In re Johnson

Kent Lindquist

MEMORANDUM OPINION AND ORDER ON OBJECTION TO CONFIRMATION BY CHAPTER 13 TRUSTEE PAUL CHAEL
I

Statement of Proceedings

This Chapter 13 Case is before the Court on the Objection to Confirmation filed on January 10, 2012 ("Objection") by the Chapter 13 Trustee, Paul Chad ("Trustee") to the Chapter 13 Plan filed by the Chapter 13 Debtor, jacquelyn D. Johnson ("Debtor") on December 8, 2011 ("the Plan").

The Plan of the Debtor, at Paragraph 4.d., provides that the General Nonpriority Unsecured Creditors would be paid Pro Rata.

The Form B22C filed by the Debtor on December 8, 2012, Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income ("B22C Statement"), provided at Line 16 that the Debtor's household size was two (2).

The Trustee's Objection to Confirmation asserted as follows:

1. The Debtor's Plan does not provide for all disposable income for the applicable commitment period and accordingly Debtor's Plan does not comply with 11 U.S.C. Sec. 1325(b)(3).
2. According to the Statement of Current Monthly Income filed on behalf of the Debtor, the Trustee's calculation of same, based on a household size of one(l), the Debtor has $517.09 per month in disposable income which would yield the dividend to unsecured creditors over the life of the Plan of approximately $31,00.00. According to Schedule F, there is unsecured debt in the amount of $48,752.60. Debtor's calculation of current monthly income is based on a household size of two(2) and the Trustee objects to the inclusion of Debtor's twenty-seven (27) year old son for purposes of calculation of the household size as he is not disabled. Debtor's Plan provides a pro-rata dividend to unsecuredcreditors of approximately §10,000.00. The Trustee respectfully requests that this matter be evaluated after the claims Bar Date of April 9, 2012 to ensure that an appropriate dividend is being paid consistent with the amount of disposable income in the household.

A Prehearing Conference was held on April 11, 2012 on the Objection by the Trustee. The Parties stipulated there was no need for the submission of evidence at that point in the proceeding, as it appeared that this Contested Matter, at least initially, involved questions of law only, and that this Contested Matter should be submitted as an Agreed Cause without an evidentiary hearing. The parties were ordered to file a Stipulation of Facts by May 3, 2012 and upon the filing of the same the Court would issue an order for a briefing schedule. The legal issue to be briefed was the following:

Whether on Form B22C filed by the Debtor, she is permitted to claim as household size of two, or whether the Debtor should claim a household size of one as asserted by the Trustee in his Objection to Confirmation.

See
, Order dated April 16, 2012 (Docket No. 25).

On May 3, 2012 the Trustee and the Debtor filed a Stipulation of Facts. The Stipulation stated as follows:

1. That the Debtor filed for relief under Chapter 13 of the U.S. Bankruptcy Code on December the 8th, 2011.
2. That the Debtor filed a Form B22C listing a household size of two (2) rather than a household size of one(l).
3. That said household size was arrived at by claiming her 27 year-old Son.
4. That the Debtor's Son in question has resided with the Debtor for several years since being incarcerated and has been unable to find work, is ineligible for and does not receive any income or public benefits, and does not currently possess a valid Driver's License.
5. That the Debtor's Son is not disabled and is capable of working.
6. That the Debtor's State and Federal Tax Transcripts for the years of 2009, 2010, and 2011 reflect that the Debtor has claimed her son as a dependant without objection from the Internal Revenue Service or the Indiana Department of Revenue. True and accurate copies of the Debtor's State and Federal Tax Transcripts for the years of 2009, 2010, and 2011 have been redacted and attached hereto as "Exhibit A.".

II

The Position of the Parties
A The Trustee

The Trustee filed his Memorandum In Support of his Objection to Confirmation on June 13, 2012. The Trustee's Memorandum rejects the IRS Dependant Standard as a basis for determining household size, in that it would limit deductions only to those individuals who qualify as dependants for tax purposes.

The Trustee also notes that the Seventh Circuit in the case of In re Ross-Tousley, 549 F.3d 1148 (7 th Cir. 2008), declined to use the "IRM Approach", i.e. the IRS' Internal Revenue Manual, used to assess the financial condition of delinquent taxpayers in order to determine how much they can pay the IRS. Id. 549 F.3d at 1156.

Next, the Trustee asserts that the "heads on beds" approach, adopted by some courts, is not the proper standard to determine household size, in that it would permit a debtor to subtract deductions from the debtor's current monthly income for individuals who are fiscally independent of the debtor, thus permitting some debtors to avoid paying their unsecured creditors the true amount of their disposable income.

