In re Sawdy

• Decision Date: 20 February 2007
• Docket Number: No. 06-25130.,06-25130.
• Citation: 362 B.R. 898
• Parties: In re Michael G. and Jori A. SAWDY, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

362 B.R. 898

In re Michael G. and Jori A. SAWDY, Debtors.

No. 06-25130.

United States Bankruptcy Court, E.D. Wisconsin.

February 20, 2007.

COPYRIGHT MATERIAL OMITTED

Rollie R. Hanson, West Allis, WI, for Debtors.

Mary B. Grossman, Milwaukee, WI, for trustee.

ORDER OVERRULING TRUSTEE'S OBJECTION TO DEBTORS' MODIFIED CHAPTER 13 PLAN

PAMELA PEPPER, Bankruptcy Judge.

The debtors in this Chapter 13 matter are above-median income debtors who own two vehicles free and clear of liens. They contend that, while they no longer make payments on their cars, the language of 11 U.S.C. § 707(b)(2)(A)(ii)(I) entitles them to deduct from their disposable income calculations the cost of ownership of the vehicles. The trustee disagrees. The Court concludes that the debtors are correct, and that in spite of the fact that they do not actually have to make a note or lease payment each month, they are entitled to deduct the IRS Local Standard amount for vehicle ownership from their disposable income for the purposes of determining how much they have available to devote to paying creditors.

Facts

The debtors filed their Chapter 13 petition in 2006, which means that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") governs their matter. The debtors' Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income ("Form B22C") demonstrates that their income is above the median income for a family of their size in Wisconsin, and therefore BAPCPA requires that they determine their disposable income for Chapter 13 purposes by subtracting from their "current monthly income" fixed amounts for certain expenses. On Line 28 of their Form B22C, the debtors checked the box indicating that they claimed "ownership/lease expense[s]" for two or more vehicles. They listed the amounts for these deductions as $471.00 for one vehicle and $332.00 for the second vehicle.

On Line 58 of their original Form B22C, the debtors showed that they had $156.32 per month in disposable income to devote to paying unsecured creditors during a Chapter 13 plan. The debtors' original Chapter 13 plan proposed to pay the trustee $115 weekly for 60 months, for a total payment over the life of the plan of $29,645.91. Paragraph 7 indicated that the proposed plan would allow the trustee to pay general unsecured claims at a pro rata share of 46%.

Two weeks later, the debtors filed an amended Form B22C. The amended form reflected an additional deduction from the debtors' disposable income of $189.65 on Line 48 for past-due payments on the debtors' homestead property. This new deduction reduced the debtors' disposable income dramatically; Line 58 of the amended form showed that the debtors had negative $33 to devote to a Chapter 13 plan. Accordingly, the debtors moved to modify their plan. By this modification, they proposed to reduce the dividend for unsecured creditors from 46% to 0%. It was this proposed modification to the plan that gave rise to the trustee's objection to confirmation.

The trustee argues that the modified plan does not devote all of the debtors' projected disposable income to the plan as required by 11 U.S.C. §§ 1325(a)(3) and (b)(1)(B). Particularly, the trustee objects that the debtors should not be allowed to claim vehicle ownership deductions, because the debtors' vehicles aren't subject to a lien or lease agreement. In other words, the debtors aren't making any note or lease payments on their vehicles, so the trustee argues that they should not be allowed to use such expenses to reduce the amount of disposable income they have available to fund a plan. Indeed, the trustee argues that in this case, if the debtors had not deducted the ownership expenses for their two vehicles, they'd have enough disposable income to pay their unsecured creditors in full.

The debtors disagree with the trustee's position. They pointed out at the hearing on the objection that several courts have ruled that debtors may deduct the ownership expense, even if those debtors aren't making note payments or lease payments. They argued that debtors whose vehicles have been paid off generally own older vehicles-vehicles which are more likely to need repair or replacement during the life of the plan. (These debtors own a 1996 Ford Explorer XLT with 115,000 miles on it and a 1993 Ford Escort LX wagon with 160,000 miles on it.) They argued that, if they were not allowed to deduct ownership expenses for, these vehicles, they would be at a disadvantage if they had to-as they were likely to do-repair or replace a vehicle during the plan's life.

Discussion

I. Jurisdiction

The, issue in this case involves a core proceeding under 28 U.S.C. § 157(b)(2)(A), and this Court has jurisdiction under 28 U.S.C. § 1334(b).

