In re Willis, 08-41820.

• Decision Date: 02 June 2009
• Docket Number: No. 08-41820.,08-41820.
• Citation: 408 B.R. 803
• Parties: In re Jason Donald WILLIS, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Missouri

408 B.R. 803

In re Jason Donald WILLIS, Debtor.

No. 08-41820.

United States Bankruptcy Court, W.D. Missouri.

June 2, 2009.

Jason C. Amerine, Castle Law, Kansas City, MO, for debtor.

MEMORANDUM OPINION

JERRY W. VENTERS, Bankruptcy Judge.

The United States Trustee's motion to dismiss now before the Court presents two issues. The first, threshold issue is whether 11 U.S.C. § 707(b)(2) applies to cases converted from Chapter 13. In other words, can a case be dismissed as an abuse of Chapter 7 based on an application of the "means test" if the case was originally filed under Chapter 13? The second issue (which the Court reaches because it answers the first issue in the affirmative) is whether the Debtor has rebutted the presumption of abuse which does in fact arise in this case.

On March 6, 2009, the Court entered an interim order announcing its holding that § 707(b)(2) applies to converted cases. The reasons for that holding are discussed below. The Court then held an evidentiary hearing on May 6, 2009, to provide the Debtor an opportunity to rebut the presumption of abuse triggered by the Form B22A filed with the Debtor's motion to convert.

Upon consideration of the evidence presented at that hearing, the Court has determined that the Debtor has failed to rebut the presumption of abuse. The Court will therefore grant the UST's motion to dismiss.

BACKGROUND

The Debtor, Jason Donald Willis ("Debtor"), filed a Chapter 13 bankruptcy petition on May 9, 2008. He moved to convert the case to one under Chapter 7 on September 5, 2008, and although he later maintained that it wasn't necessary, the Debtor filed a Chapter 7 Statement of Current Monthly Income and Means Test Calculation ("Form 22A") at the same time he filed the motion to convert. On December 23, 2008, the United States Trustee ("UST") filed a motion to dismiss pursuant to § 707(b)(2) alleging that the Debtor's monthly disposable income reflected on the Form 22A triggers the presumption of abuse. The Debtor has $2,627.86 in disposable income; for this particular debtor, the presumption of abuse is triggered when monthly disposable income exceeds $182.50.

At the hearing, the UST offered a concise analysis of the Debtor's current financial situation, conceding that his (and his non-filing wife's) circumstances have indeed changed since the Debtor commenced this case. Based on the UST's analysis, the Debtor's current monthly income (including the wife's contributions) is $8,102.96. From that figure, the UST calculated $7,628.41 of permissible deductions, leaving a monthly disposable income of $474.55 — an amount sufficient to trigger the presumption of abuse.

In rebuttal, the Debtor offered evidence that his income was less than the UST contends and that his expenses were greater than those calculated by the UST. On the income side of the equation, the Debtor offered several recent paychecks from his full-time and part-time jobs and from his wife's job indicating that their current monthly income has dropped to somewhere around $6,858, primarily as a result of the Debtor's wife's change from full-time to "PRN," or "as-needed," status at her nursing job. The Debtor further testified that he believes his and his wife's income will decrease further in the coming months.

On the expense side, the Debtor testified that he has several expenses in addition to (or at variance with) those considered by the UST in her calculations. Specifically, the Debtor testified that he incurs approximately $250 a month in child care costs and $85 a month in mandatory union dues. The UST conceded that the Debtor was entitled to an additional $70-75 credit for union dues, but the UST disputed the Debtor's entitlement to a $250 expense deduction for child care based on his failure to provide written documentation of that expense and his alleged failure to establish that there was no reasonable alternative to this expense.

DISCUSSION

1. 11 U.S.C. § 707(b) applies to cases converted from Chapter 13 to Chapter 7

The dispute between the Debtor and the UST over whether § 707(b) applies to cases converted from Chapter 13 to Chapter 7 — i.e., whether a converted case can be dismissed for abuse — has its genesis in the arguably ambiguous language of § 707(b). Section 707(b) provides in pertinent part:

[T]he court ... 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.¹

The Debtor maintains that § 707(b) does not apply to converted cases because it does not explicitly state that it applies to cases converted to Chapter 7 from another chapter. According to the Debtor, § 707(b)'s reference to cases "filed by an individual debtor under this chapter" limits its application to cases originally filed under Chapter 7. The UST argues that while § 707(b) might refer only to cases "filed ... under this chapter," other provisions of the Bankruptcy Code make it clear that, for purposes of § 707(b), a case converted to Chapter 7 is deemed to have been "filed under" Chapter 7.

