Robert Alan Witcher, et al. v. Valery W. Early, III

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 11-15883
________________________
D.C. Docket Nos. 1:10-cv-03081-CLS; 1:10-bk-40227-JJR7
In Re: ROBERT ALAN WITCHER,
JENNIFER WITCHER,
Debtors,
___________________________________________
ROBERT ALAN WITCHER,
JENNIFER WITCHER,
lllllllllllllllllllllllllllllllllllllllPlaintiffs - Appellants,
versus
VALERY W. EARLY, III,
llllllllllllllllllllllllllllllllllllllllDefendant - Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(December 13, 2012)
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Before DUBINA, Chief Judge, CARNES and GILMAN,* Circuit Judges.
GILMAN, Circuit Judge:
The question in this case is whether a court may take into account a debtor’s
ability to pay his or her debts in determining whether “the totality of the
circumstances . . . of the debtor’s financial situation demonstrates abuse” of
chapter 7 of the Bankruptcy Code under 11 U.S.C. § 707(b)(3)(B). We hold that
the court may do so. The judgment of the district court is therefore AFFIRMED.
I. BACKGROUND
Robert Alan Witcher and Jennifer Witcher filed for chapter 7 bankruptcy in
January 2010. The bankruptcy administrator moved to dismiss the case or convert
it to chapter 13 on the ground that the Witchers’ bankruptcy petition constituted an
abuse of the chapter 7 process. In ruling on the motion, the bankruptcy court first
found no presumption of abuse by the Witchers under the “means test” contained
in 11 U.S.C. § 707(b)(2). The means test is a complex statutory formula based on
the debtor’s monthly income modified by various amounts that are set forth in that
subsection. Next, the court considered the “totality of the circumstances” test set
* Honorable Ronald Lee Gilman, United States Circuit Judge for the Sixth Circuit, sitting
by designation.
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forth in 11 U.S.C. § 707(b)(3)(B) and found, under this second test, that the
Witchers’ bankruptcy petition demonstrated abuse.
The primary factor that the court relied upon to support its conclusion was
its finding that the Witchers had kept certain luxury items—including a camper, a
boat, a trailer, and a tractor—and had continued making payments on these items
to their secured creditors. It determined that “the Debtors’ ability to pay, as well as
their reluctance to change their lifestyle in order to provide a distribution to
creditors, together indicate that granting relief in this chapter 7 case would be an
abuse.” Because “a meaningful distribution to unsecured creditors could be made
by simply surrendering those items that are being kept for merely recreational
purposes,” reasoned the court, the Witchers’ decision to keep paying for these
“unnecessary, luxury items” showed that they were not prepared to earnestly
engage in the “give and take process” of bankruptcy. The court accordingly gave
the Witchers 14 days to convert their case to chapter 13. When they failed to do
so, the court dismissed the case.
The Witchers subsequently moved to amend or alter the order of conversion
based on a change in their financial circumstances due to Mr. Witcher’s loss of
employment. After a hearing, the bankruptcy court found that the alleged change
in circumstances was not material and therefore denied the motion, again giving
the Witchers 14 days to convert.
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The Witchers appealed the order of conversion to the district court. They
contested the bankruptcy court’s consideration of their ability to pay their debts
under the totality-of-the-circumstances analysis of § 707(b)(3)(B), but did not
contest the bankruptcy court’s factual findings or its failure to find a meaningful
change in circumstances. The district court affirmed, finding that the Witchers’
argument that ability to pay may not be considered as part of the totality of the
circumstances contradicts the plain text of § 707 and the overwhelming weight of
authority. On appeal, the Witchers contend that both the bankruptcy court and the
district court erred in considering their ability to pay their debts as part of the
totality of the circumstances.
II. ANALYSIS
A. Standard of review
Because this appeal raises purely legal questions, our review is de novo. See
In re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996).
B. Discussion
Section 707 of the Bankruptcy Code, 11 U.S.C. § 707, sets forth the
circumstances under which a court may dismiss a chapter 7 case or, with the
debtor’s consent, convert it into a chapter 11 or a chapter 13 case. One of the
grounds justifying dismissal or conversion is a court’s finding that “the granting of
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relief [i.e., bankruptcy discharge] would be an abuse of the provisions” of chapter
7. 11 U.S.C. § 707(b)(1).
