Michael James Bennett

OCR transcription for search; preserved printed pages are authoritative

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FILED
JUN - 6 2007
CeiinaL Bis TRICT OF CALIEC Rim
ENTERED |
JUN - 6 2007
UNITED STATES BANKRUPTCY COURT 2 strut
CENTRAL DISTRICT OF CALIFORNIA
In re Case No. SA 06-12499 TA
MICHAEL J. BENNETT, Chapter 13
Debtor. STATEMENT OF DECISION RE
DEBTOR’S VEHICLE OWNERSHIP
EXPENSE
Date: April 24, 2007
Time: 1:30 p.m.
Place: 5B

This case requires the Court to determine whether some Chapter 13 debtors

are entitled to an automatic ownership deduction for a second vehicle in determining

“disposable income,” irrespective of whether any payment for the vehicle is actually
due. The Court writes to add a few additional thoughts on this vexing issue of
statutory interpretation which has almost evenly divided (so far) twenty six courts
nationwide.

The Chapter 13 Trustee (“Trustee”) objects to confirmation of the Debtor's
plan, with a request for dismissal. The issue is whether the Debtor can deduct on
Form B22C [block 29] the full amount allowed under IRS standards for “ownership

expense” for his second vehicle, a Plymouth Neon (“second vehicle”), although he in

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fact owns the second vehicle free and clear and pays no monthly amount. Debtor

? only still owes money on his Chevrolet, the other of his two automobiles. If Debtor is
; allowed to deduct for the second vehicle, in the Central District of California this is a
4 $332 per month “swing” between what the applicable IRS Standards allow and what
5 he actually must pay. The Trustee contends that this “swing” means that the Debtor
6 fails the “means test” and is not pledging ai! of his disposable income within the
7 meaning of 11 U.S.C. §§ 1325(b)(1)(B) and 1325(b)(2). Under § 1325(b)(3)' for
8 above-median debtors we are referred to the “means test” formula of § 707(b}{2) for
9 identification of permissible “amounts reasonably necessary to be expended” for the
10 | debtor's household in the “disposable income” determination.
i In the Ninth Circuit there are two cases that have come down on the side of
12 denying a Chapter 13 debtor the automatic allowance and two that would allow it,
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notwithstanding that no lien or lease payment is actually owed. Compare /n re

141 Siusher, 359 B.R. 290 (Bankr. D. Nev. 2007) and In re Carlin, 348 B.R. 795 (Bankr. D.
15 | Oregon 2006) with In re Swan, No. 06-50708-ASW, 2007 WL 1146485, (Bankr. N.D.
16 |] Cal. April 18, 2007) and /n re Nas/und, 359 B.R. 781, 789-790 (Bankr. D. Mont. 2006).
17 | Moreover, as Judge Weissbrodt observed in Swan, there is no discernable majority
18 || view which has emerged nationally, with (as of this writing) eleven opinions holding

19 | that a debtor cannot deduct an ownership expense for a vehicle owned free and clear
20 || and fifteen, including Swan, that go the other way and permit an automatic allowance.
21 || The cases that do not permit an automatic allowance are: in re Hardacre, 338 B.R.

22 | 718 (Bankr. N.D. Tex. 2006); In re McGuire, 342 B.R. 608 (Bankr. W.D. Mo. 2006); In
23 || re Barraza, 346 B.R. 724 (Bankr. N.D. Tex. 2006); In re Lara, 347 B.R. 198 (Bankr.

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* Citation of statutes is to Title 11 of the United States Code unless otherwise
26 || indicated.

