In re Moriarty

530 B.R. 637

In re: Julia Elizabeth Moriarty, Debtor.

Case No. 13–51437

United States Bankruptcy Court, W.D. Virginia, Harrisonburg Division .

Signed May 18, 2015

Eryk Gabhran Boston, Boston Law Firm, Winchester, VA, for Debtor.

MEMORANDUM OPINION

Rebecca B. Connelly, U.S. Bankruptcy Judge

The matter before the Court is the motion for summary judgment by the debtor, Ms. Julia Elizabeth Moriarty. Although styled as a motion for summary judgment, based on the parties' joint stipulation of facts¹ and their representations at the hearing, the Court construes Ms. Moriarty's motion as one for partial summary judgment regarding whether the Court may consider Social Security income for purposes of the totality of the circumstances test under Bankruptcy Code section 707(b)(3)(B). According to the facts and argument in the record and as more fully set forth below, the Court grants Ms. Moriarty's motion for partial summary judgment and finds, as a matter of law, the Court may not consider a debtor's Social Security income as part of the totality of the circumstances of the debtor's financial situation under section 707(b)(3)(B).

PROCEDURAL BACKGROUND

Ms. Moriarty petitioned for relief under chapter 7 of the Bankruptcy Code on November 24, 2013.² On February 12, 2014, the United States Trustee filed her first motion to dismiss the case for abuse.³ In the motion to dismiss, the United States Trustee alleged Ms. Moriarty's petition was abusive based on the totality of the circumstances test of her financial condition under Bankruptcy Code section 707(b)(3)(B), asserting Ms. Moriarty had the ability to pay her debts in full without modifying her lifestyle or petitioning for bankruptcy.⁴ In particular, the United States Trustee asserted that, although Ms. Moriarty's schedules demonstrated a substantial negative net monthly income, for the purposes of section 707(b)(3)(B), the Court should consider her Social Security benefits, which would result in a positive net monthly income.⁵ In response, Ms. Moriarty voluntarily converted her case to one under chapter 13 on May 2, 2014.⁶

Upon conversion, Ms. Moriarty filed a chapter 13 plan, in which she proposed to maintain her mortgage payments outside of her plan and pay to the trustee only the amounts necessary to satisfy the bankruptcy administrative fees and her attorney's fees, with a zero percent dividend to her unsecured creditors.⁷ The chapter 13 trustee objected to Ms. Moriarty's plan, alleging, in part, that the plan was infeasible and had not been proposed in good faith.⁸ Ultimately, the chapter 13 trustee argued that Ms. Moriarty should not be in chapter 13, and, instead, she should reconvert her case back to one under chapter 7.⁹

Ms. Moriarty concluded her brief foray into chapter 13 by reconverting her case back to one under chapter 7 of the Bankruptcy Code on September 18, 2014.¹⁰ Once again, however, the United States Trustee filed a motion to dismiss Ms. Moriarty's petition, alleging abuse based on the totality of the circumstances under Bankruptcy Code section 707(b)(3)(B), citing the same concerns as she did in her first motion to dismiss.¹¹ Instead of voluntarily converting once again, however, Ms. Moriarty filed a response denying the alleged abuse and asserting that based on the language of the Social Security Act, the Bankruptcy Code, and Fourth Circuit case law, the Court could not consider Ms. Moriarty's Social Security income under the totality of the circumstances test.¹² Accordingly, Ms. Moriarty requested the Court deny the United States Trustee's motion to dismiss.¹³

Based on the developments in the case, the Court set deadlines for filing dispositive motions, filing a joint stipulation of facts, and any memoranda or responsive pleadings thereto.¹⁴ That order also set a date for oral argument if needed.¹⁵ Thereafter, Ms. Moriarty filed this motion for summary judgment¹⁶ and a memorandum in support,¹⁷ in which she alleges no genuine issue of material fact and requests the Court deny the United States Trustee's motion to dismiss. The United States Trustee filed a timely response, asserting the case is abusive and should be dismissed.¹⁸

FACTUAL BACKGROUND AND STIPULATED FACTS

Prior to the hearing and to aid the Court in ruling on the motion for partial summary judgment, Ms. Moriarty and the United States Trustee filed a joint stipulation of all material questions of fact relevant to the inquiry.¹⁹ Accordingly, the Court makes the following findings of fact, to which the parties have stipulated:

6. At the time of filing, the Debtor received gross base pay from employment averaging to $3,226.68 per month, gross survivor's benefits from the Department of Labor of $2,070.46 per month, and $1,591.00 per month in Social Security payments under the Social Security Act.

