Jeffery W. Cavender, U.S. Bankruptcy Court Judge.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334. Confirmation
To confirm a chapter 13 plan, all chapter 13 debtors must satisfy the requirements of § 1325. At issue in this case are the requirements found in § 1325(b), which provides that, upon objection by the trustee or an unsecured creditor, the court may not confirm a plan unless, as of the effective date of the plan, (1) unsecured creditors will be paid in full or (2) "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 to unsecured creditors under the plan." Code § 1325(b)(1). Trustee objected to the Plan and argues Debtor satisfies neither provision. There is no dispute the Plan does not satisfy the first option as Debtor is not paying unsecured creditors in full. Debtor argues he satisfies option 2—the projected disposable income test (or "PDI Test").
The PDI Test "establishes a minimum amount to be paid to unsecured creditors based on a debtor's income and expenditures." Drake, Bonapfel, Goodman, Chapter 13 Practice and Procedure § 8:1 (2019 Ed.). The test has three basic elements: (1) calculation of projected disposable income ("PDI"); (2) determination of the applicable commitment period ("ACP"); and (3) payment of all PDI received during the ACP to "unsecured creditors." The question before the Court is whether Debtor may deduct his attorney's fees in calculating the minimum payment to nonpriority unsecured creditors under the Plan. Debtor offers two theories allowing him to do so. First, he argues he may deduct his attorney's fees in calculating his PDI. Second, he argues that even if he may not deduct the fees in calculating PDI, his attorney is an "unsecured creditor" whose fees may be paid from PDI before nonpriority unsecured creditors. If he is correct on either theory, the Plan is confirmable.
The facts are not in dispute. Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code on August 4, 2018 (the "Petition Date"). Before filing, Debtor hired the Law Office of Jeffrey B. Kelly, P.C. ("Attorney") to represent him in his bankruptcy case. Debtor agreed to pay his Attorney $4,500 (the "Attorney's Fees") for such representation. The amount and reasonableness of the Attorney's Fees are not in dispute. Debtor treats the Attorney's Fees in § 4.3 of the Plan. Upon confirmation, the Attorney's Fees will be an allowed administrative expense under § 503(b) to the extent set forth in this Court's General Order 22-2017 and will be entitled to priority pursuant to § 507(a)(2). Trustee will pay the Attorney's Fees pursuant to the Plan and the General Order, which generally provide that the Attorney's Fees will be paid before any other claims except Trustee's fees and unpaid preconfirmation adequate protection payments. The sole source of funding for the Attorney's Fees will be Debtor's Plan payments.
Debtor is an "above-median" debtor. The term "above-median" is not found in the Code, but, in simplified terms, it means Debtor has more current monthly income than the median income of families sharing Debtor's household size and state of residence. See Code § 1325(b)(3). Debtor is a resident of Georgia, has a one-person household, and filed his case on August 4, 2018. The median family income as of August 4, 2018 for a household with one earner in the State of Georgia was
All debtors must first look to § 1325(b)(2) to calculate PDI. That section defines "disposable income" as "current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor...." Code § 1325(b)(2). Debtor's current monthly income is not in dispute. The parties' main dispute is whether Debtor's Attorney's Fees fall within "amounts reasonably necessary to be expended." The Code prescribes nothing further for below-median debtors, and the determination of "amounts reasonably necessary to be expended" is left to debtors, trustees, creditors, and courts to determine on a case-by-case basis. For above-median debtors, however, the Code prescribes that "amounts reasonably necessary to be expended... shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)." Code § 1325(b)(3). Subparagraphs (A) and (B) of § 707(b)(2), in turn, spell out what is commonly called the "means test."
The means test and its incorporation into the PDI Test for above-median debtors were added to the Code by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").
Debtor accomplishes the means test deduction by including his Attorney's Fees as a line item deduction on his amended Official Form 122C-2, Chapter 13 Calculation of Your Disposable Income ("Form 122C-2") filed at docket number 28. Bankruptcy Rule 1007(b)(6) requires above-median debtors to file "a calculation of disposable income made in accordance with § 1325(b)(3), prepared as prescribed by the appropriate Official Form." Fed. R. Bankr. P. 1007(b)(6). Form 122C-2 is the appropriate Official Form for above-median debtors to take applicable deductions under the means test and is designed to track the deductions listed in § 707(b)(2)(A).
