By: Scott B. Riddle, Esq.

In Schultz v. United States, 2008 WL 2229495 (6th Cir. June 12, 2008) (pdf opinion here), the debtor argued that the Means Test violates the United States Constitution because the test is reliant on state and local income standards and deductions.

Because of these deductions, eligibility under the new regime is calculated at least in part based on the state and county where the debtor resides. The housing expense deduction, for example, is governed by the county where the debtor resides. Id. § Although the national standards, which identify amounts for “food, housekeeping supplies, apparel and services, and personal care products and services,” and a fixed miscellaneous” amount, id. §, are mostly uniform throughout the United States, the local standards, which define amounts for housing and transportation, vary greatly. 

…the Schultzes brought a separate suit against the United States, which challenges the five sections of the BAPCPA that employ the “means test”-Sections 707(b)(7), 707(b)(2), 704(b), 1325(b)(3), and 1325(b)(4)-under one central theory: because median-income calculations are based, at least in part, on the state and county in which the debtor resides, the BAPCPA is not a “uniform Law[ ] on the subject of Bankruptcies throughout the United States.” U.S. Const. art. 1, § 8, cl. 4   

The District Court granted the United States’ summary judgment motion and the debtor appealed. The Sixth Circuit affirmed.

We turn to the central issue in this case: Is the BAPCPA a uniform law on the subject of bankruptcy? The Bankruptcy Clause of the Constitution grants Congress the power to “establish … uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. What distinguishes these “peculiar terms” from the other Article I powers is the concept of uniformity, which, as Chief Justice Marshall noted nearly two centuries ago, “deserve[s] notice. Congress is not authorized merely to pass laws, the operation of which shall be uniform, but instead to establish uniform laws on the subject throughout the United States.”

Over the last century, the Supreme Court has wrestled with the notion of geographic uniformity, ultimately concluding that it allows different effects in various states due to dissimilarities in state law, so long as the federal law applies uniformly among classes of debtors. In Moyses, one of the first cases dealing with the validity of a bankruptcy statute, the Court upheld the incorporation of varying state exemptions into the 1898 Bankruptcy Act. 186 U.S. at 189-90, 22 S.Ct. 857. Geographic uniformity in this context, the Court observed, was satisfied “when the trustee takes in each state whatever would have been available if the bankrupt law had not been passed. The general operation of the law is uniform although it may result in certain particulars differently in different states.” Id. at 190, 22 S.Ct. 857. In 1918, the Court reaffirmed the Moyses principle in a case involving the Bankruptcy Act’s incorporation of varying state fraudulent conveyance statutes, despite the fact that the laws “may lead to different results in different states.” Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 62 L.Ed. 507 (1918). See also Vanston, 329 U.S. at 172, 67 S.Ct. 237 (explaining that the Bankruptcy Clause “does not mean wiping out the differences among the forty-eight States” and holding that state tort and contract law may determine the validity of creditors’ claims).

Nearly sixty years later, the Supreme Court, applying Moyses, held that Congress may enact non-uniform laws to deal with geographically isolated problems as long as the law operates uniformly upon a given class of creditors and debtors. Blanchette v. Connecticut General Ins. Corps., 419 U.S. 102, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974). …The Court ultimately concluded that the “uniformity provision does not deny Congress power to take into account differences that exist between different parts of the country, and to fashion legislation to resolve geographically isolated problems,” id. at 159, 67 S.Ct. 237, so long as the law “appl[ied] equally to all creditors and debtors,” id. at 160, 67 S.Ct. 237. See also Leidigh Carriage Co. v. Stengel, 95 F. 637, 646 (6th Cir.1899) (holding that the Bankruptcy Clause “imposes no limitation upon congress as to the classification of persons who are to be affected by such laws, provided only the laws shall have uniform operation”).

Applying these principles to the instant case, we conclude that the BAPCPA is a constitutionally uniform law. Congress is allowed to distinguish among classes of debtors, and to treat categories of debtors differently, whether it be through the incorporation of varying state laws “affecting dower, exemptions, the validity of mortgages, priorities of payment and the like.” Stellwagen, 245 U.S. at 613, 38 S.Ct. 215. And this is precisely what the BAPCPA does: Sections 707(b)(7), 1325(b)(3), and 1325(b)(4) distinguish between two classes of debtors, those whose annualized current monthly income is above the family median income for the applicable state and those whose income is below. All Chapter 13 below-median-income debtors have only a three-year instead of a five-year applicable commitment period, and are subject to more favorable treatment in calculating their disposable income than all debtors above the median; all above-median-income debtors are subject to an applicable commitment period of “not less than 5 years,” and have their income recalculated in accordance with the IRS Handbook’s national and local standards. Yes, the Schultzes may receive less favorable treatment simply because they are residents of Tennessee, a state whose median monthly income is lower than a host of others, but the same could be said of debtors living in states with less favorable state property exemption laws. See Moyses, 186 U.S. at 190, 22 S.Ct. 857. Accordingly, “[t]he general operation of the law is uniform although it may result in certain particulars differently in different states.” Moyses, 186 U.S. at 190, 22 S.Ct. 857.

Had Congress described the “means test” in explicit geographic terms, by enacting legislation exempting residents of certain states without justification, we would be faced with a significantly different case. In St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525 (9th Cir.1994), for instance, the Ninth Circuit considered whether a statutory amendment extending the deadline for two states to implement an administrative program violated the uniformity provision of the Bankruptcy Clause. The Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, 100 Stat. 3088 (1986), permanently established the United States Trustee Program, an administrative agency responsible for overseeing the administration of bankruptcy cases and private trustees. Congress curiously chose to phase the program in over a two-year period for every state except North Carolina and Alabama, who instead had the option of voting into the Trustee program over an extended period of time. Several years later, in Section 317 of the Judicial Improvements Act of 1990, Pub.L. No. 101-650, 104 Stat. 5089 (1990), Congress extended the deadline for North Carolina and Alabama to implement the program to October 1, 2002, without any corresponding explanation for the special treatment. St. Angelo, 38 F.3d at 1529. …

The Schultzes next argue that the uniformity requirement was enacted in response to the fear that the national government would use its power over commerce to the disadvantage of particular states. (Appellants’ Br. 12-21; Amicus Br. 4-5.) Accordingly, even if a federal bankruptcy law may vary in application from state to state, employing federal income standards enables the preferential treatment of debtors in some states over debtors in other states, a form of discriminatory treatment the Framers explicitly prohibited. We do not find their argument or their view of history compelling. …

… we find no merit in the Schultzes’ argument that Congress can incorporate state laws, but cannot incorporate federal standards. At the time of the Constitutional Convention, the fear was not, at least in the bankruptcy context, of Congress discriminating in favor of or against a particular locality. Quite to the contrary, uniformity in the Bankruptcy Clause was viewed as a way to safeguard the nation’s interest in establishing and maintaining a single system of debt and credit without interference from the parochial or otherwise obstreperous action on the part of the fifty states.