Do I own this car? The Supreme Court creates a standard for BAPCPA car ownership.

• Author: Hucker, Anne Benton
• Position: Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

1. Introduction

   On Monday, October 4, 2010, reporters and other observers packed the red upholstered benches and filled the white marble courtroom of the United States Supreme Court. (1) They came to witness a newsworthy event--the first day of the Court's new Term and, more importantly, Justice Elena Kagan's first day on the job. (2) The Court opened the Term with a fairly routine case, the type of "workaday dispute that makes up far more of the docket than the constitutional barnburners the [J]ustices occasionally entertain." (3) This first case of the Term would be the subject matter of Justice Kagan's first opinion. (4)

   The case was Ransom v. FIA Card Services, N.A., and the dispute was whether, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Appellant Jason Ransom should be able to claim a vehicle ownership expense for purposes of Chapter 13 bankruptcy for the unencumbered car that he owned. (5) Practitioners in the bankruptcy field had been watching the progression of this case and were eager to learn the Court's resolution of the issue. (6) The interest was due to two reasons. First, the outcome of the case would affect approximately 250,000 Chapter 13 petitioners. (7) Second, the case would resolve an issue on which the lower courts had not been able to reach a consensus. (8)

   BAPCPA was "poorly crafted" and "hastily designed," leaving one bankruptcy judge to lament that

   "those responsible for ... passing [BAPCPA] ... did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the ... bankruptcy lawyers in the country as to the perceived flaws in the Act." (9)

   Another bankruptcy judge complained that the law was "[u]nquestionably ... the most poorly written piece of legislation that I or anyone else has ever seen. ... No one has ever seen a piece of garbage like this. ... There's going to be the most fantastic anarchy in bankruptcy courts for years." (10)

   When the Court issued its opinion, holding that Ransom could not claim a vehicle ownership expense if he owned an unencumbered car, Justice Kagan created a tidy framework through which to interpret all future BAPCPA provisions: to determine the meaning of the statute, one must look at the text, context, and purpose of BAPCPA. (11)

   But Justice Antonin Scalia refused to overlook the manifest problems with BAPCPA's construction, and thus, he dissented. (12) In his dissent, he contended that Justice Kagan's opinion was simplistic and that it glossed over BAPCPA's real issues. (13) He argued that the Court's opinion in Ransom created more questions than it answered. (14)

2. Facts and Holding

   On July 5, 2006, Jason Ransom filed for Chapter 13 bankruptcy relief in the United States Bankruptcy Court for the District of Nevada. (15) Ransom had accrued $82,542.93 in unsecured debt, including $32,896.73 that Ransom owed to MBNA American Bank (MBNA). (16) During the process of filing for bankruptcy, Ransom completed Form B22C, which is the Debtor's Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. (17) On this form, Ransom reported his monthly income of $4248.56 and his annual income of $50,982.72. (18) At the time, the median income for a single-family household in Nevada was $38,506. (19) Because Ransom's income exceeded the median income for Nevada, the bankruptcy code required Ransom to create a five-year payment plan. (20)

   The bankruptcy code instructs debtors such as Ransom to deduct reported monthly expenses from the debtors' reported monthly income to determine the amount which will be repaid to creditors. (21) The bankruptcy code allows several categories of potential expenses, including household expenses, car expenses, and utility expenses. (22) For certain categories, such as car expenses, the bankruptcy code instructs debtors to use Internal Revenue Service (IRS) Standards to establish the allowable expense amounts. (23) Specifically, the IRS provides that a debtor can be eligible for ownership and operating costs with respect to a motor vehicle. (24) After a debtor calculates his expenses, he subtracts these expenses from his monthly income. (25) The surplus is the amount that the debtor is able to pay each month to his creditors in his payment plan. (26)

   At the time of Ransom's bankruptcy filing, he owned a 2004 Toyota Camry outright, with no liens or security interests. (27) Ransom calculated his monthly expenses using the IRS Standards in accordance with the bankruptcy code. (28) For his 2004 Toyota Camry, Ransom listed ownership and operating costs as reported monthly expenses. (29) After calculating these expenses, together with his other expenses, he deducted this amount from his reported monthly income, which resulted in approximately $500 of net income per month. (30) Thus, Ransom filed a Chapter 13 bankruptcy plan in which he would pay creditors $500 per month for five years. (31)

