Tuesday, January 30, 2007

Houston Judges Find Method to Avoid Unnecessary Filing of Means Testing Form in Cases That Have Mostly Business Debt

While means testing is supposed to be self-effectuating, Congress failed to specify a clear mechanism for separating those debtors required to pass through the analysis and those who were exempt. In a new opinion, Judges Marvin Isgur and Wes Steen have developed a test to help debtors navigate the straits between Scylla and Charibidis (complete with a footnote explaining who Scylla and Charibidis were). No. 06-37157, In re David Michael Beacher, (Bankr. S.D. Tex. 1/26/07) and No. 06-35550, In re Michael Antonio Pena (Bankr. S.D. Tex. 1/26/07).

Means testing is one of the hallmarks of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). It was meant to ensure that debtors who could afford to pay their debts did not take the easy way out by filing chapter 7. Means testing only applies to debtors with "primarily consumer debts." This may have been because Congress figured that business debtors would fail in a big way so that they wouldn't be able to repay their debts or it might have been intended to promote entrepreneurship or it just may have been a consequence of the fact that BAPCPA was championed by the consumer credit lobby. Whatever the reason, means testing applies to individuals with primarily consumer debts but not other individuals.

Means testing is enforced through a regime which requires debtors to file a statement of current income and expenditures, which in the case of an individual debtor with primarily consumer debts must include a calculation to determine whether the presumption of abuse arises. See 11 U.S.C. Sec. 521(a)(1) (requiring filing of statement of income and expense unless the court orders otherwise) and 11 U.S.C. Sec. 707(b)(2)(C) (requiring additional calculation if primarily consumer debts are involved). If a debtor fails to file the information required by Sec. 521 within 45 days, then the case is subject to mandatory dismissal. 11 U.S.C. Sec. 521(i)(1).

Form 22A contains a detailed analysis of income and expenditures under the means test. However, judges have disagreed on whether it must be filed by all chapter 7 debtors or just those with consumer debts. Compare In re Moates, 338 B.R. 716 (Bankr. N.D. 2006)(only consumer debtors need file the form) with In re Copeland, 2006 Bankr. LEXIS 2200 (Bankr. S.D. Tex. 2006)(all debtors must file).

Judges Isgur and Steen disagreed with their Southern District colleague and ruled that requiring all debtors to file the form was neither "reasonable or acceptable." They cited Lord Coke for the maxim that "The law requires no one to do vain or useless things." 5 Coke 21.

With that out of the way, the judges had to decide what to do if a debtor failed to file the form. If the debtor was required to file the form but did not do so, then mandatory dismissal was the penalty. On the other hand, if the debtor was not required to file the form, they could hardly complain about its absence. The two cases consolidated in their opinion illustrate two different ways to approach the problem. In the first case, the debtor filed a motion to be excused from filing Form 22A on the ground that it was not required. In the second case, the court issued a show cause order as to why the case should not be dismissed for failure to file the form. When the debtor did not respond, the case was dismissed, leading to a motion to reconsider. In both cases, someone, whether the debtor or the court, had to take a proactive step to tee up the issue.

Further, the consequences of guessing wrong were serious, since they would result in automatic dismissal. In the Beacher case, the debtors contended that 58% of their debts resulted from their failed business. However, what if it turned out that only 49% fell in the business category? If the decision was made 46 days into the case, they would be dismissed.

To solve this problem and avoid "vain and useless expenditure of resources," the judges have developed a new form for requesting waiver of the requirement to file Form 22A. Based on the certification of the debtor and counsel that debts are not primarily consumer, the court will issue a provisional order excusing the form. If no party objects to the order within 90 days, it will become final and compliance will be excused. According to an email from the Southern District, Judges Bohm, Isgur, Schmidt and Steen plan to use the form.

It is good to see judges who care about making the system work. This is a case where Congress drafted an extensive statutory scheme but failed to address an important detail as to its practical application. There may have been a simpler answer however. Form 1, the Voluntary Petition, requires debtors to indicate whether their debts are primarily business or consumer. The form is signed by the debtor under penalty of perjury and is also signed by counsel. As a result, it contains basically the same information as the new form. When a debtor checks the business box it should presumptively excuse the debtor from filing Form B22A unless a party objects. Of course, there is no rule which says this. As a result, there is no time frame for objecting. Therefore, checking the petition box does not eliminate the 45 day dismissal problem. This distinction may be the factor which commends the new Southern District procedure.

Note: All of this discussion pertains to chapter 7 debtors only. While the means test obviously does not apply to chapter 11 or chapter 13 debtors, they are still required to complete an Official Form of income and expense which can be used to determine amounts payable under a plan. Fed.R.Bankr. Pro. 1007(b)(5)requires chapter 11 debtors to file the appropriate Official Form setting forth their current monthly income. Rule 1007(b)(6) requires chapter 13 debtors to file the Official Form reflecting their monthly income, and if their income exceeds the median, they must also file a calculation of disposable income as set out in Sec. 1325(b)(3).


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