7. The debtor continues to receive income from employment, survivor's benefits from the Department of Labor, and Social Security payments.

8. The parties agree the sole issue the Court should decide regarding the motion for summary judgment is whether payments received under the Social Security Act are part of the Debtor's financial situation when considering whether the granting of a discharge under chapter 7 is abusive in light of the totality of the circumstances of the Debtor's financial situation.²⁰

The Court held a hearing on the motion for summary judgment on March 18, 2015, at which both parties appeared and presented argument in support of their respective positions. Upon the conclusion of the hearing, the Court took under advisement only the question of whether it could consider Social Security income as a part of the totality of the circumstances of the debtor's financial condition when determining if granting a discharge is abusive under Bankruptcy Code section 707(b)(3)(B).

DISCUSSION

a) Summary Judgment

At the outset, the Court accepts the parties' representations at trial and construes Ms. Moriarty's motion for summary judgment as actually being a motion for partial summary judgment regarding only the question of how the Court may treat her Social Security income. The Federal Rules of Bankruptcy Procedure authorize bankruptcy courts to grant summary judgment regarding any “claim or defense” or any “part of each claim or defense” for which there is no “genuine dispute as to any material fact.”²¹

A court should grant a motion for summary judgment when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law.²² Within the Fourth Circuit, courts consider facts “material” when they could be outcome determinative of the question presented to the court.²³ A genuine issue exists as to any material fact when the evidence is such that a reasonable juror could return a verdict for the non-moving party.²⁴ When making these determinations, a court should construe any reasonable inference in favor of the non-moving party.²⁵

In the instant case, Ms. Moriarty has asked the Court to rule on summary judgment whether the income she receives from Social Security should be considered for the purposes of section 707(b)(3)(B). The parties agree there is no dispute regarding the material facts of this narrow issue, namely that the debtor receives Social Security income and that the exclusion of such income from the section 707(b)(3)(B) test is a partial defense to the United States Trustee's motion to dismiss the case for abuse. The parties agree that the resolution of this part of the debtor's defense is necessary at this point in the proceeding.²⁶ After review of the record and considering the importance of this partial defense to the disposition of the United States Trustee's motion, the Court finds there is no genuine issue of material fact regarding this particular question and the issue is ripe for partial summary judgment.

b) Bankruptcy Code Section 707(b)(3) and Case Law

Section 707(b)(1) of the Bankruptcy Code authorizes a bankruptcy court to dismiss a case filed under chapter 7 when granting a discharge in such a case would be an abuse of the Bankruptcy Code.²⁷ To aide courts in determining what constitutes an abuse, section 707(b)(2) lays out specific criteria, which, when met, create a presumption of abuse.²⁸ Courts refer to this formula in section 707(b)(2) as the “Means Test.”²⁹ When crafting the Means Test, Congress specifically excluded from the calculation any income the debtor “received under the Social Security Act.”³⁰ Thus, as a result of this exclusion under the Means Test, courts do not consider a debtor's Social Security income when determining if a discharge under chapter 7 would be presumed to be abusive under section 707(b)(2).³¹ Stated differently, a debtor's receipt of Social Security income can never give rise to a presumption of abuse under the Means Test.

If a presumption of abuse under section 707(b)(2) does not arise, however, a court may still find a discharge under chapter 7 abusive by looking to section 707(b)(3). Under section 707(b)(3), if the court finds either, (A) “the debtor filed the petition in bad faith; or (B) the totality of the circumstances ... of the debtor's financial situation demonstrates abuse,” a court may dismiss the case.³² It is this alternate authority upon which the United States Trustee relies.

The Code does not define “bad faith” for the purpose of section 707(b)(3)(A), nor does it define the terms “circumstances” or “financial condition” for the purpose of section 707(b)(3)(B). In considering the former (bad faith) in the context of chapter 13 plan confirmation, the Fourth Circuit has questioned whether “bad faith” includes a debtor's failure to contribute Social Security income to a chapter 13 plan.³³ Regarding the latter (totality of the circumstances), the question whether Social Security income should be considered is still unanswered.

Within the Fourth Circuit, bankruptcy courts generally construe the so-called “totality of the circumstances” test of section 707(b)(3)(B) to be a means of considering...