Bankruptcy Means Test: Unfavorable Decision in Ninth BAP

19 Oct Bankruptcy Means Test: Unfavorable Decision in Ninth BAP

On October 5th, 2009, the Ninth Circuit Bankruptcy Appellate Panel (BAP) published its decision in In re Martinez, wherein it concluded that debtors who strip junior liens off mortgages are not entitled to deduct those payments from the chapter 13 projected disposable income test.  While the decision was ordered published, the 3 judge panel disagreed with each other in a 2-1 split decision.  Unfortunately, it also technically comprised three seperate appeals, yet all of which were entirely unopposed by the debtors with only the Chatper 13 Trustee arguing the appeal in favor of eliminating the deduction.

To make matters worse, the decision now stands since no appeal was filed to the Ninth Circuit.  Nevertheless, BAP decisions are not binding upon other Courts, except perhaps the originating court.  Moreover, the BAP decision is also less persuasive than usual since the appeals were unnopposed.  In the Southern District case of In re Enriquez, 244 B.R. 156, (Bankr. S.D. Cal. 2000), Judge Bowie observed at 159:

In the context of the issue raised in Lam, the Court finds that decision less persuasive than usual, in part because there was no participation by the creditor in the appellate process. Those circumstances have apparently persuaded Judge Dorian, as well, that Lam is not persuasive. In re Ortiz, 241 B.R. 460 (Bankr. E.D. Cal. 1999).

Thus, In re Martinez was no different. In those three appeals, none of the debtors participated at all.  Accordingly, that decision is probably  “less persuasive than usual.”

Perhaps of greater significance is that the BAP just plain right got it wrong.  This is because the BAP attempted to interpret 1325(b)(2) and (b)(3) without looking at the plain language of the statute.  As the dissent in that opinion correctly observed:

I do not agree that § 1325(b)(2) and (b)(3) should be read sequentially. 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).” 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.”)

This author presently has 3 similar cases under submission in the Southern District of California Bankruptcy Court.   Of great significance is that this court has already ruled that such deductions are proper in the chapter 7 context where secured property is being surrendered, per the case of In re Maya:

The second step is that if the measuring date is the petition date, then obligations that are “contractually due” on that date are obligations to be included in the calculation of expenses even though the debtor has no intent to pay them. They are nevertheless “contractually due” within the meaning of § 707(b)(2)(A)(iii) because simply filing a Statement of Intention under § 521 does nothing to relieve a debtor legally of any obligation under the terms of a promissory note on supporting trust deed or title document, as a member of courts have observed.Id at 753

So, for purposes of analysis under § 707(b)(2) to determine whether a presumption of abuse arises, a debtor may deduct the amortized monthly payments under § 707(b)(2)(A)(iii) even though the debtor intends to surrender the property because, at the time of filing, those payments are still “contractually due.” Any other holding creates great vagaries of timing, from the date of filing of the Statement of Intention (can be 30 days or more, if extended, after filing, or any time within the first 30 days), to the date to perform under § 521(a)(2) (possibly extended), to the possible scenarios discussed in relation to the Singletary decision. Many courts have agreed with this Court’s conclusion, and some have shared pieces of the reasoning. In addition to those cases already cited for using the petition date, see also In re Galyon, 366 B.R. 164 (Bankr. W.D. Okla. 2007); In re Mundy, 363 B.R. 407 (Bankr. M.D. Pa. 2007); In re Nockerts, 357 B.R. 497 (Bankr. E.D. Wise. 2006). It is with some dismay that the Court has to look past the results in cases like In re Ray, 362 B.R. 680 (Bankr. D.S.C. 2007); In re Skaggs, 349 B.R. 594 (Bankr. E.D. Mo. 2006); In re Harris, 353 B.R. 304 (Bankr. E.D. Okla. 2006), but the Court is unable to find a way to those results while keeping faith with the plain meaning and statutory structure of § 707(b)(2).

Accordingly, it remains to be seen whether the BAP decision in In re Martinez will stand, at least in the Southern District.  To the extent that its decision is followed, you can rest assured that this author will appeal the matter to the Ninth Circuit where hopefully it will get it right.

Written by Michael Doan

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