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Johnson v. Zimmer, No. 11-2034

Decided on: July 11, 2012

Johnson (“the Debtor”) filed a voluntary petition for Chapter 13 bankruptcy in September 2010.  The Debtor and her ex-husband (“the Creditor”) share joint custody of two minor sons.  The sons reside with the Debtor for 204 days each year, and her current husband has joint custody of three children from his previous marriage.  The Debtor’s proposed Chapter 13 plan claimed a household of seven members.  Upon receiving notice of the Debtor’s motion for confirmation of a plan, the Creditor objected that the proposed plan overstated the Debtor’s household size because the five children did not reside with her full-time, resulting in an inaccurate calculation of her monthly expenses.  The Creditor maintained that the Debtor’s proposed Chapter 13 plan improperly showed a “disposable monthly income” insufficient to make payments on two unsecured loans for which the Creditor was jointly liable.

The bankruptcy court observed that neither the Bankruptcy Code (“the Code”) nor case law define household.  Other bankruptcy courts have followed three different approaches to define household: the “heads-on-beds” approach, the “income tax dependent” method, and the “economic unit” approach.  In re Johnson, No. 10-0724408-JRL, 2011 WL 5902883, at *1–2 (Bankr. E.D.N.C. July 21, 2011).  The bankruptcy court adopted a variation of the “economic unit” approach, assessing the number of individuals whose income and expenses are intermingled with the Debtor’s, and calculating how much time any part-time residents were members of the Debtor’s household.  Part-time residents counted as part-time members of the Debtor’s household, thus each of the Debtor’s sons constituted .56 members of her household and each step-child constituted .49 members of her household.  This yields a total of 2.59 children in the Debtor’s household full-time, rounded up to three, plus the Debtor and her husband for a total of five persons in the household.  The issue of household size was certified for interlocutory appeal.

Statutory interpretation of the Code is reviewed de novo.  Botkin v. DuPont Cmty. Credit Union, 650 F.3d 396, 398 (4th Cir. 2011).  The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) changed how a Chapter 13 debtor’s projected disposable income is calculated.  Disposable income is current monthly income received less amounts reasonably necessary to be expended for maintenance and support, for qualifying charitable contributions, and for business expenditures.   In part, this determination turns on the size of the Debtor’s household.  An above-median-income debtor can only include certain specified expenses, calculated using the “means test” set forth in § 707(b)(2).  The means test is designed to ensure that debtors who can pay creditors do pay them.

Whether the household is calculated at five or seven, the Debtor remains an above-median-income debtor under § 1325, therefore she must use the means test set forth in § 707(b)(2).  The Debtor contends that the dispositive issue will be the application of the means test, which requires determining who her dependents are.  She argues that the court should adopt an ordinary meaning of “dependent.”  The Creditor agrees that the court should recognize that the definition of dependent is the issue, but focuses on why § 707(b)(2)’s use of “dependent” should not be used as a basis for defining “household.”  Because § 1325(b)(3) directs debtors to calculate the relevant median family income for his or her area based on “household” size, the Fourth Circuit will not ignore how the bankruptcy court calculated household size.  The bankruptcy court’s order did not specifically address how the § 707(b) means test should be performed.  The language in § 707(b)(2)(A)(ii)(I) permits a debtor to claim deductions based on actual expenses for reasonable and necessary items, including those for their “dependents,” “dependent children,” and “households.”  The Fourth Circuit’s interpretation of “household” will impact the entire § 707(b) means test.

The Debtor argues that “household” should be interpreted using the ordinary and common meaning of the word, which would make the “heads-on-beds” approach, counting all people who occupy a housing unit as part of the household, proper.  If Congress intended to require familial or economic ties to limit the definition of “household,” it could have expressed such limitations in the Code.  The Creditor argues that the bankruptcy court correctly adopted the economic unit approach and the Code’s purposes are best served by using a definition of “household” based on financial interdependence.  The economic unit approach provides an accurate picture of the Debtor’s household when considered over a period of time.

Where statutory language is facially clear and within Congress’ constitutional authority, courts must enforce it according to its terms.  In assessing whether the language is plain, a court should consider the language itself, the context in which the language is used, and the broader context of the statute as a whole.  Words that are not defined are generally given their ordinary meaning, as provided by a dictionary.  The dictionary definition of “household,” however, does not resolve the issue because the term has multiple definitions.  The Debtor relies on a broad definition of “household” and ignores the narrower definitions.  A household may consist of the heads-on-beds approach, but other definitions suggest a household consists of something beyond co-residency. Accordingly, it is not evident which ordinary definition of “household” Congress intended.  Context provides some additional guidance, but does not resolve the fundamental uncertainty of what Congress intended.  Since Congress used “household” instead of “family” or “dependent,” Congress intended the term to mean something other than what those terms mean, despite the fact that the definitions of those words often overlap.

