed to be a finding of fact, it is
24 | hereby adopted as such.

2 ly Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the
96 | Bankruptcy Code, 11 U.S.C. §§ 101-1330 after its amendment by the Bankruptcy Abuse and
Consumer Prevention Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005). “Rule” references are to
27 | the Federal Rules of Bankruptcy Procedure (“F.R.Civ.P.”), which make applicable certain
Federal Rules of Civil Procedure (“FRBP”).

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2008 and 2007, respectively. Debtors’ residence valued at $350,000 is encumbered by a first deed
of trust lien held by Community Mortgage Funding securing a debt of $395,000 and a second
Heed of trust lien held by Water & Power Community Credit Union (“W&P”) attributable to a
Hebt of $113,256. W&P’s second deed of trust lien appears to be wholly unsecured. Debtors also
bwe approximately $15,000 on the lease of a 2006 Jeep Liberty. Debtors list 8 creditors in
Schedule F holding unsecured nonpriority claims totaling $53,898 consisting primarily of credit
card debt. There are no unsecured priority claims according to Schedule E.

Debtors’ income is “above median” according to their Form B22C, Chapter 13 Statement

bf Current Monthly Income and Calculation of Commitment Period and Disposable Income

“Form B22C”) filed under penalty of perjury with the petition. As a result, Debtors were
required by § 1325(b)(3) to calculate their expenses pursuant to § 707(b)(2), which resulted in
monthly disposable income under § 1325(b)(2) as a negative number: -$938.25. Debtors’
Schedules I and J tell a different story. Schedules I and J reflected monthly income and expenses
bf $6,671 and $6,071, respectively, with monthly net income of $600. In their plan, Debtors
proposed to pay to Danielson the sum of $600 per month for a period of 60 months, which was
estimated to pay 9 % of allowed unsecured nonpriority claims.

Prior to confirmation, Danielson attacked the following deductions taken by the Debtors in
Form B22C in calculating their current monthly income under the means test:

a. Line # 47(c) — A deduction of $1,124.04 payable to W&P in conjunction with
“Future Payments on Secured Claims;”

b. Line # 48(b) — A deduction of $80.00 payable to W&P in conjunction with “Other
Payments on Secured Claims;” and

c. Line # 28 — A deduction of the full vehicle ownership allowance under the IRS’s
Local Standards.

Danielson objects to confirmation, asserting that Debtors’ proposed plan does not provide for the
payment of all of the Debtors’ projected disposable income during the five-year term of the plan
ns required by § 1325(b). Specifically, Danielson objects to Debtors’ calculation under §

707(b\(2)(A Vili) of (1) a secured debt deduction attributable to a junior lien on the Debtors’

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principal residence which the Debtors intend to value, treat as wholly unsecured, and strip in
conjunction with confirmation of their plan; and (2) the amount of a vehicle ownership allowance
claimed by the Debtors under the Local Standards. According to Danielson, the Debtors must
commit to plan payments of $1,336 per month for a period of 60 months to satisfy the
confirmation requirements of § 1325. Such a plan would pay 33% of allowed unsecured
nonpriority claims in the case.

Il. DISCUSSION
This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(b) and
1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L) and (O).
Venue is appropriate in this court. 28 U.S.C. § 1409(a).

A. Deduction of Secured Debt Payments Attributable to a Stripped Junior Lien.

Danielson argues that the Debtors have no intention of paying W&P’s debt as a secured
claim under their plan, pointing out that Debtors did not list the monthly payment due to W&P in
Kchedule J and that Debtors have filed an adversary proceeding against W&P seeking to “strip” its
lien and determine its claim to be wholly unsecured.’ In response, Debtors argue that the
Heductions at Lines # 47(c) and 48(b) are proper because the amounts owing to W&P were
‘contractually due” on the petition date, citing In re Wilkins, 370 B.R. 815 (Bankr. C.D.Cal.
2006).

