ABUSE UNDER CHAPTER 7 OF THE BANKRUPTCY CODE: A RATIONAL APPROACH TO WEIGHING ABILITY TO PAY Robert J. Landry, III I. INTRODUCTION ............... 1............................... II. STATUTORY FRAMEWORK OF 11 U.S.C. § 707....................... 3 A. Development of]] U.S.C. § 707............ ....................... 3 B. CurrentFramework of ]] U.S.C. § 707(b) .. ................ 6 1. Presumptive Abuse..................... ............ 8 2. Actual Abuse ....................... ............ 9 III. THE APPLICABILITY OF ABILITY TO PAY UNDER THE TOTALITY TEST ..................................................... 12 A. Fourth Circuit: In re Calhoun ............. ........... 13 B. Eleventh Circuit: In re Witcher ....................... 13 C. Ninth CircuitBankruptcy Appellate Panel: In re Ng ........... 15 D. Analysis of Applicability of Ability to Pay..... ............. 16 IV. THE WEIGHT OF ABILITY TO PAY UNDER THE TOTALITY TEST ....... 18 A. Appellate Courts................................... 19 B. Bankruptcy Courts.................................. 20 1. Ability to Pay Must be Coupled with Other Factors....... 20 2. Ability to Pay May be Dispositive ............. ..... 21 V. A RATIONAL APPROACH TO WEIGHING ABILITY TO PAY.............. 22 A. Arguments Against Coupling Ability to Pay with Another Factor.......................................... 23 B. Arguments Against a Per Se Rule Mandating Dismissal if There is Ability to Pay .............................. 23 C. ProposedStatutory Solution ................... ...... 25 VI. CONCLUSION .............................................. 26 I. INTRODUCTION The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 was the most extensive reform of the Bankruptcy Code2 Associate Professor of Finance, College of Commerce and Business Administration, Jacksonville State University. 'Pub. L. No. 109-8, 119 Stat. 23 (2005) (codified as amended in scattered sections of 11 U.S.C.). 11 U.S.C. § 101 et seq. (2000 & Supp. V 2006). Unless otherwise noted, all references to Bankruptcy Code, Code or Section are to Title 11 of the United States Code, including amendments made by BAPCPA as are codified in Supplement V to the 2000 edition of the U.S. Code (Jan. 2, 2006). 2 BUSINESS & BANKRUPTCY LAW JO URNAL [Vol. 1 (Code) since the Code's enactment.3 The core purpose of BAPCPA was to "correct perceived abuses of the bankruptcy system. The statutory means test5 is the primary mechanism to address the perceived abuses in consumer bankruptcy.6 Although its purpose is clear, the application of the means test is quite difficult in practice, as evidenced by the scores of decisions addressing a panoply of means test issues. 7 This paper does not address specific issues under the means test itself, but addresses situations when debtors pass the means test8 or are not subject to the means test.9 In such instances, a debtor may still be subject to dismissal for abuse under the Code. Without clear statutory standards for a finding of abuse, courts have struggled with defining the exact parameters of what constitutes abuse." A particularly important debate has ensued regarding whether the statutory means test is conclusive of ability to pay in an abuse analysis of a Chapter 7 case, and if not, what weight should be given to ability to pay.12 Bankruptcy courts have reached conflicting decisions,13 and now three appellate courts have weighed in.14 Although the appellate courts have consistently held that ability to pay is relevant under the totality test, the 3 See Lawrence A. Young & Heather Heath McIntyre, The Impact of BAPCPA An Overview, 63 CONSUMER FIN. L.Q. REP. 32, 32 (2009) ("The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 . constituted the most dramatic revision of the United States Bankruptcy Code . in twenty-seven years."); Dorothy Hubbard Cornwell, To Catch a KERP: Devising A More Effective Regulation Than § 503(c), 25 EMORY BANKR. DEV. J. 485, 486 (2009) (recognizing that BAPCPA was one of "the most comprehensive overhauls of the Bankruptcy Code in more than 25 years"). 4 Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229, 231-32, 130 S. Ct. 1324, 1329 (2010) ("Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA or Act) to correct perceived abuses of the bankruptcy system."). 11 U.S.C. § 707(b)(2) (2006) (the means test provisions); see also infra Part II.B.1 (discussing means test generally). 