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N.D. Tex. 2006); fn re Carlin, 348 B.R. 795, (Bankr. D. Or. 2006); In re Oliver, 350
B.R. 294 (Bankr. W.D. Tex. 2006); In re Harris, 353 B.R. 304 (Bankr. E.D. Okla
.2006); in re Wiggs, No. 06 B 70203, 2006 WL 2246432, (Bankr. N.D. Ill. August 4,
2006); /n re Devilliers, 358 B.R. 849 (Bankr. E.D .La. 2007); Slusher, 359 B.R. 290; In
re Ceasar, No. 06-20355, 2007 WL 777821, (Bankr. W.D. La. Mar. 6, 2007). All hold
that the debtor may not deduct a vehicle ownership expense unless actually
obligated. In addition to Swan, fourteen courts have gone the other way, holding that
the debtor may deduct the ownership expense for a vehicle that is paid off or not
financed or leased: In re Demonica, 345 B.R. 895 (Bankr. N.D. Ill. 2006); In re Fowler,
349 B.R. 414 (Bankr. D. Del. 2006); In re Hartwick, 352 B.R. 867 (Bankr. D. Minn.
2006); [n re Grunert, 353 B.R. 591 (Bankr. E.D. Wis. 2006); In re Haley, 354 B.R. 340
(Bankr. D. N.H. 2008); in re Wilson, 356 B.R. 114 (Bankr. D. Del. 2006); /n re Mcivor,
No. 06-42566, 2006 WL 3949172, (Bankr. E.D. Mich. Nov. 15, 2006); In re Naslund,
359 B.R. 781 (Bankr. D. Mont. 2006); in re Prince, No. 06-10328C-7G, 2006 WL
3501281, (Bankr. M.D. N.C. Nov. 30, 2006); in re Zak, No. 06-41241, 2007 WL
143065, (Bankr. N.D. Ohio Jan 12, 2007); In re Saway, No. 06-25130, 2007 WL
582535, (Bankr. E.D. Wis. Feb. 20, 2007); In re Crews, No. 06-13117, 06-15255,
2007 WL 626041, (Bankr. N.D. Ohio Feb. 23 2007); in re Enright, No. 06-10747, 2007
WL 748432, (Bankr.M.D.N.C. Mar. 6, 2007); In re Watson, No. 06-11948DK, 2007
WL 1086582, (Bankr. D. Md. Apr. 11, 2007).

The first step is always to look at the statutory language. If the intent is clear
and would not lead to absurd results, the Court’s analysis must cease and the Court
must merely enforce what Congress has written. See, e.g., Lamie v. United States
Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023 (2004); in re Ron Pair Enterprises, inc.,
489 U.S. 235, 241-42, 109 S. Ct. 1026, 1030-31 (1989). Unfortunately, the statute is

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not nearly as clear as it should have been. § 707(b)(2)(A)(ii)(1), which applies in
Chapter 13's for above-median debtors under § 1325(b)(3), provides:

The debtor's monthly expenses shall be the debtor's applicable
monthly expense amounts specified under the National Standards
and Local Standards, and 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, as
in effect on the date of the order for relief, for the debtor, the
dependents of the debtor, and the spouse of the debtor in a joint
case, if the spouse is not otherwise a dependent. Such expenses
shall include reasonably necessary health insurance, disability
insurance, and health savings account expenses for the debtor, the

spouse of the debtor, or the dependents of the debtor.
Notwithstanding any other provision of this clause, the monthly
expenses of the debtor shall not include any payments for debts. In
addition, the debtor's monthly expenses shall include the debtor's
reasonably necessary expenses incurred to maintain the safety of the
debtor and the family of the debtor from family violence as identified
under section 309 of the Family Violence Prevention and Services
Act, or other applicable Federal law. The expenses included in the
debtor's monthly expenses described in the preceding sentence shall
be kept confidential by the court. In addition, if it is demonstrated that
it is reasonable and necessary, the debtor's monthly expenses may
also include an additional allowance for food and clothing of up to 5
percent of the food and clothing categories as specified by the
National Standards issued by the Internal Revenue Service.”
(emphasis added).