Trustee's only objection is that Debtor may not include the Attorney's Fees in line 35 or anywhere else in Form 122C-2. Trustee contends that neither Form 122C-2 nor the Code allow any deduction for attorney's fees when calculating disposable income. Trustee is correct that line 35 of Form 122C-2 excludes chapter 13 attorney's fees, as the Committee Notes make clear:
Official Form 122 (Committee Note C.2). If Attorney's Fees are excluded from the deduction, Debtor's monthly disposable income becomes $714.49, which Trustee multiplies by 60 to get a total PDI of $42,869.40. Thus, deducting the Attorney's Fees in line 35 results in a dollar-for-dollar reduction of total PDI.
In response, Debtor argues that even if Trustee is correct that Form 122C-2 and § 707(b)(2)(A)(iv) do not allow the means test deduction, he may treat his Attorney as an "unsecured creditor" under § 1325(b)(1)(B) and pay the Attorney's Fees from the PDI pot of $42,869.40. Because the Attorney's Fees must be paid before nonpriority unsecured claims, Debtor argues, the Attorney's Fees should be deducted from the PDI pot before determining the minimum payment to nonpriority unsecured creditors. The Court refers to this proposed deduction as the "pot deduction." Trustee argues the term "unsecured creditors" is limited to nonpriority unsecured creditors and Debtor's Attorney is not a "creditor" as defined in the Code.
Importantly, Debtor does not request to use both deductions; he seeks only one or the other. Either deduction produces the same result: nonpriority unsecured creditors will receive $4,500 less than they would receive if Debtor were not allowed
Only a few cases have addressed the deductibility of attorney's fees under the PDI Test post-BAPCPA, but a clear majority has emerged allowing a deduction for attorney's fees for above-median debtors. Most of these cases have adopted or endorsed the pot deduction for attorney's fees. See In re Jiter, 2011 WL 477823, *1 (Bankr. E.D. Wis. Feb. 3, 2011); In re Minahan, 394 B.R. 116, 128 n.27 (Bankr. W.D. Va. 2008); In re Nething, 2008 WL 2246072, *4 (Bankr. E.D. Wis. May 30, 2008); In re Brown, 2008 WL 4372675, 2008 Bankr. LEXIS 1227 (Bankr. S.D. Ohio Apr. 15, 2008); In re Echeman, 378 B.R. 177, 182 (Bankr. S.D. Ohio 2007); In re Puetz, 370 B.R. 386, 390 (Bankr. D. Kan. 2007). Several cases, however, have adopted, or at least acknowledged the propriety of, the means test deduction. See In re Williams, 394 B.R. 550, 564 (Bankr. D. Col. 2008) ("Section 707(b)(2)(A)(iv) allows an above-median income debtor to subtract all priority claims in arriving at PDI. Such deductible priority claims must include those expenses given administrative expense priority by § 503."); In re Hemker, 2015 WL 5262080, *2-3, 2015 Bankr. LEXIS 3122, *7 (Bankr. C.D. Ill. Sep. 8, 2015) (technically adopting the pot deduction but basing its ruling in part on court's reading of § 707(b)(2)(A)(iv) as including attorney's fees); In re Johnson, 408 B.R. 811, 814 n.11 (Bankr. W.D. Mo. 2009) (noting that technically attorney's fees should be deducted as a priority claim pursuant to § 707(b)(2)(A)(iv) even though local practice allowed the pot deduction).
While all of the foregoing cases adopt or endorse one of the deductions for attorney's fees, the cases struggle to reconcile how the deductions fit into the framework of the PDI Test, the means test, their respective applications to above and below-median debtors, and Form 122C-2. The cases are replete with phrases such as "impossible choice," "dueling absurd results," "inconsistent provisions," and "unfortunate omissions." It is no secret that "the final version of BAPCPA has been roundly criticized as poorly crafted, containing a multitude of `typos, sloppy choices of words, hanging paragraphs, and inconsistencies.... [as well as] largely pointless but burdensome new requirements, overlapping layers of screening, mounds of new paperwork, and structural incoherence.'"
Most of the frustration stems from inclusion of a deduction for "priority claims"
This interpretation, however, leads to its own set of difficulties. For instance, below-median debtors generally still use schedule J to calculate disposable income, but schedule J does not include any deductions for priority claims. Some courts have expressed concern that interpreting "unsecured creditors" to include only nonpriority unsecured creditors may lead to the conclusion that below-median debtors may not pay priority claims with projected disposable income, meaning their plans would never be feasible without some source of payment outside of income. See, e.g., Williams, 394 B.R. at 564; Echeman, 378 B.R. at 182 n.7. The solution to the dueling absurdities of double counting priority claims for above-median debtors and unavoidable infeasibility for below-median debtors is to somehow read the statute so that "the effective result [should be] the same for all debtors—priority unsecured claims can be counted once, no more, no less, in determining which funds are left for nonpriority unsecured creditors." Williams, 394 B.R. at 564 (quoting In re Echeman, at 182 n.7).
