In Re Mravik
MEMORANDUM DECISION AND ORDER ON THE U.S. TRUSTEE’S MOTION TO DISMISS
Facts and Procedural Background
The issue is whether a debtor whose retirement plan contributions would not be considered part of her disposable income under Chapter 13 should have her Chapter 7 case dismissed as an abuse. Kathern Mravik (the “Debtor”) filed a petition under Chapter 7 on August 12, 2008. She has been employed as a clerk for Milwaukee County for over 20 years. Her monthly income is $4,025, and her principal assets are her personal residence valued at $190,000, a retirement account with a balance of $125,000, and a 1997 Mercury Villager minivan. The majority of her debt is a $164,000 mortgage on her residence, which she intends to reaffirm. Aside from that obligation, she has credit card debt totaling about $21,000.
The Debtor’s $48,300 annual income exceeds the $41,528 median income in Wisconsin for a one-person household. Therefore, in order to qualify for Chapter 7 relief, she was required to complete the calculations on Bankruptcy Form 22A, known as the “means test.” After the Debtor subtracted her allowed expenses, her Form 22A reflected $382.13 of monthly disposable income. This amount exceeds $182.50, triggering a “presumption of abuse” under Bankruptcy Code § 707(b)(2)(A).
Given the presumption of abuse, the U.S. Trustee filed a Motion under § 707(b), claiming that the Debtor’s case should be dismissed or she should voluntarily convert to Chapter 13. However,
The U.S. Trustee’s position is that the Court must either convert or dismiss a case if a debtor fails to rebut the presumption of abuse, and that the Court lacks any discretion even if conversion to Chapter 13 would result in no payments to creditors. The U.S. Trustee also contends that if the Debtor successfully rebuts the presumption or the Court determines not to dismiss or convert the case under § 707(b)(1), the Debtor’s case should be dismissed under the “totality of the circumstances” test of § 707(b)(3) of the Code.
Analysis
The principal statutory provision at issue in this case is § 707(b)(1), which states:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
11 U.S.C. § 707(b)(1) (emphasis added).
Under § 707(b)(2)(A), a case is presumed an abuse if an above-median debt- or’s disposable income exceeds the statutory guideline. There is no dispute here that the presumption of abuse arises as the Debtor’s 60-month disposable income figure of $22,927.80 exceeds the $10,950 threshold under § 707(b)(2)(A)(i)(II). In fact, the Debtor checked the box on Form
The Code states that “the presumption of abuse may only be rebutted by demonstrating special circumstances.” 11 U.S.C. § 707(b)(2)(B)®. Although § 707(b)(2)(B) lists only two examples of special circumstances — active Armed Forces duty or a serious medical condition — other scenarios can qualify if there is no “reasonable alternative” to the expense or adjustment of income. 11 U.S.C. § 707(b)(2)(B)(ii);
In re Crego,
Does the Debtor’s failure to rebut the presumption of abuse by showing special circumstances require dismissal of her case? The plain language of the statute that the court “may” dismiss the case, suggests that discretion exists. A few courts have addressed the consequences of a debtor’s failure to prove special circumstances, with some concluding without analysis or in dicta that a court must dismiss or convert when the presumption of abuse is not rebutted, regardless of the specific facts of a case.
See In re Witek,
Two cases specifically address whether the word “may” in § 707(b) provides discretion, and reach the opposite conclusions. In
Justice v. Advanced Control Solutions, Inc.,
the court considered whether the provisions of § 707(b) apply to a case
In another case regarding the construction of the word “may” the Court stated:
It is true that in statutes the word “may” is sometimes construed as “shall.” But that is where the context, or the subject-matter, compels such construction. Supervisors v. United States,4 Wall. 435 ,18 L.Ed. 419 (1866). Here it does not. This statute appears to have been drawn with great care. Throughout the act the distinction is clearly made between what the Board and the reserve banks “shall” do and what they “may” do.
Farmers’ & Merchants’ Bank v. Federal Reserve Bank,
The common-sense principle that “may” indicates discretion is especially applicable “when the same [provision] uses both ‘may’ and ‘shall,’ [because] the normal inference is that each is used in its usual sense — the one act being permissive, the other mandatory.”
Kentucky v. United States,
The
Justice
court based its decision on “legislative intent and obvious inferences to be drawn from the purpose of BAPCPA.” But a review of the legislative history of the means test reveals no clear cut sentiment that dismissal is mandatory; rather the original and recurring theme is that debtors who can pay a portion of their debts in Chapter 13 should be required to do so.
