Joseph Bledsoe, III v. Cheryl Cook ( 2023 )

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 22-1328
JOSEPH A. BLEDSOE, III,
Petitioner - Appellant,
v.
ROBERT BURNS COOK, JR.; CHERYL LOTT COOK,
Respondents - Appellee.
On Appeal from the United States Bankruptcy Court for the Eastern District of North
Carolina, at Wilmington. Stephani W. Humrickhouse, Bankruptcy Judge. (21-01059-5-
DMW)
Argued: May 4, 2023 Decided: June 14, 2023
Before THACKER and HEYTENS, Circuit Judges, and KEENAN, Senior Circuit Judge.
Affirmed by published opinion. Judge Heytens wrote the opinion, in which Judge Thacker
and Judge Keenan joined.
Joseph A. Bledsoe, III, CHAPTER 13 TRUSTEE, New Bern, North Carolina, for
Appellant. Richard Preston Cook, RICHARD P. COOK, PLLC, Wilmington, North
Carolina, for Appellees.
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TOBY HEYTENS, Circuit Judge:
Can Chapter 13 bankruptcy filers who earn more than the median income use their
actual mortgage payments when calculating how much they can afford to pay unsecured
creditors? Joining the Sixth and Ninth Circuits, we hold the answer is yes.
I.
In 2021, Robert and Cheryl Cook filed a voluntary petition under Chapter 13 of the
Bankruptcy Code. That type of bankruptcy allows individual debtors “to obtain a
discharge” so long as they pay their “creditors a portion of [their] monthly income in
accordance with a court-approved plan.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61,
64 (2011). “To determine how much income” debtors are “capable of paying, Chapter 13
uses a statutory formula known as the means test” to calculate debtors’ “disposable
income.” Id. (quotation marks omitted).
The Cooks calculated their disposable income using Official Form 122C-2. As the
form instructs, the Cooks entered the relevant “National and Local Standards” for their
monthly costs for food, clothing, utilities, out-of-pocket healthcare, and vehicles. 1 The
Cooks next listed the monthly amounts they pay for “Other Necessary Expenses” (as
relevant here, taxes and life insurance). Finally, the Cooks recorded two “Deductions for
Debt Payments” to secured creditors, including, crucially, their monthly mortgage
1
The National and Local Standards are tables listing uniform amounts for
necessities, which are prepared by the IRS to help estimate a person’s ability to pay
delinquent taxes. See Internal Revenue Manual §§ 5.15.1.9 (Aug. 29, 2018), 5.15.1.10
(Nov. 22, 2021), https://www.irs.gov/irm/part5/irm_05-015-001.
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payment. After subtracting these amounts, the Cooks reported a monthly disposable
income of $253.27, which would be used to repay unsecured creditors.
The bankruptcy trustee objected to the Cooks’ proposed Chapter 13 plan. The
trustee acknowledged the Cooks followed the instructions on Official Form 122C-2. The
trustee maintained, however, that the form was wrong because the Bankruptcy Code only
allowed the Cooks to claim the relevant Local Standards amount for their “Mortgage/Rent”
deduction ($1,098) rather than their actual monthly payment ($2,233.34). Thus, the trustee
reasoned, the Cooks’ plan shortchanged unsecured creditors by $1,135.34 each month.
The bankruptcy court disagreed. “By correctly filling out Form 122C-2 and listing
their entire mortgage payment,” the court stated, the Cooks “followed the plain language
of the Bankruptcy Code.” JA 98. The court overruled the trustee’s objection and confirmed
the Cooks’ plan.
The trustee asked the bankruptcy court to certify an appeal directly to this Court
under 28 U.S.C. § 158(d)(2)(A). The bankruptcy court did so, concluding the case
“involves a matter of public importance and a question of law requiring a resolution of
conflicting decisions within the Eastern District of North Carolina, and because an
immediate appeal may materially advance the progress of this case.” JA 115–16 (citing
§ 158(d)(2)(A)). This Court granted the petition to appeal. We review interpretations of the
Bankruptcy Code de novo. See Johnson v. Zimmer, 686 F.3d 224, 227 (4th Cir. 2012).
II.
We join the Sixth and Ninth Circuits in holding the Chapter 13 means test permits
above-median income debtors to deduct the actual costs of their mortgage payments when
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calculating their disposable income. See In re Welsh, 711 F.3d 1120, 1130 (9th Cir. 2013);
Baud v. Carroll, 634 F.3d 327, 349 (6th Cir. 2011). We thus affirm.
A.
The relevant statutory provisions—though intricate—are straightforward. Because
of the trustee’s objection, the bankruptcy court could only approve the Cooks’ proposed
Chapter 13 plan if the plan made all “projected disposable income” available to unsecured
creditors. 11 U.S.C. § 1325(b)(1)(B). Disposable income, in turn, means “current monthly
income received by the debtor” minus “amounts reasonably necessary to be expended.”
§ 1325(b)(2). And for above-median income debtors like the Cooks, the Bankruptcy Code
instructs that “[a]mounts reasonably necessary to be expended . . . shall be determined in
accordance with subparagraphs (A) and (B) of section 707(b)(2).” § 1325(b)(3).
