Schultz v. U.S.

• Decision Date: 02 June 2008
• Docket Number: No. 07-5618.,07-5618.
• Citation: 529 F.3d 343
• Parties: Bernard F. SCHULTZ; Elizabeth M. Sabatine, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

529 F.3d 343

Bernard F. SCHULTZ; Elizabeth M. Sabatine, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 07-5618.

United States Court of Appeals, Sixth Circuit.

Argued: March 17, 2008.

Decided and Filed: June 2, 2008.

ARGUED:

Thomas E. Ray, Samples, Jennings, Ray & Clem, Chattanooga, Tennessee, for Appellants. Lewis Yelin, United States Department of Justice, Washington, D.C., for Appellee.

ON BRIEF:

Thomas E. Ray, Samples, Jennings, Ray & Clem, Chattanooga, Tennessee, for Appellants. Lewis Yelin, William Kanter, United States Department of Justice, Washington, D.C., for Appellee. George W. Kuney, University of Tennessee College of Law, Knoxville, Tennessee, for Amicus Curiae.

Before: RYAN, SILER, and COLE, Circuit Judges.

OPINION

R. GUY COLE, JR., Circuit Judge.

Plaintiffs-Appellants Bernard Francis Schultz and Elizabeth Mary Sabatine (hereinafter "the Schultzes"), husband and wife and residents of Hamilton County, Tennessee, filed for bankruptcy under Chapter 13 in the United States Bankruptcy Court for the Eastern District of Tennessee. Independently, the Schultzes filed a complaint for declaratory judgment in the United States District Court for the Eastern District of Tennessee, alleging that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA" or "the Act") violates Article I, Section 8, Clause 4 of the Constitution (the "Bankruptcy Clause"), which gives Congress the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. CONST. art. 1, § 8, cl. 4 (emphasis added). The district court granted the Government's motion for summary judgment and dismissed the Schultzes' complaint. For the following reasons, we AFFIRM the judgment of the district court.

I. BACKGROUND

A.

Individual consumer debtors generally choose between two forms of relief afforded by the Bankruptcy Code: Chapter 7 and Chapter 13.¹ In a Chapter 7 proceeding, an individual debtor receives an immediate unconditional discharge of personal liabilities for debts in exchange for the liquidation of all non-exempt assets. See 11 U.S.C. §§ 701-784. By contrast, in a Chapter 13 proceeding, a debtor commits to repayment of a portion of his or her financial obligations over a specified period of time (generally three to five years) in exchange for retaining non-exempt assets and receiving a broader discharge of debt than is available under Chapter 7. See 11 U.S.C. § § 1301-1330. Under the bankruptcy system prior to the BAPCPA, Pub.L. No. 109-8, 119 Stat. 23 (codified as amended in scattered sections of Title 11 of the United States Code), debtors had a presumption of eligibility to file under Chapter 7, with the final determination made by the Bankruptcy Court on an individualized basis. 11 U.S.C. § 727.

In 2005, the landscape for bankruptcy filings dramatically changed. Responding to a growing belief that "bankruptcy relief may be too readily available and is sometimes used as a first resort, rather than a last resort," H.R. REP. NO. 109-31(I), at 4 (2005), and the prevalence of "opportunistic personal filings and abuse," id. at 5, Congress enacted the BAPCPA in order to require above-median income debtors to make more funds available for the payment of unsecured creditors. As a result, higher-income debtors with the ability to repay a substantial portion of their debts without significant hardship are now required to do so by filing under Chapter 13 rather than Chapter 7.

The centerpiece of the Act is the imposition of a "means test" for Chapter 7 filers, which requires would-be debtors to demonstrate financial eligibility to avoid the presumption that their bankruptcy filing is an abuse of the bankruptcy proceedings. By its terms, the BAPCPA authorizes a bankruptcy court to dismiss a debtor's petition filed under Chapter 7 or, with the debtor's consent, to convert such a petition to Chapter 13 "if it finds that the granting of relief would be an abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b)(1). Under this test, the first step instructs the bankruptcy court to compare the debtor's annualized current monthly income to the median family income of a similarly sized family in the debtor's state of residence. If the debtor's current monthly income is equal to or below the median, then the presumption of abuse does not arise. 11 U.S.C. § 707(b)(7). If, however, it exceeds the median, the Act directs the court to recalculate the debtor's income by deducting certain necessary expenses specified by the statute. Id. § 707(b)(2)(A)(ii). These reductions are derived from the national and local standards contained in the Internal Revenue Service's Financial Analysis Handbook. Id.; see INTERNAL REVENUE SERV., INTERNAL REVENUE MANUAL, FINANCIAL ANALYSIS HANDBOOK ("IRS Handbook"), available at http://www.irs.gov/ irm/part5/ch15s01.html.