A second difficulty arises in cases in which courts, in apparent reliance on Form 122C-2, exclude administrative expenses and other post-petition priority claims from the definition of "priority claims" under § 707(b)(2)(A)(iv).
Trustee cites, and the Court's own research has found, only one case allowing no deduction for attorney's fees. See In re Amato, 366 B.R. 348, 353 (Bankr. D. N.J. 2007). In Amato, the Court appears to rely almost exclusively on Form 122C-2 to deny any deduction for attorney's fees, despite
Official Form 122 (Committee Note D.3). It is not clear why Amato did not follow the Committee Note endorsing the pot deduction, but it relied in part on two decisions rejecting the pot deduction for other priority claims and trustee fees. See In re Wilbur, 344 B.R. 650; In re McDonald, 361 B.R. 527.
Neither Wilbur nor McDonald addressed attorney's fees directly. In Wilbur, the question was whether a debtor could deduct priority claims twice, once under the means test and again from the PDI pot. Which priority claims are at issue in Wilbur is unclear, but attorney's fees are not mentioned and there is no apparent dispute the priority claims were properly included as means test deductions. The court determined that allowing the pot deduction as well would be absurd because it allowed for double counting. The court thus interpreted the term "unsecured creditors" to exclude priority creditors. In re Wilbur, 344 B.R. at 654-55. In McDonald, the Court similarly ruled that trustee's fees are not included in the "unsecured creditors" pool because such fees are deducted in the PDI calculation and double counting would be absurd. McDonald likewise concluded the term "unsecured creditors" does not include priority creditors. In re McDonald 361 B.R. at 530-31.
Importantly, Amato did not analyze the language of § 707(b)(2)(A)(iv) and whether attorney's fees should be included in the means test deduction. Instead, Amato relied on Form 122C-2's exclusion of attorney's fees from the means test deduction. Several courts, however, have recognized that, despite the absence of a deduction on Form 122C-2, the plain language of § 707(b)(2)(A)(iv) includes allowed attorney's fees entitled to priority. In re Williams, 394 B.R. at 563-64 (finding that § 707(b)(2)(A)(iv) allows for deduction of attorney's fees even though the form omits such a deduction); In re Hemker, 2015 WL 5262080 at *2-3, 2015 Bankr. LEXIS 3122 at *7 (characterizing the lack of deduction for attorney's fees of a chapter 13 debtor on the official form as an "unfortunate omission").
In short, the Court disagrees with Amato and concurs with the majority conclusion that attorney's fees should be deducted before calculating the minimum amount to be paid to nonpriority unsecured creditors. Whether that is more appropriately done through a means test deduction or pot deduction is analyzed below.
The Court begins its analysis, as it always must, with the language of the
Section 707(b)(2)(A)(iv) allows a deduction for "debtor's expenses for payment of all priority claims (including priority child support and alimony claims) [which] shall be calculated as the total amount of debts entitled to priority, divided by 60." Code § 707(b)(2)(A)(iv). The question before the Court thus seems rather simple: do attorney's fees for" a chapter 13 debtor count as a "priority claim" for purposes of § 707(b)(2)(A)(iv)? The Court finds that they do.
"Priority claim" is not defined in the Code, but "claim" is defined broadly as
Code § 101(5). The definition of claim suffers from few limitations. The only question to answer when determining whether something is a claim is whether the something is a right to payment. If so, then the something is a claim. The Court easily concludes that the Attorney's Fees represent a right to payment held by Debtor's Attorney. The Attorney's Fees are a claim.
"Priority" is not defined by the Code explicitly, but § 507 is titled "Priorities" and provides in subsection (a) a priority order for claims and expenses. Code § 507(a). Subsection (a)(2) includes as the second priority category "administrative expenses allowed under section 503(b) of this title...." Code § 507(a)(2). Section 503(b), in turn, is titled "Allowance of administrative expenses" and provides that "after notice and a hearing, there shall be allowed administrative expenses, including—(2) compensation and reimbursement awarded under section 330(a) of this title...." Code § 503(b). Section 330(a)(4), in turn, provides for the allowance of "reasonable compensation to [a chapter 13] debtor's attorney." Upon confirmation of the Plan, the Attorney's Fees will be allowed under § 330(a)(4). The Attorney's Fees, which no one has challenged as to reasonableness, will therefore be an allowed administrative expense under § 503(b)(2) entitled to priority under § 507(a)(2).
