Meehean v. Vara (In re Meehean)

• Decision Date: 18 August 2020
• Docket Number: Bankruptcy Case No. 19-46085-tjt,Civil Action No. 20-CV-10380
• Citation: 619 B.R. 371
• Parties: IN RE: Wayne D. MEEHEAN and Reeda L. Meehean, Debtors. Wayne D. Meehean and Reeda L. Meehean, Appellants, v. Andrew R. Vara, United States Trustee, Appellee.
• Court: U.S. District Court — Eastern District of Michigan

619 B.R. 371

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

v.Andrew R. Vara, United States Trustee, Appellee.

Bankruptcy Case No. 19-46085-tjt

Civil Action No. 20-CV-10380

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

Signed August 18, 2020

Charissa R. Potts, East Pointe, MI, for Appellants.

Andrew R. Vara, Detroit, MI, pro se.

OPINION AND ORDER AFFIRMING ORDER OF THE BANKRUPTCY COURT

BERNARD A. FRIEDMAN, SENIOR UNITED STATES DISTRICT JUDGE

This matter is presently before the Court on debtors' appeal of an order of the Bankruptcy Court granting the motion of the United States Trustee ("Trustee") to dismiss their Chapter 7 bankruptcy petition pursuant to 11 U.S.C. § 707(b)(3)(B). The Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). The Court reviews a Bankruptcy Court's factual findings for clear error; its conclusions of law are reviewed de novo. See In re Cook , 457 F.3d 561, 565 (6th Cir. 2006) ; In re Musilli , 398 B.R. 447, 452-53 (E.D. Mich. 2008). "[T]he ultimate question of whether to dismiss for substantial abuse under § 707(b) is reviewed for abuse of discretion." In re Behlke , 358 F.3d 429, 434 (6th Cir. 2004). As the issues have been fully briefed, the Court shall dispense with oral argument and decide the appeal without a hearing pursuant to E.D. Mich. LR 7.1(f)(2).

The debtors in this matter filed their Chapter 7 petition in April 2019. They listed $5,842 in monthly income ($4,007 in Social Security benefits and $1,835 in pension income) and $4,446 in monthly expenses.¹ Debtors listed $142,871 in secured debt (the mortgage loan on their home) and $43,100 in unsecured non-priority debt, mainly credit card debt.² They own property, including their home and a boat, worth $157,500.

In July 2019, the trustee moved to dismiss the petition under 11 U.S.C. § 707(b)(3)(B),³ arguing that debtors' "Social Security income should be considered as a factor in assessing the Debtors' need for bankruptcy relief." Mot. to Dismiss ¶ 12. The trustee also questioned the reasonableness of the monthly amounts debtors claimed to spend on clothing/laundry, personal care, transportation, and entertainment. Id. ¶ 13. The trustee argued that with "some belt tightening," and if their Social Security income is considered, debtors could pay off all their unsecured debt within five years under a Chapter 13 plan. Id. ¶¶ 15-16. In short, the trustee's argument is that "[t]he Debtors' attempt to obtain relief under Chapter 7 when they have the ability to pay their creditors with little or no adjustment to their expenses constitutes an abuse of the provisions of Chapter 7." Id. ¶ 17. The trustee noted that "[c]ourts are divided on the question of whether social security income should be considered in an analysis under § 707(b)(3)." Trustee's Mem. of Law at 2.

In opposing this motion, debtors argued that their Chapter 7 petition is not abusive because Social Security income may not be considered in assessing the "totality of the circumstances of the debtor's financial situation" under § 707(b)(3)(B). Among other arguments, debtors pointed to 42 U.S.C. § 407(a), which states that Social Security benefits are not "subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." According to debtors, this means that their Social Security benefits must be disregarded in determining whether they have the ability to pay their debts.

After hearing oral argument, the Bankruptcy Court granted the trustee's motion in a lengthy written opinion. See In re Meehean , 611 B.R. 574 (Bankr. E.D. Mich. 2020). The Bankruptcy Court found 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.