Wilkins is not dispositive. Wilkins addressed the issue of whether a chapter 7 debtor can

include mortgage payments in the debtor’s means test calculation, notwithstanding the debtor’s

¥ Valuation does not require the filing of an adversary proceeding. Scott v. Countrywide Home
Loans, Inc. (In re Scott}, 376 B.R. 285, 291 (Bankr. D. Idaho 2007). Valuation pursuant to 11
U.S.C. § 506(a) and FRBP 3012 is a contested matter initiated by the filing of a motion. FRBP
3012. A valuation motion does not seek to avoid a lien nor determine the extent, validity, or
priority of a security interest. See FRBP 7001(2). Nor does the adjudication of a valuation
motion determine the validity of a claim or avoid a lien or security interest. The junior
lienholder's deed of trust remains of record until the plan is completed. 11 U.S.C. §

1325(a)(5)(B)(i).
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intention to surrender the property immediately after bankruptcy. Id. at 816. The court in Wilkins
Henied the United States trustee’s motion to dismiss under § 707(b)(2), holding that the mortgage
payments were still “scheduled as contractually due” on the date of the petition and properly
Heductible from the debtor’s current monthly income in performing the means test calculation. Id.
At 819. The result is different in the context of a chapter 13 case.’

The majority of courts addressing this issue have concluded that, in calculating projected
Hisposable income, a chapter 13 debtor may not deduct from current monthly income secured debt
payments on real property which the debtor intends to surrender. See, e.g., In re Suess, 387 B.R.
D43, 247 (Bankr. D.S.D. 2007); Inre Van Bodegom Smith, 383 B.R. 441, 451 (Bankr. E.D. Wis.

2008); Spurgeon, 378 B.R. at 201; In re Sackett, 374 B.R. 70, 72-73 (Bankr. W.D.N.Y. 2007); In
re McPherson, 350 B.R. 38, 47 (Bankr. W.D. Va. 2006); In re Crittendon, 2006 WL 2547102, *3
Bankr. M.D.N.C. 2006). First, the timing of the application of § 707(b)(2)(A) and (B) is
Hifferent in a chapter 13 case. Crittendon, 2006 WL 2547102, *3. While the chapter 7 calculation
to determine whether a presumption of abuse arises under § 707(b)(2) is made as of the date of the
petition, § 1325(b)(1) specifically requires the court, upon objection, to make the determination
whether the chapter 13 debtor is committing all projected disposable income “as of the effective

Hate of the plan.” 11 U.S.C. 1325(b)(1); see. e.g., Suess, 387 B.R. at 247; Van Bodegom Smith,

4 Debtors cite In re Oliver, 2006 WL 2086691 (Bankr. D. Or. 2006), which held that a chapter 13
debtor who intended to surrender real property could take a secured debt deduction on the means
test, reasoning that “Form B22C is only the first step to calculate the amount to be paid under the
debtor’s [sic] proposed plan.” Id. at *3 (emphasis added). The majority of courts disagree with
the Oliver decision. See In re Hoss, 392 B.R. 463, 469 n.24 (Bankr. D. Kan. 2008); In re
Spurgeon, 378 B.R. 197, 200-01 (Bankr. E.D. Tenn. 2007), In re McGillis, 370 B.R. 720, 728
n.12 (Bankr. W.D. Mich. 2007); In re Edmunds, 350 B.R. 636, 641 (Bankr. D.S.C. 2006). It is
important to note that Oliver preceded Pak v. eCase Settlement Corp. (In re Pak), 378 B.R. 257
(9" Cir. BAP 2007), which held that the “calculation of disposable, as defined in § 1325(b)(2),
[was] the starting point for determining “projected disposable income,” subject to adjustment,
based on evidence, to reflect the reality going forward.” Id. at 268 (emphasis added). Pak was

later abrogated by Maney v. Kagenveama (In re Kagenveama), 541 F.3d 859, 874 (9" Cir. 2008).

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383 B.R. at 451; Sackett, 374 B.R. at 72-73. Second, the chapter 13 plan effectively creates a new
bontract between the debtor and secured creditor, so no payments are scheduled as contractually
due to a secured creditor if the plan proposes a surrender of collateral. Suess, 387 B.R. at 248;

Van Bodegom Smith, 383 B.R. at 450; Spurgeon, 378 B.R. at 201; McPherson, 350 B.R. at 46.

