Opinion
Case No. 08-22607-svk.
July 2, 2008
DECISION AND ORDER SUSTAINING TRUSTEE'S OBJECTION TO CONFIRMATION
The means test issue in this case is whether a self-employed debtor can deduct business expenses "above the line" in reaching current monthly income, or whether those charges are properly deducted from current monthly income to determine projected disposable income. Mary Jo Bembenek (the "Debtor") has owned her own business for the past eleven years. She filed a Chapter 13 bankruptcy petition on March 21, 2008, listing average monthly income of $3,864 on Schedule I (Current Income of Individual Debtor). A portion of the Debtor's income is from long term disability payments, but the majority is business income. On her Official Form B22C, used to calculate "current monthly income," the Debtor lists gross business receipts of $2,822 on Line 3(a), and lists Ordinary and Necessary Business Expenses of $973 on Line 3(b). As a result, the Debtor's current monthly income on Line 15 is less than the applicable median family income.
Even though the Debtor filled in the form correctly, the Chapter 13 Trustee objected to the Debtor's Chapter 13 plan arguing that the Debtor's current monthly income (hereinafter "CMI") was improperly calculated. The Trustee contends that Form B22C is inconsistent with the Bankruptcy Code in that the business expense deduction of Line 3(b) should not be made to determine a debtor's CMI, but rather that the business expenses should be deducted with the Debtor's other expenses.
Title 11 U.S.C. § 101(10A) defines CMI as the "average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income."
In Chapter 13 cases, § 1325(b)(2) defines disposable income in terms of CMI:
For purposes of this subsection, the term "disposable income" means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended . . . (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
The plain meaning of both § 101(10A) and § 1325(b)(2) is apparent. Where the plain meaning is clear, a court should look to that in making its determination. Dekalb County Div. of Family Serv. v. Platter (In re Platter), 140 F.3d 676, 681 (7th Cir. 1998). Section 101(10A) includes all income within CMI. It does not say "net income" or "income after allowable expenses." When read in tandem with § 1325(b)(2), the meaning becomes even clearer, since disposable income is CMI less "expenditures necessary for the . . . operation of [a] business."
The Trustee notes that the exact scenario here was faced by the court in In re Arnold, 376 B.R. 652 (Bankr. M.D. Tenn. 2007). The debtors in Arnold deducted business expenses in Part I of Form B22C, resulting in a lower CMI. The court noted a direct conflict between § 1325(b) and the Official Form, and held that, in the event of inconsistency, the Code, not the Form, governs to determine CMI. Arnold, 376 B.R. at 654.
The Debtor points to In re Featherston, 2007 WL 2898705 (Bankr. D. Mont. Sept. 28, 2007), in support of her argument that business expense deductions should be taken to determine CMI. The primary issue in Featherston was whether the debtors could deduct expenses they incurred in the sale of cattle and trailers when calculating their CMI. In upholding the deduction, the court reasoned that the deductions allowed on Form 1040 under the Internal Revenue Code ought to provide guidance because § 101(10A) "distinguishes between `income from all sources' and taxable income." Id. (citing Hon. Eugene R. Wedoff, Means Testing in the New § 707(b), 79 Am. Bankr. L.J. 231, 244-45 (2005)). Section 101(10A), however, specifically does not distinguish between types of income, stating that CMI is calculated "without regard" to the taxability of income. 11 U.S.C. § 101(10A). Moreover, the court did not rule on the validity of the Form B22C Line 3(b) deduction in light of the definition in § 1325(b). The court overruled the Trustee's objection primarily because Form B22C "specifically called for" those deductions. Since this Court holds that the unambiguous provisions of the Code must take precedence over the Form, I respectfully disagree with Featherston.
The Montana bankruptcy court's decision in Featherston may have been superseded by a recent decision of the Bankruptcy Appellate Panel in Drummond v. Wiegand (In re Wiegand), 386 B.R. 238 (B.A.P. 9th Cir. 2008). Although the court did not expressly overrule Featherston, the facts of Wiegand were virtually identical. Similar to Arnold, the B.A.P. in Wiegand held that the plain language of the statue does not allow the deduction of business expenses to calculate CMI. The court reversed the bankruptcy court for reliance on the Tax Code to determine the meaning of income for purposes of § 101(10A). Wiegand, 386 B.R. at 242. Additionally, to allow a business expense deduction in Part I would render § 1325(b)(2)'s deduction for those same expenses "superfluous," since the deduction is then made twice. Wiegand, 386 B.R. at 240.
The Debtor relies on several cases involving the interpretation of the term "income". In two of those cases, Shelley v. Kendall (In re Shelley), 184 B.R. 356 (B.A.P. 9th Cir. 1995), and In re Bush, 346 B.R. 207 (Bankr. S.D. Cal. 2006), the courts interpreted California's homestead exemption statute to determine the debtor's income for purposes of that statute. The decisions did adopt a narrow view of income for a debtor seeking to determine income for the homestead exemption, but did not involve the clear definition of income in Bankruptcy Code § 110(10A).
The Debtor correctly notes that Official Form B22C allows the deduction of the business expenses above the line. However, in this allowance, Form B22C is inconsistent with the Bankruptcy Code. As the court in Arnold stated, in a conflict between the Code and Official Form, "the Bankruptcy Code always wins." Arnold, 376 B.R. at 653. Form B22C should be changed. Until that time, debtors ought to deduct business deductions allowed under § 1325(b)(2) in the Other Expenses category in Part IV of Form 22C. Arnold, 376 B.R. at 655.
For the foregoing reasons, it is therefore ORDERED: the Trustee's Objection to Confirmation is sustained.
IT IS FURTHER ORDERED: that the Debtor shall file an amended plan within 30 days of the date of this Order.