Dispute over car payments headed to Supreme Court

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A long-running dispute in the bankruptcy courts will finally be resolved definitively.

The U.S. Supreme Court granted certiorari on Monday to decide whether a debtor with an income above median and no monthly car payment can nevertheless claim a vehicle expense deduction when calculating his disposable income.

In the case, Ransom v. MBNA, America Bank, N.A., No 09-907, the Ninth Circuit held that the debtor may not do so. 577 F.3d 1026 (9th Cir. 2009).

In the Seventh Circuit, in contrast, the court held that the debtor may, adopting a “plain language” approach to the statute at issue, 11 U.S.C. 707(b)(2)(A)(ii)(I), in Ross-Tousey v. Neary, 549 F.3d 1148 (7th Cir. 2008).

The issue in Wisconsin has had a long and uneven history.

Bankruptcy courts in the state that considered the issue unanimously concluded that a debtor may claim the deduction. In re Sawdy, 362 B.R. 898 (Bankr.E.D. Wis.2007); In re Grunert, 353 B.R. 591 (Bankr.E.D.Wis.2006); In re Clark, Case No. 07-23390 (Bankr.E.D.Wis., Feb. 14, 2008); and In re Long, 372 B.R. 467 (Bankr.W.D.2007).

Invariably, however, when cases were appealed to the district courts, the bankruptcy judges were reversed. In re Ross-Tousey, 368 B.R. 762 (E.D.Wis.2007); Grossman v Sawdy, 384 B.R. 199 (E.D.Wis.2008).

In turn, in Ross-Tousey, the Seventh Circuit reversed the district courts, and agreed with the bankruptcy courts’ interpretations.

Next term, the Supreme Court will have the final say on the issue.

The statute provides that the debtor’s monthly expenses, “shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards … issued by the Internal Revenue Service.”

The Seventh Circuit’s view is that, because the statute refers to the “amount specified” in the standards, rather than actual expenses, a debtor can take an allowance, even if he has no actual expenses.

In addition to its “plain language” analysis, the Seventh Circuit also defended its decision on policy grounds.

The court noted that there are costs associated with car ownership apart from loan or lease payments, and that a car owned outright may be old and need to be replaced during the course of the bankruptcy plan.

Furthermore, the court noted that an alternative interpretation would be arbitrary and unfair in two respects: (1) a debtor who completes his last payment just before filing would not be allowed the deduction, while a debtor with just one payment remaining would; and (2) it would punish debtors who drive older and cheaper vehicles, and reward those who borrow money to obtain newer and more expensive cars.

The Ninth Circuit’s view is that a plain language interpretation contravenes Congress’ intent that debtors pay creditors the maximum that they can afford.

Attorney Claire Ann Resop, Chair of the State Bar’s Bankruptcy, Insolvency & Creditor’s Rights Committee, said the bankruptcy bar will be happy just to have the issue resolved one way or another.

“It’s poorly drafted legislation, and while it’s a little tacky issue, it becomes very important when it is at issue, and we really need to have a decision,” Resop said.

Resop said the court’s opinion will also be important to give an indication on how the Court would rule on other issues, where the dispute is the plain language of the statute versus legislative intent. “There are a lot of provisions in the Code, where, if you do what the Code says to do, it makes no sense. How the Court decides this case will give an indication how it would interpret other provisions.”

David Ziemer can be reached at [email protected].