In re Meyer

• Decision Date: 22 March 2012
• Docket Number: No. 11–24099.,11–24099.
• Citation: 467 B.R. 451
• Parties: In re Clark S. MEYER and Sara M. Meyer, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

467 B.R. 451

In re Clark S. MEYER and Sara M. Meyer, Debtors.

No. 11–24099.

United States Bankruptcy Court, E.D. Wisconsin.

March 22, 2012.

N. Andrew Wagener, Bollenbeck, Wagener, Spaude & Fyfe, SC, Appleton, WI, for Debtors.

MEMORANDUM DECISION ON UNITED STATES TRUSTEE'S MOTION TO DISMISS

MARGARET DEE McGARITY, Bankruptcy Judge.

This matter came before the Court upon the United State Trustee's motion to dismiss pursuant to 11 U.S.C. § 707(b)(1), based on 11 U.S.C. §§ 707(b)(2) and (3). The debtors opposed the motion on the ground Official Form 22A, Chapter 7 Statement of Current Monthly Income and Means Test Calculation, violates their constitutional right to religion and religious belief. Both parties submitted briefs in support of their respective positions. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and the Court has jurisdiction under 28 U.S.C. § 1334. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. For the reasons stated below, the motion to dismiss is granted but stayed for 30 days to allow the debtors to convert this case to one under chapter 13.

BACKGROUND

On March 28, 2011, Clark and Sara Meyer filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. On the same date, the debtors filed Schedules A through J, a Statement of Financial Affairs, and a Statement of Current Monthly Income and Means Test Calculation. According to the debtors' Schedules and Means Test Form and the affidavits presented to the Court, the following facts are undisputed. The debtors have no unsecured priority debts and $152,260.00 in general unsecured creditors, almost all of which appear to be credit card debts. The debtors have secured debts totaling $184,708.00, which includes a first mortgage secured by real property. The debtors claimed a household size of six persons with a combined current monthly income of $9,277.00, which annualized is above the median income level for the debtors' household size. The debtors claimed $8,865.98 in total deductions allowed under 11 U.S.C. § 707(b)(2). Because the presumption of abuse arose on the means test form, the debtors claimed further expenses totaling $2,324.00 for vehicle insurance, additional school tuition, and college expenses. The debtors are both employed; the debtor husband is as an architect and the debtor wife is a parochial school teacher.

The debtors took the following monthly deductions that the United States Trustee argued were not reasonable and necessary and/or are excessive: $187 for retirement deductions, $900 for school tuition ( not including additional school expenses of $150, instrument rental of $60, and childcare of $100), $400 for medical expenses, $20 in bank fees, and $395 for a vehicle payment that has subsequently been paid in full. After Sara Meyer first became a teacher in the ACES Xavier Catholic education system in 2007, the debtors enrolled their children in the parochial schools. As a benefit of Sara's employment, the debtors receive a 50% discount on tuition.

While the parties agreed an evidentiary hearing may be necessary to determine the reasonableness of certain of the debtors' other expenses, the parties filed briefs regarding the appropriateness of the parochial school tuition expense.

ARGUMENTS

The debtors argue 11 U.S.C. § 707(b) compels them to choose between exercising their constitutional rights—to the free practice of religion, the right to educate their children and the right of the children to receive such education—and receiving the economic benefit of a discharge under 11 U.S.C. § 727. The choice to practice one's religion by having one's children attend a religious school is a form of worship, and as a result of this choice it is irrelevant whether or not it is a requirement to attend private Catholic school as part of the Catholic religious faith. The educational limits in section 707(b)(2)(A)(ii)(IV) are nothing more than a covert suppression of a debtor's right to practice religion and the United States, through this act of Congress, is dictating how they should practice it. According to the debtors, the United States does not have a compelling interest in enforcing section 707(b)(2)(A)(ii)(IV), and it does not have a compelling in interest in specifically controlling the debtors' decision to exercise their constitutional rights.

