American Express Bank, FSB v. Smith (In Re Smith) ( 2009 )

HOLLOWELL, J.,

dissenting.

Under the guise of a plain meaning statutory analysis, the majority holds that § 1325(b)(2) and (b)(3) must be read sequentially, thereby arriving at a “common sense” result which only permits an above median-income debtor to use the means test to calculate expenses after the debtor demonstrates the expense is reasonably necessary. While I sympathize with the majority’s desire to achieve a common sense result, I cannot agree with its contorted statutory analysis.

Section 1325(b)(3) provides that when a debtor has an above-median income, the reasonably necessary expenses to be deducted from current monthly income (“CMI”) “shall be” calculated in accordance with § 707(b)(2)(A) and (B), otherwise known as the means test. 11 U.S.C. § 1325(b)(3) (emphasis added). The word “shall” is mandatory. Therefore, for the above-median income debtor, expenses must be calculated under § 707(b)(2). In re Farrar-Johnson, 353 B.R. 224 (Bankr. N.D.Ill.2006).

Presumably, Congress believed the inclusion of the means test into the calculation of an above median-income debtor’s CMI was the mechanism through which debtors would meet BAPCPA’s goals of ensuring debtors repay creditors the maximum they can afford and reducing judicial discretion and non-uniformity. See Marianne B. Culhane & Michaela M. White, Catching Can-Pay Debtors: Is the Means Test the Only Way, 13 Am. Bankr.Inst. L.Rev. 665, 677-683 (2005); Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868, 875 (9th Cir.2008); In re Alexander, 344 B.R. 742, 747-48 (Bankr.E.D.N.C.2006) (Congress acted intentionally when it inserted the means test into the calculation of chapter 13 payment plans).

The Ninth Circuit, in Kagenveama, declined to “override the definition and process for calculating disposable income under § 1325(b)(2)-(3) as being absurd” even if it produced a less favorable result for unsecured creditors. 541 F.3d 868, 875 (9th Cir.2008). In contrast, the Ninth Circuit recently determined, in Ransom v. MBNA Am. Bank (In re Ransom), 577 F.3d 1026 (9th Cir.2009) that in order to reach a result consistent with BAPCPA’s goal of ensuring that debtors repay creditors as much as possible, § 707(b)(2)(A)(ii)(I) could only be interpreted to “apply” expense standards in cases where debtors in fact pay such expenses.

Of course, as the majority notes, the somewhat inconsistent holdings of Kagen-veama and Ransom are not binding as to the resolution of this case since they did not address the issue presented here on appeal. However, I part with the majority’s contention that the Kagenveama court’s statutory analysis and discussion about how projected disposable income should be calculated was “made casually and without analysis,” and can be dismissed as mere dicta. Instead, I believe the statutory analysis undertaken by the Ninth Circuit in Kagenveama provides important guidance for the interpretation of § 1325(b)(2) and (b)(3).

In Kagenveama, the Ninth Circuit was confronted, as we are here, with interpreting a subsection of § 1325(b) that contains an imbedded definition in a following subsection. It did not read the sections sequentially. Rather, the court held that the definition of “disposable income” in § 1825(b)(2) gave meaning to the phrase “projected disposable income” in § 1325(b)(1)(B). 541 F.3d at 873. The Kagenveama court refused to “de-couple ‘disposable income’ from the ‘projected disposable income’ calculation simply to arrive at a more favorable result for unsecured creditors, especially when the plain text and precedent dictate[d] the linkage of the two terms.” Id. at 875.

I agree with the courts that find the most natural reading of § 1325(b)(3) “commands the application of Section 707(b)(2)(A) and (B) to determine the meaning of the amounts ‘reasonably necessary to be expended’ ” under § 1325(b)(2). In re Burbank, 401 B.R. 67, 73 (Bankr.D.R.I.2009) (citing In re Quigley, 391 B.R. 294, 299 (Bankr.N.D.W.Va.2008)). Because § 1325(b)(3) contains the definition of “amounts reasonably necessary to be expended,” it must be read to give meaning to what is to be deducted by an above median-income debtor in order to determine disposable income. The bankruptcy court correctly analyzed § 1325(b)(2) and (b)(3):

As with “disposable income,” the term “amounts reasonably necessary to be expended” appears only twice in § 1325; once in § 1325(b)(2) and then in § 1325(b)(3). If the Court were to require an additional requirement that the expense also be necessary for a debtor’s “maintenance or support,” it would likewise render as surplusage the clear direction in § 1325(b)(3) as to how “amounts reasonably necessary to be expended” shall be determined.