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Third, the majority’s interpretation promotes the policies underlying chapter 13 bankruptcy. See
In re Holmes, 395 B.R. 149, 153 (Bankr, M.D. Fla. 2008) (“As one of the main requirements in
Chapter 13 is that a plan be funded with all of the debtor’s disposable income, it would go against
the very essence of Chapter 13 to allow a debtor to deduct an expense that is non-existent at the
time of confirmation.”). Finally, a contrary interpretation might result in disparate treatment
between below median and above median debtors when surrendering real property under a plan,

i e., a below median debtor, whose plan payments are determined by the actual income and
expenses stated in Schedules I and J as of the effective date of the plan, could pay more that an
nbove median debtor, whose projected disposable income is calculated under the means test. See

In re Fager, 2008 WL 2497694, *2 (Bankr. D. Neb. 2008); In re Marciniak, 2008 WL 2497690, *2

Bankr. D. Neb. 2008).
Courts have applied the same rule where debtors intend to strip a junior lien on a principal

residence they intend to retain. See. e.g., Hoss, 392 B.R. at 473-74 (“Only a secured debt payment

eduction for the first mortgage is permitted; that is all that is ‘reasonably necessary to be
expended’ under the plan in order for the debtors to retain their home.”); McPherson, 350 B.R. at
M5 (stating that where “a secured claim is bifurcated for purposes of treatment under the chapter
13 planf,] .. . [alny deduction from income based on a secured claim that no longer exists may not
be allowed.”).

Accordingly, the court will sustain Danielson’s objection. In calculating projected
Hisposable income, Debtors will not be permitted to deduct from current monthly income secured
Hebt payments attributable to a junior lien on the Debtors’ principal residence which the Debtors

intend to value, treat as wholly unsecured, and strip in conjunction with confirmation of their plan.

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B. Deduction of Vehicle Ownership Expense.

Section 1325(b)(3) provides, in pertinent part that “amounts reasonably necessary to be
expended under [§ 1325(b)(2)] shall be determined in accordance with subparagraphs (A) and (B)
bf section 707(b)(2).” 11 U.S.C. § 1325(b)(3). Under § 707(b)(2)(A)(ii)(D), a debtor’s monthly
expenses under the means test “shall be the debtor’s applicable monthly expense amounts
specified under the National Standards and the Loca! Standards, and the debtors’ 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, as in effect on the date of the order for relief. . .
” 11 U.S.C. § 707(b)(2)(A)Gi)(). This court has followed consistently the line of cases holding
that a debtor may not take a vehicle ownership allowance under the Local Standards for a vehicle

that is owned free and clear of liens. See, e.g., Ransom v. MBNA Am. Bank, N.A. (In re

Ransom), 380 B.R. 799, 808-09 (9" Cir. BAP 2007) (“Under § 707(b)(2)(A)Gi)(), the deduction
bf a vehicle ownership expense only applies to the debtor when he or she has that particular
expense.”); In re Slusher, 359 B.R. 290, 310 (Bankr. D. Nev. 2007) (stating that taking a vehicle
pwnership deduction under the Local Standards for a vehicle owned free and clear of liens “would
be inconsistent with the manner in which the IRS calculated and created the Local Standards”), In
be McGuire, 342 B.R. 608, 612-13 (Bankr. W.D. Mo. 2006) (observing that “the ownership
expense only applies to debtors who actually are obligated to pay a monthly loan or lease payment
hssociated with a vehicle”); In re Hardacre, 338 B.R. 718, 728 (Bankr. N.D. Tex. 2006) (“Because
the Local Standards only provide for a deduction for automobiles that are subject to lease or
purchase, they do not permit a debtor to claim an ownership deduction for a vehicle owned free
and clear by the debtor.”).

In this case, the Debtors are entitled to take a vehicle ownership allowance under the Local
Standards for the 2006 Jeep Liberty that is subject to a lease with Chrysler Financial. The
remaining issue is the amount of the allowance to which the Debtors are entitled. As the Ninth

Circuit Bankruptcy Appellate Panel observed in Ransom, courts are divided on this issue:

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The issue of whether, if the debtor makes loan or lease payments on a vehicle, the debtor
can take the full deduction under the Local Standards, whatever the actual amount of the
vehicle expense, is not before us in this appeal. Some courts have concluded that the
debtor can take the full standard deduction, even though he or she has an actual expense
lower than the standard deduction. See, e.g., In re Barrett, 371 B.R. 855, 859 (Bankr. $.D.
Ill. 2007) (allowing the debtor to assert the full vehicle ownership expense deduction of
$471 under the Local Standard, even though she had an average monthly car payment of
$75.13); Naslund, 359 B.R. at 791, 793 (allowing the debtors to assert the full vehicle
ownership expense deduction of $471 when their actual monthly payment was $133 and
the average monthly payment over 60 months was $85.15). ... Other courts have taken a
contrary position. See, e.g., In re Rezentes, 368 B.R. 55, 56, 62 (Bankr. D. Hawaii 2007)
(ruling that the debtors can only deduct their actual monthly housing expense of $300,
even though the full housing expense deduction under the Local Standard was $2,000).