The Trustee's Memorandum next cautions against the application of a third approach in determining household size, known as the "economic unit" approach, whereby "[a] household will include individuals who are financially dependent of the debtor, individuals who financially support a debtor, and individuals whose income and expenses are intermingled or interdependent with the debtor, quoting, In re Morrison, 443 B.R. 378, 386 (Bankr. M.D. N.C. 2011). The Trustee argues that the economic unit approach could lead to cases where the unsecured creditors are prejudiced by the debtor's willingness to assume the financial responsibility and daily living expenses of their adult, able-bodied children.

The Trustee urges the Court to adapt a fourth approach similar to the "economic unit" approach to determine household size, i.e. the "dependent" approach, which requires the debtor to have a reason to provide support for a dependent and the claimed dependent must have a reason to rely on the debtor, citing In re Heinze, 2011 WL 143870 (Bankr. D. Wyo. 2011). and In re Hernandez, 2012 WL 1067692 (Bankr. D. Wyo. 2012).

The Trustee asserts that in applying the "dependent" approach to the Stipulated Facts in this case in determining household size, as decided by the Court in In re Hernandez, the Objection to Confirmation by the Trustee should be sustained, and the Debtor should only be permitted to claim a household size of one(l), noting there is no disagreement that the Debtor's son is 27 years old, is not disabled, and is capable of working. The Court in Hernandez in deciding that the "dependant" approach is the proper approach in determining household size stated as follows:

In the "dependant" approach, the debtor must have reasons to provide support for a dependant and the claimed dependant must have a reason to rely on the debtor... The Court considers the following factors to determine if the dependant should be included in the household size: (1) the length of time the claimed dependant resided in the household; (2) the reason the claimed dependant resides in the household; (3) the age of the alleged dependant; (4) how much income or support the dependant receives from a third party; (5) whether the dependant is in school; and, (6) whether the Dependant could be claimed as an IRS deduction or qualify in another legal way, i.e. for purposes of medical insurance.

Id
. 2012 WL 1067692 at* 2.

The Trustee further asserts that to permit the Debtor to claim a household size of two(2), this would reduce her disposable income in this case by $588.00 a month, while if the Debtor's household size was determined to be a size of one('l) this would yield an approximate dividend to unsecured creditors of $31,025.00 over the life of the Plan.

B
The Debtor

The Debtor filed her Memorandum in Opposition to the Trustee's Objection to Confirmation on June 22, 2012. The Debtor points out that a commonly adopted approach to determining household size is the IRS Dependency Standard, using IRS Regulations and IRS Publication No. 501, citing In re Frye, 440 B.R. 685, 687 (Bankr. W.D. Va 2010).

The Debtor also asserts that while in this case, the Debtor's son is a "qualifying relative" for Income Tax purposes, and would qualify as a household member under the IRS Dependency Standard, the Debtor urges that the Court not adopt the IRS Dependency Standard, because this Standard would not result in a realistic determination of disposable monthly income.

Next, the Debtor argues that if the Court is seeking a "bright line" approach in determining household size that is "reasonably fair" to the debtor and creditors, then it should adopt the "heads on beds" approach, which incorporates the U. S. Census Bureau's approach to determining a "household", citing, In re Ellinger, 370 B.R. 905 (Bankr. D. Minn, 2007). The U.S. Census Bureau defines a "household" as all people related and unrelated who occupy a housing unit. The Debtor asserts that should the Court adopt the "heads on beds" standard, the Debtor's household would clearly be two(2) in number based on the Stipulation of Facts.

The Debtor in her Memorandum next addressed the "economic unit " standard, as discussed in some detail in the Trustee's Memorandum, citing. In re Morrison. 443 B.R. 378 (Bank M.D. N.C. 2011). The Debtor observes that applying this test would compel the Trustee and the Court to determine household size on a case-by-case basis, but would result in the most accurate and fair determination of disposable monthly income. The Debtor asserts that if the Court chooses to adopt the "economic unit" approach, the Debtor would qualify as maintaining a household of two(2), in that the Debtor's son is entirely supported by the Debtor.