The Court observes the same ambiguity as highlighted by the parties in their
briefs. Monthly expenses shall be debtor's “applicable monthly expense amounts
specified under the National Standards and Local Standards” of the IRS but will
include “actua/ monthly expenses” only for the category specified as “Other Necessary
Expenses” issued by the IRS for the area where the debtor resides. The use of the
two different adjectives within the same sentence might be read to suggest that
something different was intended. Debtor's argument is that applicable expenses
under the IRS National and Local Standards (which clearly include both housing and

transportation ownership) need not then be those actually incurred as this is required

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only for “Other Necessary Expenses” category, which does not include vehicle
ownership. This point was relied upon for the interpretation that vehicle ownership
costs are incorporated into § 707(b)(2){a)(ii)(I) as fixed allowances irrespective of
whether they actually exist as monthly payments in several of the cases. See, e.g.,
Fowler, 349 B.R. at 418; Swan, 2007 WL 1146485, at *5; Crews, 2007 WL 626041, at
*3-4,

The Debtor also adopts an argument based on the opinion in Fowler that

“applicable” has a narrow interpretation, relating only to a determination of the number
of vehicles owned, since the IRS Local Standards have an additional deduction for a
taxpayer that owns a second car. Fowler, 349 B.R. at 418-19. Under this view,
“applicabie” refers to the number of vehicles, not the amount of payment. In contrast,
the Trustee urges that “applicable” has a wider meaning, referring to those expenses
that “apply” or, in other words, actually exist. The dictionary definition of “applicable”
offers little illumination: “capable of or suitable for being applied.” Webster's
Collegiate Dictionary, 10 Edition.

Unlike other courts, the Court is not persuaded that the different adjectives
used in the same statute necessarily imply different meanings, since the two terms
are effectively synonyms. Compare /n re Farrar-Johnson, 353 B.R. 224, 230 (Bankr.
N.D. Ill. 2006), with Sfusher, 359 B.R. at 305-310. Moreover, the Court is persuaded
that even if slightly different shades of meaning were intended, the meaning offered
by Debtor is superfluous and illogical. The Court agrees with the S/usher court that
had an automatic allowance been intended, the statute would not have included
“applicable” at all but would merely have read “the debtor’s monthly expenses shall be
the monthly expense amounts specified under the National Standards and the Local

Standards...” Sfusher, 359 B.R. at 308-309.

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Moreover, where, as here, the statute is ambiguous, there is a more accepted
means for discerning Congressional intent. That is to look into the legislative history.
Thrifty Oil Co. v. Bank of America Nat. Trust and Sav. Assn., 322 F. 3d 1039, 1057
(9" Cir. 2003) (citing Blum v. Stenson, 465 U.S. 886, 896, 104 S. Ct. 1541, 1548
(1984)). Here the Court is guided by the comments of Congressman Sensenbrenner
from the Committee on the Judiciary, H.R. Rep. 109-31, pt. 1 at 13-14 (2005), as
reprinted in 2005 U.S.C.C.A.N. 88, 99-100 with footnote references in brackets:

In addition, these reforms contemplate replacing the current law's
presumption in favor of the debtor with a mandatory presumption of
abuse that would arise under certain conditions. As amended, section
707(b) of the Bankruptcy Code would require a court to presume that
abuse exists if the amount of the debtor's remaining income, after
certain expenses and other specified amounts are deducted from the
debtor's current monthly income (a defined term) [FN60] when
multiplied by 60, exceeds the lower of the following: (1) 25 percent of
the debtor's nonpriority unsecured claims, or $6000 (whichever is
greater); or (2) $10,000. Section 102 mandates that the debtor's
expenses include reasonably necessary expenditures for health
insurance, disability insurance, and heaith savings accounts for the
debtor, the debtor's spouse, and dependents of the debtor. In
addition, the debtor's expenses must include those incurred to
maintain the safety of the debtor and the debtor's family from family
violence as identified in section 309 of the Family Violence Prevention
and Services Act or other applicable law. in addition to other
specified expenses, [FN61] the debtor's monthly expenses-exclusive
of any payments for debts (unless otherwise permitted)-must be the
applicable monthly amounts set forth in the Internal Revenue Service
Financial Analysis Handbook [FN62] as Necessary Expenses [FN63]
under the National [FN64] and Local Standards [FN65] categories and
the debtor's actual monthly expenditures for items categorized as
Other Necessary Expenses. [FN66] (emphasis added).

