Justice Kagan's First Opinion Tightens Automobile Ownership Cost Determination Under the Means Test

On behalf of Macdonald Fernandez LLP on Friday, January 21, 2011.

In her first opinion on the United States Supreme Court, Justice Elena Kagan reports the Justices' 8-1 ruling that a consumer debtor cannot deduct the IRS standard automobile ownership costs from his or her disposable monthly income under the means test if the automobile is free and clear. In Ransom v . FIA Card Services, N.A., 11 C.D.O.S. 459 (U.S. Supr. Ct. No. 09-907 January 11, 2011), Justice Kagan explained that the means test, which is used for determining eligibility for chapter 7 and is related to the calculation of plan payments under chapter 13, includes deductions from disposable monthly income for vehicle "Ownership Costs" and vehicle "Operating Costs" pursuant to certain IRS standards. The Ownership Costs include only loan or lease payments, and they are deemed to be $471 per month based on national automobile financing data. Operating Costs, on the other hand, can include the expenses of driving and maintaining a vehicle.

In Ransom, the chapter 13 debtor claimed the full Ownership Cost as well as Opweating Costs of $388 per month for a car that the debtor owned free and clear. A creditor, namely FIA Card Services, objected to the claim of Ownership Costs and argued that the payments to creditors proposed in the plan should be increased in light of the resulting higher disposable monthly income. The bankruptcy court agreed and denied confirmation of the plan. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit Court of Appeals affirmed.

The Supreme Court focused on the language of 11 U.S.C. § 707(b)(2)(A)(ii)(I), which provides that: "The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides." Specifically, the Justices ruled that the term "applicable" means that the debtor must have actually incurred the expense. In other words, the Ownership Costs do not apply if there are in fact no loan or lease payments. The opinion further notes that the Ownership Costs do not include the expenses of driving or maintaining an automobile, which are covered by the separate Operating Costs deduction.

The Justices did not discuss the debtor's policy argument or alternative interpretation of the term "applicable." These may be similar to the arguments advanced in a recent Credit Slips article. The article argues that: "[W]e also can think of the 'ownership expense' as the cost of saving up to replace an existing car. In addition, if we deny an ownership expense to a debtor who owns a car free and clear, we create an incentive to buy a new car on credit just before filing bankruptcy so that there is an actual out-of-pocket 'ownership expense' the debtor can deduct."

Justice Scalia filed a dissenting opinion, arguing that the term "applicable" does not do as much work as the majority thinks. "A House of Lords opinion holds, for example, that in the phrase 'in addition to and not in derogation of ' the last part adds nothing but emphasis. Davies v. Powell Duffryn Associated Collieries , Ltd. , [1942] A. C. 601, 607." Specifically, Justice Scalia argues that the phrase simply makes the IRS tables applicable to the means test. The tables have entries for "one car" and "two cars," but not "no car." In other words, the first two entries are applicable of the debtor has a car, and the last is applicable if the debtor has no car, regardless of whether there are any loan or lease payments.

In an interesting twist, the Credit Slips article criticized the Office of the US Trustee for having published guidelines on the means test that stated, without qualification, that the Ownership Costs could not be deducted if the automobile is free and clear; in other words, the US Trustee decided the Ransom case before the Supreme Court did.

By Reno F.R. Fernandez III