Opinion
Case No. 08-26263-svk.
February 12, 2009
DECISION AND ORDER DENYING THE U.S. TRUSTEE'S MOTION TO DISMISS
The U.S. Trustee moved to dismiss this case based on the "totality of the circumstances" under Bankruptcy Code § 707(b)(3). The parties stipulated to the relevant facts, and the Court also held a hearing on the matter. Paul Le Roy (the "Debtor") is a 45 year-old single man who filed a case under Chapter 7 of the Bankruptcy Code on June 10, 2008. He is engaged to be married in October 2009. The Debtor earns $4,216.33 monthly from his job as a safety manager, and he owns a duplex. He lives in one half of the duplex while renting out the other half for $695 per month. The mortgage payment on the duplex is $1,516 per month. He contributes $421 monthly toward a voluntary 401(k) plan through his employer. His 401(k) plan has a current value of approximately $17,000, and the Debtor testified that his employer does not offer a pension plan in addition to the 401(k).
In November 2006 the Debtor purchased a vacant lot for $68,000. At the hearing, the Debtor testified that he purchased the lot with the intention of building a home with his fiancée sometime after they marry. The Debtor explained that his fiancée is visually impaired, and he purchased the lot because of its close proximity to her place of employment. The monthly mortgage payments on the lot are $600, and the real estate taxes average $116.66 per month. At the time of the hearing in February 2009, the Debtor had missed five payments on the mortgage. He was hopeful of catching up on these payments, perhaps using his tax refund or financial help from his fiancée.
The Debtor testified that, aside from the secured debts on the duplex and vacant lot, he pays $90 per month on a loan secured by his 1996 Dodge truck. The Debtor lost a job about 10 years ago, which caused him to accrue significant credit card debt, but he was able to pay off that debt over time. He testified that his recent financial difficulty arose in part due to his inability to carefully monitor his expenses, and due to some unexpected medical bills. In deposition testimony, the Debtor stated he has been diagnosed with sleep apnea and is on medication for tremors. The Debtor did take a one-week vacation to Milwaukee in July of 2006, but that was the most extravagant trip he could recall taking recently. His only expenditure of more than $500 was for tires.
The parties do not dispute that the Debtor's case is not presumed abusive under § 707(b)(2). The primary issue is whether the Debtor's case is an abuse under § 707(b)(3) of the Code, which states:
The U.S. Trustee presented evidence that the Debtor's Form B22A does not reflect his rental income from the duplex. However, the Debtor testified that his expenses from the duplex approximately match the income, leaving a small amount of net rental income. The U.S. Trustee does not contend that the Debtor intentionally omitted the information or attempted to manipulate the means test.
In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider —
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor's financial situation demonstrates abuse.
In cases under § 707(b)(3), the U.S. Trustee, not the Debtor, bears the burden of proof. In re Perotta, 378 B.R. 434 (Bankr. D.N.H. 2007). To prevail, the U.S. Trustee must prove that the Debtor filed his petition in "bad faith" or that the totality of the circumstances of the Debtor's financial situation demonstrates abuse. Here, the U.S. Trustee does not argue that the Debtor filed his petition with any sort of bad faith, but rather that the totality of the Debtor's financial circumstances demonstrates abuse.
