Court Erroneously Applies Lanning to Find Presumption of Abuse in Chapter 7

Posted by NCBRC - July 4, 2013

The district court for the Eastern District of North Carolina was asked to revisit its previous decision that a chapter 7 debtor may take secured payment deductions on property he intends to surrender. Krawczyk v. Lynch (In re Krawczyk), No. 12-643 (E.D. N.C. June 17, 2013). The bankruptcy court had concluded that intervening Supreme Court and Fourth Circuit decisions rendered that finding incorrect. In re Krawczyk, No. 11-0956-8-JRL, 2012 WL 3069437 * 5 (Bankr. E.D. N.C. July 27, 2012) (relying on Hamilton v. Lanning, 130 S. Ct. 2464 (2010); Ransom v. FIA Card Services, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011); In re Quigley, 673 F.3d 269 (4th Cir. 2012)). The district court agreed that the debtor could not take the deductions and that, therefore, the petition was presumptively abusive under section 707(b)(2)(A).

The court began with a look at section 707(b)(2)(A) which provides that a chapter 7 petition is presumptively abusive when calculation of the means test reveals current monthly income in excess of a statutory minimum. Under the means test, calculation of current monthly income permits a deduction for ‘[t]he debtor’s average monthly payments on account of secured debts,’ which ‘shall be calculated as . . . the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition. . . . divided by 60.’ 11 U.S.C. § 707(b)(2)(A)(iii).” In this case, when the debtor calculated his income with the deduction for his secured debts his petition did not trigger the presumptive abuse provision.

Nonetheless, the court agreed with the trustee’s position, finding that under Lanning, Ransom and Quigley, the debtor’s intent to surrender collateral altered the means test calculation of current monthly income. It rejected the debtor’s argument distinguishing those cases on the basis that they concern chapter 13, finding that, because the means test is the basis for the calculation whether the bankruptcy is chapter 7 or chapter 13, the reasoning is identical in either situation.

In so holding,the court performed various contortions beginning with a strained reading of the section quoted above that allows certain deductions in the monthly income calculation. The court first examined the word “scheduled” finding that it is amenable to two plausible interpretations: 1) specified to be paid under the terms of the security agreement, or 2) scheduled as expenses in the debtor’s bankruptcy schedules. If the proper meaning is the latter, the court reasoned, a debtor who has not made payments on the loan and does not intend to in the future, will not schedule the expense on the bankruptcy Schedule J and may not take the deduction. The court next found ambiguity in the phrase “on account of secured debts.” The court found this phrase susceptible to meaning: 1) on account of debts created with a security interest but subject to change – the “snapshot” view, or 2) on account of debts which will continue to be secured during the bankruptcy – the “forward-looking” view.

Having found ambiguity, the court went on to resolve the issue by reference to In re Quigley, 673 F.3d 269 (4th Cir. 2012), where the circuit court applied a forward-looking approach to decide that a chapter 13 debtor could not calculate projected disposable income with a deduction for secured payments on property he intended to surrender. The Quigley opinion was supported by Hamilton v. Lanning, 130 S. Ct. 2464 (2010) (projected disposable income calculation may take into account changes that are virtually certain to occur), and Ransom v. FIA Card Services, N.A., 131 S.Ct. 716 (2011) (debtor may not take expense deduction for payments on surrendered vehicle).

It was in the interpretation of the lessons of Lanning, Ransom and Quigley, all three of which dealt with chapter 13 plans, that the district court went off course. The means test is an objective first step in the bankruptcy process based on the state of debtor’s financial affairs as of the petition date. See In re Rivers, 466 B.R. 558 (Bankr. M.D. Fla. 2012) (citing Ransom). “[A] plain, ordinary reading of the subsection supports the bankruptcy court’s finding that it applies to payments that the debtor is under contract to make.” Lynch v. Haenke (In re Lynch), 395 B.R. 346, 349 (E.D. N.C. 2008). A finding based on the means test that the petition is not presumptively abusive under section 707(b)(2) does not preclude a finding of bad faith, however. Section 707(b)(3) permits a court to inquire into the good faith of the petitioner based on the totality of the circumstances, “including debtor’s income and expenses after the filing of the petition.” Id. at 560. Therefore, it is neither necessary nor appropriate to manipulate the outcome of the means test to account for the intended surrender of collateral.

This reasoning finds support in the very cases the court in Krawczyk relied on for the opposite proposition. Unlike the court here, the Lanning Court did not recalculate “current monthly income” as determined by the means test. Rather, the Lanning Court decided that “projected disposable income” would not be based on that calculation alone when changes to current monthly income were known or virtually certain to occur. The Lanning Court did not have to perform the same sleight of hand with respect to the language of section 707(b)(2)(A)(iii) because that Court did not require recalculation of current monthly income for its ultimate decision. Specifically, Lanning answered the question of whether the “projected disposable income” calculation—a calculation that does not come into play in chapter 7—always had to be based on the current monthly income in the means test, or whether it could take into account changes to the means test calculation that were “virtually certain” to occur. Notably, the Lanning Court did not find that anticipated changes to income altered the means test calculation of current monthly income.

The issue is also not answered by Ransom where the Court examined a different provision of the means test relating to deduction of vehicle ownership costs for a car that was fully paid off. Calculation of that deduction is explicitly dependent upon IRS Standards which define the deduction in such a way that it covers only expenses related to a car loan or lease. Since the debtor had neither, the ownership deduction was deemed inapplicable within the meaning of the means test. The Court noted that the means test provided for a separate deduction based on operating expenses which was not dependent on the existence of debt.

The means test is a “snapshot” of the debtor’s financial situation at the time of filing. Therefore, a debtor’s intent to surrender does not come into play at that juncture. This finding is harmonious with the recent Supreme Court decisions in Lanning and Ransom, and obviates the need for strained reading of section 707, without precluding a later finding of abuse if the totality of circumstances warrants such a finding.

Krawczyk D Ct opinion

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