See
144 Cong. Rec. S10766-68 (daily ed. Sept. 23, 1998) (stating proposed means test provision “gives the bankruptcy judge discretion to convert a Chapter 7 case to Chapter 13 upon a motion by the creditor, if the debtor can afford to repay 30 percent of his or her debts”); Susan Jensen,
A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
79 Am. Bankr.L. J. 485, 494 (2005) (noting that in response to a report by the Bankruptcy Review Commission, the Consumer Bankruptcy Reform Act of 1997 would have amended Bankruptcy Code § 707 to require the court, in determining whether a Chapter 7 case should be dismissed for abuse, to consider, among other factors, whether “on the basis of the current income of the debtor, the debtor could pay an amount greater than or equal to 20% of unsecured claims that are not considered to be priority claims.”). If a debtor would make no payments under a Chapter 13 plan because of the Congressional protection of retirement plan contributions, it follows that the debtor’s Chapter 7 case should not be considered abusive under § 707(b)(2).
5
The district court in
Justice
stated: “If abuse is presumed under § 707(b)(2) and is not rebutted, it would make no sense to read the statute as allowing bankruptcy courts discretion to disregard the Means Test and allow the debtor to obtain a discharge in Chapter 7, rather than dismiss or convert the case. The bankruptcy court would be placing its judicial imprimatur on an abuse of the provisions of Chapter 7 in the face of congressional attempts to avoid such abuse.”
In
Justice,
the court concluded that the word “may” in § 707(b) is used to indicate discretion only to decide which of two options — dismissal or conversion to Chapter 13 — should be exercised in a case where the presumption of abuse arises and is not rebutted. This construction does not comport with the history of the dismissal provision, as BAPCPA added the option of conversion to Chapter 13, while the lan
Other clues in the statutory structure also point to Congressional intent that the word “may” in § 707(b) is discretionary. First, even if the presumption of abuse arises, § 704(b)(2) allows the U.S. Trustee to decline to file a motion to dismiss if the U.S. Trustee does not consider such a motion to be “appropriate.” It would be curious indeed to grant the U.S. Trustee discretion to determine that dismissal is not appropriate, but to deny discretion to the Bankruptcy Judge to reach that same conclusion. Second, the mandatory provisions for barring bankruptcy relief are found in § 109 of the Bankruptcy Code, not § 707(b). For example, § 109(h)(1) states that an individual “may not be a debtor” unless certain credit briefing requirements are met. 6 Early versions of bankruptcy reform legislation would have added the means test to § 109. In her article about the history of the BAPCPA, Susan Jensen discusses legislation introduced on September 18, 1997, and comments: “With respect to means testing, H.R. 2500 would have amended Bankruptcy Code 109 to make an individual ineligible to be a debtor if such individual had income available to pay creditors as determined pursuant to a specified formula.” 79 Am. Bankr.L.J. at 493. Finally, as noted above, the provisions for the dismissal of Chapter 11 and Chapter 12 cases demonstrate that when dismissal is mandatory, the statute uses the term “shall.”
The facts in
Justice
are distinguishable, but in
In re Skvorecz,
the situation was virtually identical to ours, and the court denied a motion to dismiss for abuse.
If part of the intent of Congress in tying Chapter 7 relief to a means test, was to require a debtor to repay his creditors if he is able to, then it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from “disposable income” in a Chapter 13.
Since the conversion of the debtor’s case to Chapter 13 would result in no payments to creditors, the
Skvorecz
court held that it had discretion to decline to dismiss the case because “such a strict application
under the facts of this case
would lead to an absurd result.”
This Court concurs with the analysis and result in Skvorecz. The overriding purpose of the means test, as evidenced by the earliest legislative history and the President’s remarks when signing BAPCPA into law, is to restrict Chapter 7 relief to debtors who cannot afford to make payments to unsecured creditors in Chapter 13. 7 A debtor who is not required to make payments to unsecured creditors in Chapter 13 due to the exclusion of retirement contributions from the definition of disposable income is no different than a debtor who cannot afford to make payments to unsecured creditors in Chapter 13 due to some other protected expense. And, a debtor who cannot afford to make payments to creditors in Chapter 13 or is not required to do so in light of Congressional deference to retirement savings is not abusing a Chapter 7 discharge. In other words, the Court has discretion to deny a motion to dismiss a Chapter 7 case that is presumed abusive under the means test, but would, in complete compliance with Chapter 13, produce no payments to creditors.