B80 B.R. at 809 n.20.

Debtors argue that they are permitted to claim the fid/ IRS ownership allowance on Line #
D8 notwithstanding the actual amount of their lease payment, reasoning that “they have an
extremely reasonable lease payment” and “[t]his payment will most likely increase at some time
Huring the Debtors’ plan.” Debtors point out that they are deducting an IRS allowance on Line #
D8, and that the monthly lease payment is subtracted from the IRS allowance and treated
separately on Line # 47 in accordance with Form B22C. According to the Debtors,

“The drafters of Form 22 intended that Debtors claim the full ownership allowance for
their vehicles. Form 22 C, Line 28 would not be instructing Debtors to subtract the IRS
ownership standard from their average secured debt expense if Debtors were unable to
claim an IRS ownership standard. If the Trustee is correct, the drafters made a huge
mistake, and Lines 28 and 29 should be deleted from Form 22. The drafters of Form 22
have had sufficient enough time to revise Form 22 if there has been such a huge mistake as
the Trustee argues has been apparently made. Form 22 has been changed several times
(including very recently) since its original inception, but Lines 28 and 29 remain. The
Debtor should be allowed to claim deduction on Line 28.”

Danielson acknowledges that Form B22C is an Official Form, but argues that Official Forms are
not approved by Congress and cannot trump the statutory requirements of § 707(b)(2)(A).
Danielson points to the IRS’s application of the vehicle ownership allowance in non-bankruptcy
situations and argues that, to the extent Debtors may be entitled to a vehicle ownership allowance,
Debtors are entitled to claim their actual payment or the maximum amount allowed under the

Local Standard, whichever is less.

“[N]ational or local forms are only valid to the extent that they conform to the substantive

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provisions of the Bankruptcy Code.” Ransom, 380 B.R. at 805 n.13; see Simmons v. Ford Motor
Credit Co. (In re Simmons), 237 B.R. 672, 675 (Bankr. N.D. Ill. 1999) (“‘[U]nlike the Rules, the
Official Forms do not require approval either by the Supreme Court or by Congress, and while

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they should be observed and should be used . . . they do not have the force of law.”” (citation
pmitted)); In re Curry, 77 B.R. 969, 970 (Bankr. $.D. Fla. 1987) (“The Official Forms do not
pverride the statute.”). Section 707(b)(2)(A)(ii)(D) allows a debtor the applicable monthly expense
amount specified under the Local Standards for transportation issued by the IRS. See 11 U.S.C. §
707(b)(2)(A ii) (emphasis added). Courts have looked to the IRS Collection Financial

Standards and Internal Revenue Manual for guidance in applying the Local Standards. See, e.g.,

Fokkena v. Hartwick, 373 B.R. 645, 650-51 (D. Minn. 2007); Rezentes, 368 B.R. at 61; Slusher,
B59 B.R. at 309; Hardacre, 338 B.R. at 726. As the court in Slusher observed:

“Congress’ decision to use the IRS standards within the Bankruptcy Code strongly
suggests that courts should look to how the IRS determined those standards; that is, as to
how the IRS would have applied them in similar circumstances. In making that inquiry, it
makes no sense to turn a blind eye to existing administrative interpretations of the very
text Congress has specified. And such interpretations exist. The IRS’ [Internal Revenue
Manual] sets forth various administrative interpretations of the financial collection
standards for many cases. As a result, if guidance is sought on the meaning of the IRS
standards Congress incorporated into the Bankruptcy Code, practical reason would suggest
that courts should consider the full manner by which the IRS uses these standards.”

B59 BR. at 309; see Rezentes, 368 B.R. at 61-62 (“If Congress had intended to adopt the IRS
standards but prevent the courts from looking to the IRS’s own interpretations of its standards, it
keems reasonable to expect that it would have said so explicitly.”). The IRS Collection Financial
Standards, under the heading “Local Standards: Transportation,” state, in pertinent part:

If a taxpayer has a car payment, the allowable ownership cost added to the allowable
operating cost equals the allowable transportation expense. The taxpayer is allowed the
amount actually spent, or the standard, whichever is less.

