Tuesday, January 11, 2011

Supreme Court Rules That Debtor Must Have Loan or Lease Payment for Means Test Deduction

In an 8-1 decision authored by Justice Kagan, the Supreme Court ruled today that an ownership expense is not "applicable" under the Means Test unless the Debtor has an actual payment. Ransom v. FIA Card Services, No. 09-907 (1/11/11). You can read the opinion here.

Justice Kagan framed the issue in this manner:

This case concerns the specified expense for vehicle-ownership costs. We must determine whether a debtor like petitioner Jason Ransom who owns his car outright, and so does not make loan or lease payments, may claim an allowance for car-ownership costs (thereby reducing the amount he will repay creditors). We hold that the text, context, and purpose of the statutory provision at issue preclude this result. A debtor who does not make loan or lease payments may not take the car-ownership deduction.
Opinion, pp. 1-2.

Justice Kagan described the means as designed to "help ensure that debtors who can pay creditors do pay them." Opinion, p. 2.

The Dictionary Approach to Ordinary Meaning

Justice Kagan used an ordinary meaning analysis and a dictionary to conclude that the ownership expense was not applicable.

The key word in this provision is “applicable”: A debtor may claim not all, but only “applicable” expense amounts listed in the Standards. Whether Ransom may claim the $471 car-ownership deduction accordingly turns on whether that expense amount is “applicable” to him.

Because the Code does not define “applicable,” we look to the ordinary meaning of the term. (citation omitted). “Applicable” means “capable of being applied: having relevance” or “fit, suitable, or right to be applied: appropriate.”Webster’s Third New International Dictionary 105 (2002). See also New Oxford American Dictionary 74 (2d ed. 2005) (“relevant or appropriate”); 1 Oxford English Dictionary 575 (2d ed. 1989) (“[c]apable of being applied” or “[f]it or suitable for its purpose, appropriate”). So an expense amount is “applicable” within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.

What makes an expense amount “applicable” in this sense (appropriate, relevant, suitable, or fit) is most naturally understood to be its correspondence to an individual debtor’s financial circumstances. Rather than authorizing all debtors to take deductions in all listed categories, Congress established a filter: A debtor may claim a deduction from a National or Local Standard table (like “[Car]Ownership Costs”) if but only if that deduction is appropriate for him. And a deduction is so appropriate only if the debtor has costs corresponding to the category covered by the table—that is, only if the debtor will incur that kind of expense during the life of the plan. The statute underscores the necessity of making such an individualized determination by referring to “the debtor’s applicable monthly expense amounts,” (citation omitted)—in other words, the expense amounts applicable (appropriate, etc.) to each particular debtor. Identifying these amounts requires looking at the financial situation of the debtor and asking whether a National or Local Standard table is relevant to him.

If Congress had not wanted to separate in this way debtors who qualify for an allowance from those who do not, it could have omitted the term “applicable” altogether. Without that word, all debtors would be eligible to claim a deduction for each category listed in the Standards. Congress presumably included “applicable” to achieve a different result.
Opinion, pp. 6-8.

This passage is the heart of the opinion. One word used according to its ordinary meaning decides the issue.

Making Sense of BAPCPA

As additional support for her conclusion, Justice Kagan noted that:
  • this interpretation furthered the goals of BAPCPA; and
  • this interpretation was consistent with the way in which the IRS applied the standards (although she was careful to point out that the "guidelines . . . cannot control if they are at odds with the statutory language")
You Have to Decide What Should Be Applicable to Determine What Applicable Means

Justice Kagan rejected the Debtor's argument that "applicable" referred to the applicable number of vehicles which the Debtor had in reference to the standards. Her approach was a functional one.

On this approach, the word “applicable” serves a function wholly internal to the tables; rather than filtering out debtors for whom a deduction is not at all suitable, the term merely directs each debtor to the correct box (and associated dollar amount of deduction) within every table.