Although agreeing that § 707(b) is permissive, not mandatory, the discretion to deny a motion to dismiss for presumed abuse should not be exercised lightly. As the Supreme Court instructed in
Rodgers:
“We do emphasize, however, that the limited discretion accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the Government’s paramount interest in prompt and certain collection of delinquent taxes.”
As an alternative to dismissal under § 707(b)(2), the U.S. Trustee argues that the Court should dismiss the Debtor’s case under § 707(b)(3) of the Bankruptcy Code. That section states:
In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider—
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.
There is no suggestion here that the Debtor filed her petition in bad faith. The U.S. Trustee’s Motion is grounded on the second prong of § 707(b)(3), and relies on a First Circuit decision,
In re Lamanna,
8
for the proposition that a case is an abuse under the totality of the circumstances if the debtor has the ability to fund a Chapter 13 plan.
The U.S. Trustee relies on Judge Pepper’s decision in
In re Richie
for the proposition that a debtor who does not have the ability to fund a Chapter 13 plan can still have her case dismissed as an abuse of Chapter 7 under the totality of the circumstances test.
In contrast to
Richie,
which bears no factual resemblance to this case, are several cases in which the debtors’ retirement contributions or repayment of retirement plan loans were not considered abusive under the totality of the circumstances. In
In re Tucker,
the U.S. Trustee sought dismissal under § 707(b)(3) arguing that the debtor could fund a Chapter 13 plan through the monthly payments deducted from his salary for a 401(k) contribution and for repayment of a 401(k) loan.
This case is similar to Tucker, Becker-man and Latone, and completely distinguishable from Richie. The Debtor’s lifestyle appears modest: she drives an old vehicle, has no luxury items or extravagant expenses, and her retirement contributions are a reasonable proportion of her income. There is no clear evidence in the record of the Debtor’s age or when she might retire. However, the burden of proof to show that the Debtor is young, healthy and far enough from retirement to replenish her retirement fund without hardship rests on the U.S. Trustee. The U.S. Trustee has not met the burden of proof that the Debt- or’s case is an abuse of Chapter 7 under the totality of the circumstances.
Conclusion
Although the U.S. Trustee has established that the Debtor’s case is presumed an abuse under § 707(b)(2), and the Debt- or has not rebutted that presumption by showing special circumstances, the statute provides that the Court
may
dismiss the case, and the Court has discretion to deny
IT IS THEREFORE ORDERED: that the U.S. Trustee’s Motion to Dismiss under 11 U.S.C. §§ 707(b)(1) and 707(b)(3) is denied.
Notes
. Information about IRC 457(b) Deferred Compensation Plans is available at the IRS website, www.irs.gov/retirement/article/0„ id= 172437,00.html
. BAPCPA excludes from Chapter 13 disposable income any amounts withheld from wages as contributions to an ERISA qualified plan or a 457 plan. 11 U.S.C. § 541 (b)(7)(A)(II);
see, e.g., In re Mati,
.The language of § 707(b) is that the court ’’may” dismiss the case, not that the court “shall” dismiss the case if it is deemed an abuse. In response to the U.S. Trustee’s argument for dismissal under the totality of the circumstances, the Debtor simply contends that she did not file her petition with any sort of bad faith, and that her financial circumstances do not warrant dismissal under that provision.
. Many of the cases involve the repayment of loans from retirement plans and attempts to characterize them as either secured claims that can be deducted under the means test or as special circumstances.
See, e.g., In re Morais,
. Obviously, the case of a debtor who manipulated the means test by instituting or increasing contributions in anticipation of filing Chapter 7 could still be dismissed under the bad faith or totality of circumstances test of § 707(b)(3).
. The construction of the term "may not” in § 109(h) is prohibitive, not permissive. 11 U.S.C. § 102(4). There is no rule of construction for the word "may.”
. "Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state’s median income will not be required to pay back their debts.” Press Release, White House Press Office, President Signs Bankruptcy Abuse Prevention, Consumer Protection Act (April 20, 2005), available at http://www.whitehouse. gov/news/releases/2005/04/20050420-5.html.
.
Lamanna
preceded the adoption of BAPCPA with its addition of the means test as a basis for determining abuse under § 707. Since the overhaul of § 707(b), courts have questioned how much weight to provide a debtor's ability to fund a Chapter 13 plan under the totality of circumstances test. This Court recognized that issue in
In re Nockerts,