In re Harkins

• Decision Date: 01 May 2013
• Docket Number: 12–52555,12–53893.,Nos. 12–51446,s. 12–51446
• Citation: 491 B.R. 518
• Parties: In re Douglas W. HARKINS and Shelly A. Harkins, Debtors. In re Charles Francis Mancino and Deborah Dawn Holdren, Debtors. In re Richard E. Louden and Theresa A. Louden, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

491 B.R. 518

In re Douglas W. HARKINS and Shelly A. Harkins, Debtors.
In re Charles Francis Mancino and Deborah Dawn Holdren, Debtors.
In re Richard E. Louden and Theresa A. Louden, Debtors.

Nos. 12–51446, 12–52555, 12–53893.

United States Bankruptcy Court,
S.D. Ohio,
Eastern Division.

May 1, 2013.

[491 B.R. 521]

Scott R. Needleman, Columbus, OH, for Debtor and Joint Debtor.

MEMORANDUM OPINION AND ORDER ON TRUSTEE'S OBJECTIONS TO CONFIRMATION OF CHAPTER 13 PLANS
JOHN E. HOFFMAN, JR., Bankruptcy Judge.
I. Introduction

As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Congress added the term “current monthly income” to the Bankruptcy Code. The definition of that term in 11 U.S.C. § 101(10A)—and its use in various other sections of the Bankruptcy Code—have generated numerous interpretive issues. The issue before the Court is whether, for the purpose of calculating current monthly income, self-employed Chapter 13 debtors may use a net business income figure arrived at by deducting their ordinary and necessary business expenses. Self-employed debtors do just that if they follow Official Form 22C—Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (“Form 22C”). ¹ While some courts have upheld Form 22C's approach, others permit debtors engaged in business to deduct reasonably necessary business expenses only as part of the calculation of their “disposable income,” as that term is defined in § 1325(b)(2).

[491 B.R. 522]

What difference does it make whether debtors deduct business expenses when calculating current monthly income instead of when determining disposable income? Among other things, it can affect the minimum duration of a debtor's plan. A Chapter 13 debtor's “applicable commitment period” (the minimum duration of his or her plan) is three years if the annualized current monthly income of the debtor and the debtor's spouse combined is below the relevant median family income, but is five years if the annualized current monthly income of the debtor and the debtor's spouse combined is equal to or above the relevant median family income. See Baud v. Carroll, 634 F.3d 327, 335 & n. 5 (6th Cir.2011)(addressing the interaction of §§ 1322(d) and 1325(b)(4)), cert. denied,––– U.S. ––––, 132 S.Ct. 997, 181 L.Ed.2d 732 (2012). If the debtors in the above-captioned cases (collectively, “Debtors”) are permitted to use the current monthly income figures derived from their calculations on Form 22C, they are below-median-income debtors and have applicable commitment periods—as they propose in their Chapter 13 plans—of three years. By contrast, if the Debtors must calculate their current monthly income without subtracting business expenses, they are above-median-income debtors with applicable commitment periods of five years. In his objections to confirmation of the Debtors' plans (“Objections”), Chapter 13 Trustee Jeffrey P. Norman (“Trustee”) argues that the latter approach is the one the Debtors must take when calculating their current monthly income and that their applicable commitment periods are therefore five years.

The Court concludes that calculating current monthly income without deducting business expenses is more consistent with the Bankruptcy Code than is Form 22C's method. Although the definition of current monthly income in and of itself is ambiguous, and although the use of the term in the “means test” of § 707(b)(2) does not provide a definitive answer as to its meaning, its use in § 1325(b) makes clear that business expenses should not be deducted when calculating current monthly income. After subtracting certain kinds of payments not at issue in these cases, current monthly income is the starting point for calculating disposable income and, ultimately, the projected disposable income that debtors must pay to unsecured creditors in order to overcome an objection to plan confirmation. See11 U.S.C. § 1325(b). From that starting point, debtors who are engaged in business are permitted to deduct, among other reasonably necessary expenses, “expenditures necessary for the continuation, preservation, and operation of such business.” 11 U.S.C. § 1325(b)(2)(B). Use of the net-income method, therefore, would either permit a double deduction of business expenses or would render § 1325(b)(2)(B) surplusage.