The U.S. Trustee argues the Court should reject the debtors' Free Exercise claim because section 707(b) of the Bankruptcy Code is neutral on its face and does nothing to preclude the debtors from practicing their religion. Additionally, even if the Code did have an effect on the debtors' religious practice, any such effort is incidental and well within constitutional bounds. The government has a compelling interest in ensuring the fair and efficient application of the Bankruptcy Code for both debtors and creditors, and the debtors' attempt to use the Code to subsidize private school expenses runs counter to that compelling interest.

DISCUSSION

Section 707(b)(2)(A)(i) of the Bankruptcy Code requires the Court to presume that a chapter 7 filing is abusive when the debtors' current monthly income, reduced by certain amounts set forth under section 707(b)(2)(A)(ii), (iii) and (iv), and multiplied by 60, is not less than (I) the lesser of 25 percent of the nonpriority unsecured claims in the case or $7,025, whichever is greater; or (II) $11,725. The presumption of abuse, if it arises under section 707(b)(2)(A), may only be rebutted by demonstrating “special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.” 11 U.S.C. § 707(b)(2)(B). The debtors have not met their burden of rebutting the presumption of abuse.

The debtors are not attempting to demonstrate special circumstances. Instead, they challenge the provisions contained in section 707(b)(2)(A)(ii)(IV), which limit the deduction on the means test for educational expenses. That section provides:

In addition, the debtor's monthly expenses may include the actual expenses for each dependent child less than 18 years of age, not to exceed $1,775 per year per child, to attend a private or public elementary or secondary school if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (I).

11 U.S.C. § 707(b)(2)(A)(ii)(IV). This section allows a debtor to deduct $147.92 per month per child in educational expenses. Because the debtors' monthly religious educational expenses exceed this amount, they contend the provision is unconstitutional.

This is not the first instance in which the availability of a discharge under the Bankruptcy Code has faced constitutional scrutiny. In 1973 the Supreme Court held that an indigent individual was not denied due process or equal protection by being required to pay a fee for commencing a bankruptcy case as a condition to obtaining a discharge. United States v. Kras, 409 U.S. 434, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973). Specifically, the Court found that there was not a constitutional right to obtain the discharge of debts in bankruptcy. Id. at 445–47, 93 S.Ct. 631. In the most general sense, “[b]ankruptcy laws regulating economic activity do not involve constitutionally protected conduct and, thus, are subject to ‘a quite lenient test for constitutional sufficiency.’ ” See also In re Stewart, 175 F.3d 796, 811 (10th Cir.1999) (quoting In re Kelly, 841 F.2d 908, 915 (9th Cir.1988)) (considering constitutionality of § 707(b) under vagueness and equal protection standards).

If the question were the Meyers' access to bankruptcy relief, it would be easily answered. They obviously have such access, but they want a chapter 7 discharge, not the burden of funding a chapter 13 plan for five years. See 11 U.S.C. § 1325(b)(4)(A)(ii) (applicable commitment period for above median income debtors). Kras makes clear that the right to a bankruptcy discharge is not a fundamental constitutional right, so congressional regulation only requires a “rational justification.” 409 U.S. at 446, 93 S.Ct. 631. If the activity at issue is not constitutionally protected, then a statute will run afoul of the First Amendment only if the law's application to protected rights is substantial in relation to the scope of the law's plainly legitimate applications. 1 Bankr. Desk Guide Relationship to Other Constitutional Provisions § 1:11 (2011) (citing United States v. Kras, 409 U.S. 434, 446, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973) (“Bankruptcy is hardly akin to free speech or marriage or to those other rights, so many of which are imbedded in the First Amendment, that the Court has come to regard as fundamental and that demand the lofty requirement of a compelling governmental interest before they may be significantly regulated.”)). Thus, in most instances where bankruptcy legislation is challenged on constitutional grounds, the applicable standard for determining whether the statute denies equal protection of the law is that of rational justification.

As the Supreme Court in Kras pointed out, there have been periods in American history when there has been no bankruptcy relief available at all, and now that there is, it is entirely within the province of Congress to provide for it—with rational justification, of course—however it deems fit. 409 U.S. at 447, 93 S.Ct. 631. This includes the amendments to section 707(b) made by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which provided a mathematical formula for determining abuse of the bankruptcy process, rather than the application of judicial...