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Ransom Argument--Not Very Edifying

posted by Jean Braucher

The very first case argued today, the opening day of the 2010 Supreme Court term, was Ransom v. MBNA. Ransom presents an issue at the heart of the bankruptcy means test. The question for the Court is whether an above-median-income debtor in chapter 13 who does not currently have a car payment can take the IRS allowance for vehicle “ownership expense” as part of the means test. This issue also arises in chapter 7. You can find the transcript of the oral argument here. http://www.supremecourt.gov/oral_arguments/argument_transcripts/09-907.pdf

As with any oral argument, it is hard to know what to make of it as far as prediction as to the outcome. I will refrain from critiquing the lawyers’ arguments. I will merely note that Katie Porter recently asked why the government was involved and that although an answer to that question was not forthcoming, the government lawyer did end up serving the function of presenting a simple argument that the justices could (barely) follow.

The justices seemed very perplexed, and the primary reason is the statute itself, which is extremely difficult to fathom. But reading the tea leaves, Justice Scalia is the most sympathetic to the position that the means test is mechanical and a debtor who owns a car gets an ownership deduction, whether the debtor currently has no debt payment, has a debt payment of $1 a month, has a debt payment that will be paid off soon, or has a debt payment that is close to the IRS allowance and will go on for years. Otherwise, Congress could have just permitted a deduction for the actual secured debt, as it does in section 707(b)(2)(A)(iii). Instead, it also gave debtors an ownership deduction.

Like Justice Scalia, Chief Justice Roberts seemed to understand the textual argument as well as the point that perhaps bankruptcy law should not treat better those with big debt payments on their cars as opposed to those hanging on to an old car that might be about to break down and give out. Justice Kennedy might rate as the third most likely to side with the debtor, given his concern about the sentence in section 707(b)(2)(A)(ii) that says, “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.” This sentence certainly suggests that the ownership expense allowance does not depend on the debtor having a debt, with secured debts given their own deduction under section 707(b)(2)(A)(iii). Of course, the solution of the rules committee in the means testing forms for both chapters 7 and 13 is to allow the above-median-income debtor the greater of the IRS ownership expense allowance or the actual secured debt, something not mentioned in the Supreme Court argument today.

What about the so-called liberal members of the Court? Justice Ginsberg seemed to have the most sway with them and to be tilting them toward using the IRS collection standards’ definition of ownership expense (loan or lease payment only), rather than the language of the Bankruptcy Code. Justices Breyer, Kagan, and Sotomayor all seemed to agree with Ginsberg (along with Alito). I did not detect any faint heartbeat of sympathy for debtors among the bunch, let alone a bleeding heart. I hope I am wrong.

What was sorely missing was the big picture, but at least Chief Justice Roberts was looking for it. He asked the government’s lawyer (who largely sided with MBNA), “I should probably know this, but if you do have amounts that are excluded from the disposable income because of car ownership, in other words, you actually have, in your point of view, expenses, do they have to go to . . . pay off the car loan or are they available for everybody? All the creditors?” Of course the answer was that they go for the car loan. Robert’s next question was, “If there is more food expense than is allowed, can he [referring to the debtor] decide of the amount that would otherwise go for the car payment that he is going to pay some of that for the food expenses?” Roberts thus established himself as the justice most in search of the big picture, including from the debtor point of view.

The questions of the chief justice are the right ones. A debtor with a big debt payment on a car loan gets that as an allowance, to be paid to the secured creditor in chapter 13, and thus that money is not available to pay unsecured creditors. So it is odd to make a debtor holding on to an old, paid-off car take on a multi-year plan based on an assumption of no car payment. (If the Court holds for MBNA, and as the government favors, we can expect more debtors to buy new cars before filing; we can also expect less use of chapter 13, as debtors see that they cannot minimize actual car expense but use the means testing allowance for vehicles in order to pay more to save a home or for religious school tuition, for two obvious examples of how debtors might like to move money around by economizing on a vehicle.) And sometimes IRS allowances that are “too big” make up for ones that are too small, as with Roberts’ question about food expense. The whole IRS allowance system is a rough approximation, not based on actual expenses, allowing debtors to economize on one expense to have a little more for some other goal and also overall have a sustainable budget in chapter 13 (or avoid chapter 13 and have a workable budget outside bankruptcy after chapter 7 discharge). This message did not get across in the Supreme Court argument. I’ve left out a lot of excruciating details.


Agree with your assessment although I think the Justices - as evidenced by Justice Breyer's comment at 37-38 of the transcript - did eventually get the message identified in the antepenultimate sentence of your post. It's just that they didn't get it from Ransom's lawyer. He should have argued that every car owner has an ownership expense - the periodic registration fee you pay the state as the owner, whether you operate it or not. That is the "$1" referred to in the Court's questions that you need to trigger the allowance. Then you make the "national standards are a rough approximation" argument which provides administrative efficiency.

Confusion can be edifying. The initial questioning about ownership expenses has a "Who's On First?" feel to it.

The big picture is that the BAPCPA statutory scheme is sloppy. Current Monthly Income is a fictional amount that may or may not have any real relation to the "actual" monthly income of the debtor at the time of filing. And you're supposed to subtract actual expenses from that? No, you're supposed to create a budgetary bubble around the debtor within which he/she/they can live. The means test is just a freaking screening tool.

With respect to the Ransom attorney, who I'm sure is very capable and intelligent, but the opening questions were a wonderful (and sadly missed) opportunity to win the justices over with an arch wink acknowledging the baseline absurdity of the statute but presenting his client's position as the better common-sense fit. Scalia would have been receptive to that.

Doesn’t the argument that the below-mean income chapter 13 debtor does not get a vehicle “ownership” deduction unless they are paying for a car carry the day in Ransom? That is, below-mean income debtors do not fill out form 22C where that deduction resides and the excess on Schedule J determines plan payments for the most part - given expenses on Schedule J are reasonable (actual) and conform to IRS standards where applicable, like food, housing, utilities, etc.
I predict another “holistic” approach to interpreting ambiguity in the Code by the High Court.

The argument that above-median-income debtors' expenses should be treated like those of debtors with median income or less runs afoul of the problem that Congress wrote different expense tests for these two categories in chapter 13 and didn't subject debtors at or below median income to presumed abuse means testing in chapter 7. The means test is only for above-median-income debtors in both chapters.

The Supreme Court may very well be on a road to writing the means test out of the Bankruptcy Code. If so, it would be nice if debtors could stop filling out means testing forms in both chapters. The test "catches" less than one percent of chapter 7 filers and doesn't squeeze debtors hard in chapter 13. It would be great if Congress would repeal it and get rid of the associated paperwork.

But it also should be noted that Schedule J does not reflect "actual" expenses of debtors, particularly if projected into the future. The means test is usually more generous and is usually closer to an overall reasonable budget going forward. Schedule J is often an understatement of expenses at the time and especially of expenses projected into the future. This is one of the reasons debtors in chapter 13 (nearly three quarters of whom are at or below median income) overwhelmingly do not complete their plans; their budgets are not sustainable.

It is hard to make sense out of nonsense. I don't think the Supreme Court is going to succeed at that task. And a legislative fix is not immediately in prospect. Debtors' lawyers should be focused on pumping up Schedule J with all the things that debtors reasonably spend money on in the course of five years but don't think about putting down.

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