II. Burden of Proof

Section 1325, which governs confirmation of Chapter 13 plans, does not tell us who bears the burden of proof when a party objects to confirmation. In In re Mendenhall 54 B.R. 44, 45-46 (Bankr. W.D.Ark.1985), Judge Mixon points out that the courts are divided on the question of whether the objecting party or the debtor bears the burden of proof:

... In one line of cases the courts have ruled that the proponent of a Chapter 13 plan has the burden of proof to show that the requisite tests for confirmation have been met.... Following the general rule in civil litigation, other courts have determined that the burden of proof rests on the moving party, the creditor objecting to confirmation of the debtor's Chapter 13 plan.

Id. (citations omitted)

Judge Mixon also points out that the phrase "burden of proof' has two components-the burden of persuading the trier of fact, which is "static" and "remains on the party in whom it is first Placed," and the burden of producing evidence, which shifts from party to party. Id. at 46.

In the current case, there is no need for the parties to produce evidence. The parties do not dispute that the debtors own their vehicles free and clear, and that they are not making any note or lease payments on those vehicles. Thus, there is no burden of producing evidence. The only burden applicable in this case is the burden of persuading the Court on the legal issue the trustee has raised. In Mendenhall, Judge Mixon placed the burden of persuasion on the trustee. Id. at 46. This Court does the same, and holds that the trustee has the burden of persuading the Court that the debtors should not be allowed to deduct the ownership expenses.

III. Current Law

A. The Statute

Section 1325(a)(3) states that a court shall confirm a plan if, among other things, it is "proposed in good faith and not by any means forbidden by law." Section 1325(b)(1)(B) holds that if either the trustee or the holder of an allowed, secured claim objects to a proposed plan, the court cannot approve that plan unless "the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period ... will be applied to make payments under the plan."

The difficult task under BAPCPA is determining the debtor's "projected disposable income." Section 1325(b)(2) defines "disposable income" as "current monthly income received by the debtor ... less amounts reasonably necessary to be expended [for certain purposes]." In the almost 1½ years since the implementation of BAPCPA, bankruptcy practitioners have become familiar with the term "current monthly income"-it is the "average monthly income from all sources that the debtor receives ... derived during the 6-month period ending on the last day of the calendar month immediately preceding the date of the commencement of ate case ..." 11 U.S.C. § 101(10A).

The "amounts reasonably necessary" that an above-median-income debtor can subtract from the "current monthly income" to yield his disposable income are determined by looking at 11 U.S.C. §§ 707(b)(2)(A) and (B). Section 707(b)(2)(A) requires above-median-income debtors to subtract "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...." The IRS has Local Standards for vehicle ownership costs. The standards for the greater metropolitan Milwaukee area, where these debtors live, provide for ownership costs of $471 for a first vehicle and $332 for a second vehicle-exactly the amounts the debtors have deducted on their amended Form B22C.

The question, of course, is whether the debtors may reduce their disposable income by deducting those ownership costs when they're not actually making payments on vehicles. In trying to answer this question, the Court next turns to the case law.

B. The Case Law

As courts and practitioners frequently find when interpreting provisions of BAPCPA, reasonable minds are quite capable of disagreement. Such is the case when one looks at the case law that has developed on the issue in question in the current case. Two distinct lines of decisions have emerged on this issue.,

1. Cases Refusing to Allow the Debtor to Deduct the Ownership Cost

Several courts have held that a debtor cannot deduct an ownership expense for a vehicle he or she owns free and clear. These cases include: In re Hardacre, 338 B.R. 718 (Bankr.N.D.Tex.2006); In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006); In re Barraza, 346 B.R. 724 (Bankr.N.D.Tex.2006); In re Oliver, 350 B.R. 294, 301 (Bankr.W.D.Tex.2006); In re Wiggs, 2006 WL 2246432 (Bankr.N.D.Ill., August 4, 2006); In re Carlin, 348 B.R. 795 (Bankr.D.Or.2006); and In re Harris, 353 B.R. 304 (Bankr.E.D.Okla.2006).¹

The same judge decided Hardacre and Barraza. Thus, six judges in as many districts have concluded that debtors may not deduct the vehicle ownership expense if they do not actually have a note or lease payment. Hardacre, McGuire, Wiggs and Carlin considered the issue in the context of Chapter 13 cases, in discussions of how to calculate the amount of disposable...