Bankruptcy courts have offered reasoned explanations for why one method of defining “household” is more or less appropriate based on the context within § 1325(b), the BAPCPA amendments, and the Code as a whole, but no approach is directly required by the statute.  The court has a responsibility to determine which approach best corresponds to Congress’ intent despite the ambiguous meaning of the text used.  Some bankruptcy courts adopted the heads-on-beds approach, using the Census Bureau definition of “household,” thought their rationales for doing so varied.  Some bankruptcy courts have reasoned that this definition of “household” is simply its plain meaning, while other bankruptcy courts based their use of the heads-on-beds approach upon § 1325(b)’s reference to Census Bureau statistical data.  However, the Fourth Circuit was not persuaded that Congress intended such a broad definition, particularly as nothing in § 1325(b) supports the conclusion that bankruptcy courts are required to use such a broad definition.

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 approaches.  The Fourth Circuit agreed with a 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 of the Code.  The Census Bureau’s definition is wholly unrelated to any bankruptcy purpose and does not serve the Code’s objective of identifying a debtor’s disposable income.  Furthermore, the Census Bureau definition is at odds with § 1325(b)’s purpose, as the calculation of a debtor’s monthly income and expenses is aimed at ensuring that debtors pay the amount they can reasonably afford to pay. It does not make sense to allow debtors to broadly define their “households” so as to include individuals who have no financial impact on expenses because it would lead to an incorrect determination of the debtor’s disposable income.   Accordingly, the bankruptcy court did not err in rejecting the heads-on-beds approach.

Because 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 is in fact consistent with § 1325(b), the BAPCPA, and the Code.  Examining the financial interdependence of individuals allows bankruptcy courts to avoid over- and under-inclusive results that would result by artificially defining “household.”  The approach is flexible because it recognizes that a debtor’s “household” may include individuals who may not be claimed on a tax return, but nevertheless impact the debtor’s financial situation.  The economic unit approach is appropriate because the debtor’s finances are the focal point of the Code.  Furthermore, it is consistent with other components of the § 1325(b)(2) analysis, particularly in addressing whether the debtor’s income or expenses are interdependent with another individual’s.  For the aforementioned reasons, the bankruptcy court did not err in adopting the economic unit approach.

Neither party advocated the income tax dependent model as the best method of defining “household.”  This approach puts limitations on the bankruptcy court’s ability to accurately determine household size and fails to match the goals of the BAPCPA and the Code.  A “household” includes the individuals allowed as dependents on the taxpayer’s tax returns or those who could be included.  The § 707(b) means test mentions dependents and refers debtors to use certain IRS tables as part of their calculations in determining deductible monthly expenses.  However, several factors negate the appropriateness of using “dependents” as the definition for “household.”  First, neither § 707(b) nor § 1325(b) expressly incorporates the IRS definitions.  Second, the IRS definition of “dependent” was created with a markedly different purpose from the Code’s definition of “household.”  Finally, § 1325(b)(2) refers to “dependents” at one point and “household” at another.  If Congress intended for “household” to refer to the debtor and his or her dependents, it could have done so.  The income tax dependent approach tends to be under-inclusive.  Accordingly, the district court did not err in rejecting the income tax dependent approach.

The bankruptcy court opted to further refine the economic unit approach to account for part-time members of the Debtor’s “household.”  The Debtor argues that even if the bankruptcy court did not err in using an economic unit analysis, it erroneously relied  on the outlier case of In re Robinson, 449 B.R. 473, 478–82 (Bankr. E.D. Va. 2011), to divide the children into fractions.  The bankruptcy court did not err in applying the economic unit approach in a manner that accounted for part-time members of the household.  The cases upon which the Debtor relies differ from the facts of the instant case because the children do not live with the Debtor on a full-time basis.  The bankruptcy court had to consider that the Debtor’s “household” fluctuated from two to seven individuals depending on the day; allowing the use of fractions is more accurate than choosing between two extremes, which would be either under- or over-inclusive.  The bankruptcy court did not err in applying the economic unit method and using fractions to determine the Debtor’s “household” size.  Accordingly, the Fourth Circuit affirmed the bankruptcy court’s decision.

Circuit Judge Wilkinson dissented due to an inability to approve the bankruptcy court’s decision to break the Debtor’s children into fractions, as it contravenes statutory text, allows judges to unilaterally update the Code, and subjects debtors to needlessly intrusive and litigious proceedings.  If the means test applies, as the parties agree it did in the instant case, the amount of the deduction is based in part on the number of “dependents” the Debtor has, pursuant to § 707(b)(2)(A)(ii)(I).  The bankruptcy court’s fractional view is not how courts ordinarily interpret statutes.  Just because Congress does not define “household” or “dependents” does not mean bankruptcy courts can take liberties with the terms.  Instead, when statutory terms are undefined, they are given their ordinary meaning, which does not include “partial people.”  Wilkinson also objected to the bankruptcy court’s decision to update the Code to address the increase in split custody arrangement, as this matter should be left to Congress.  Finally, by allowing judges to treat dependents as fractions, the majority’s decision will require courts to conduct more intrusive and litigious proceedings in order to apply the Chapter 13 means test.  While bankruptcy courts have some discretion in applying the Code, they lack the authority to depart from the rules in the Code and implement their own policy views.  Accordingly, the bankruptcy court erred in dividing the Debtor’s children and stepchildren into fractions for purposes of the means test.

Full Opinion

-Michelle Theret