Footnotes 62-65 in the Report refer to the “Internal Revenue Service, Internal
Revenue Manual-Financial Analysis Handbook, pt. 5.15.1 (rev. May 1, 2004).” It
would appear that not only the National and Local Standards but the Internal

Revenue’s Financial Analysis Handbook (“Handbook,” also known as The Internal

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Revenue Manual) as well was in the mind of Congress when the amendments to 11
U.S.C. §707(b)(2) were adopted. Ironically the word “applicable” immediately
precedes this reference to the Handbook in the Report. The Standards as described
by the IRS itself are comprised of two elements in determining “Transportation

Expenses,” i.e. ownership and operating costs, as follows:

The transportation standards consist of nationwide figures for monthly
loan or lease payments referred to as ownership costs, and additional
amounts for monthly operating costs... The ownership costs provide
maximum allowances for the lease or purchase of up to two
automobiles if allowed as a necessary expense...If a taxpayer has a
car payment the allowable ownership costs added to the allowable
operating cost equals the allowable transportation expense. If a
taxpayer has no car payment, or no car, the operating cost equals the
allowable transportation expense. /fa taxpayer has no car payment,
or no car, the operating costs portion of the transportation standard
is used to come up with the allowable transportation expense.

IRS Collection Standards, (emphasis added}, available at

http://www.irs.gov/individuals/article/0, id=96543,00.html.

The Handbook provides, in relevant part:

The transportation standards consist of nationwide figures for loan or
lease payments referred to as ownership costs...If a taxpayer has a
car payment, the allowable ownership cost added to the allowable
operating cost equals the allowable transportation expense. ff a
taxpayer has no car payment only the operating cost portion of the
transportation standard is used to figure the allowable transportation
expense.”

Internal Revenue Service Manual, Financial Analysis Handbook, pt. 5, ch.
15,§5.15.1.7(4.B) (2004), (emphasis added), available at
http://www.irs.gov/irm/part5/ch15s01.html.

Many other courts have been persuaded by the IRS materials. Hardacre,

338 B.R. at 726; McGuire, 342 B.R. at 612-13; Barraza, 346 B.R. at 728: Carlin, 348

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B.R. at 797; Hartwick, 352 B.R. at 869. Others have not; those not persuaded point
out that some distinction must have been intended by Congress’ citation to the
Standards in the statute without additional explicit citation to the Handbook. Swan,
2007 WL 1146485, at *6; Fowler, 349 B.R. at 419; Grunert, 353 B.R. at 594. This
Court, however, is persuaded that the specific mention of the Handbook in the
Congressional Record cited above suggests that it is more likely and more logical
that Congress intended to incorporate the entire IRS approach to the issue,
including the administrative interpretation of the Standards by the IRS itself. See
Slusher, 359 B.R. at 309. Had the kind of parsing suggested by Debtor and the
cases upon which he relies been Congress’ intent, i.e. that the Standards but not
the clarification offered in the Handbook should govern, that crucial distinction would
nave appeared in a more direct fashion. See in re Rezentes, No. 06-00754, 2007
WL 98805 at *6 (Bankr. D. Haw. April 2, 2007).

Moreover, there is an additional reason for the Court’s opinion. The entire
approach under BAPCPA? reflects Congress’ clear determination that debtors
should be obliged to repay as much of their debt as is reasonably possible, allowing
for ordinary (some would say stingy) costs of living. H.R. REP. No. 109-31, pt.1 at 2
(2005) as reprinted in 2005 U.S.C.C.A.N. 88, 89. It is therefore antithetical to this
approach that some debtors should get an automatic allowance for “ownership
costs” on a vehicle when, in fact, there is no such expense. Debtor offers no
persuasive reason for such a “bonus.” Debtor argues that paid-off vehicles are
generally older and therefore more likely to need repair or earlier replacement.

While it might be true that some paid-off vehicles owned by debtors are older and

* Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-
8, 119 Stat. 23 (2005) signed into law by President Bush April 20, 2005.

