Wealthy Reservist Can't Exploit Chapter 7 Discharge

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By Diane Davis

Sept. 9 — The bankruptcy case of a wealthy psychiatrist and his wife should be dismissed even though the debtor husband is a reservist in the U.S. Army because the “totality of the circumstances” suggests abuse, a bankruptcy court in Wisconsin held.

Judge Susan V. Kelley of the U.S. Bankruptcy Court for the Eastern District of Wisconsin concluded that even though the debtors are exempt from “any form of means testing” due to debtor Thomas R. Rowell's former active duty as a reservist in the U.S. Army, the “totality of the circumstances test” still applies.

‘Means Test' Apply?

Bankruptcy Code Section 707(b)(2)(D), states that “for certain veterans, [s]ubparagraphs (A) through (C) shall not apply, and the court may not dismiss or convert a case based on any form of means testing.”

The “means test” is a term of art under the Bankruptcy Abuse Prevention and Consumer Protection Act that tests “whether a person has the means to pay his or her debt,” the court said.

Debtor Thomas Rowell is a psychiatrist and a reservist, who was called to active duty for a 90-day deployment in Kosovo, and later released from active duty. Thomas and his wife Natasha, who is also well-educated, filed their Chapter 7 bankruptcy petition during the 540-day period following his release from active duty. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.

The debtors argued that they qualified for a Chapter 7 discharge under the exemption in Section 707(b)(2)(D). According to the debtors, under the National Guard and Reservist Debt Relief Act of 2008, Pub. L. No. 110-438, 122 Stat. 5000 (2008), the court can't consider their ability to pay their debts as part of the totality of the circumstances analysis.

The U.S. Trustee moved to dismiss the case for abuse, arguing that the means test applied to the debtors' case and, even if it didn't, their case should be dismissed as an abuse under the totality of the circumstances. According to the trustee, nothing in the Act prevents the court from considering the debtors' ability to pay.

Debtors' Income and Expenses 

Thomas practiced psychiatry in Virginia in an independent private practice, and also operated a separate practice under an employment agreement with Danville Regional Medical Center. After he returned from his deployment, Thomas severed his employment contract with Danville because he could not maintain the practice.

An arbitration award of $182,464 plus interest in Danville's favor was issued over the breached employment contract.

At the time of filing, the debtors, who are now divorced, listed $467,717 of secured debt, and $520,415 of unsecured debt, including $223,933 in student loan debt, $200,000 for the Danville arbitration, $71,482 in credit card debt, and $25,000 for a medical software lease.

On the date of their bankruptcy filing, the debtors had annual income of $591,867. Because they maintained separate households, they filed two expense schedules with the court. Thomas claimed $12,098 of monthly expenses for a household of two, which included entertainment expenses of $1,000, two vehicle payments of $1,250, back tax payments of $800, and divorce attorney fees of $3,000.

Natasha's expenses for a household of two total $13,901 per month, including entertainment costs of $1,430, which consisted of a stay at a waterpark, and the cost of trips to South Africa, a vehicle payment of $640, student loan payments of $1,497, pet and hobby costs of $300, incidental costs of $500, and divorce attorney fees of $2,500.

Together, the debtors reported a $3,732 surplus per month after expenses. The court noted that some of the items included in their expenses were no longer incurred, such as divorce attorneys' fees since the divorce had been finalized.

Protecting Veterans 

The bankruptcy court looked at the language of Section 707(b)(2)(D), and concluded that the statute is ambiguous. The court then looked to Congress' intent, which was to “exempt from the means test in bankruptcy cases, for a limited period, qualifying reserve component members.”

According to the court, Congress was concerned about the vast fluctuations in pay that can occur when a person is called to active duty, and did not want these fluctuations to cause service members potentially to fail the means test when “in reality the service member was financially distressed as a result of military service.”

The court determined that the “clear Congressional intent in creating and extending the Act was to protect veterans from the means test presumption of abuse.” By exempting veterans from the means test, Congress shifted the burden of proof to the UST to prove that the debtors filed their petition in bad faith or that the totality of the circumstances of the debtors' financial situation demonstrates abuse, the court said.

Apply Totality of Circumstances Test 

The UST cited the debtors' stable income, ability to reduce excessive expenses, and deductions that no longer apply as factors demonstrating that this case should be dismissed under the totality of the circumstances.

The court found that the “totality of the circumstances test” does apply in this case even though the debtors are exempt from any forms of means testing. The UST has met his burden of proof showing that the totality of circumstances suggests abuse, the court said.

“While respectful of the service that Thomas provided in the military, the Court can barely imagine a case in which the totality of the debtors' financial circumstances would be more abusive of Chapter 7 than this one,” the court said.

Joel Bruce Winnig, Joel Bruce Winnig S.C., Madison, Wis., represented debtors Thomas R. Rowell, and Natasha Rowell, aka Natasha Rae Rowell; Larry H. Liebzeit, Appleton, Wis., represented Trustee Larry H. Liebzeit; Michelle S. Y. Cramer, U.S. Trustee, Milwaukee, Wis., represented the Office of the U.S. Trustee.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/In_re_Rowell_No_Chapter_7_2015_BL_286678_Bankr_ED_Wis_Sept_03_201