We thus turn to Section 707(b)(2). The first provision of subparagraph A—which
we will call Clause One—provides:
In considering under paragraph (1) whether the granting of relief would be
an abuse of the provisions of this chapter, the court shall presume abuse exists
if the debtor’s current monthly income reduced by the amounts determined
under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the
lesser of [two specified thresholds].
11 U.S.C. § 707(b)(2)(A)(i). 2 The three clauses referenced in Clause One—which we will
call Clause Two, Clause Three, and Clause Four—address “[t]he debtor’s monthly
2
The referenced “paragraph (1)” says a bankruptcy court may dismiss a filing under
Chapter 7 “if it finds that the granting of relief would be an abuse under the provisions of
this chapter.” 11 U.S.C. § 707(b)(1). The other subparagraph referenced in Section
1325(b)(3) allows a debtor to rebut any presumption of abuse created by Clause One by
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expenses,” “[t]he debtor’s average monthly payments on account of secured debts,” and
“[t]he debtor’s expenses for payment of all priority claims,” respectively. 11 U.S.C.
§ 707(b)(2)(A)(ii), (iii), (iv). As relevant here, Clause Three instructs: “The debtor’s
average monthly payments on account of secured debts shall be calculated as the sum of
. . . 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.”
§ 707(b)(2)(A)(iii)(I).
Now apply those rules here. Everyone agrees the mortgage on the Cooks’ house is
a “secured debt[ ].” 11 U.S.C. § 707(b)(2)(A)(iii). Accordingly, Clause Three says the
Cooks’ “average monthly payments on account of ” that mortgage “shall be calculated”
based on the amounts “contractually due to secured creditors,” § 707(b)(2)(A)(iii)(I)—that
is, what the Cooks owe under their mortgage agreement. Performing that calculation, the
Cooks reached an average monthly payment of $2,233.34. Then, Clause One tells the
Cooks to “reduce[ ]” their “current monthly income” “by the amount[ ] determined under”
Clause Three. § 707(b)(2)(A)(i). Thus, the Cooks subtracted $2,233.34 (and other
uncontested amounts) from their current monthly income to reach a disposable income of
$253.27. Easy-peasy.
demonstrating “special circumstances.” U.S.C. § 707(b)(2)(B). See p. 9, infra (discussing
that provision).
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B.
The trustee offers a flurry of arguments against this straightforward reading. We are
unpersuaded.
In essence, the trustee asserts the critical provision here is Clause Two—
specifically, the first sentence of Clause Two’s five subparts about how to calculate “[t]he
debtor’s monthly expenses.” 11 U.S.C. § 707(b)(2)(A)(ii)(I). The language the trustee
relies on reads:
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 for the area in which the debtor
resides, as in effect on the date of the order for relief [.]
Id. Because the Local Standards contain allowances for “[h]ousing expenses”—and define
that term to include “mortgage (including interest),” Internal Revenue Manual
§ 5.15.1.10.1 (Nov. 22, 2021); see note 1, supra—the trustee insists the Cooks must use
the lower, Local Standard number rather than their actual mortgage payment.
The trustee’s argument fails multiple times over. To start, it violates “the first rule
of . . . statutory interpretation,” which is: “Read on.” Arkansas Game & Fish Comm’n v.
United States, 568 U.S. 23, 36 (2012). Just two sentences after the language the trustee
relies on, Clause Two states: “Notwithstanding any other provision of this clause, the
monthly expenses of the debtor shall not include any payments for debts.” 11 U.S.C.
§ 707(b)(2)(A)(ii)(I). A home mortgage is, of course, a debt. Thus, read in full, Clause Two
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declares that the National and Local Standards govern a debtor’s “monthly expenses,”
while clarifying mortgage payments are not “monthly expenses.” Id. 3
The trustee gamely insists the “notwithstanding” clause precludes the Cooks from
deducting their actual mortgage payments under Clause Three. But the trustee does not
explain how a directive limited to “this clause” (that is, Clause Two) somehow extends to
Clause Three. Nor does the trustee clarify how an instruction about “monthly expenses”
should apply to Clause Three, which never uses that term.
Making matters worse, the trustee’s argument also finds no support in the text of
Clauses One and Three. Nothing in Clause One says debtors may “reduc[e]” their current
monthly income “by the amount[ ] determined under” Clause Three only if that amount
turns out to be less than the Local Standard referenced in Clause Two. 11 U.S.C.
§ 707(b)(2)(A)(i). Nor does Clause Three suggest that debts secured by a person’s home
receive less favorable treatment than other types of secured debt for which there may be
no relevant National or Local Standard. Quite the contrary. Beyond allowing debtors to
deduct the full amount of their “contractually due” mortgage payments, Clause Three
allows debtors to deduct “any additional payments to secured creditors necessary for the
3
A reader wondering why the IRS would have gone to the trouble of preparing
county-level housing-cost figures if those amounts were inapplicable to debtors like the
Cooks should recall the Standards were not created for bankruptcy purposes, but (as the
trustee concedes) to assess delinquent tax liability. It makes sense then that, rather than
reinvent the wheel, the means test would adopt the National and Local Standards for
calculating debtors’ monthly expenses. This rare display of federal efficiency does not
compel this Court to adopt a mangled reading of the means test. Cf. Ransom, 562 U.S. at
72 (“[T]he IRS’s explanatory guidelines to the National and Local Standards . . . of course
cannot control if they are at odds with the statutory language.”).