The U.S. Trustee's central argument is that the Debtor has the ability to pay creditors under Chapter 13 of the Bankruptcy Code, and therefore his Chapter 7 case is an abuse. Ignoring for the moment the issue of whether the Debtor's Chapter 13 plan would produce any payments to creditors, the U.S. Trustee argues that a debtor's ability to fund such a plan is the primary factor the Court should consider under the totality of the circumstances test. In support, the U.S. Trustee cites In re Lamanna, 153 F.3d 1 (1st Cir. 1998) and In re Krohn, 886 F.2d 123 (6th Cir. 1989). However, both of these cases predate BAPCPA's adoption of the Means Test and presumption of abuse in § 707(b). Following the BAPCPA amendments, courts have struggled with the weight to allocate to a debtor's ability to repay. This Court previously held in In re Nockerts that the ability to pay is a factor under the totality of the circumstances test, but that if it is the only factor asserted, a case should not be dismissed. 357 B.R. 497 (Bankr. E.D. Wis. 2006) (totality of the circumstances suggests that more than one factor must be considered). The court in In re Jensen examined the Court's analysis in Nockerts, and rejected the theory that more than ability to repay must be shown. In re Jensen, ___ B.R. ___, 2008 Bankr. LEXIS 3095 (Bankr. C.D. Cal. Nov. 12, 2008). However, the Jensen court reached the same result (denial of the motion to dismiss) by articulating the theory in a different manner. The court held that the Means Test functions as an initial screen to weed out those Chapter 7 petitions that are most clearly abusive, and that the totality of the circumstances test serves as a backstop to eliminate unusual cases that the Means Test cannot account for. According to Jensen, an example of abuse under the totality of the circumstances test is a debtor who has recently changed jobs, and whose current monthly income bears no resemblance to actual income. However, in Jensen (and in this case), the U.S. Trustee was not requesting that the court estimate a more accurate income figure for the debtor or substitute a more reasonable expense for one taken by the debtor, but rather to eliminate a deduction allowed by the Means Test. This wholesale denial of an expense permitted by the Means Test is not "fine-tuning" to prevent abuse in a case that might otherwise slip through the cracks, but rather a complete disregard of a policy implicit in Means Test. The court explained:
Jensen and Nockerts involved almost the same facts: debtors deducting secured debt payments considered excessive by the U.S. Trustee. This court commented: "To apply the means test, dislike the result, and then examine the debtor's ability to fund a chapter 13 plan under § 707(b)(3), renders the means test "surplusage." In re Nockerts, 357 B.R. at 506. The Jensen court properly limited this concept to the U.S. Trustee's attempt to disallow a deduction expressly allowed by the means test. In re Jensen, 2008 Bankr. LEXIS 3095 at *15-16. Both this court and the Jensen court are careful to analyze whether the allowed deductions were recently incurred or some other manipulation of the Means Test has allowed a wealthy debtor to abuse the provisions of Chapter 7.
Congress has specified that for purposes of determining the presumption of abuse, a debtor's monthly payments on account of secured debt shall not be considered. § 707(b)(2)(A)(iii). Considering such payments under the § 707(b)(3)(B) totality of the circumstances test would render the language in § 707(b)(2) disallowing consideration of those payments superfluous, void, and insignificant.
Jensen, 2008 Bankr. LEXIS 3095 at *15-16. In Jensen, as in this case, the U.S. Trustee sought to reclassify the debtors' secured debt payments as income available to pay creditors. The court determined that the Code expressly permits the deduction of secured debt payments under the Means Test, thereby providing an advantage to secured creditors over unsecured creditors. To ignore the Code's mandate and disallow secured debt expenses allowed by the Means Test would violate Congressional policy. The Jensen court found no other abusive factors in the debtors' case, such as acquiring the secured assets immediately before filing or listing an inaccurate monthly payments, which would have justified dismissal under § 707(b)(3) of the Code.
Here, the U.S. Trustee contends that the Debtor has the ability to fund a Chapter 13 plan by foregoing his retirement contributions and ceasing his payments on the vacant lot. But the Means Test, as Jensen emphasizes, determines whether a petition is abusive with respect to these secured debt expenses, assuming they are accurate and there are no other abusive factors. As this Court recently held in In re Mravik, it should not be considered abuse for a debtor to continue to contribute to a retirement plan when the Code specifically allows a debtor to keep those funds in Chapter 13. 2008 Bankr. LEXIS 3515 (Bankr. E.D. Wis. Dec. 31, 2008) (citing In re Latone, 2008 Bankr. LEXIS 3206 (Bankr. D. Ariz. Oct. 23, 2008) (court did not dismiss case where basis for dismissal under totality of the circumstances was the debtor's 401(k) loan payments, which would be excluded from disposable income under Chapter 13) and In re Mati, 390 B.R. 11 (Bankr. D. Mass. 2008) (debtor's 401(k) contributions, which would be excluded from disposable income under Chapter 13, did not evidence bad faith)). The Debtor here, like the debtor in Mravik, has been making regular retirement contributions for several years. This case also resembles In re Tucker, where the court concluded that the debtor's reasonable contributions to a 401(k) plan while leading a modest lifestyle was not an abuse under the totality of the circumstances. 389 B.R. 535 (Bankr. N.D. Ohio 2008). For these reasons, the Debtor's 401(k) contributions should not be deemed to satisfy the burden of proof necessary to show that this case is abusive under the totality of the circumstances.