Having determined the Attorney's Fees are a claim entitled to priority, it seems straightforward to conclude that the Attorney's Fees easily fall within the meaning of "priority claims" and may be deducted pursuant to § 707(b)(2)(A)(iv). Several courts have reached the same conclusion. See In re Williams, 394 B.R. at 564; In re Hemker, 2015 WL 5262080, *2-3, 2015 Bankr. LEXIS 3122, *7; In re Johnson, 408 B.R. at 814 n.11.
Trustee disputes this straightforward analysis of the plain meaning of "priority claims" and argues for a more nuanced approach. Trustee cites the well-known canon of statutory construction that
Trustee argues that reading "priority claim" in the context of §§ 507, 503(b), and 330 requires an interpretation that excludes all administrative expenses, including attorney's fees. The basic reasoning is that § 507 makes a careful distinction between claims and expenses, and neither §§ 507, 503(b), nor 330 ever refer to an administrative expense or attorney's fees as a claim. Therefore, a claim and an expense are something different. By using "priority claims," Trustee argues, § 707(b)(2)(A)(iv) harnesses the distinction between a claim and an expense to exclude administrative expenses. Trustee offers no authority in support of her position that an expense is something other than a claim or that an administrative expense is not a priority claim, whether under § 707(b)(2)(A)(iv) or otherwise. The Court's own research found no case even addressing this possibility.
Every priority-implementing provision in chapters 7, 9, 11, 12, and 13 uses the word "claim" in reference to administrative expenses. For example, § 726 gives top priority to "payment of claims of the kind specified in, and in the order specified in, section 507 of this title...." Code § 726(a)(1) (emphasis added); see also Code §§ 752(a) and 766(h) and (i). No reference to an "expense" is to be found in § 726(a)(1), but it is beyond dispute that the "claims" in § 726 include administrative expenses. Sections 943(b)(5) and 1129(a)(9) require all chapter 9 and 11 plans to pay administrative expenses in full. Those sections reference only "claims" and not "expenses," each using the word "claim" four separate times specifically in reference to § 507(a)(2) administrative expenses. Section 1123(a)(1) uses the single word "claim" to commingle administrative expenses with other priority claims that need not be classified in chapter 11 plans. See Code § 1123(a)(1) (requiring plans to "designate ... classes of claims, other than claims of a kind specified in section 507(a)(2) [administrative expenses], 507(a)(3) [unsecured 502(f) claims], or 507(a)(8) [priority taxes]"). All of these Code sections unquestionably consider administrative expenses to be "claims" and never once use the term "expense."
Closer to home for chapter 13 cases, § 1322(a)(2) requires chapter 13 plans to "provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim...." Code § 1322(a)(2) (emphasis added). Again, the section uses only the term "claim" in reference to § 507 without a single mention of "expenses," yet the section is commonly understood to include
Is there a distinction to be made between the foregoing Code sections and § 707(b)(2)(A)(iv), which has the unique distinction of being the only Code section to use the term "priority claims" in a substantive provision? Nearly every Code section referring to § 507 uses the phrase "claims of the kind specified in ... section 507" and, when needed, lists specific subsections to be included (or excluded). See, e.g., §§ 726(a), 1123(a)(1), 1129(a)(9), 1226(b)(1), and 1326(b)(1).
If any ambiguity remains after reference to the Code itself, the Code's legislative history repeatedly confirms that the term "priority claim" includes administrative expenses. The Senate Report for § 364, as originally enacted, twice uses the term "priority claim" explicitly in reference to administrative expenses—once to the specific administrative expenses authorized
The legislative history of BAPCPA further bolsters the Court's interpretation of "priority claims." While the main body of the House Report accompanying BAPCPA says essentially nothing about § 707(b)(2)(A)(iv) or the term "priority claims" as used therein, footnote 61 makes clear that "a debtor's monthly expenses may also include ... claims and expenses entitled to priority under section 507 of the Bankruptcy Code...." H. Rep. 31, 109th Cong. at 13 n.61, reprinted in 2005 U.S.C.C.A.N. 99 (emphasis added). This statement directly contradicts Trustee's main thesis—that "priority claims" exclude expenses under § 507—and directly supports Debtor's position and the Court's view. Further, contrary to Trustee's argument, the fact that the House Report does not explicitly reference a deduction for attorney's fees does not indicate an intent by Congress to exclude attorney's fees. No priority claims garner mention in the legislative history specific to § 707(b)(2)(A)(iv) other than child support and alimony claims (which also are the only two meriting specific mention in the statute). The Court does not read the Trustee's argument to be that child support and alimony are the only priority claims worthy of deduction. The Court reads nothing into the absence of a specific deduction for attorney's fees in the legislative history or the statute itself because a specific reference would be redundant.