The Debtors make a number of arguments in favor of the net-income method, but at the heart of those arguments is this: As self-employed debtors, they will be treated differently than other debtors if they are not permitted to deduct business expenses when calculating current monthly income. But permitting Chapter 13 debtors engaged in business to deduct business expenses only when calculating disposable income will not “lead to patently absurd consequences, that Congress could not possibly have intended [.]” Pub. Citizen v. United States Dep't of Justice, 491 U.S. 440, 470, 109 S.Ct. 2558, 105 L.Ed.2d 377 (1989) (Kennedy, J., concurring) (citation and internal quotation marks omitted).

In the final analysis, there is a conflict between an official form and the Bankruptcy Code. When that is the case, the Bankruptcy Code prevails. For all these reasons,

[491 B.R. 523]

which are explained in greater detail below, the Objections are sustained.

II. Jurisdiction

The Court has jurisdiction to hear and determine these contested matters pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See28 U.S.C. § 157(b)(2)(L).

III. Background

Although the details vary, the basic facts of the Debtors' cases—at least as those facts relate to the legal issue before the Court—are essentially the same. The Debtors in each case completed Form 22C.² Prior to the commencement of their bankruptcy cases, at least one of the Debtors in each case derived a certain amount of income from self employment. In the section of Form 22C in which they begin to calculate their current monthly income, the Debtors listed an amount of gross receipts from the operation of a business on Line 3(a) and deducted what they identified as ordinary and necessary business expenses on Line 3(b). They then subtracted Line 3(b) from Line 3(a), resulting in their net business income and included the sum of this net business income and any other income on Line 11 as the their total income. After multiplying that figure by 12, they entered the product as their “annualized current monthly income for [purposes of] § 1325(b)(4)” on Line 15. Calculated in this way, the annualized current monthly income for each of the Debtors is below the applicable median family income. But if the business expenses had not been deducted on Line 3(b), the annualized current monthly income for each of the Debtors would have been above the applicable median family income. On their Forms 22C, the Debtors stated that their applicable commitment period is three years.

The Debtors also all filed Chapter 13 plans in which they stated that they are below median income debtors. The Trustee filed objections to confirmation in each of the cases on several grounds, including the one at issue here—that the Debtors may not subtract their business expenses from gross receipts for the purpose of calculating current monthly income and that the applicable commitment period is five years.³

[491 B.R. 524]

In support of his position, the Trustee primarily relies on Drummond v. Wiegand (In re Wiegand), 386 B.R. 238 (9th Cir. BAP 2008). In Wiegand, the Bankruptcy Appellate Panel for the Ninth Circuit held that “[i]n contrast to the statutory definition of current monthly income, § 1325(b)(2) is plain and unambiguous with specific reference to deductions for business expenses[,]” and that “[w]e can conclude from the statutory language that the specificity of § 1325(b)(2)(B) controls—business deductions are to be taken from a debtor's current monthly income to arrive at the debtor's disposable income.” Wiegand, 386 B.R. at 242. In their briefs in support of confirmation, the Debtors rely on In re Roman, 2011 WL 5593143 (Bankr.D.Puerto Rico Nov. 16, 2011), in which the bankruptcy court held that Form 22C's method of calculating current monthly income is correct because “[t]he use of gross receipts for self-employed debtors would lead to distinctions in the calculation of current monthly income based on the business form under which the debtor has chosen to operate, resulting in prejudicial treatment to business proprietors[.]” Id. at *4. The Debtors also rely on a paper by Mark A. Redmiles & Saleela Khanum Salahuddin, The Net Effect—Debtors with Business Income Are Permitted to Deduct Ordinary and Necessary Business Expenses in Calculating Current Monthly Income, 27–OCT Am. Bankr.Inst. J. 16 (October 2008).⁴ The Court will discuss these and other authorities below.

IV. Legal Analysis

In describing a different amendment to the Bankruptcy Code made by BAPCPA, another bankruptcy court observed that “[d]eciphering this puzzle is like trying to solve a Rubik's Cube that arrived with a manufacturer's defect.” In re Donald, 343 B.R. 524, 529 (Bankr.E.D.N.C.2006).⁵ So too here, where the deduction of business expenses seems to be a missing piece in the Rubik's Cube

[491 B.R. 525]

that is BAPCPA. But “[f]ortunately, after many twists and turns, a few patches of solid color emerge.” Id.

A. The Definition of Current Monthly Income in § 101(10A)

The Court's “interpretation of the Bankruptcy Code starts where all such inquiries must begin: with the language of the statute itself.” Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 723, 178 L.Ed.2d 603 (2011) (internal quotation marks omitted). Because § 101(10A) defines current monthly income, the Court begins with that section:

The term “current monthly income”—

(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive)...