The present case concerns §§ 707(b)(2) and 707(b)(3). Under § 707(b)(2),
“the court shall presume abuse” of chapter 7 if the debtor runs afoul of the so-
called “means test.” The means test takes into account a great many factors,
including the debtor’s payment of secured debts as calculated by a statutory
formula. See 11 U.S.C. § 707(b)(2)(A)(iii). If a presumption of abuse arises under
the means test and is not rebutted, the court may dismiss or convert the chapter 7
case. See 11 U.S.C. §§ 707(b)(1), 707(b)(2).
Subsection 707(b)(3) comes into play when the presumption of abuse under
707(b)(2) does not arise or is rebutted. Under § 707(b)(3), the court shall consider
“whether the debtor filed the petition in bad faith,” § 707(b)(3)(A), or whether “the
totality of the circumstances (including whether the debtor seeks to reject a
personal services contract and the financial need for such rejection as sought by the
debtor) of the debtor’s financial situation demonstrates abuse,” § 707(b)(3)(B).
In the present case, the bankruptcy court found that the Witchers did not run
afoul of the means test under § 707(b)(2) but failed the totality-of-the-
circumstances test under § 707(b)(3)(B). It held that the Witchers’ failure was due
primarily to the fact that they were able to pay their secured debts on a number of
luxury items. The sole question presented on appeal is whether consideration of
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the debtors’ ability to pay their debts under § 707(b)(2) precludes consideration of
their ability to pay under § 707(b)(3)(B).
The Witchers contend that ability to pay should not be considered under the
totality-of-the-circumstances test because such a consideration would render the
means test meaningless. They argue that there would be no point to the complex
formula crafted by Congress in the means test if a court could take the same factors
that are incorporated in that formula and plug them into the totality-of-the-
circumstances test. The Witchers rely on In re Walker, 381 B.R. 620, 624 (Bankr.
M.D. Pa. 2008), for the proposition that “inclusion of the income and expenses
calculation in § 707(b)(2) precludes reconsideration of income and expenses in
§ 707(b)(3) pursuant to the canon of negative implication.”
We disagree with the Witchers’ narrow reading of § 707(b)(3)(B). To begin
with, the text of § 707(b)(3)(B) broadly refers to “the totality of the circumstances
. . . of the debtor’s financial situation,” phrasing which is surely intended to include
the debtor’s ability to pay his or her debts.
Moreover, although the Witchers are correct that allowing each bankruptcy
court to devise its own subjective means test under § 707(b)(3) would defeat the
purpose of the congressionally enacted means test in § 707(b)(2), the same logic
does not dictate that any factors that are considered under § 707(b)(2) are by
implication precluded from consideration under § 707(b)(3). If Congress had
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intended such preclusion, it could have easily said so. Congress could have, for
example, drafted § 707(b)(3)(B) to read that “the court shall consider . . . the
totality of the circumstances . . . of the debtor’s financial situation—except for the
circumstances that the court has already considered under § 707(b)(2).” But that
is not what Congress enacted; the italicized language is not actually in the statute,
and we decline to add it by judicial interpretation.
Our examination of the structure and textual evolution of § 707 further
bolsters our reading of the statute. The current version of § 707 is largely a
product of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA). BAPCPA made it harder to obtain chapter 7 relief by eliminating the
“presumption in favor of granting the relief requested by the debtor” that had
existed in the previous version of § 707(b), adding a means test that created a
presumption of abuse, and lowering the standard from “substantial abuse” to
“abuse.”
The phrase “totality of the circumstances” was not in the pre-BAPCPA
statute, but it was the pre-BAPCPA standard used by many courts across the
country in determining whether there had been a substantial abuse of chapter 7.
These courts uniformly took the ability to pay into account in examining the
totality of the circumstances. For example, the courts in In re Lamanna, 153 F.3d
1, 4-5 (1st Cir. 1998), In re Green, 934 F.2d 568, 572 (4th Cir. 1991), and In re
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Krohn, 886 F.2d 123, 126 (6th Cir. 1989), all used the totality-of-the-
circumstances formulation and held that a debtor’s ability to pay his or her debts is
a factor to be considered in deciding whether there has been substantial abuse.
And the courts in United States Trustee v. Harris, 960 F.2d 74, 77 (8th Cir. 1992),
and In re Kelly, 841 F.2d 908, 914 (9th Cir. 1988), although not utilizing the
totality-of-the-circumstances formulation, nevertheless held that the ability to pay
is a factor to be considered in deciding whether there has been substantial abuse.