This alternative reading of “applicable” fails to comport with the statute’s text, context, or purpose.
Opinion, pp. 11-12.

Actual vs. Applicable

Justice Kagan also pointed out that her approach avoided making "actual" and "applicable" mean the same thing. She noted that if a person's actual expense exceeded the standard, it would be capped. However, she refused to opine on whether a person who had less than the standard would be limited to the actual amount. She noted that both the debtor and the United States believed that the debtor received the full standard as long as any amount was incurred, while FIA Card Services contended that the debtor received the lesser of the standard or the actual amount. She said that because the debtor had no ownership expense, it was unnecessary to determine whether the debtor received the full standard or just the actual amount. See Opinion, p. 13, n. 8.

Overall, Justice Kagan's approach the statute is a pragmatic one. She ties her conclusion to a plausible reading of the text but shores up her interpretation with the purpose of the statute. She rejected the invitation to incorporate the IRS guidelines into the statute while allowing that they could be consulted so long as they didn't conflict with the text.

A Minority of One Says Stop Making Sense

Predictably, Justice Scalia dissented. In his typical eloquent manner, he did not agree with Justice Kagan's grammar lesson or use of canons of statutory construction.

The Court believes, however, that unless the IRS’s Collection Financial Standards are imported into the Local Standards, the word “applicable” would do no work,violating the principle that “‘we must give effect to every word of a statute wherever possible.’” (citation omitted). I disagree. The canon against superfluity is not a canon against verbosity. When a thought could have been expressed more concisely, one does not always have to cast about for some additional meaning to the word or phrase that could have been dispensed with. This has always been understood. 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. (citation omitted).

It seems to me that is the situation here. To be sure, one can say “according to the attached table”; but it is acceptable (and indeed I think more common) to say “according to the applicable provisions of the attached table.” That seems to me the fairest reading of “applicable monthly expense amounts specified under the National Standards and Local Standards.” That is especially so for the Ownership Costs portion of the Local Standards,which had no column titled “No Car.” Here the expense amount would be that shown for one car (which is all the debtor here owned) rather than that shown for two cars;and it would be no expense amount if the debtor owned no car, since there is no “applicable” provision for that on the table. For operating and public transportation costs, the“applicable” amount would similarly be the amount provided by the Local Standards for the geographic region in which the debtor resides. (The debtor would not first be required to prove that he actually operates the cars that he owns, or, if does not own a car, that he actually uses public transportation.) The Court claims that the tables “are not self-defining,” and that “[s]ome amount of interpretation” is necessary in choosing whether to claim a deduction at all, for one car, or for two. (citation omitted). But this problem seems to me more metaphysical than practical. The point of the statutory language is to entitle debtors who own cars to an ownership deduction, and I have little doubt that debtors will be able to choose correctly whether to claim a deduction for one car or for two.
Dissent, pp. 2-3.

Making Sense of BAPCPA

Here, Justice Scalia echoes his dissent in Hamilton v. Lanning where he unsuccessfully argued for a literal reading rather than a practical one. The difference here is that the word "applicable" here truly is ambiguous. Where either meaning is persuasive, one that is consistent with the purpose of the statute probably should carry more weight.

As with last term's opinions in Milavetz and Lanning, the majority wants to construe BAPCPA in a manner which avoids extreme results. Thus, the Court will not apply the DRA sections to require a creditor's lawyer to say "I am a Debt Relief Agency." Similarly, the Court will neither require a debtor to recognize phantom income or allow a debtor to take a phantom deduction.


Anonymous said...

So, do you suppose we'll see debtors incurring new debt on their paid-for cars -- say a couple of hundred bucks at a title loan place so that they'll get the exemption?

law offices philadelphia pa said...

Legal and bankruptcy experts agree with the decision. They also say that the law should be rewritten to pre-empt future challenges like this. A well-written about supreme court rules. Thanks for sharing this helpful info with us.

Anonymous said...

What a waste of the Court's time.