Id. at 579 (emphasis in original). The Bankruptcy Court found, in short, that it would be an abuse to grant the Chapter 7 petition in this matter because debtors have the ability to pay their debts. The Bankruptcy Court cited In re Krohn , 886 F.2d 123, 126 (6th Cir. 1989), for its statement that the debtor's ability to pay his debts "alone may be sufficient to warrant dismissal" under § 707(b)(3). The Bankruptcy Court noted that, if debtors' Social Security benefits are considered, their monthly income ($5,842) exceeds their claimed monthly expenses ($4,446) by $1,396.⁴ In re Meehean , 611 B.R. at 594. After surveying the conflicting case law on this issue,⁵ the Bankruptcy Court determined that debtors' Social Security income may be considered in determining whether they have the ability to pay, i.e., whether they are needy and deserving of a Chapter 7 general discharge. Based on debtors' total income (including their Social Security benefits) and their claimed expenses, the Bankruptcy Court determined that debtors have the ability to fund a Chapter 13 plan and pay 100% of their unsecured debts in 41 months. Id. at 595. The Bankruptcy Court concluded that debtors,

who have no dependents, can do this even while continuing to drive their two nearly-new and rather expensive leased vehicles. These factors "strongly suggest that [the Debtors] can readily repay a substantial dividend to their creditors and that [they] do not need Chapter 7 relief." See [In re ] Modiri , 474 B.R. [511] at 514 [ (Bankr. E.D. Mich. 2012) ]. The Debtors have not asserted any other circumstances that militate against a finding of abuse. Nor is a finding of abuse negated by any of the other Krohn factors noted in Part IV.A above.

The Court finds that granting the Debtors in this case a discharge under Chapter 7 would be an abuse of Chapter 7. So under §§ 707(b)(1) and 707(b)(3), this case must be dismissed, or, if the Debtors so choose, converted to Chapter 13.

Id. (footnote omitted). When debtors declined to file a motion to convert to a Chapter 13 proceeding, the Bankruptcy Court dismissed the case.

On appeal, the parties repeat their arguments as to whether a bankruptcy court may consider debtors' Social Security benefits in assessing the "the totality of the circumstances ... of [their] financial situation" under § 707(b)(3)(B). Having considered the parties' arguments de novo, the Court agrees with the Bankruptcy Court that Social Security benefits may, among other relevant factors, properly be considered in making this determination.

The starting point is the statute itself. Section 707(b)(3)(B) permits the Bankruptcy Court to dismiss a Chapter 7 petition if, in that court's judgment, "the granting of relief would be an abuse of the provisions of this chapter" considering "the totality of the circumstances ... of the debtor's financial situation." "Totality" is "as inclusive [a term] as it is possible to employ." In re Riggs , 495 B.R. 704, 716 (Bankr. W.D. Va. 2013). Congress chose to place only one limit on what the Bankruptcy Court may consider in evaluating a debtor's financial situation in determining whether, under § 707(b)(3)(B), his/her Chapter 7 petition is abusive, namely, "the court may not take into consideration whether a debtor has made, or continues to make, charitable contributions ... to any qualified religious or charitable entity or organization." Section 707(b)(1). With this single exception, § 707(b)(3)(B) permits inquiry into the entirety of the debtor's "financial situation." This contrasts notably with the inquiry under § 707(b)(2), which presumes abuse if the debtor's "current monthly income" (a term of art that is defined by the Bankruptcy Code to exclude Social Security benefits, see 11 U.S.C. § 101(10A)(B)(ii)(I) ) exceeds a certain amount. If Congress had intended, in like manner, to exclude Social Security benefits from the § 707(b)(3)(B) inquiry, it easily could have done so by adding the words "in light of his current monthly income" at the end of this subsection. Instead, Congress directed the Bankruptcy Court to evaluate abuse based on the "totality" of the debtor's financial situation with no such limitation. This suggests that the Bankruptcy Court should consider all of the debtor's income and expenses, as well as any other factors relevant to his/her financial situation.

The parties agree that the leading Sixth Circuit case addressing § 707(b)(3)(B) is In re Krohn, supra. That court's comments bear repeating here at length:

Those courts which have reviewed the legislative history, have generally concluded that, in seeking to curb "substantial abuse," Congress meant to deny Chapter 7 relief to the dishonest or non-needy debtor. See [In re ] Walton , 866 F.2d [981] at 983 [ (8th Cir. 1989) ]. In determining whether to apply § 707(b) to an individual debtor, then, a court should ascertain from the totality of the circumstances whether he is merely seeking an advantage over his creditors, or instead is "honest," in the sense that his relationship with his creditors has been marked by essentially honorable and undeceptive dealings, and whether he is "needy" in the sense that his financial predicament warrants the discharge of his debts in exchange for liquidation of his assets. See 4 Collier, supra , ¶ 707.07, at 707-20. Substantial abuse can be predicated upon either lack of honesty or want of need.

It is not possible, of course, to list all the factors that may be relevant to ascertaining a debtor's honesty. Counted among them, however, would surely be the debtor's good faith and candor in filing schedules and other documents, whether he has engaged in "eve of bankruptcy purchases," and whether he was forced into Chapter 7 by unforeseen or catastrophic events.

Among the factors to be considered in deciding whether a debtor is needy is his ability to repay his debts out of

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