That attorney's fees are not specifically mentioned in the legislative history or the statute supports the Court's interpretation. While no other provision of the Code referencing § 507 uses the term "priority claim," Congress knows how to exclude specific classes of claims under § 507 with clarity and precision. It has never used the general term "priority claim" to exclude a type of claim entitled to priority. If Congress intended a new paradigm for excluding administrative expenses from the scope of claims entitled to priority, the Court expects it would do so with clarity, or at least some mention of such intent in the legislative history. It would be curious for Congress to do it with a phrase that the Code, its legislative history, and BAPCPA's legislative history commonly and historically understood to include administrative expenses.
The purpose behind the means test as incorporated into the PDI Test also supports the Court's interpretation of priority claims to include attorney's fees. In Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), the Supreme Court analyzed whether a chapter 13 debtor was entitled to take a specific deduction under the means test. The question in Ransom was not whether the statute provided for a specific category of expense, but whether a specific debtor qualified to take the deduction in a category in which the debtor had no actual expenses. In finding that the debtor could not take the deduction, the Court stated:
562 U.S. at 70-71, 131 S.Ct. 716. The Court agrees with Debtor that Trustee's position places too much emphasis on "repay creditors the maximum" without sufficient consideration for what debtors can "afford." Unlike in Ransom, Debtor here actually has the expense he seeks to deduct. Moreover, that expense must be paid under the Plan, and it must be paid before all other unsecured creditors. See Code §§ 1322(b)(2) and 1326(b)(1). The purpose of the means test is "best achieved by interpreting [it], consistent with the statutory text, to reflect a debtor's ability to afford repayment. Id. at 71, 131 S.Ct. 716. That purpose is not served by interpreting the means test to exclude actual expenses that a debtor must pay under a plan before other unsecured creditors.
Pre-BAPCPA practice also supports the Court's interpretation of "priority claims." Prior to BAPCPA, chapter 13 plans "routinely paid the debtor's net income figure first toward priority claims in the order set forth in § 507—which included... postpetition or administrative expenses (such as attorney's fees and trustee's compensation)—and then applied the balance to the nonpriority unsecured creditor class." In re Williams, 394 B.R. at 563. Courts should not "read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure." Hamilton v. Lanning, 560 U.S. 505, 517, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010). Given the lack of any clear intention to alter the common understanding of "priority claim" or to specifically exclude attorney's fees from the deduction, the Court will not read "priority claims" to erode the pre-BAPCPA practice of allowing debtor's to pay attorney's fees before calculating payments to nonpriority unsecured creditors.
What, then, is to be made of § 507's seemingly careful distinction between expenses and claims? Trustee argues that the distinction between "expense" and "claim" is to emphasize an intended difference in their treatment. The Court agrees. But Trustee misconstrues which term's treatment is being emphasized to the exclusion of the other. While the Code does not use the term "claim" or "priority claim" to the exclusion of administrative expenses, the Code does use the term "administrative expense" to specifically designate certain types of claims as administrative expenses under § 503(b). See, e.g., Code §§ 364(a)-(c), 1114(e)(2), 1116(6)(B), and 1171(a). Administrative expenses generally must be paid before any other unsecured claims, even most priority claims, and often are paid during the pendency of cases in advance of other creditors, even other priority creditors. See, e.g., Code § 1326(b)(1). Administrative expenses are priority claims with benefits. It makes sense that the Code would employ a unique term to designate which priority claims are bestowed with these additional benefits. The distinction between claims and expenses in § 507 is not made for the purpose of excluding administrative expenses from the benefits of priority treatment. The distinction is made for the converse purpose—to exclude most priority claims from the additional benefits that attach to administrative expenses.
