In re Maura

• Decision Date: 19 April 2013
• Docket Number: No. 10–68295.,10–68295.
• Citation: 491 B.R. 493
• Parties: In re Columbo MAURA, and Lisa Maura, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

491 B.R. 493

In re Columbo MAURA, and Lisa Maura, Debtors.

No. 10–68295.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

April 19, 2013.

Leslie K. Berg (UST), Detroit, MI, for U.S. Trustee.

Jeffrey H. Bigelman, Yuliy Osipov, Osipov Bigelman, P.C., Southfield, MI, William C. Blasses, Christopher F. Nelson, Southfield, MI, for Debtor.

James Jon Tocco, Detroit, MI, for Trustee.

OPINION REGARDING THE UNITED STATES TRUSTEE'S MOTION TO DISMISS

THOMAS J. TUCKER, Bankruptcy Judge.

The United States Trustee (the “UST”) filed a motion to dismiss this Chapter 7 case, on the ground that the case is an “abuse” of Chapter 7, within the meaning of 11 U.S.C. § 707(b)(1).¹ To demonstrate such abuse, the UST relies on the “presumption of abuse” provisions of 11 U.S.C. § 707(b)(2); and alternatively, points to the totality of the Debtors' financial circumstances under 11 U.S.C. § 707(b)(3). The Debtors, Columbo and Lisa Maura, deny that their Chapter 7 case is an abuse, and oppose the Motion.

The Court held several hearings, including an evidentiary hearing. For the reasons stated in this opinion, the Court will grant the motion, based on the presumption of abuse in § 707(b)(2)(A)(i), and the Debtors' failure to rebut that presumption under § 707(b)(2)(B).

I. 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 (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, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See 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,” see id., namely Bankruptcy Code § 707(b). And this 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.” See id.

II. Background

The Debtors in this Chapter 7 case, Columbo Maura and Lisa Maura, are husband and wife, and have been married for over 20 years. Columbo Maura works as a salesman for Lipari Foods, Inc. Lisa Maura works as a nurse at Providence Hospital. According to their most recent amended Schedule I, Columbo Maura has an average gross monthly income of $5,965.00, and Lisa Maura has an average gross monthly income of $5,579.00.² These numbers mean that the Debtors have an annual combined gross income of $138,528.00.

The Debtors have three children. At the time of the evidentiary hearing, the children were ages 19, 16, and 14. The Debtors are Catholic, and the Debtors' children have always attended Catholic elementary school and Catholic high school. As a result of this, the Debtors have paid substantial tuition for their children over the years. At the time of the evidentiary hearing, the 16 year old was attending a Catholic high school, and the 14 year old was in Catholic grade school and due to begin at Catholic high school the following year.³

III. Discussion

Section 707(b)(1) allows a United States Trustee, a trustee, a party in interest, or the court on its own motion, to seek dismissal of a consumer Chapter 7 case, for “abuse.” It provides, in pertinent part:

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). In this case, the parties agree that the Debtors' debts are “primarily consumer debts.” ⁴ “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).

The UST argues that abuse is shown in this case based on both § 707(b)(2) and § 707(b)(3). The Court will begin by considering the presumption of abuse under § 707(b)(2).

A. Section 707(b)(2) and the presumption of abuse1. General principles

Under § 707(b)(2)(A)(i), whether a presumption of abuse arises depends on the results of a complex formula commonly referred to as “the means test.” The means test and the provisions now in § 707(b)(2) were added by the 2005 amendments to the Bankruptcy Code, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).

The Supreme Court recently described the means test this way:

‘Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ... to correct perceived abuses of the bankruptcy system.’ Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. [229], 231, 130 S.Ct. 1324, 1329, 176 L.Ed.2d 79 (2010). In particular, Congress adopted the means test—“[t]he heart of [BAPCPA's] consumer bankruptcy reforms,” H.R.Rep. No. 109–31, pt. 1, p. 2 (2005), 2005 U.S.C.C.A.N. 88, 89 ...—to help ensure that debtors who can pay creditors do pay them. See, e.g., ibid. (under BAPCPA, “debtors [will] repay creditors the maximum they can afford”).

Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 721, 178 L.Ed.2d 603 (2011)(italics in original). In Chapter 7 cases, the means test is “used as a screening mechanism to determine whether a Chapter 7 proceeding is appropriate.” Id. at 722 n. 1.

The Sixth Circuit has described the means test and the calculations to determine whether the presumption of abuse arises:

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) 2005 U.S.C.C.A.N. 88, at 90, 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/ part 5/ ch 15 s 01. 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). [Footnote 2: The BAPCPA also permits a debtor to deduct additional expenses for food, clothing, housing, utilities, health insurance, disability insurance, health savings accounts, and certain educational expenses, so as long as the debtor demonstrates that those additional allowances are reasonable and necessary. 11 U.S.C. § 707(b)(2)(A)(ii).] 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).

Schultz v. United States, 529 F.3d 343, 347 (6th Cir.2008).

If the result of the means test is that the presumption of abuse arises, the debtor may attempt to rebut that presumption, but only under the detailed rules set forth in § 707(b)(2)(B). To summarize these statutory provisions, a debtor may only rebut the presumption of abuse by establishing, under oath...