August 5, 2016
Authored by: Mark Duedall
So, a ruling came out in June that we in The Bankruptcy Cave have been dying to blog about (and not just so we can use the blog title above). Forgive the delay – heavy workloads and summer vacations often preclude timely blog posts. But this one is a doozy, better late than never on this blog post.
In re Perez, Case No. 15-31645 (Bankr. E.D. Wisc., June 3, 2016) is one of those weird Chapter 13 cases (and we know most folks’ eyes glaze over when they read “Chapter 13” – ours do too, but just keep reading for once). It addresses the definition of “current monthly income,” which partially drives what a Chapter 13 debtor must pay unsecured creditors over time via Chapter 13 plan. In Perez, the debtor worked for an auto dealer; part of her pay was her regular use of a “demo” car. She was w-2’ed for it to the tune of $625 per month, so this was a real and tangible job benefit. She also had a personal car, a 2008 Dodge Avenger. She would keep her personal car under her Chapter 13 plan by making payments on the debt secured by the Avenger. So she would leave bankruptcy with two cars – one her employer provided under the terms of her employment, and also a personal car. But her Chapter 13 plan, after figuring her “current monthly income” (in which she did not include the $625 per month value of the Avenger, hence the issue of this post), making the Chapter 13 adjustments, and deducting her allowable living expenses, resulted in unsecured creditors getting nothing.
The Chapter 13 Trustee objected – if the monthly value of her employer-provided car was instead included in “current monthly income,” then her income would be sufficient for unsecured creditors to receive a nice percentage payment. The Bankruptcy Court rejected the argument. First, the Bankruptcy Code has no definition of income (!?!), and so the Court looked elsewhere. It rejected the dictionary definition of income, in which income is “a gain or recurrent benefit” – the value of a demo car she could use fits that bill, but the Bankruptcy Court didn’t buy it. It rejected the Internal Revenue Code, under which the car’s value is clearly something on which one would pay tax, hence making it taxable income. (Then again, the Bankruptcy Code’s definition of “current monthly income” states that it is without regard to whether income is taxable, so we get ditching the tax code. We don’t get why Congress would try to define “current monthly income” but not define “income” at all – but we digress.) The Court then looked to census figures, as the purpose of determining “current monthly income” is to compare it against median income under the U.S. census. Under Census Bureau definitions (which are not law, just regulatory publications), “in-kind” income does not count toward one’s census income. So the Court liked that source of a definition of “income.” And in addition to the Census Bureau definition, the Court noted that the $625 in monthly income attributable to the demo car was not real cash available to creditors. So even if the in-kind value of this job benefit did count as “income,” it couldn’t be distributed to creditors – the right to use a demo vehicle is not a liquid asset. The Chapter 13 Plan was confirmed.
I get it – except for one thing – the Debtor was allowed to keep, and pay off under the Plan, her Avenger! We don’t understand how a Chapter 13 plan is in good faith (that requirement is in Chapter 13 too, just like in Chapter 11 – see 11 U.S.C. § 1325(a)(3)) if the plan pays unsecured creditors nothing, but allows a debtor to have two cars. The Perez court does not address this at all.
We don’t fault the Debtor Ms. Perez. We examined every item on the docket in her case, every single one, and she is in all respects an honest but unfortunate debtor. This is not, at all, a wealthy person misusing bankruptcy, gaming the system to stiff creditors. If she later leaves her car dealership job, then she will need her personal car. And we at The Bankruptcy Cave never have an issue when BAPCPA, drafted almost entirely by the creditor lobby, back-fires to result in a pro-Debtor opinion. (Folks, if you have never seen Judge Lundin’s live presentation skewering the back-room creditor-centric deals of BAPCPA, and the stupidity of BAPCPA’s Chapter 13 revisions, please do – it will open your eyes. In the meantime, Judge Lundin’s editorials and analysis ring like truth.) But Perez still gnaws at us, for two reasons. First, unsecured creditors should really scratch their heads upon hearing of a Chapter 13 plan in which they get nothing, and the Debtor has full use of two cars. Second, how can we have a Chapter 13 system that has no definition of “income”? The Bankruptcy Code, painstakingly designed throughout the 1970s and enacted in 1978, was a careful, thoughtful balance of the interests of creditors and debtors. Congressional meddling over the years has rendered it a cumbersome tome – there are now 28 exceptions to the automatic stay, Sections 503(b)(9) and 365(d)(4) have made Chapter 11 a graveyard for all retailers (see Isaac Pachulski’s Congressional testimony on this, and his chart showing 200,000 retail jobs lost when retailers can’t reorganize, here), and if you ever try to determine who or what is protected by the safe harbor provisions of the Code, please have a stiff drink handy. Meanwhile, other key terms, like “income” are undefined. What’s going on with our beloved Code?
Enough ranting. The Code, like all things in our universe, will gravitate toward entropy, and not simplicity. Perez is the most recent example. It is a case that could be easily decided – either way – by a simple definition of “income.” A definition is lacking, and so the Court simply ruled in the manner it thought best. Perhaps in our arcane and technical world of the Bankruptcy Code, having a court rule based on what it thinks is right, is right – even if we think it got it wrong.