6 The Supreme Court in reviewing the legislative history has recognized the role of the "means test" as ensuring that debtors who have the ability to pay creditors, actually do so. See Ransom v. FIA Card Servs., N.A., _ U.S. _, 131 S. Ct. 716, 721 (2011) ("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) ... to help ensure that debtors who can pay creditors do pay them."). There are literally hundreds of published bankruptcy decisions since the enactment of BAPCPA pertaining to issues under the mean test. The difficulty in defining the exact parameters of the means test is evident with the numerous appellate level decisions since BAPCPA, including several U.S. Supreme Court decisions pertaining to means test issues. For example, see Ransom 131 S.Ct. 716 (2011) (analyzing projected disposable income and the proper deduction of car related expenses under the means test); Hamilton v. Lanning, 130 S. Ct. 2464, 177 L.Ed.2d 23 (2010) (analyzing the definition of projected disposable income in a Chapter 13 case which relies on the statutory means test provisions in Chapter 7). See infra notes 66-78 and accompanying text. See infra notes 78. o See infra notes 80-81 and accompanying text. See infra notes 82 95 and accompanying text. See infra Part IV.A & B. 13See infra notes 167-92 and accompanying text. 14 See In re Witcher, 702 F.3d 619 (11th Cir. 2012) (holding that ability to pay is a relevant factor under the totality test, but did not rule on the proper weight of this factor); In re NG, 477 B.R. 118 (B.A.P. 9th Cir. 2012) (after considering pre-BAPCPA case law the court held that ability to pay continues to be the primary factor in an abuse analysis and it may justify dismissal alone); In re Calhoun, 650 F.3d 338 (4th Cir. 2011) (holding that ability to pay is relevant under the totality test but did not make a determination regarding the property weight of that factor). 2014] WEIGHING ABILITY TO PAY 3 important question, whether there is proper weight to give ability to pay and if it is sufficient in and of itself to warrant a finding abuse, is unanswered. Eventually, the United States Supreme Court will most certainly answer the question presented to the appellate courts and hopefully provide answers to the lingering issues. This paper examines the appellate courts' analyses and offers an approach to answering the lingering issues in the context of the current statutory framework, legislative history, and consistency with the underlying policy behind BAPCPA. Following this introduction is an overview of the statutory framework of § 707 and evolution of § 707(b). Part III analyzes the applicability of ability to pay under the totality of circumstances test embodied in § 707(b)(3). 15 The case law approaches the weight given to ability to pay under the totality of circumstances test-this article contemplates this issue in Part IV.16 Part V argues for a rational approach to considering that ability to pay under the totality test and offers a statutory solution to advance this approach.17 Finally, the conclusion addresses other areas of research and identifies specifics. II. STATUTORY FRAMEWORK OF 11 U.S.C. § 707 A. Development of ]] U.S.C. § 707 When the Bankruptcy Code was passed in 1978, the only basis for dismissal of a Chapter 7 case was for "cause."1 Section 707, as originally enacted, merely provided as follows: The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including- (1) unreasonable delay by the debtor that is prejudicial to creditors; and (2) nonpayment of any fees and charges required under Chapter 123 of Title 28.19 The grounds enumerated are just illustrative; 20 however, the legislative history expressly provides that § 707, as originally enacted, did not give " See infra Part III. 16See infra part IV. See infra Part V. Adam J. Ruttenberg, The Totality of What Circumstances? How Courts Determine Whether Granting Bankruptcy Relief Would Be an Abuse, 2009 ANN. SURV. BANKR. L. 18 (2009). '9 11 U.S.C. § 707 (1978) (current version at 11 U.S.C. § 707(a) (2006)), see also In re Griggs, 679 F.2d 855, 856 (11th Cir. 1982). 20 In re Amir, 436 B.R. 1, 16 (B.A.P. 6th Cir. 2010) (noting that the three examples of "cause" listed are illustrative only.); see also Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829, 831 (8th Cir. 1994) (explaining that the enumerated grounds for a "for cause" dismissal are nonexclusive); Indus. Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126 (6th Cir. 1991) ("'[I]ncluding' is not meant to be a limiting word"). 4 BUSINESS & BANKRUPTCY LAW JO URNAL [Vol. 1 bankruptcy courts the power to dismiss a case based on ability to repay debts in whole or in part.21 Without any specific definition of what constituted cause, courts determined what constituted cause on a case-by- case basis based largely on equitable principles.22 In 1984, after a strong lobbying effort by the credit industry 23 and consumer filings doubled in numbers from 1978 to 1982,24 the Bankruptcy Amendments and Federal Judgeship Act of 1984 substantially modified § 707.25 The existing § 707 was reclassified as § 707(a) 26 and subsection (b) was added. 227 Section 707(b) added substantial abuse as a basis for dismissal of consumer cases.