Lastly, the Debtor's Memorandum points out that there is one other test in determining household size, that has been applied by a minority of courts, i.e. the "dependent" approach, which is the approach that the Trustee urges that this Court adopt in his Memorandum, citing. In re Heinze, 2011 WL 143870 (Bankr. D. Wyo. 2011). In Heinze, the Court required the debtor to have a reason to provide support for a dependent and the claimed dependent must have a reason to rely on the debtor. This same court in in re Hernandez, 2012 WL 1067692 (Bankr. D. Wyo. 2012, cited with approval by the Trustee in his Memorandum, set out the various factors the Court should consider in applying the dependency approach. The Debtor asserts that if the Court should apply the "dependent" approach, the Debtor satisfies this test, as the Debtor's son has resided with the Debtor for several years because he is unable to support himself. Nevertheless, the Debtor does not urge the Court to adopt the "dependency" test, stating that "economic unit" approach ultimately results in a more accurate determination of monthly disposable income.

III
Conclusions of Law an Discussion

No objection was made by counsel to the jurisdiction of this Court as to this contested matter, the Court finds jurisdiction to be present, pursuant to 28 U.S.C. § 1334(b), and that this contested matter is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(A) and (L).

The United States Court of Appeals, Fourth Circuit, on July 11, 2012, issued an Opinion in the case of Johnson f/k/a Zimmer v. Zimmer, 686 F.3d 224 (4th Cir. 2012). In that case, the Fourth Circuit-decided that the household size of a Chapter 13 Debtor should be determined by applying a variation to the "economic unit " approach, i.e. the "fractional economic unit" approach as to part-time "household" members.

The Court finds that this Opinion is exceedingly well written and thoughtful, and fully covers all of the relevant and salient points to be considered by this Court in determining the household size of the Chapter 13 Debtor in this case. This Court agrees with the Opinion in to to, as to the discussion, analysis, and conclusions of law contained therein on the issue. Accordingly, this Opinion is attached hereto as Appendix A, and is adopted by this Court in its entirety as its decision.

The Court shall take the liberty of setting out below, excerpts from the Opinion of the Fourth Circuit that highlights its Ratio Decedendi. The Court stated:

We begin by examining whether the heads-on-beds approach best reflects Congress' intent in requiring a debtor to determine his or her "household" size, as the Debtor contends. A handful of bankruptcy courts have adopted the heads-on-beds approach, using the Census Bureau definition of "household.", although they use different—and in some cases no—reasons to explain why. Some bankruptcy courts have stated that this definition of household" is simply its plain meaning. E.g., In re Smith, 396 B.R. 214, 215-18 (Bankr. W.D. Mich. 2008).
* * * *

In the absence of clear direction in the Code to use the heads-on-beds approach, the question becomes whether the bankruptcy court erred in failing to choose that method over other possible approaches. On this point, we agree with the majority of bankruptcy courts in concluding that the heads-on-beds approach using the Census Bureau's expansive definition of "household" is inconsistent with the purpose and objectives of the Code. As noted, the Census Bureau defines a "household" as "all of the people, related and unrelated, who occupy a housing unit." Ellringer, 370 B.R. at 911 (internal quotation marks and citation omitted). This definition serves the Census Bureau's need to compile demographic information identifying the number of people in a particular geographic region. It is wholly unrelated to any bankruptcy purpose and does not serve the Code's objective of identifying a debtor's deductible monthly expenses and, ultimately, his or her disposable income.
* * * *

[B]ecause the text does not define "household" and leaves room for different connotations, the economic unit approach does not inherently contradict the language of §1325(b). And unlike the heads-on-beds approach, the economic unit approach is consistent with §1325(b), the BAPCPA, and the Code as a whole. By examining the financial interdependence of individuals to determine whether someone is an economic part of the debtor's household, bankruptcy courts are able to avoid over- and under-inclusive results that would result by artificially defining "household" according to factors unrelated to which individuals within a residence impact the debtor's financial situation. This approach is flexible because it recognizes that a debtor's "household" may include non-family members and individuals who could not be claimed as dependents on the debtor's federal income tax return, but who nonetheless directly impact the debtor's financial situation. See Morrison, 443 B.R. at 388; Herbert, 405 B.R. at 169; Robinson. 449 B.R. at 481-82. Accordingly, it is consistent with §1325(b)'s purpose of identifying a debtor's disposable income by identifying a debtor's "amounts reasonably necessary to be expended" each month and determining what amount a debtor is able to pay to his or her creditors. Under this method, a debtor's "household" would include individuals who operate as an "economic unit" with the debtor: those the debtor financially supports and those who financially support the debtor. In other words, those whose income and expenses are interdependent with the debtor's are part of his or her "household" for purposes of §1325(b). Such financial intermingling is an appropriate factor in determining "household"size under focal point of the Code. Indeed, §1325(b) is specifically directed at determining a debtor's disposable income, which is defined as currently monthly income less "amounts reasonably necessary to be expended." §1325(b)(2).
* * * *

