In re John M. Lanza And Susan P. Lanza, 1:10–bk–06272MDF.

• Decision Date: 25 March 2011
• Docket Number: No. 1:10–bk–06272MDF.,1:10–bk–06272MDF.
• Citation: 450 B.R. 81
• Parties: In re John M. LANZA and Susan P. Lanza, Debtors.Roberta A. DeAngelis, United States Trustee, Movantv.John M. Lanza and Susan P. Lanza, Respondents.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

450 B.R. 81

In re John M. LANZA and Susan P. Lanza, Debtors.Roberta A. DeAngelis, United States Trustee, Movant

v.John M. Lanza and Susan P. Lanza, Respondents.

No. 1:10–bk–06272MDF.

United States Bankruptcy Court, M.D. Pennsylvania.

March 25, 2011.

Jerry A. Philpott, Duncannon, PA, for Debtors.

OPINION

MARY D. FRANCE, Chief Judge.

The United States Trustee (the “UST”) requests dismissal of the bankruptcy petition of John M. and Susan P. Lanza (“Debtors”) alleging that, given the totality of their financial circumstances, their petition is an abuse of Chapter 7. Debtors assert in response that because their income is below the state median for a four-person household, their case may not be dismissed under § 707(b)(3) simply because they have the ability to repay their creditors. At a hearing on November 22, 2010, the parties argued their positions on the legal issues. The Court requested that they submit the matter on stipulated facts and briefs, which were filed on December 13, 2010.¹

I. Factual Findings

On July 30, 2010, Debtors filed a voluntary petition for relief under Chapter 7. Debtors are individuals whose reported debts are primarily consumer in nature. At the time they filed their Chapter 7 petition, Debtors' annual income was below the state median income for their household size.² Their unsecured debts total $52,788, including student loan debts totaling $24,481.

The parties have stipulated to two sets of facts regarding Debtors' expenses. The first category pertains to Debtors' housing expenses. As reported in their schedules, Debtors have net monthly income of $5004 and net monthly expenses of $5192. Their expenses include a monthly mortgage payment of $1173 for a property located in Florida, where they lived until September 2008. Debtors were unable to sell the Florida property because its fair market value was significantly less than the liens against it; specifically, the home was valued at $69,500 with liens of $201,269. Debtors rented the property in 2008, 2009, and 2010, but filed a statement with the Court that they intend to surrender their former residence to the mortgagee.³ In addition to their residence, Debtors held an interest in a Florida timeshare, which required a monthly payment of $255. Debtors also intend to surrender the timeshare interest. At the time they filed their bankruptcy, Debtors were contractually obligated to make the monthly payments for both the residence and the timeshare. Since the commencement of the bankruptcy case, Debtors have not made any payments on either obligation and do not expect to make any further payments. Debtors currently reside in a parsonage in Pennsylvania and do not incur housing expenses.

The second category of relevant facts concern educational expenses for Debtors' child. Debtors make a monthly student loan payment of $564 and a monthly college tuition payment of $546 for the benefit of their 21–year–old daughter.

II. Discussion

The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) was enacted by Congress in 2005 “to correct perceived abuses in the bankruptcy system.” Ransom v. FIA Card Services, N.A., ––– U.S. ––––, 131 S.Ct. 716, 721, 178 L.Ed.2d 603 (2011). BAPCPA includes a Means Test “to help ensure that debtors who can pay creditors do pay them.” Id. Prior to BAPCPA's enactment, consumer debtors could elect either to file a plan to repay creditors under Chapter 13 or seek straight bankruptcy in Chapter 7. A debtor's ability to elect a particular bankruptcy chapter is now more limited.

To ensure that debtors who can pay do pay, Congress made significant modifications to § 707(b).⁴ Section 707(b)(1) provides that “a court ... may dismiss a case if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Section 707(b) provides two processes to evaluate whether a case is an abuse of Chapter 7; these processes are found in § 707(b)(2) and § 707(b)(3). Section 707(b)(2) defines the Means Test, which requires debtors to perform certain mathematical computations to determine whether they have disposable income. If a debtor has disposable income, a bankruptcy court must presume that the case is an abuse of the chapter. This purely mathematical test channels debtors away from Chapter 7 and into Chapter 13 unless they can rebut the presumption of abuse. However, a debtor and his spouse whose income is equal to or below the median family income for the same size household in the applicable state is not subject to the Means Test. 11 U.S.C. § 707(b)(7). When the presumption of abuse does not arise or is rebutted and a motion to dismiss is filed under § 707(b)(3), the bankruptcy court is required to “consider whether the debtor filed his 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).