Congress was doubtless aware when it codified the totality-of-the-
circumstances standard that the relevant pre-BAPCPA jurisprudence took into
consideration a debtor’s ability to pay his or her debts. See, e.g., Lorillard v. Pons,
434 U.S. 575, 581 (1978) (“[W]here . . . Congress adopts a new law incorporating
sections of a prior law, Congress normally can be presumed to have had
knowledge of the interpretation given to the incorporated law, at least insofar as it
affects the new statute.”). Accordingly, if Congress had intended to preclude such
consideration, it presumably would have explicitly said so. The absence of an
explicit preclusion regarding the ability to pay under § 707(b)(3)(B) in the face of
Congress’s awareness of judicial inclusion of the same factor under prior law
indicates that Congress did not intend to preclude such consideration.
The Witchers’ “negative implication” argument is therefore unpersuasive.
Their extensive citations to legislative history are similarly unavailing because
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these materials pertain either to other provisions of the Bankruptcy Code or to the
pre-amendment version of § 707, and thus shed no light on the relationship
between current §§ 707(b)(2) and 707(b)(3).
We therefore hold that a debtor’s ability to pay his or her debts may be taken
into account under the totality-of-the-circumstances test set forth in 11 U.S.C.
§ 707(b)(3)(B). With the exception of In re Walker, 381 B.R. 620 (Bankr. M.D.
Pa. 2008), every single court we know of to consider the question has reached the
same conclusion. See In re Reed, 422 B.R. 214, 233 (C.D. Cal. 2009); In re Lanza,
450 B.R. 81, 86-87 (Bankr. M.D. Penn. 2011); In re Keller, No. 09-21519, 2010
WL 4386850, at *2 (Sep. 2, 2010 Bankr. S.D. Ga.); In re Perelman, 419 B.R. 168,
176 (Bankr. E.D.N.Y. 2009); In re James, 414 B.R. 901, 914 (Bankr. S.D. Ga.
2008); In re Talley, 389 B.R. 741, 745 (Bankr. W.D. Wash. 2008); In re Cribbs,
387 B.R. 324, 334 (Bankr. S.D. Ga. 2008); In re Barnett, No. 06-62414, 2007 WL
4510277, at *4 (Dec. 18, 2007 Bankr. N.D. Ohio); In re Henebury, 361 B.R. 595,
607 (Bankr. S.D. Fl. 2007); In re Mestemaker, 359 B.R. 849, 856 (Bankr. N.D.
Ohio 2007); In re Lenton, 358 B.R. 651, 664 (Bankr. E.D. Penn. 2006); In re
Nockerts , 357 B.R. 497, 507 (Bankr. E.D. Wis. 2006); In re Pak, 343 B.R. 239,
244 (Bankr. N.D. Cal. 2006).
C. The scope of our holding
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Before concluding, we wish to emphasize the limited nature of our holding.
We do not decide whether a debtor’s ability to pay his or her debts can alone be
dispositive under the totality-of-the-circumstances test. Nor do we decide how
much weight a bankruptcy court may properly give to the debtor’s ability to pay as
compared with other factors making up the totality of the circumstances. The
questions of whether the ability to pay may be dispositive and, if not, what weight
it should be given as compared to other factors, were debated in the pre-BAPCPA
caselaw, compare, e.g., Green, 934 F.2d at 572 (indicating that the ability to pay is
the “primary” factor to be considered, but holding that it should be considered
alongside other factors), with Harris, 960 F.2d at 77 (holding that the ability to pay
alone may be a sufficient reason for finding abuse, and rejecting the “sweeping and
free ranging inquiry” in Green), and they continue to be debated post-BAPCPA,
compare, e.g., Cribbs, 387 B.R. at 334 (“[T]he Trustee must show more than just
Debtors’ ability to pay.”), with Henebury, 361 B.R. at 607 (“[T]he ability to pay,
standing alone, is sufficient.”).
But the Witchers do not raise these questions. Instead, they argue that their
ability to pay their secured creditors should not have been taken into account at all
under § 707(b)(3)(B). Accordingly, we construe the present appeal to raise only
the narrow question that we have answered above.
III. CONCLUSION
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For all of the reasons set forth above, the judgment of the district court is
AFFIRMED.
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