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November 16, 2009

9th Circuit BAP Adds to Debate on Above-Median Chapter 13 Plans, How to Compute Projected Disposable Income

American Express Bank v. Smith (In re Smith), ---- B.R. ----, 2009 WL -------- (9th Cir. BAP Oct, 2009)

Issue:   When computing the chapter 13 plan payment, can an above-median chapter 13 debtor deduct payments to secured creditors for property they intend to abandon?   

Holding:   No.   

Trial Judge:  Paul Snyder, Washington
Montali, Jury, Hollowell

Opinion by Montali (Hollowell dissenting)
These are above-median chapter 13 debtors.  Their means test net income was minus $1,789.  That included deduction for payments to secured creditors for “two houses and a vehicle” which they were surrendering.  The plan proposed to pay $889 for six months which would pay 4% to unsecured creditors.  The debtors’ I and J net was apparently (as it is not clear) about $900 to the positive.  The chapter 13 trustee and a creditor objected that the debtors were not paying their “projected disposable income” and the plan was not proposed in good faith.  If the means test did not include the secured payments and did include the housing allowance, the debtors had a positive net of $4,191 per month and could pay unsecured creditors in full in 24 months.  The bankruptcy court overruled the objections.  “The bankruptcy court held that section 1325(b)(3) supersedes -- not supplements -- subsection (b)(2) when debtors have above-median incomes.”

The BAP reversed, 2-1.  It first dealt with Kagenveama.  “The issue before the Ninth Circuit in Kagenveama did not involve either the determination of what are proper expenses (under section 1325(b)(2)) or the measurement of them (under section (b)(3)).” 

It then states:

“Subsections (b)(2) and (b)(3) of section 1325, read together, provide that if an expense is not reasonably necessary for a debtor’s and/or dependants’ maintenance and support, it is not included in the calculation of disposable income.  If the expense is reasonably necessary, and the debtor is an above median income debtor, subsection (b)(3) requires the court to determine the amount in accordance with section 707(b)(2).”
 
“If the expense is reasonably necessary for the debtor’s and/or dependants’ maintenance and support, then section 1325(b)(3) requires the court to determine the amount in accordance with section  707(b)(2).”  “Items that a debtor has surrendered or intends to surrender are not necessary for his or her support or maintenance.  The concepts -- surrender and necessity – are mutually exclusive of one another. Phantom payments for the surrendered item are not reasonably necessary for a debtor’s support and maintenance.”

Dissent of Hollowell.

“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.” 

“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.”


Yarnall v. Martinez (In re Martinez), ---- B.R. ----, 2009 WL -------- (9th Cir. BAP Oct, 2009)

Issue:   When computing the chapter 13 plan payment, can an above-median chapter 13 debtor deduct payments to a secured creditor for a lien which has been “stripped off” pursuant to a Lam Motion?   

Holding:   No.  Note:  The opinion references and is essentially the same as In re Smith decided the same day by the same panel.   

Trial Judges:  Riegel, Markell, Nakagawa, Nevada
Montali, Jury, Hollowell

Opinion by Montali (Hollowell dissenting)
This is an appeal from three separate chapter 13 cases.  The debtors are above-median chapter 13 debtors who filed successful Lam Motions yet still deducted the payment on the avoided second from the calculation of the plan payment.  The bankruptcy judges in Nevada held a joint hearing and approved the plans holding that Kagenveama and Section 1325(b)(3) require a mechanical test and specifically permit deducting payments to secured creditors, even those they do not intend to make.

The BAP reversed.  2-1.  It held that subsections (b)(2) and (b)(3) of section 1325 must be read together.  The expense must first be “necessary” pursuant to (b)(2) and, if necessary, it must be computed pursuant to (b)(3).  “[The debtors] made the decision to strip the liens, not the bankruptcy courts.  Phantom payments cannot be necessary.”  “[I]f an item is not necessary for a debtor’s support or maintenance, a debtor cannot engage in the fiction of pretending to pay for it.” 

The dissent is virtually identical to Judge Hollowell’s dissent in Smith (see above). 

November 16, 2009 in 9th Circuit Briefs | Permalink

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Comments

Well, if the courts are now going to eschew a mechanical, strict statutory reading re "phantom payments" for surrendered property in favor of a "common sense" approach, will they similarly adopt the comon sense approach of allowing the stripping of wholly unsecured second mortgages in Chapter 7 cases?

Posted by: Tye Van Buren | Nov 17, 2009 5:55:38 AM

What if the "lien stripping" fails and the debt was omitted from the means test per In Re Martinez? Wouldn't that put the Debtor in an unattainable position where they now have to make the payment on the second mortgage, yet they don't have the income to do so because the plan is allocating those funds to an unsecured creditor???

Posted by: C. Lopez | Dec 3, 2009 11:56:32 PM

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