JAMES J. ROBINSON, Chief Bankruptcy Judge.
The debtor filed an application to waive her chapter 7 filing fee (Doc. 2), and the chapter 7 trustee objected (Doc. 12). If the court approves the debtor's application, the trustee's meager $60 minimum fee, otherwise included in the filing fee, will not be paid, and he will likely work for free.
Section 1930(f)(1) of title 28 sets out a two-pronged test to determine whether a debtor qualifies for the waiver. The court may waive the filing fee otherwise due in an individual's chapter 7 case if (1) the debtor's income is "less than 150 percent of the income official poverty line (as defined by the Office of Management and Budget . . .) applicable to a family of the size involved and (2) [the debtor] is unable to pay that fee in installments." Id. (emphasis added).
Following this court's recent opinions and orders entered in In re Clyde L. Davis, Jr.
The court's orders issued in Davis required debtors' counsel to reimburse filing fees paid by those of his clients who, according to their schedules, satisfied the income test for a waiver, although no determination was ever made by the court of whether those debtors nonetheless had the ability to pay filing fees in installments. Counsel in Davis never mentioned to his clients that their limited incomes likely qualified them for a waiver of the filing fee, because truthful answers to the questions posed in the filing fee waiver applications would have disclosed the unscheduled debt for his attorney's fees and would have risked exposure of his clandestine postdated-check-attorney-fee-collection-scheme. In Davis, counsel's failure to seek filing fee waivers for potentially eligible debtors was a deliberate, systematic omission, and was an integral part of concealing his attorney fee collection scheme from the court, the trustee, the bankruptcy administrator, creditors, and others. This bankruptcy court and, on appeal, the district court, found that the undisclosed fee collection scheme was in violation of the Code, Rules, and ethical standards.
The court encourages debtors' attorneys to file applications for a waiver of filing fees when they believe their chapter 7 clients satisfy the two-prong test set out in § 1930(f)(1). Nonetheless, the court emphasizes that it has no intention of, sua sponte, examining whether chapter 7 debtors are entitled to filing fee waivers under § 1930(f)(1) even when their schedules indicate they likely pass the income test. In the Davis case, the bankruptcy administrator moved the court to examine transactions and consider disgorgement of attorney's fees, and the evidence presented made it impossible for the court to ignore that debtors' counsel failed to seek filing fee waivers because to have done so would have disclosed an inappropriate attorney-fee-collection-scheme. Absent extraordinary circumstances such as the improprieties discovered in Davis, whether to apply or not apply for a waiver of filing fees is a decision that should be made exclusively by the debtor and his counsel, even when the debtor's income is less than the § 1930(f)(1) threshold.
Official Form 103B is simple enough, and in Part 1, it asks a series of questions to help determine a debtor's eligibility for a fee waiver. The first question asks, "What is the size of your family?" and defines family as including the debtor, the debtor's spouse, and any dependents listed on Schedule J. The debtor in the instant case is not married, but has a dependent son, although he does not live with her. Question 2 asks the amount of the family's average income, which is described as "average monthly net income (take-home pay)" plus any non-cash governmental assistance such as food stamps. In this case, the debtor receives no governmental assistance.
The debtor's "monthly income" of $1,861 as shown on her Schedule I, line 10, was the same amount she listed on Form 103B as her "family's average monthly net income." This amount was determined on Schedule I by starting with the debtor's gross monthly wages of $2,736, which was then reduced by payroll taxes of $443, insurance of $77, and domestic support obligations (presumably for her dependent son) of $355, to arrive at her monthly net income of $1,861.
The penultimate question in Part 1 of Form 103B asks whether the debtor expects her "family's average monthly net income will increase or decrease by more the 10% during the next 6 months?" to which she answered no. The final question invites the debtor to explain "why she is unable to pay the filing fee in installments within 120 days" and provide any "additional circumstances that cause [the debtor] to not be able to pay [the] filing fee in installments . . . ." The debtor provided no explanation or additional circumstances supporting her inability to pay the filing fee in installments, but she did attach copies of her Schedules I and J that disclosed her monthly income and expenses.
Part 2 of Form 103B asks the debtor to list her estimated average monthly expenses, and she listed the same amount shown on her Schedule J: $1,858. And she answered "no" to other questions that, if answered in the affirmative, might demonstrate an ability to pay the fee in installments. Part 3 asks a series of questions about the debtor's property, which she left blank, but she attached copies of her Schedules A and B that disclosed no real estate and no substantial unencumbered or nonexempt personal property. Finally, Part 4 inquires about whom the debtor has paid, promised to pay, or expects to pay for assisting her with her bankruptcy case.
The trustee objected to the debtor's application on grounds that the income shown on the debtor's income tax returns and on her Statement of Financial Affairs ("SOFA") disclosed a monthly income approximately $800 higher than was disclosed on Schedule I and on Form 103B. At the hearing on August 11, 2016, the court admitted Trustee's Exhibits 1 and 2, the debtor's tax returns for 2014 and 2015, which show average monthly gross income of $2,633.50 (2014) and $2,726 (2015), respectively. The SOFA showed that the debtor had earned $14,229 during the present year before her case was filed in early June 2016, equating to an average monthly gross income of $2,845 (averaged over 5 months) before deductions. This figure is slightly higher than the gross monthly income of $2,736 shown on Schedule I. The debtor's deductions on Schedule I, which the trustee did not challenge, total $875 per month, leaving a net monthly income of $1,970 when using the SOFA gross income. Net monthly income of $1,970 is slightly higher than the $1,861 shown on Schedule I and Form 103B, but is still below the waiver threshold of $2,002.50 for a family of two.