Trustee also argues that the distinction between "expenses" and "claims" in § 507 is the result of administrative expenses not meeting the definition of a prepetition claim. In that way, she argues, they are more like post-petition claims under § 1305, which are not deductible under the PDI Test. Since § 1305 claims are a type of post-petition claim that do not get deducted, the argument goes, then attorney's fees, as a post-petition administrative expense, should not be deducted either. The Court is not persuaded. Courts have rejected the argument that a chapter 13 debtor's attorney's fees (or administrative expenses) are the same thing as § 1305 claims. In re Hanson, 223 B.R. 775, 776-81 (Bankr. D. Or. 1998) ("The postconfirmation fees and costs of debtor's counsel related to the Chapter 13 case are administrative expenses, a specific category of post-petition debts distinct from the more general types of consumer debts covered by section 1305(a)(2)."); In re Phillips, 219 B.R. 1001, 1009 (Bankr. W.D. Tenn. 1998) (disapproving practice of debtor's attorney filing post-petition claims under § 1305 for routine prepetition attorneys' fees and reimbursement of expenses). Administrative expenses and § 1305 claims are two different things, with different characteristics and different treatment under the Code. Unlike administrative expenses, § 1305 claims are not required to be paid under a plan and obtain no special priority under the Code. The fact that § 1305 claims are not deductible under the PDI Test does not mean that administrative expenses are not deductible as priority claims.
Trustee offers one other statutory argument in support of her position that "priority claims" exclude administrative expenses. Trustee argues that the separate deduction for the "actual administrative expenses of administering a chapter 13 plan" (i.e., chapter 13 trustee fees) found in § 707(b)(2)(A)(ii)(III) shows that no other administrative expenses should be deducted in a debtor's PDI calculation. Trustee invokes the canon of statutory construction expressio unius est exclusio alterius and cites to a Judge Wedoff article in support. See Eugene R. Wedoff, Means Testing in the New § 707(b), 79 AM. BANKR. L.J. 231, 273 (2005). The Court disagrees the canon applies here. Judge Wedoff in his article talks about chapter 7 debtors taking deductions for hypothetical chapter 13 administrative expenses, not actual chapter 13 debtors taking deductions for actual administrative expenses allowed by the Court. It makes sense that chapter 7 debtors, who do not have administrative expenses, cannot take deductions for hypothetical chapter 13 expenses because, as Trustee states, one must "be clairvoyant in knowing what and how much the Court may award." Trustee's Brief, Doc. No. 35, p. 10.
Not only would it be difficult from a practical perspective, but allowing chapter 7 debtors to deduct purely hypothetical administrative expenses could lead to all sorts of shenanigans. As Trustee again points out, however, chapter 13 trustee fees are an exception: "The fact that the
The Court disagrees that the canon applies for purposes of the PDI Test in an actual chapter 13 case with actual administrative expenses that Debtor is `required to pay "as a claim entitled to priority under § 507." Code § 1322(b). There is no need to engage in hypotheticals with respect to the Attorney's Fees. Trustee raises no objection to the reasonableness of the fees, and the fees will be an actual allowed administrative expense immediately upon confirmation of the Plan. The Court sees a sharp difference between, on the one hand, a chapter 13 debtor with actual attorney's fees that Debtor must pay under the Plan, which have ostensibly been negotiated (or at least shopped), and are subject to review and allowance under § 330, and, on the other hand, a chapter 7 debtor whose chapter 13 attorney's fees are purely hypothetical and without the benefit of negotiation, shopping, or review under § 330. The means test contemplates a deduction for actual, i.e., allowed, administrative expenses in § 707(b)(2)(A)(iv) while foreclosing any deductions for hypothetical administrative expenses, excepting chapter 13 trustee fees.
The separate deduction for trustee fees in chapter 13 cases may further be explained by the fact that standing chapter 13 trustee fees work differently than other administrative expenses. In fact, standing trustee fees technically may not even be administrative expenses because they are statutorily mandated and not subject to allowance by the Court, even though they are "loosely referred to" as administrative expenses. Drake, Bonapfel, Goodman, supra, at § 6:7.
Even if the separate deduction for the "administrative expense" of chapter 13 trustee fees in the means test creates a small redundancy vis-à-vis the deduction for "priority claims," the Court finds any mild redundancy to be the unfortunate result of inartful drafting and the wholesale incorporation of the chapter 7 means test into chapter 13. The Court is satisfied that its analysis of the term "priority claim," the policies behind the PDI Test and means test, pre-BAPCPA practice, the reasons analyzed above for including a separate deduction for trustee fees, and policy concerns discussed below significantly outweigh any minor redundancy.
Ultimately, the Court discerns no disciplined explanation for why Congress used the term "priority claims" in § 707(b)(2)(A)(iv) other than expedience and inartful drafting. If Congress intended to exclude the actual administrative expenses of a chapter 13 debtor in § 707(b)(2)(A)(iv), it could have done so explicitly in several different ways, such as a simple parenthetical: "priority claims (excluding administrative expenses)," or it could have indicated somewhere in the text of BAPCPA or its legislative history that Congress intended to exclude administrative expenses from the scope of "priority claims." Instead, Congress picked a term commonly understood to include administrative expenses with no indication that the common understanding is wrong. The Court concludes that "priority claim" as used in § 707(b)(2)(A)(iv) includes actual attorney's fees of a chapter 13 debtor allowed as an administrative expense and entitled to priority under § 507(a)(2), and such expenses may be deducted as a reasonably necessary expense when calculating an above-median debtor's PDI.
