In re Meehean

• Decision Date: 27 January 2020
• Docket Number: Case No. 19-46085
• Parties: IN RE: Wayne D. MEEHEAN and Reda L. Meehean, Debtors.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

611 B.R. 574

IN RE: Wayne D. MEEHEAN and Reda L. Meehean, Debtors.

Case No. 19-46085

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed January 27, 2020

Leslie K. Berg, Office of the United States Trustee, Detroit, Michigan, Attorney for the United States Trustee.

Charissa Potts, Anne Sorge, Freedom Law, PC, Eastpointe, Michigan, Attorneys for the Debtors.

OPINION REGARDING UNITED STATES TRUSTEE'S MOTION TO DISMISS THIS CASE UNDER 11 U.S.C. § 707(b)(3)

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

This is a no-asset Chapter 7 case — that is, the Chapter 7 Trustee has determined that there are no non-exempt assets he can administer for the benefit of creditors. But the Debtors, Wayne D. Meehean and Reda L. Meehean, have monthly Social Security income, that when combined with their other income, gives them the financial ability to pay off all of their unsecured debts in about 41 months. And they can do that while at the same time continuing to make the monthly mortgage payments for their home and the monthly lease payments on their two vehicles. But instead of seeking to repay their unsecured creditors, through a repayment plan in Chapter 13, the Debtors seek to discharge their unsecured debts in Chapter 7, without paying anything.

Is this attempted use of Chapter 7 by the Debtors an impermissible "abuse" of Chapter 7, within the meaning of 11 U.S.C. §§ 707(b)(1) and 707(b)(3) ? What role, if any, does the Debtors' Social Security income play in this inquiry?

Pending before the Court is the United States Trustee's motion to dismiss this Chapter 7 bankruptcy case, based on 11 U.S.C. § 707(b)(3).¹ The United States Trustee (the "UST") argues, in the words of § 707(b)(3)(B), that the "totality of the circumstances" of "the Debtors' financial situation" demonstrates "abuse" of Chapter 7. This is so, according to the UST, because when considering all of the Debtors' income, including the monthly amount that the Debtors receive in Social Security benefits, the Debtors have ample disposable income with which to pay their debts.²

The Debtors object to the UST's motion.³ The Debtors argue that Congress, through the enactment of 42 U.S.C. § 407, and certain provisions of the Bankruptcy Code, 11 U.S.C. §§ 101(10A)(B)(ii)(I)⁴ and 1325(b)(2), has shown an intent to protect Social Security benefits from the reach of creditors, and that the Debtors' retention of Social Security income cannot be the basis for a dismissal under § 707(b)(3).⁵

This Court held a hearing on the UST's motion. The Court has considered all of the oral and written arguments of the parties as well as the briefs and exhibits filed by the parties. For the reasons explained in this Opinion, the Court agrees with the UST, and will grant the UST's motion, as described in part V of this Opinion.

II. Jurisdiction

This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and 157(b)(2)(O).

This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11. See 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. Allard v. Coenen (In re Trans-Industries, Inc.) , 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," including Bankruptcy Code § 707. Id. It is a proceeding "arising in" a case under title 11 because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." Id.

III. Facts

The following facts are undisputed. The Debtors filed this Chapter 7 bankruptcy case on April 22, 2019. The Debtors' original Schedule E/F listed no priority unsecured claims, and non-priority unsecured claims totaling $202,696.97.⁶ But this amount erroneously included a secured claim of $143,143.00 attributable to the mortgage on the Debtors' residence.⁷ The Debtors later amended Schedule E/F to remove the secured claim, and it now lists no priority unsecured claims, and a total of $43,099.97 in non-priority unsecured claims.⁸

The Debtors' Schedule I lists $4,007.00 in combined monthly income from Social Security and $1,834.98 in combined monthly income from "Pension or retirement income," for a total monthly income of $5,814.98.⁹ The Debtors' monthly expenses listed on Schedule J, which include a monthly mortgage payment of $900.00 and monthly payments on two vehicle leases in the combined amount of $630.55, total $5,745.55, resulting in a reported monthly net income (surplus) of $96.43.¹⁰ But in listing their monthly expenses in Schedule J, the Debtors included $1,300.00 per month which they described as "Social Security Income Excluded from CMI."¹¹ If this Social Security income had not been listed as an expense in the Debtors' Schedule J in this way, the Debtors would show a monthly net income (surplus) of $1,396.43.¹²

This surplus amount actually appears to be slightly lower than $1,396.43 per month. As explained in Part IV.E of this Opinion, two vehicle lease assumption agreements filed recently indicate that the Debtors' actual monthly net income (surplus) is $1,252.32.

