Tuesday, April 10, 2007

Court Allows Expense Deduction for Paid Off Vehicles, Survey of Major Rationales of Prior Cases

Judge Pamela Pepper recently issued a lengthly decision involving a hot topic under BAPCPA -- the issue of the allowability of the Local Standard's vehicle ownership deduction in the calculation of the projected disposable income for an above-median income debtor when the vehicle is paid off. In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Banktcy. E.D. Wis.). The debtors contended that they were allowed to take the vehicle ownership deduction while the Chapter 13 Trustee disagreed. Pursuant to the case of In re Mendenahll, 54 B.R. 44 (W.D.Ark. 1985), the Court held that the Trustee as the objecting party held the burden of persuading the Court that the debtors should not be allowed to deduct the ownership expenses.

The Court noted that two distinct lines of decisions have emerged on the presented issue. The Court noted that several courts have held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. See In re Hardacre, 338 B.R. 718 (N.D.Tex.2006), In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), and In re Barraza, 346 B.R. 724 (Bankr.N.D.Tex.2006). The Court also noted that a similar number of courts have come to the opposite conclusion in both the chapter 13 and 7 contexts, deciding that regardless of whether a debtor actually has a note or lease payment, that the debtor may deduct the vehicle ownership expense. See In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006)The Court went on to "attempt to tease from both groups of decisions the major rationales which support them, and to analyze those rationales to determine if they are persuasive in this case."

The Court first examined the "plain meaning" doctrine, which both lines of cases rely on. The Court noted that if the meaning of the statutes was "plain, clear, and unambiguous, then how could six court have interpreted it one way and five courts have interpreted it in exactly the opposite way?". The Court noted that it was skeptical of the usefulness of the "plain meaning" doctrine as a tool of statutory interpretation in analyzing the statutory language at issue. The Court further noted that two courts found the statutory language to have the same meaning, but for different reasons. What made the language clear to one court was not what made it clear to the other. The Court noted a similar pattern in the cases that reached the opposite conclusion.

The Court also found that the "unfair result" rationale can provide support for either line of decisions.

The Court next examined the "ownership/liability" distinction rationale. That is which debtors are entitled to deduct an "ownership expense?" or in other words "what makes a debtor a vehicle "owner". Does the vehicle actually have to be titled in one's name or can one take a deduction for a car one uses and pays for even though it is not titled in one's name? The Court noted that neither the BAPCPA nor the IRS Local Standards Chart provide any guidance in answering this question.

The "policy" rationale was next examined and the Court also found that policy interests can support either line of decisions.

Next, the Court examined the "applicable vs. actual" rationale. Here the Court reviewed the Fowler decision by the Delaware Court that discussed that the expenses for the categories of expense listed in the National and Local Standards are to be the "applicable" monthly expenses specified while for the Other Necessary Expenses, they were to be the debtor's "actual" expenses. <In re Fowler, 349 B.R. 414 (Bankr.D.Del.2006). The point being that where Congress used the word "actual" it meant for the debtor to deduct only the amount the debtor actually paid, but where Congress used the word "applicable", it meant something other than the "actual" payment the debtor has to make each month. But the Court noted that this begs the question of what Congress mean by the word "applicable?".

The Court noted that the Fowler court concluded as did Chief Judge Wedoff in his article Means Testing in the New World - that by the use of "applicable", Congress meant to allow the above-median debtor to claim the Local Standard expenses as "fixed allowances", whether the debtor made lower-or no-actual payment in those categories. The Court noted that this decision was buttressed for the Fowler court, by the fact that Congress did not import into the involved statute certain language from the referenced Internal Revenue Manual that set the Local Standards as a cap. Judge Pepper stated that this rationale provide compelling support for the debtor's argument that the above-median income debtor is allowed a flat ownership deduction, regardless of whether they have an actual car payment expense or not.

Finally, the Court review the reliance on IRS materials rationale. That is, several of the Courts which did not allow debtors with paid off vehicles the ownership deduction reached their decisions by referencing certain materials promulgated by the IRS. The Court found that it is not appropriate to look to the IRS materials to interpret the word "applicable."

The Court concluded that the debtors are entitled to deduct on their Form B22C the IRS Local Standard expense amount for vehicle ownership even though they own their vehicle outright and do not make monthly note or lease payments. The Court based its decision on the use of the word "applicable" instead of the word "actual" and second that Congress considered, but did not import certain language from the IRS materials.
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