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debtor . . . to maintain possession of the debtor’s primary residence.” § 707(b)(2)(A)(iii).
This provision cannot be squared with the trustee’s view that the means test could leave
debtors like the Cooks with insufficient funds to pay their mortgage in the first place. 4
The trustee asserts Clause Three merely tells debtors how to calculate their average
monthly payments on secured debts but does not authorize debtors to deduct the resulting
amount from their gross monthly income. True, nothing in Clause Three itself allows the
Cooks to subtract the calculated amounts from their monthly income. But Clause One does.
Indeed, Clause One tells debtors to deduct “the amounts determined under” Clause Three
from their monthly income in the same sentence and with the same language in which it
tells debtors to do the same for Clauses Two and Four. See 11 U.S.C. § 707(b)(2)(A)(i)
(“the debtor’s current monthly income reduced by the amounts determined under clauses
(ii), (iii), and (iv)”). 5
The trustee’s “Clause Three as calculator” theory faces another problem: It is not
obvious why Clause Three would tell debtors to calculate a figure (and how to do it) unless
the resulting number had some real-world purpose. Undeterred, the trustee responds that
those calculations do have practical effect—they provide the maximum amount the Cooks
4
In Lynch v. Jackson, 853 F.3d 116 (4th Cir. 2017), this Court held that two above-
median income debtors whose home mortgage and car loan expenses were less than the
amount listed in the Local Standards were “entitled to the full National and Local Standard
amount.” Id. at 118. As the trustee acknowledges, that decision did not consider or discuss
the applicability of Clause Three to a mortgage debt. See Oral Arg. 13:34–14:13.
5
The trustee notes that Clause Three (unlike Clauses Two and Four) does not
contain the word “expense.” But then, neither does Clause One. All four clauses, however,
use the same word to discuss the thing being deducted: “amounts.” See 11 U.S.C.
§ 707(b)(2)(A).
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may deduct if they prove to the bankruptcy court the amount above the relevant Local
Standard is “reasonable.” Oral Arg. 4:40–5:04; see id. at 1:07–10. As support for this view,
the trustee points to a provision—which we will call Subparagraph B—stating a debtor
may “rebut[ ]” a “presumption of abuse” generated under Subparagraph A “by
demonstrating special circumstances” that “justify additional expenses or adjustments of
current monthly income for which there is no reasonable alternative.” 11 U.S.C.
§ 707(b)(2)(B)(i); see note 1, supra.
That view comes with its own host of problems. For one thing, saying a debtor may
rebut a presumption of abuse by showing special circumstances is different from saying a
bankruptcy court may permit deductions for any debts the court concludes are reasonable.
What is more, Subparagraph B only allows bankruptcy courts to assess a debtor’s special
circumstances if their petition is shown to be presumptively abusive under
Subparagraph A; it does not alter whether and how much a debtor may deduct for secured
debts as a matter of course. And nothing in Clause Three suggests there is “any
qualification or limitation on the kind of secured debt that is deducted from current monthly
income.” Welsh, 711 F.3d at 1134.
At bottom, the trustee’s plea for a reasonableness limitation sounds in public policy.
Like the Ninth Circuit, we recognize our interpretation of Clause Three means “debtors
could make secured payments on luxury or comfort items”—or expensive home
mortgages—“with the result that little ‘disposable income,’ as that figure is calculated,
remains to pay unsecured creditors.” Welsh, 711 F.3d at 1130. One might reasonably object
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to favoring one type of creditor over another or limiting a bankruptcy court’s discretion to
decide which debt payments are reasonable or should take priority.
“As usual,” however, “there are (at least) two sides to the policy question before
us,” and “a rational Congress could reach the policy judgment the statutory text suggests it
did.” Niz-Chavez v. Garland, 141 S. Ct. 1474, 1486 (2021). The current statutory regime
was introduced in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
which sought “to correct perceived abuses of the bankruptcy system.” Milavetz, Gallop &
Milavetz, P.A. v. United States, 559 U.S. 229, 231 (2010). In particular, the means test
“supplants the [previous] practice of calculating debtors’ reasonable expenses on a case-
by-case basis”—a regime that “led to varying and often inconsistent determinations.”
Ransom, 562 U.S. at 65. Because “Congress made a conscious effort to cabin the discretion
of bankruptcy judges” by removing the power to determine “what is or is not ‘reasonably
necessary,’ ” Welsh, 711 F.3d at 1130, 1134 (some quotation marks omitted), we decline
to interpret the statute to restore the very power Congress removed.
* * *
The Cooks were entitled to use their average monthly mortgage payments when
calculating their disposable income. The order of the bankruptcy court is thus
AFFIRMED.
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