However, the U.S. Trustee contends that this case is distinguishable from a case where the only factor is a debtor's 401(k) contributions because the Debtor here makes payments on a secured debt for his vacant lot. The lot, the U.S. Trustee argues, is not necessary to the Debtor's health and welfare, and therefore his ownership of the lot constitutes grounds for a finding of abuse under the totality of the circumstances. Although the Debtor did not purchase the lot immediately before filing for bankruptcy, the U.S. Trustee contends that his payments on the lot contributed to his need to file for bankruptcy. Even assuming this is true, the Bankruptcy Code explicitly allows the Debtor to deduct payments on account of secured debt. 11 U.S.C. § 707(b)(2)(a)(iii). Debtors can deduct secured payments on homes, cars, motorcycles, and even vacation homes. See In re Nockerts, supra; In re Johnson, ___ B.R. ___, 2008 WL 5265740 (Bankr. S.D. Cal. Dec. 8, 2008) (debtors' $6,000 monthly mortgage payment on residence not abusive under the totality of the circumstances; Bankruptcy Code creates priority for secured debts); In re Jensen, supra (debtors' reaffirmation of secured debts on home, motor home and boat not deemed abusive under totality of the circumstances). Although the means test expressly permits debtors to deduct payments on secured debts, courts have dismissed cases under the totality of the circumstances in situations where the debtors make large payments on luxury items if abusive circumstances exist. See, e.g., In re Brenneman, 397 B.R. 866 (Bankr. N.D. Ohio 2008) (debtors' acquisition of 2 new automobiles with secured payments totaling over $1,200 monthly immediately before filing required dismissal under § 707(b)(3)); In re Oot, 368 B.R. 662 (Bankr. N.D. Ohio 2007) (court dismissed case under totality of the circumstances where debtors made over $3,000 monthly mortgage payments on home, and reaffirmed debts for newer luxury vehicles and pop-up camper). But the circumstances of the Debtor's financial situation are distinguishable.
First, the Debtor acquired the vacant lot almost two years before he filed bankruptcy for reasons that are neither irresponsible nor extravagant. He testified that due to his fiancée's visual impairment, he purchased the lot because of its proximity to his fiancée's employer. In several years, they intend to build a ranch house that will not have stairs she will be forced to navigate. Rather than incurring more debt that he cannot afford in order to accomplish this goal, the Debtor testified that his father (a builder) will obtain the construction loan, and the Debtor will sell his duplex to be able to afford the permanent loan on the new house. The Debtor's mortgage payment on the lot is $600, a small sum compared to the much larger payments debtors often make on secured debts — the debtors in Jensen were paying $760 per month on their boat payment alone. The Debtor makes a $1,516 mortgage payment on the duplex, but after subtracting the $695 rental income, the net mortgage payment is $821. The Schedules show a $90 monthly payment on the Debtor's 1996 truck. His total payments on secured debt, while not insignificant, are certainly not excessive. The U.S. Trustee compared the Debtor's vacant lot payment to a mortgage on a vacation home, outfitted with a boat, jet skis, snowmobiles, all terrain vehicles and similar "toys". The comparison fails because the Debtor does not own any of these luxury items; his sole "extravagance" is the vacant lot.
Considering the secured debt payments made by the Debtor, along with his income and lifestyle, the Court does not find that the Debtor's circumstances demonstrate abuse. He earns a modest income, drives an older vehicle and does not appear to make excessive purchases. The Debtor's description of his one-week vacation in Milwaukee as a large expenditure is revealing of the Debtor's spending habits. Moreover, conversion of the Debtor's case to Chapter 13 would result in no payments to unsecured creditors, because he would be entitled to deduct his 401(k) contributions and the mortgage payments on the lot to determine his projected disposable income. Mravik, supra; In re Guzman, 345 B.R. 640 (Bankr. E.D. Wis. 2006) (reasonably necessary expenses "shall be determined" by Form B22C). Therefore, the U.S. Trustee's assertion that the Debtor's ability to fund a Chapter 13 is the primary factor under the totality of the circumstances analysis suggests that the Debtor's case should not be dismissed, since the Debtor would not be required to devote any income to pay unsecured creditors in a Chapter 13.
The circumstances in this case include a $600 per month payment on a vacant lot purchased well in advance of the Debtor's bankruptcy and a contribution to a 401(k) plan that would not be required to be dedicated to creditors as part of the Debtor's Chapter 13 disposable income. Netting the rental income from the duplex mortgage payments results in total secured debt payments of $1,511. There is no evidence that the Debtor has manipulated the means test, purchased luxuries on credit on the eve of bankruptcy, altered his expenses in his Schedules, accrued significant debt prior to the petition, or that his budget is excessive or unreasonable. The modest payments the Debtor makes on the vacant lot, even combined with the Debtor's voluntary contribution to his 401(k) plan, do not demonstrate an abuse under the totality of the circumstances of § 707(b)(3).
IT IS THEREFORE ORDERED: that the U.S. Trustee's Motion to Dismiss under 11 U.S.C. § 707(b)(3) is denied.