Having concluded that the Code itself allows the means test deduction, the Court next addresses Form 122C-2. Trustee relies heavily on Form 122C-2, which clearly limits the deduction for priority claims at line 35 to priority claims "that are past due as of the filing date of your bankruptcy case." The limitation to "past due" claims generally excludes attorney's fees and other administrative expenses, and the Committee Notes to Form 122, last updated in 2015, clearly indicate that the deduction for priority claims excludes chapter 13 attorney's fees.
The limitation goes too far for chapter 13 cases, at least for attorney's fees that will be allowed as an administrative expense at confirmation and paid by a debtor through regular plan payments.
The Committee theoretically softens the effect of its conclusion by endorsing the pot deduction,
One difficulty with the pot deduction is whether it is viable under the language of § 1325(b)(1)(B), which requires that all PDI received during the ACP be "applied to make payments to unsecured creditors under the plan." The term "creditor" is defined in the Code as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor...." Code § 101(10). "Thus, by definition, this term would only include creditors holding prepetition claims." In re Williams, 394 B.R. at 563. This interpretation makes the Court less inclined to follow cases like Puetz and the Committee Notes that seem to treat the pot deduction as a catchall for any post-petition claim or expense. See In re Puetz, 370 B.R. at 391-92. In this way, the Committee Notes are contradictory by holding steadfastly to a prepetition limitation appearing nowhere in § 707(b)(2)(A)(iv) while simultaneously endorsing the pot deduction despite a clear textual basis in the Code limiting "unsecured creditors" to prepetition claims.
Another difficulty with the pot deduction is the issue of double counting. The Court agrees with the cases that have interpreted "unsecured creditors" to be limited to "nonpriority unsecured creditors" because allowing double counting would be absurd. Further, some have found that by adding the term "unsecured creditors" in § 1325(b)(1)(B) with BAPCPA, Congress
While the Court is hesitant to find that the form is simply wrong, it is not the first court to do so. See In re Williams, 394 B.R. at 563-64 (finding that § 707(b)(2)(A)(iv) allows for deduction of attorney's fees even though the form omits such a deduction); In re Hemker, 2015 WL 5262080 at *2-3, 2015 Bankr. LEXIS 3122 at *7 (characterizing the lack of deduction for attorney's fees of a chapter 13 debtor on the official form as an "unfortunate omission"). Other Courts have found that Official Form 122C-1, which calculates a debtor's current monthly income, does not comply with the Code. See, e.g., In re Gonzalez, 597 B.R. 133, 141 (Bankr. D. Colo. 2018) ("Courts and commentators alike have called for revisions to the Official Form so that it better aligns with the Code, but no change has occurred, even though the Judicial Conference revised this form in 2015" and citing cases concluding the form is wrong). Bankruptcy Rule 9009 requires that "the forms shall be construed to be consistent with these rules and the Code." The Court will not bend its construction of the Code to match the form. "When an Official Bankruptcy Form conflicts with the Code, the Code always wins." In re Gonzalez, 597 B.R. 133, 141 (Bankr. D. Colo. 2018) (citing Drummond v. Wiegand (In re Wiegand), 386 B.R. 238, 242 (9th Cir. BAP 2008)). Here, the Code wins. The Court finds that the absence of a deduction for allowed attorney's fees on Form 122C-2 does not preclude Debtor from deducting his Attorney's Fees to calculate PDI.
Because the Court finds that the Attorney's Fees may be included in the deduction for "priority claims" pursuant to § 707(b)(2)(A)(iv), it need not determine whether, as an alternative, Debtor may use the pot deduction. While, as discussed above, the Court recognizes some difficulties in the pot deduction, it is not ruling one way or another on whether it is available to any debtor,
Trustee offers several policy arguments in favor of her position, most of which, in the Court's view, compel a different result. Trustee argues that allowing above-median debtors to take a deduction for attorney's fees leads to inequitable treatment between above-median debtors and below-median debtors. The basis of her argument is that some cases, such as Hemker, justify a deduction of attorney's fees for above-median debtors, at least in part, on the notion that the means test is designed to calculate all a debtor can afford to pay. If attorney's fees are not deducted in that calculation, then the debtor must not have any means to pay the attorney's fees, which creates feasibility issues. Trustee argues that this reasoning means that below-median debtors and above-median debtors with negative disposable income will not be able to confirm feasible plans if they hire attorneys. The Court disagrees that above-median debtors are getting an unfair benefit.