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might need eventual replacement, the opposite is not necessarily unlikely. Debtors
may find themselves owning a paid off vehicle for any variety of reasons. While
some models only have a 5-year life expectancy, just about coterminous with the
loan, others are renowned for their dependability for a decade or more. Better
maintained vehicles last longer and some debtors are scrupulous about
maintenance while others are not. Moreover, Debtor's argument for an artificial
“ownership expense” is undercut by the fact that the IRS Local Standards offer an
additional $200 monthly operating expense deduction for older cars. See McGuire,
342 B.R. at 613; Carlin, 348 B.R. at 798. The Handbcok does not treat such a
deduction as part of or in addition to the ownership expense, but allows it only as
“an additional operating expense” once the loan is paid off in the hypothetical
examples shown in the Handbook. Handbook § 5.8.5.5.2 (2005) available at

www. irs.gov/irm/part6/chO8s05.html. See also Slusher, 359 B.R. at 310.

Debtor raises the argument adopted in some of the cases that unfair or
absurd results might arise from allowing a debtor with only a few months left on his
loan to get the allowance, while the debtor who has just paid off his car gets no
allowance. However, just as many seemingly unfair hypothetical cases can be
constructed on the other side of the argument. For example, what of the debtor who
inherits his parents’ Daimler Benz that has been paid off? Should he get the full
allowance even though the vehicle might be serviceable for another ten years? Or,
if Debtor's view were adopted, why should not every debtor use the limit on his
credit card to pay off the remaining lien on his car so he can get the full allowance
while his plan might offer his unsecured creditors (like the credit card company)
repayment of only pennies on the dollar? Moreover, it could as well be said that the

distinction between allowing some debtors an additional amount for ownership

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expenses while denying others anything at all above the operational component of
transportation (for example, debtors in New York City who own no car but rely
wholly on public transportation) is arbitrary, but such results are implicit in any kind
of standardized test such as the “means test.”

Certainly there will be unexpected repair or replacement expenses, there will
be cases of abuse or attempted abuse and there will be anomalous results. These
result in any scheme based upon standardized allowances such as we have with the
current “means test” because no two families are in precisely the same financial
position. However, the Court believes the better approach is to rely on the inherent
flexibility provided under motions to dismiss for abuse under § 707(b)(3)(B), the
possibility of additional expenses based on “special circumstances” under §
707(b)(2)(B) or under the ability of the debtor to seek to modify his plan under §
1329, rather than to create an automatic ownership allowance for all owners of
vehicles whether there is a commensurate expense associated with the ownership
or not. Had such a result been intended by Congress in the teeth of an otherwise
quite draconian tightening of the standards expected of debtors, it would have been
more clearly stated.

Sustain objection and grant motion to dismiss unless debtor amends to cure

this issue within 20 days.

Dated: JUN “6 2007 (Baws gee.

Hon Theodor C. Albert
UNITED STATES BANKRUPTCY JUDGE

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NOTE TO USERS OF THIS FORM:
Physically attach this form as the fast page of the proposed Order or Judgment.
Do not file this form as a separate document.

inre MIGHAEL J. BENNETT CHAPTER _13

Debtor. | CASE NUMBER SA 06-12499 TA

NOTICE OF ENTRY OF JUDGMENT OR ORDER
AND CERTIFICATE OF MAILING

TO ALL PARTIES IN INTEREST ON THE ATTACHED SERVICE LIST:

1. You are hereby notified, pursuant to Local Bankruptcy Rule 9021-1(a)(1}{E), that a judgment or order entitled
(specify): STATEMENT OF DECISION RE DEBTOR'S VEHICLE OWNERSHIP EXPENSE

was entered an (specify date): J UN ” 6 2007

2. i hereby certify that | mailed a copy of this notice and a true copy of the order or judgment to the persons and

entities on the attached service list on (specify date):
JUN -6 2007

Dated: JON D. CERETTO
™ JUN ~ 6 200? Clerk of the Bankruptcy Court

By:
Deputy Clerk

Rev. 1/07 This form is optional. Jthas been approved for use by the United States Bankruptcy Court for tha Central District of California. F 9 02 1 -1 2 1

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SERVICE LIST

Michael James Bennett
6 Pinestone
Irvine, CA 92604

James G. Beirne

Law Offices of James G. Beirne
520 E. Wilson Ave Ste 110
Glendale, CA 91206

Amrane Cohen

Chapter 13 Trustee

770 The City Drive So, Suite 3300
Orange, CA 92868

Office of the United States Trustee
411 W. Fourth Street, Suite 9041
Santa Ana, CA 92701