A. Reconsideration of the holding in Athens

In the Factual Findings, the parties have stipulated that Debtors' current monthly income is below the median income for a four-person household in Pennsylvania. Therefore, under 11 U.S.C. § 707(b)(2), they were not required to complete the Means Test when they filed their Chapter 7 petition, and their case is not subject to the statutory presumptions regarding abuse. Debtors' argument is correct as far as it goes. However, Debtors further argue that because their case is not subject to the Means Test, the Court may not examine their schedules of income and expenses to determine whether, when considering the totality of the circumstances, they have the ability to pay a significant portion of their unsecured debt. The UST counters that a court may find a case to be abusive under § 707(b)(3) even when the § 707(b)(2) presumptions regarding abuse are inapplicable. As I have ruled in a prior decision, I agree with the UST.

In In re Athens, 2007 WL 6376132 (Bankr.M.D.Pa. Aug.1, 2007) (No. 1:06–BK–02293MDF), the UST filed a motion to dismiss the Chapter 7 case of a debtor whose monthly income was below the state median. In response to the UST's motion, the debtor “counter[ed] that because his household income is below the state median, he should not be subject to dismissal under § 707(b)(3) on the sole basis of the ability to pay.” Id. at *3. In light of the specific language of § 707(b)(3), I found this argument to be unpersuasive. Section 707(b)(3) specifically states that in cases in which the presumption of abuse “does not arise or is rebutted,” a court must consider whether under the totality of the circumstances, a “debtor's financial situation demonstrates abuse.” Accordingly, I held that a debtor's “financial situation” clearly includes his ability to pay his creditors out of future income. In reaching this conclusion, I relied on Judge Walrath's decision in In re Paret, 347 B.R. 12 (Bankr.D.Del.2006).

Debtors ... are only safe from a presumption of abuse that might otherwise arise under paragraph (b)(2) and are not beyond the reach of paragraph (b)(3)'s comprehensive, statutorily-mandated inquiry into their fitness for chapter 7 relief.... When no presumption of abuse arises under paragraph (b)(2), the Court concludes that the Code mandates consideration of a debtor's ability to pay his creditors within the test articulated in paragraph (b)(3).

Id. at 15 (citing In re Pak, 343 B.R. 239, 244 (Bankr.N.D.Cal.2006)).

Section 707(b)(7) limits the application of § 707(b)(2) to above median debtors, but there is no provision in either (b)(2) or (b)(3) that limits the review of a debtor's financial circumstances when determining whether a case is abusive under the totality of the circumstances. “Section 707(b)(2)(A) creates a statutory presumption of abuse in certain circumstances but offers no safe harbor to those debtors with respect to whom this statutory presumption does not arise.” In re Zaporski, 366 B.R. 758, 770 (Bankr.E.D.Mich.2007) (quoted in In re Boule, 415 B.R. 1, 4 (Bankr.D.Mass.2009)). Other courts holding that § 707(b)(3) may be applied to dismiss the case of a “below-median” debtor include: In re Corridori, 2010 WL 3522122 (Bankr.D.Mass. Sept.1, 2010), In re Riley, 2010 WL 3718017 (Bankr.D.Mass. Sept.14, 2010); In re Myers, 2009 WL 1456921 (Bankr.M.D.N.C. May 22, 2009), In re Hageney, 422 B.R. 254 (Bankr.E.D.Wash.2009), In re Latone, 2008 WL 5049460 (Bankr.D.Ariz. Oct.23, 2008), In re Pfiefer, 365 B.R. 187 (Bankr.D.Mont.2007), In re Richie, 353 B.R. 569, 574 (Bankr.E.D.Wis.2006), In re Pak, 343 B.R. 239, 241 (Bankr.N.D.Cal.2006), In re Hill, 328 B.R. 490, 507 (Bankr.S.D.Tex.2005).

Debtors have asked me to revisit my holding in Athens because in In re Walker, 381 B.R. 620 (Bankr.M.D.Pa.2008), Judge Opel reached the opposite conclusion on similar facts. In Walker, Judge Opel held that because a debtor's income and expenses are analyzed within the Means Test under § 707(b)(2), a debtor's ability to pay may not be considered when reviewing a case for abuse under § 707(b)(3). Judge Opel based his decision, in part, on the reasoning of the Court of Appeals for the Third Circuit in Perlin v. Hitachi Capital America Corp. (In re Perlin), 497 F.3d 364 (3d Cir.2007). In Perlin, the Court of Appeals ruled that the statutory canon of negative implication was not useful when construing the meaning of § 707(a) within the context of the section because subsections (a) and (b) address different issues. Because the inclusion of the Means Test in § 707(b) did not create an implication that a debtor's income and expenses could not be considered in § 707(a), the Circuit Court determined that a bankruptcy court may consider a debtor's income when analyzing whether a case should be dismissed for “bad faith” under § 707(a).

The canon of negative implication provides that the enumeration of a group or series of items excludes items not mentioned. United States v. Vonn, 535 U.S. 55, 65, 122 S.Ct. 1043, 152 L.Ed.2d 90 (2002). It “applies only when the expressed and...