An individual cannot evade the means test in Section 707(b) by filing first in chapter 13 and then converting to chapter 7, the Eleventh Circuit held on June 27.
The debtor made payments for two years under his chapter 13 plan and then exercised his right under Section 1307 to convert to chapter 7. The U.S. Trustee moved to dismiss, saying the debtor’s disposable income vastly exceeded the means test in Section 707(b), thus making his case presumptively abusive.
The debtor conceded that he failed the means test. Nonetheless, he argued that Section 707(b) does not apply in a converted case, only in cases initially filed under chapter 7.
Sitting by designation and writing the opinion for the Eleventh Circuit, Second Circuit Judge Barrington D. Parker, Jr. disagreed and upheld dismissal.
The debtor in substance argued that the plain meaning of Section 707(b) makes the means test inapplicable in a converted case. He said the phrase, “a case filed by an individual under this chapter,” means it applies only to a case originally filed in chapter 7.
Although he said the interpretation was “defensible,” Judge Parker disagreed.
Focusing on the “history and statutory evolution” of the statute, Judge Parker concluded that Section 707(b) “would be eviscerated” if he adopted the debtor’s reading.
Dismissal for “substantial abuse” originally appeared in the 1984 amendments because Congress “believed that the bankruptcy courts were insufficiently invoking the ‘for cause’ provision to dismiss petitions.” Twenty years later, in the BAPCPA amendments of 2005, Congress “significantly strengthened Section 707(b)” by adding the means test.
Given how Section 707(b) evolved, Judge Parker said it was “inconceivable” that Congress authorized an evasion of the means test by filing first in chapter 13 and immediately converting to chapter 7.
When the BAPCPA amendments came into law, Bankruptcy Rule 1019(2)(A) was already on the books. Judge Parker said the rule “would be unintelligible” if the debtor’s theory were correct. Since courts presume that Congress was aware of the rule, he cited Hamilton v. Lanning, 560 U.S. 505, 516 (2010), where the Supreme Court declined to “read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a result.”
An individual cannot evade the means test in Section 707(b) by filing first in chapter 13 and then converting to chapter 7, the Eleventh Circuit held on June 27.