On May 22, 2019, just after the Chapter 7 Trustee concluded the § 341 meeting of creditors, the Trustee filed a "no asset" report, indicating that there are no non-exempt assets in the bankruptcy estate that can be used to pay anything to creditors. From this it is clear that if this case remains in Chapter 7, creditors will be paid nothing.

As discussed in more detail in part IV.E of this Opinion, it is clear that if the Debtors wanted to do so, they could afford to propose, confirm, and perform a Chapter 13 plan that would pay their unsecured creditors in full in about 41 months. But instead of doing this, the Debtors seek to use Chapter 7 to discharge all of their unsecured debts, keep all of their income, including all of their Social Security income, and pay their unsecured creditors nothing . For the reasons stated below, the Court finds this to be an "abuse" of Chapter 7, within the meaning of §§ 707(b)(1) and 707(b)(3).

IV. Discussion

A court may dismiss a case filed under Chapter 7 or, with the debtor's consent, convert the case to Chapter 13, if the court finds that "the granting of relief would be an abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b)(1).

"Abuse of the provisions of" Chapter 7, within the meaning of § 707(b)(1), can be shown in two alternative ways. The first of these is based on an unrebutted presumption of abuse under § 707(b)(2). If the presumption of abuse does not arise under § 707(b)(2) or is rebutted, the Court must consider whether abuse is established under § 707(b)(3), by determining "whether the debtor filed the petition in bad faith" or whether "the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." 11 U.S.C. § 707(b)(3).

In re Maura , 491 B.R. 493, 497 (Bankr. E.D. Mich. 2013).

In this case the UST does not argue that there is a presumption of abuse under the "means test" established by § 707(b)(2). Rather, the UST argues abuse based only on § 707(b)(3).

A. Section 707(b)(3)

Section 707(b)(3) states:

(3) In considering ... whether the granting of relief would be an abuse of the provisions of [Chapter 7] in a case in which the presumption in paragraph (2)(A)(i) does not arise or is rebutted, the court shall consider–

(A) whether the debtor filed the petition in bad faith; or

(B) [whether] 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.

11 U.S.C. §§ 707(b)(3)(A) and (B).

The UST does not allege "bad faith" under § 707(b)(3)(A). Rather, the UST argues that dismissal is required because "the totality of circumstances of the debtor's financial situation demonstrates abuse."¹³ See 11 U.S.C. § 707(b)(3)(B).

In the Sixth Circuit, In re Krohn , 886 F.2d 123 (6th Cir. 1989) is the leading case for determining abuse under § 707(b)(3).¹⁴ Under Krohn , a finding of abuse can be made when there is a want of "need" for Chapter 7 relief. See id. at 126. In this case, the UST asserts that the Debtors are not "needy" because they have $1,396.43 (actually, $1,252.32) in monthly disposable income available to pay their debts.

"Among the factors to be considered in deciding whether a debtor is needy is [his or her] ability to repay [his or her] debts out of future earnings." Id. (citing In re Walton , 866 F.2d 981 (8th Cir.1989) and In re Kelly , 841 F.2d 908 (9th Cir. 1988) ). "That factor alone may be sufficient to warrant dismissal. For example, a court would not be justified in concluding that a debtor is needy and worthy of discharge, where his disposable income permits liquidation of his consumer debts with relative ease." Krohn , 886 F.2d at 126 ; see also In re Modiri, 474 B.R. 511, 514 (Bankr. E.D. Mich. 2012) ("Clearly, it is an abuse of Chapter 7 for a debtor to seek a discharge of debts that the debtor can pay, since the purpose of bankruptcy is to grant relief to those debtors who cannot pay their debts.").

The Court in Krohn further stated:

Other factors relevant to need include whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities.

Krohn , 886 F.2d at 126-27.¹⁵ An...