In re Smith, 401 B.R. 469, 474 (Bankr.W.D.Wash.2008).

As another court noted, “ § 1325(b)(3) states that the amounts determined to be reasonably necessary under § 1325(b)(2) shall be determined in accordance with § 707(b)(2)(A) and (B) — period. The term ‘reasonably necessary’ in § 1325(b)(3) is not superfluous — it is the very term that this section defines. For that reason, ... courts may [not] conduct a separate ‘reasonably necessary’ analysis beyond § 707(b)(2):” In re Van Bodegom Smith, 383 B.R. 441, 448 (Bankr.E.D.Wis.2008) (ultimately holding that payments on surrendered collateral are not “scheduled as contractually due” under § 707(b)(2)(A)(iii)(I) and, therefore, cannot be deducted in a debtor’s means test calculation).

I do not agree that § 1325(b)(2) and (b)(3) should be read sequentially and am unswayed by the majority’s reliance on a hypothetical situation of an above-median income debtor engaged in business to support its contention that this is the correct way to read the statute. Section 707(b)(2)(A)(ii) provides that a “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 [IRS]....” 11 U.S.C. § 707(b)(2)(A)(ii)(I).

Business expenses are considered Other Necessary Expenses as specified in the IRS Financial Analysis Handbook. Drummond v. Wiegand (In re Wiegand), 386 B.R. 238, 243 n. 11 (9th Cir. BAP 2008); In re Arnold, 376 B.R. 652, 654-55 (Bankr.M.D.Tenn.2Ó07). The IRS Financial Analysis Handbook provides for expenses that are necessary for production of income: “[i]f the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met....” Int. Rev. Man. Fin. Analysis Handbook, § 5.15.1.10 (available at http://www.irs.gov/ irm/). Therefore, an above-median income debtor engaged in business may deduct his or her actual Other Necessary Expenses (via § 1325(b)(3)’s reference to § 707(b)(2)(A)) as long as those expenses are substantiated and necessary. As a result, business expenses do not require a separate determination of necessity in § 1325(b)(2) as the majority asserts. Sec-' tion 1325(b)(2)(B) is not rendered meaningless but continues to apply to below-median income debtors who have business expenses.

The statutory analysis put forth by the majority, which reads § 1325(b)(2) and (3) sequentially, essentially adds language to § 1325(b)(3) to read “after it is determined the expense is reasonably necessary, then the amounts reasonably necessary to be expended shall be determined in accordance with § 707(b)(2).” Such a strained analysis also reads out the “reasonably necessary” language in calculations under § 707(b)(2)(A) for Other Necessary Expenses.

I cannot join my colleagues in an interpretation that upends the statutory inclusion of the means test in chapter 13, reverting back to the pre-BAPCPA judicial discretion as to what expenses of a debtor are reasonably necessary. See Kagenveama, 541 F.3d at 874 (deliberate departure from the pre-BAPCPA disposable income calculation was so that debtors would “be subject to clear, defined standards, no longer left to the whim of a judicial proceeding” (citation omitted)). The majority contends the discretion of the bankruptcy court, under its analysis, is only to hold debtors to the consequences of their decisions about what assets they retain or surrender; however, the reality of the majority’s interpretation of the statute is that bankruptcy courts will have the discretion to make determinations about what expenses are “reasonably necessary.”

While I sympathize with the majority’s desire for a commonsense solution to the problem created by incorporating the means test into the chapter 13 above median-income debtor’s calculation of disposable income, I do not believe it is the role of the judiciary to remedy outcomes that do not comport with our view of common sense. See Id. at 875 (“If the changes imposed by BAPCPA arose from poor policy choices that produced undesirable results, it is up to Congress, not the courts, to amend the statute.”).