As explained above, the test for waiver of the filing fee has two prongs. In addition to the income test, which the court finds the debtor has satisfied, she must also demonstrate she is "unable to pay that fee in installments." 28 U.S.C. § 1930(f)(1). The debtor testified that she postponed filing her bankruptcy case for several months while she saved the money needed to pay her attorney's fees of $900. An attorney fee of $900 is reasonable and well within the norm for the Eastern Division of this District. According to the debtor's testimony, she simply could not afford to pay the filing fee in installments or otherwise. The trustee offered no evidence to rebut that testimony which the court finds credible, especially in light of the debtor's income, expenses and assets shown on her schedules. The debtor's schedules do not disclose any assets, exempt and nonexempt, that she could liquidate to pay the filing fees, and reaffirmation of her car loan is necessary for her transportation to her place of employment.
Accordingly, for the reasons stated above, the court finds the debtor's net monthly income is below the applicable poverty line, and that she cannot afford to pay the fee in installments. Therefore, the Debtor's Application to Have Chapter 7 Filing Fee Waived is GRANTED, and the trustee's objection is OVERRULED.
So done and ordered.
On remand, and after an evidentiary hearing, the court found counsel did in fact have the ability to pay for the reimbursement of filing fees to his clients, and so ordered. Counsel and the bankruptcy administrator informed the court that funds sufficient to pay all sanctions were deposited by counsel in a reimbursement account for disbursement to those debtors identified in the court's previous orders as being entitled to refunds of their attorney fees, and where applicable, NSF check charges and case filing fees.
A recent article published in the AMERICAN BANKRUPTCY INSTITUTE JOURNAL might foster a misunderstanding of this court's premise for imposing sanctions in Davis. Richard H. Thomson, "Filing Fee Waivers: Be Careful of What You Don't Ask For," AMERICAN BANKRUPTCY INSTITUTE JOURNAL, July 2016, Vol. XXXV, No. 7, p. 20 ("Incredibly, counsel is facing sanctions for failing to advise his clients to file in federal court declarations executed under the penalty of perjury that they were unable to make payments that they, in fact, could and did make." Id. at 69). The article does not accurately reflect the reasons this court imposed sanctions in Davis, and may raise an unwarranted concern that this court intends to sanction attorneys whenever they fail to seek filing fee waivers for debtors who can pass the income prong of the fee waiver test, even without considering whether the debtors have the ability to pay the fees in installments. The interpretation of Davis espoused in the article is founded on a flawed premise—that the delivery of postdated checks to pay both filing and attorney's fees, followed by counsel's incremental monthly payment of filing fees out of his office account without regard to whether any particular debtor's checks were paid by the bank, was tantamount to a demonstration of those debtors' ability to pay filing fees in installments. Counsel in Davis made the same argument, which the court addressed and rejected in its opinions. In hopes of avoiding further confusion, and for the benefit of attorneys practicing in the Eastern Division, the court will reiterate its three controlling findings that caused the court to include reimbursement of filing fees in the sanctions imposed in Davis.
First, the failure to apply for filing fee waivers was not an exercise of counsel's discretion in Davis, but was part of the cover-up of his inappropriate and undisclosed attorney-fee-collection-scheme involving at least 292 cases, 159 of which on their face satisfied the income test for a filing fee waiver. He employed his Byzantine collection scheme in virtually all his chapter 7 cases — the only requirement being that the debtors have a checking account. Counsel made no effort to determine if any debtor would have the wherewithal to cover his checks after his case was filed. In fact, counsel kept no records regarding which debtors were covering their checks and which were not. Counsel paid the filing fees in installments based upon his ability to pay them each month, with no consideration whatsoever of whether any debtor would have had the ability to pay them and without regard to whether a debtor's check had bounced. Second, according to counsel's own records, 368 of those checks were not paid due to insufficient funds, thus negating the argument that delivery of the checks (or counsel's payment of the monthly installments regardless of whether checks cleared the bank) demonstrated an ability of the debtors to pay the filing fee in installments. Finally, even if one accepts the flawed premise that counsel's eventual payment of the filing fees in installments out of his office account without regard to whether any particular debtor's check cleared the bank, a fortiori supported an ability of the debtors to pay their filing fee in installments, it would be impossible to conclude that counsel in Davis did not allow his clients to sign fee waiver applications out of an ethical fear of suborning them to commit perjury rather than in furtherance of concealing his postdated check scheme. Consider that counsel routinely had his debtors sign declarations confirming the accuracy of their schedules, under penalty of perjury. Yet those schedules purposefully failed to list counsel as a creditor holding a $1,500 prepetition claim. In that same vein, counsel filed Rule 2016(b) compensation disclosures that were never amended, as mandated by that Rule, to disclose his receipt, postpetition, of checks totaling $1,500 intended to pay his attorney's fees and expenses. Likewise, counsel never mentioned his anticipated receipt of debtors' postdated checks in his written services and fee agreements required by Code § 528(a).
Finally, while it may be true that "the bankruptcy system is designed to be self-sustaining and funded through the allocation of court fees", R. Thomson at 68, the burden to make up any funding shortfall should not be presumptively shifted onto the backs of individual chapter 7 debtors whose incomes are less than 150% of the poverty line — the poorest debtors seeking relief under title 11 — whom Congress specifically made eligible for filing fee waivers under § 1930(f)(1). Notably, that legislation does not include a requirement that the applicant show extraordinary circumstances to qualify for a waiver, neither does it mention "adequate funding for the courts" as a factor for the court to consider in ruling on fee waiver applications.