The "economic unit" approach is also consistent with other components of the income and ability to pay creditors: a goal unrelated to tax collection. Third, §1325(b)(2) refers to "dependents" at one point in the provision and "household" in another, even setting aside §1325(b)'s subsequent cross-reference to §707(b) which in turn uses both "dependents" and "household." If Congress had intended for "household" to refer exclusively to the debtor and his or her dependents as defined for income tax purposes, it could have done so. Congress did not, and instead referred to a debtor's "household." As the parties recognize, and as we explain further below, the income tax dependent approach tends to be under-inclusive for purposes of ascertaining a debtor's household size and disposable income.
* * * *

Just as the heads-on-beds approach poses the risk of skewing the calculation by being over inclusive and thus risks misrepresenting a debtor's ability to pay, the income tax dependent method poses an unnecessary risk of skewing the calculations by "undercounting legitimate deductions due to a debtor who financially provides for individuals he or she does not claim as dependents" on his or her tax return. Robinson, 449 B.R. at 481. Neither the income tax dependent nor the "heads-on-beds" approach best reflect the purposes of the Code—and specifically the BAPCPA amendments and §1325—as to how a debtor's disposable income is to be calculated.

Id. 66 F.3d at 235-240. (emphasis in the original) (footnotes omitted.)

In addition, the Fourth Circuit also sustained the bankruptcy court's decision, which held that the court may consider part-time "household" members in its analysis of what constitutes household size i.e. the "fractional economic unit" approach. The Court further stated:

The foregoing analysis does not end our inquiry, however, because the bankruptcy court opted to further refine the economic unit approach to account for the part-time members of the Debtor's household.
* * * *

We find no error in the bankruptcy court's method of applying the economic unit approach in a manner that accounted for part-time members of the Debtor's household. The cases apart from Robinson that have used the economic unit approach were asked to determine whether an individual who resided full-time with the debtor should be considered part of his or her "household." E.g., Morrison, 443 B.R. at 388 (using the economic unit approach to determine that the boyfriend of a debtor who lived with that boyfriend full-time was a member of the debtor's "household" under §1325(b)); Jewell, 365 B.R. at 802 (using the economic unit approach to determine whether the debtors' adult daughter and her children, and the debtors' adult son, who resided full-time with the debtors were members of the debtors' "household".
* * * *
We recognize, as the bankruptcy courts in Robinson and this case have that dividing individuals into fractional members of a household is less than ideal. At the same time, we recognize that the Debtor's situation is increasingly common in modern American life, and that the number of individuals with a financial relationship to a debtor may well vary depending on the day of the week and other circumstances.
* * * *

This result is consistent with the Supreme Court's recognition in Hamilton that bankruptcy courts possess flexibility to look beyond a mechanical application of §1325(b)'s calculations in order to account for variations readily apparent in the record, even after the BAPCPA. See 130 S. Ct. at 2471-78; See also id. at 2478 ("[W]hen a bankruptcy court calculates a debtor's projected disposable income [under § 1325(b)], the court may account for changes in the debtor's income of expenses that are known or virtually certain at the time of confirmation."). Consistent with that approach, we conclude that the bankruptcy court did not err in recognizing that the Debtor's actual household size fluctuated based on the changing number of part-time members of her household.

Id
. 66 F3rd at 240-242 (footnotes omitted).

This Court having concluded that the "Fractional Economic Unit" approach is the approach most consistent with the intent of Congress in determining the household size of a Chapter 13 debtor, the Court accordingly decides that the Objection to Confirmation by the Trustee must be denied, in that the Stipulation of Facts clearly stated that the Debtor's son has resided with the Debtor for several years since being incarcerated, has been unable to find work, and ineligible for and does not receive any income or public benefits, even though he is not disabled and capable of working. As a consequence the Debtor's son is totally financially dependent on the Debtor. Accordingly, the proper household size of the Debtor is two (2), rather than one (1), as asserted by the Trustee. It is therefore,

ORDERED, ADJUDGED, AND DECREED that the Objection by the Trustee to the Confirmation of the Debtor's Plan should be and is hereby DENIED.

The Clerk shall enter this Order on a separate document.

_______________

JUDGE, U. S. BANKRUPTCY COURT
Distribution: Debtor
Attorney for Debtor
Attorney Godshalk
Trustee Chael
U. S. Trustee