First, allowing above-median debtors to deduct attorney's fees pursuant to § 707(b)(2)(A)(iv) does not preclude below-median debtors from deducting their attorney's fees when calculating PDI, they just do not have the ability to do so under § 707(b)(2)(A)(iv) because that section does not apply to them. Indeed, the only decisions the Court has found on the issue allow below-median debtors to deduct their attorney's fees in the PDI Test, albeit some allow it under the pot deduction. See, In re Williams, 394 B.R. at 564; In re Puetz, 370 B.R. at 391-92; In re Echeman, 378 B.R. at 182; and In re Hemker, 2015 WL 5262080, at *3, 2015 Bankr. LEXIS 3122, at *8. Not allowing above-median debtors to take a similar deduction leads to inequitable treatment, not the other way around.
Second, above-median debtors with negative PDI do get to deduct their attorney's fees under the Court's ruling, even though they may not need the benefit of the deduction because they have no PDI that must be paid to unsecured creditors.
Third, the Court does not base its ruling on the premise that the means test is coextensive with feasibility. Its ruling is based on the language of the Code and the pervasive Code policy of giving priority to attorney's fees and other administrative expenses. While the means test may have been designed to ensure above-median debtors pay unsecured creditors "the maximum they can afford," it often does a poor job, which "is the inevitable result of a standardized formula like the means test." Ransom, 562 U.S. at 78, 131 S.Ct. 716. Deficiencies notwithstanding, if the purpose of the means test is "best achieved by interpreting [it] ... to reflect a debtor's ability to afford repayment," then allowing deductions for actual priority claims such as attorney's fees best achieves that goal.
Trustee also argues that allowing a deduction for attorney's fees will allow manipulation when negotiating attorney's fees for above-median cases. The Court appreciates Trustee's point: if a deduction is allowed, then above-median debtors will have no incentive to negotiate lower counsel fees so long as the fee is less than the resulting unsecured claim pool in the absence of the deduction. It's a wash from an above-median debtor's perspective because the funds will be paid either to counsel or to unsecured credits. The Court, however, does not share Trustee's concern. First, the Court does not believe that most debtors when negotiating fees with counsel appreciate the intricacies of the PDI Test and how it affects payments in a chapter 13 case. The Court has trouble believing
The Court is more concerned with the potential message sent to above-median debtors by Trustee's position: don't hire an attorney. Chapter 13 (indeed every chapter of the Code) works better for all parties, trustees and creditors included, when debtors are represented by competent counsel. The Code's priority scheme recognizes this fact by placing administrative expenses, including attorney's fees, at or near the top of the priority list in every chapter. See, e.g., §§ 507, 726, and 1129(a)(9)(A). Chapter 13 is no different. Attorney's fees (to the extent allowed) must be paid under a chapter 13 plan and before nearly all other claims. See §§ 1322(a)(2) and 1326(b)(1). Trustee's position is contrary to this pervasive Code policy and singles out attorney's fees as the only common priority claim in chapter 13 essentially placed on equal footing with general unsecured creditors. It is illogical to require above-median debtors to honor the priority of attorney's fees through actual payment while simultaneously ignoring that priority when calculating the minimum payment to nonpriority unsecured creditors. Nothing in the plain language of BAPCPA or its legislative history suggests a goal of making it harder for above-median debtors to hire counsel. The Court will not extrapolate such a goal through the oblique devices of expressio unius and artificial limitations on commonly understood terms.
The ultimate policy question boils down to this: who should foot the bill for above-median debtors' attorney's fees—debtors or unsecured creditors? Trustee's position collects from the debtors. Debtor's position sends the bill to unsecured creditors. If the primary goal of the means test is to ensure that debtors are channeled into chapter 13 cases instead of chapter 7 for the benefit of unsecured creditors, then it makes sense for unsecured creditors to pay the extra freight that comes with a chapter 13 case meant to serve them. The better policy is the one that eliminates barriers to hiring counsel, not raises them. Trustee's position erects such a barrier.
For the foregoing reasons, Trustee's objection to confirmation is overruled and a separate order confirming Debtor's Plan will enter once Debtor amends his Form 122C-2 and the Plan to account for the correct amount of priority claims as indicated in footnote 6 of this opinion.