IRS Collection Financial Standards, available at

http://www. irs.gov/businesses/small/article/0,,id=104623,00.html (emphasis added). This
interpretation is bolstered by the IRS’s Internal Revenue Manual, which provides:

A single taxpayer is normally allowed ownership and operating costs for one vehicle. 7 he
taxpayer is allowed the standard for ownership and operating costs, or the amounts

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actually spent, whichever is less.
If a husband and wife own two vehicles, they are allowed the amount claimed for cach
vehicle up to the maximum allowances for ownership and operating expenses. 7 he

taxpayers are allowed the standard for ownership and operating costs, or the amounts
actually spent, whichever is less.

Internal Revenue Service Manual, § 5.15.1.9(1)(B), available at

http://www.irs.gov/irm/part5/ch15s01.html. (emphasis added), see Ransom, 380 B.R. at 806

“The Manual provides that the Transportation Standard is the maximum a taxpayer may claim —
it fixes the deduction at the allowance under the Local Standard or the amount actually paid,
whichever is less.”). But see Hardacre, 338 B.R. at 727 (“The effect of section 707(b\(2)(A)GI)
js to permit the debtor to deduct the greater of her actual mortgage and car ownership payments or
the amounts provided in the Local Standards.”).

Based on the foregoing, the court will sustain Danielson’s objection. Debtors will be
permitted to deduct the vehicle ownership allowance under the Local Standard or their actual
Wchicle ownership expense, whichever is less. This interpretation is consistent with the
underlying policy of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA”). See. e.g., Ransom, 380 B.R. at 808 (“To interpret the statute otherwise is

-Lounterintuitive to one of the main objectives of BAPCPA: to ensure that debtors repay as much
bf their debt as reasonably possible.”); Rezentes, 368 B.R. at 61 (“Congress made clear that the
income/expense screening mechanism of section 707(b)(2){A) and (B) was ‘intended to ensure
that debtors repay creditors the maximum they can afford.’” (citation omitted)); Hardacre, 338
B.R. at 725 (“The means test was intended to ‘ensure that those who can afford to pay some
portion of their unsecured debts [be] required to do so.”” (citation omitted)).

Ill. CONCLUSION
Danielson’s objections to confirmation of the Debtors’ proposed chapter 13 plan are
sustained. In calculating projected disposable income, Debtors will not be permitted to deduct
from current monthly income secured debt payments attributable to a junior lien on the Debtors’

principal residence which the Debtors intend to value, treat as wholly unsecured, and strip in

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onjunction with confirmation of their plan. Furthermore, Debtors will be permitted to deduct the
vehicle ownership allowance under the Local Standard or their actual vehicle ownership expense,
whichever is less.

A separate order will be entered consistent with this opinion.

Dated: February 26, 2009 C20

PETER H. CARROLL
United States Bankruptcy Judge

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In re:
CHAPTER:

Debtor(s). CASE NUMBER:

NOTE TO USERS OF THIS FORM:
4) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3) Category I. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category II. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity (or attorney) who filed
an opposition to the requested relief. DO NOT list an address if person/entity is listed in category |.

NOTICE OF ENTERED ORDER AND SERVICE LIST

Notice is given by the court that a judgment or order entitled (specify) AMENDED MEMORANDUM DECISION
_was entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in the manner
indicated below:

|. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) - Pursuant to controlling General Order(s) and
Local Bankruptcy Rule(s), the foregoing document was served on the following person(s) by the court via NEF and hyperlink to
the judgment or order. As of__2/26/09 _ the following person(s) are currently on the Electronic Mail Notice List for this
bankruptcy case or adversary proceeding to receive NEF transmission at the email address(es) indicated below.

Rod (PC) Danielson _notice-efile@rodan13.com
Stuart M Price notice@pricelawgroup.com
United States Trustee (RS) _ustpregion16.rs.ecf@usdoj.gov

(J Service information continued on attached page

li. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order was sent by
United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the address(es) indicated below.

Thomas R. Reyes
Denise M. Reyes
2765 Via Cielo Drive
Corona, CA 92882

Pam Lacey, Esq.

Price Law Group

15760 Ventura Blvd., Ste. 1100
Encino, CA 91436

O Service information continued on attached page

ill. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order which bears
an “Entered” stamp, the party lodging the judgment or order will serve a complete copy bearing an “Entered” stamp by U.S.
Mail, overnight mail, facsimile transmission or email and file a proof of service of the entered order on the following person(s)
and/or entity(ies) at the address(es), facsimile transmission number(s), and/or email address(es) indicated below:

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

January 2009 F 9021-1.1