Argument recap: Can debtor claim car ownership allowance of paid-off vehicle?

By Kevin Russell
on Oct 5, 2010 at 1:46 pm

In the first argument of the new Term, Ransom v. FIA Card Services (No. 09-907), the Justices considered whether a bankruptcy debtor should be able to shield from creditors money allocated for the cost of owning a car when the debtor has no current car payments.

As explained in the argument preview, the Bankruptcy Code requires Chapter 13 debtors to pay their “disposable income” to their creditors while the bankruptcy plan is in place.  The bankruptcy court calculates the debtor’s “disposable” income by, in essence, subtracting an amount of money necessary for the debtor to continue to live and work, including allowances for housing, food, and transportation, from the debtor’s income.   This case involved the allowance for owning a car; separate calculations for the cost of operating the car – for example, gas, parking, and routine maintenance – were not at issue.

Congress could have required the bankruptcy courts to make an individualized determination about the debtor’s actual car ownership expenses, alternatively, it could have specified an amount in the text of the statute.  Instead, the statute provides that the allowance “shall be the debtor’s applicable monthly expense amount specified under” certain standards developed by the IRS for use in deciding how much money delinquent taxpayers can afford to pay on their back taxes.  The IRS, in turn, has developed a chart with a column for “ownership cost” that provides $471 for a first car and a lesser amount for a second car.  In guidance for IRS agents for using the chart, the agency indicates that the $471 is available only if the taxpayer actually has a car payment.

Much of the debate at the oral argument was over whether Congress intended bankruptcy courts to follow the IRS’s instructions on how to use the chart, or whether Congress adopted the chart, but not the guidance, for use in bankruptcy proceedings.

At oral argument, counsel for the debtor, Christopher P. Burke, argued that Congress intended to incorporate only the charts; in an effort to simplify bankruptcy calculations, it did not intend courts to inquire about the actual expenses of car ownership.  That argument met with skepticism from Justices Alito, Breyer, Ginsburg, and Kagan.  Why, they asked in various forms, would Congress intend to incorporate the chart but not the IRS’s view of what the chart means (and, in particular, what the chart’s reference to “ownership” means)?  Surely, Justice Breyer suggested, courts must have some definition of what counts as car “ownership” – buying a dozen apples every month, he mused, presumably would not count, even if you used them to decorate the car.  And even setting aside the IRS’s specific direction to exclude costs when the person does not have any car payments, Justice Kagan asked, the charts have a separate category for non-ownership costs associated with having a vehicle.  Doesn’t it make sense to say that debtors get the ownership costs only if they have a car payment, but get the other operational allowance to cover the other costs associated with having a paid-off vehicle?

Justice Scalia, however, seemed more sympathetic, pointing out that even under the other side’s view of the statute, someone with a small car payment gets the entire $471 allowance.  And after some struggle to find the relevant statutory language in the petitioner’s brief – practitioner’s note: the Justice openly chastised petitioner for not including the language in the beginning of his brief or in a statutory appendix – Justice Scalia noted that the statute speaks of the “applicable amount specified” rather than the “amount specified if applicable.”

Arguing for the creditors, Deanne E. Maynard, of Morrison and Foerster, relied on the IRS’s interpretation of its own charts and on the statutory language allowing only “applicable” monthly expenses.  An ownership cost allowance is not “applicable,” she argued, if the debtor has no actual ownership expenses.

Under questioning from Justice Sotomayor and the Chief Justice, Maynard acknowledged that under the IRS standards and the statute, other expense allowances are calculated without regard to the amount actually spent.  But she insisted that if the debtor has no expenses at all for a specified item, he is not entitled to any allowance for that category of expense.  The Chief Justice suggested that this punished debtors who paid off their cars and rewarded those who are less thrifty.  And Justice Breyer asked whether Ransom’s rule might not be preferable for its simplicity.

Representing the government, and supporting the creditors, Assistant Solicitor General Nichole Saharsky began by emphasizing that Ransom’s interpretation would allow him to shield thousands of dollars from his creditors because of an expense he did not in fact have.   The Chief Justice, however, noted that under the Government’s view, so long as other debtors had a small car payment, they would get the same windfall.  Saharsky argued that this was no more anomalous than the tax deduction for dependents – everyone gets the same deduction, but only if they have children.

Saharsky was also questioned at length over how much of the IRS’s explanation of the charts should be applied in the bankruptcy context.  While the creditors argued that the IRS explanation applied in its entirety – including the statement that the taxpayer is allowed the lesser of the amount specified in the chart or his actual car payment – the government argued that this statement applied only to tax collection efforts and not to bankruptcy proceedings, in which the debtor is entitled to the entirety of the $471 allowance so long as he has any car payment at all.  Several Justices expressed skepticism over this partial adoption of the IRS interpretation of its standards.

In the end, it appeared that only the Chief Justice and Justice Scalia had much sympathy for the debtor’s position (although these two Justices are often the hardest to read from their questions at oral argument).  Justices Alito, Breyer, Kagan, and Ginsburg seemed decidedly hostile to Ransom’s view.  Of the rest, Justice Sotomayor seemed mostly inclined again the debtor, Justice Kennedy asked few questions, and as is his custom, Justice Thomas asked none.

A decision is not expected for several months.