Because of these deductions, eligibility under the new regime is calculated at least in part based on the state and county where the debtor resides. The housing expense deduction, for example, is governed by the county where the debtor resides. Id. § 5.15.1.7(4)(A).² Although the national standards, which identify amounts for "food, housekeeping supplies, apparel and services, and personal care products and services," and a fixed "miscellaneous" amount, id. § 5.15.1.7(3), are mostly uniform throughout the United States, the local standards, which define amounts for housing and transportation, vary greatly.

If after deducting these necessary expenses and specified amounts, the debtor's current monthly income exceeds certain mathematical benchmarks, then the presumption of abuse arises. 11 U.S.C. § 707(b)(2)(A)(i). This presumption may be rebutted only if the debtor demonstrates special circumstances justifying any additional expenses or adjustments to the debtor's income for which there is no reasonable alternative, and that those special circumstances reduce the debtor's income below the specified benchmarks. Id. § 707(b)(2)(B). And even if the presumption of abuse does not apply, or has been rebutted by the debtor, the BAPCPA empowers a bankruptcy court to consider whether it believes "the debtor filed the petition in bad faith," or whether "the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." Id. § 707(b)(3).

To implement and enforce these reforms, the United States trustee or the bankruptcy administrator reviews a Chapter 7 debtor's petition and files with the court a statement explaining whether a presumption of abuse arises. Id. § 704(b)(1). If the trustee determines that it does, then the trustee is directed either to file a motion to dismiss, a motion to convert the petition, or to provide a statement explaining why such a motion is inappropriate. Id. § 704(b)(2).

The BAPCPA also amended two aspects of Chapter 13. First, "disposable income" is now defined as "currently monthly income received by the debtor ... less amounts reasonably needed to be expended." 11 U.S.C. § 1325(b)(2). If a debtor's annualized monthly income exceeds the median family income for a similarly sized family in the applicable state, the Act requires the bankruptcy court to calculate "amounts reasonably necessary to be expended" in accordance with the same IRS Handbook's national and local standards used in Chapter 7. Id. § 1325(b)(3). If a debtor is below the median income, the "amounts reasonably necessary to be expended" are instead determined as they were pre-BAPCPA — by the bankruptcy court assessing whether the expenses listed by the debtor in Schedule J (which must be filed along with the bankruptcy petition) are reasonably necessary for the debtor's maintenance and support. Id. § 1325(b)(2). Second, if the debtor's income still exceeds the median after recalculation, the Act imposes an "applicable commitment period" of "not less than 5 years." Id. § 1325(b)(4)(A)(ii). However, if the debtor's annualized income is less than the median, then the applicable commitment period is three years. Id. § 1325(b)(4)(A)(i).

B.

On November 21, 2006, the Schultzes filed for bankruptcy under Chapter 13 in the United States Bankruptcy Court for the Eastern District of Tennessee. On January 13, 2007, the bankruptcy court confirmed their plan, which required payment for sixty months and resulted in a pro-rata distribution to unsecured creditors of less than 100% of their allowed claims.

Concurrently, the Schultzes brought a separate suit against the United States, which challenges the five sections of the BAPCPA that employ the "means test" — Sections 707(b)(7), 707(b)(2), 704(b), 1325(b)(3), and 1325(b)(4) — under one central theory: because median-income calculations are based, at least in part, on the state and county in which the debtor resides, the BAPCPA is not a "uniform Law[] on the subject of Bankruptcies throughout the United States." U.S. CONST. art. 1, § 8, cl. 4 (emphasis added).

At the time of their Chapter 13 filing, the Schultzes had an annualized current monthly income of $84,975.84, an amount that is above the median family income for a family of five for Tennessee residents (which is $63,174), but below the median family income of Connecticut, Hawaii, Massachusetts, Maryland, New Hampshire, and New Jersey.³ As a result of this benchmark in Tennessee, the Schultzes' applicable commitment period was five, rather than three, years, and in calculating their disposable income they were limited to the expense deductions set forth in Sections 707(b)(2)(A) and (B). 11 U.S.C. § 1325(b)(3)-(4).

After the parties filed cross-motions for summary judgment, the district court granted the Government's motion and dismissed the Schultzes' complaint. Canvassing relevant Supreme Court precedent, the district court concluded that the "uniformity requirement does not proscribe different results in different states because of state law variations." Schultz v. United States, 369 B.R. 349, 352 (E.D.Te...