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Utica Judge Rules Above-Median-Income Ch 13 Debtor Expenses Determined Solely by Means Test, based on Lanning and Ransom: In re Joest

A judge form the Bankruptcy Court for the Northern District of New York has ruled that the recent Supreme Court decisions in Hamilton v. Lannin, 130 S. Ct. 2464, 2468-69 (2010), and Ransom v. FIA CardServices, 131 S. Ct. 716 (2011), do not permit a bankruptcy court to disallow "means test" expenses in calculating the minimum payment to unsecured creditors in an above-median income Chapter 13 case. In re Joest, Ch. 13 Bk #10-60028; Bankr. NDNY, Hon. Diane Davis, decision March 17, 2011.)

The specific issue in Joest was whether a single debtor (no dependents) with income above the median in New York who has two car loans can deduct the 'ownership cost' for both in calculating 'projected disposable income' in a Chapter 13 case. The debtor, represented by attorney Steven R. Dolson, Esq., said yes; the chapoter 13 trustee, Mark W. Swimlar (represented by staff attorney Maxsen D. Champion, Esq.) siad no.  The court went with the debtor.

Before reviewing the holding, I would make two observations: First, the debtor's proposed plan called for a 17% dividend to unsecured creditors. The consequence of the ruling in this particular case would not have been particularly significant either way - had the trustee's objection to the proposed plan been allowed, the dividend to the unsecureds would have increased only two percentage points. But the legal issues would have significance far beyond this single case.

Secondly, the Court appears to have come to its conclusion based on Supreme Court decisions rendered after the issue in the case was briefed and argued. The debtor filed her chapter 13 case on January 6, 2010, and the trustee filed an objection to her plan February 25, 2010. The debtor's response was filed March 2, and the parties filed legal briefs March 22 (the trustee) and April 22 (the debtor.) The docket shows three hearings on the issue, the last of which was May 6. I do not see any docket entries related to the plan objection after that (other than a one-page trustee letter in September asking the case to be considered unconfirmed until a decision is reached), yet the Court did not issue its decision until ten months later, on St. Patrick's Day 2011.

In the meantime (that is, after May 6), the Supreme Court issued the Lanning decision June 7, 2010 and the Ransom decision January 7, 2011. It appears that the Court in Joest relied on both of these decisions without further arguments or briefing from the parties.

In Chapter 13, a debtor must commit all his or her 'projected disposable income' into the plan; that is, to the extent that income exceeds expenses, the difference must be put into the plan. But how is 'income' and 'expenses' calculated?

In Lanning, the Supreme Court held that an unusual fluctuation in the debtor's income during the six months prior to filing bankruptcy should not be taken into consideration in calculating future income. In that case, a debtor had received a one-time bonus, which, if included in calculating future income, would have projected much higher income that was actually available. Therefore, the Lanning holding is that the income side of calculating projected disposable is the debtor's actual future income; more or less the income reflected on Schedue I of the bankruptcy schedules.

In Ransom, the issue was whether a debtor was entitled to claim as an expense the IRS standard ownership cost of a car which had no loan against it. The Supreme Court said no, if there is no loan there is no ownership expense. In Joest, the judge concluded that under the reasoning of Ransom the opposite is true: that a debtor with two cars is eligible for two ownership expenses.

The court's interpretation of Ransom is that the expense side of projected disposable income, for above-median-income debtors, is the Form 22C means test expenses, period. Even if the trustee or the Court believed the expense was not a necessary household expense, the Court's discretion is limited by the BAPCPA changes to the bankruptcy code in 2005 and the Supreme Court's two most recent cases interpreting projected disposable income.

In summary, Joest holds that Lanning and Ransom, taken together, mean that the minimum payment an above-median-income debtor must pay to unsecured creditors in Chapter 13 is the difference between the debtor's actual income (Schedule I) and means test expenses (Form 22C.)

As an aside, the Joest decision also emphasized that the IRS Collection Manual, which sets out its practices in determining necessary expenses for delinquent taxpayers, was relevant to, but not determinative of, any interpretation of means test expenses in bankruptcy, according to Ransom. In other words, it is the Bankruptcy Code, and not the IRS practices, that determine what expenses are allowed under the means test.

I would note in closing two other things. First, the issue of "good faith", a requirement in Chapter 13 plans, was not argued in the Joest case, perhaps because the difference in the dividend to unsecured would have changed so little whichever way it came out. Secondly, that it appears the decision in Joest has not been appealed, nor has there been a motion to reconsider, according to the case docket as of March 29, and the ten day deadline to do either appears to have passed. Whether other judges in the Norther District of New York, not to mention the Western District, will follow this case remains to be seen.

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