The cases are fairly evenly split on this issue, with two cases holding that § 707(b) does not apply to converted cases — In re Ryder² and In re Fox³ — and three cases holding that it does — In re Kellett,⁴ In re Kerr,⁵ and In re Perfetto.⁶ Interestingly, both positions ostensibly rely on the "plain language" of the statute and proclaim that their interpretation advances underlying bankruptcy policy goals. None of these decisions, however, is binding on this Court.

Ryder and Fox advance essentially three arguments in support of their interpretation of § 707(b). First, they place great weight on the fact that § 707(b) does not explicitly refer to converted cases.

Throughout § 707(b), reference is made to a debtor's filing of a case under Chapter 7. Never does the language make reference to a debtor's conversion of a case under another chapter to Chapter 7. The language is unambiguous that the means test computation required under § 707(b)(2) is required for debtors who have "filed" a case under chapter 7. The fact that the section provides for the dismissal or conversion to chapter 13 or 11 where the court finds abuse is an indication that the drafters were contemplating the effect of conversion specifically in this subsection. If the drafters intended for cases converted to chapter 7 to be subject to this new requirement, they did not say so in the clear language of the section. Moreover, it would also seem counterintuitive to read the section to apply to those cases converted from chapter 13 where the section provides for conversion to chapter 13 as a possible consequence of a finding of "abuse."⁷

Second, Ryder and Fox cite the language of 11 U.S.C. § 348(b) as evidence that Congress did not intend for § 707(b) to apply to converted cases.⁸ Section 348 addresses the effects of converting a bankruptcy case from one chapter to another. Section 348(b) provides that "in sections 701(a), 727(a)(10), 727(b), 728(a), 728(b), 1102(a), 1110(a)(1), 1121(b), 1121(c), 1141(d)(4), 1146(a), 1146(b), 1201(a), 1221, 1228(a), 1301(a), and 1305(a) of this title, `the order for relief under this chapter' in a chapter to which a case has been converted under section 706, 1112, 1208, or 1307 of this title means the conversion of such case to such chapter."⁹ These cases note that since § 707(b) is not on this list, a conversion under § 1307 of a Chapter 13 case to one under Chapter 7 does not constitute "the order of relief" under Chapter 7, and, therefore, it should not be considered to have been "filed under Chapter 7" for purposes of § 707(b).

Finally, Ryder and Fox contend that the application of § 707(b) to converted cases would lead to an absurd result by forcing debtors who have made a good faith effort in Chapter 13 — but failed — back into Chapter 13. Under § 707(b)(2), whether a presumption of abuse arises depends on the outcome of the "means test." That test is based on a debtor's "Current Monthly Income," which 11 U.S.C. § 101(10A) defines as, essentially, the average of the debtor's monthly income for the six months prior to the petition date. Consequently, whether a presumption of abuse arises in a case will always be based on a debtor's Current Monthly Income as of the petition date. If that figure is no longer representative of a debtor's income at the time of conversion, the debtor will inevitably "fail" the means test even though his economic situation may have deteriorated to the point that his actual current monthly income (not the defined term) would be insufficient to trigger the presumption of abuse.

On the other side of the debate, Kerr, Kellett, and Perfetto hold that § 707(b) applies to converted cases based, in large part, on a broader, contextual interpretation of § 707(b). The fact that § 707(b) doesn't specifically refer to converted cases is of no consequence because, they reason, when § 707(b) is examined with other provisions of the Bankruptcy Code, it is clear that cases converted to Chapter 7 are to be treated as if they were filed under Chapter 7, at least for purposes of § 707(b).

These cases also cite 11 U.S.C. § 348 in support of their position, but they come to a conclusion opposite from that of Ryder and Fox. They reach that conclusion by examining the relationship between § 348(a) and (b) versus Ryder's and concentrated emphasis on § 348(b).

Section 348 provides:

(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for...