   The trustee of Ransom's bankruptcy case and MBNA contested the plan and filed motions in opposition to the plan, arguing that the court should prohibit Ransom from taking an ownership expense for a vehicle that he owned in full. (32) The bankruptcy court found in favor of the trustee and MBNA, holding that an ownership expense is not appropriate if the debtor is not making any car payments. (33)

   Ransom appealed the bankruptcy court's ruling to the bankruptcy appellate panel. (34) While the bankruptcy appellate panel acknowledged that many courts had found that a debtor could deduct an ownership expense even if the debtor owned an unencumbered car, the bankruptcy appellate panel noted that many other courts had prohibited debtors from deducting an ownership expense in that situation. (35) The bankruptcy appellate panel found the latter line of cases more persuasive; consequently, it affirmed the bankruptcy court's decision. (36)

   Ransom appealed the bankruptcy appellate panel's decision to the United States Court of Appeals for the Ninth Circuit. (37) In a unanimous opinion, the court affirmed the bankruptcy appellate panel's ruling, holding that debtors do not have applicable ownership expenses if they are not making loan or lease payments on the car. (38) The court reached this holding by defining the term "applicable" as "capable of or suitable for being applied." (39) Next, the court determined that "applicable" modified the phrase "monthly expense amounts." (40) Consequently, a vehicle ownership expense could become "capable of being applied" only when the debtor had an actual vehicle ownership expense. (41) otherwise, the court reasoned, the term "applicable" would be meaningless. (42)

   Ransom appealed the Ninth Circuit's decision to the United States Supreme Court, which affirmed the Ninth Circuit's ruling. (43) In an eight-to-one decision, the United States Supreme Court held that based on the "text, context, and purpose" of the statutory language regarding vehicle expenses, a debtor could not take a vehicle ownership deduction if that debtor was not making loan or lease payments. (44)

3. Legal Background

   Scholars believe that the term "bankruptcy" comes from an Italian phrase, banco rotto, referring to a merchant's "broken bench." (45) The phrase described the common Italian practice of merchants selling their goods and products from benches. (46) When merchants were unable to pay their obligations, their creditors would take possession of the merchant's goods and would break the merchant's bench to prevent the merchant from selling goods. (47) While creditors were able to punish insolvent debtors, this Italian practice also left merchants unable to earn a living. (48)

   Since its inception, bankruptcy law has struggled to balance the competing concerns of creditors and of debtors. (49) Legislation has vacillated from favoring one group to favoring the other group. (50) For many decades, the bankruptcy code strongly favored debtors, leading to loud complaints from the creditor community. (51) With the enactment of BAPCPA, the pendulum swung back in favor of creditors. (52) Despite this victory for creditors, BAPCPA has created turmoil for all the parties involved in the bankruptcy process. (53)

   1. The Beginnings of Bankruptcy Laws in America

      Because the flow of commerce always has required a solution to deal with unsuccessful businesses and individuals, America's founding fathers considered bankruptcy laws when they drafted the Constitution. (54) The drafters viewed bankruptcy as an important tool in handling business and personal financial failures. (55) In particular, James Madison wrote in Federalist Paper 42 that the creation of "uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question." (56) Consequently, the drafters of the Constitution included the Bankruptcy Clause, which stated that Congress had the power to pass "uniform Laws on the subject of Bankruptcies." (57)

      In the late eighteenth century, an economic panic swept across the young nation. (58) Calls for a federal bankruptcy law rang out across the country. (59) Congress responded by passing the United States's first bankruptcy law, the Bankruptcy Act of 1800. (60) Congress passed the law with the goal of helping creditors maximize their recovery, not ensuring that debtors received a fresh start. (61) Notably, the Bankruptcy Act of 1800 authorized only involuntary bankruptcy proceedings. (62) As the economy stabilized, much of the American public no longer saw the need for bankruptcy legislation. (63) Consequently, Congress repealed the Bankruptcy Act of 1800 just three years after passing it. (64) This cycle--financial panic, passage of a...