Case No. 15–27642–B–7
Mikalah R. Liviakis, Gold River, CA, for Debtor(s).
Mikalah R. Liviakis, Gold River, CA, for Debtor(s).
MEMORANDUM DECISION ON MOTION OF THE UNITED STATES TRUSTEE TO DISMISS CASE PURSUANT TO 11 U.S.C. §§ 707(b) (1) AND 707(b) (3) (B)
CHRISTOPHER D. JAIME, UNITED STATES BANKRUPTCY JUDGE
Presently before the court is a motion by the United States trustee to dismiss this chapter 7 case pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(3)(B). Debtor Angela Denise Ferreira has opposed the motion. The United States trustee replied to the debtor's opposition.
Section 707(b)(1) states, in relevant part:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
Section 707(b)(3)(B) states, in relevant part:
(3) 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 paragraph (2)(A)(i) does not arise or is rebutted, the court shall consider—
(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.
The court has reviewed the motion, opposition, reply, and all related declarations and exhibits. Pursuant to Federal Rule of Evidence 201, the court takes judicial notice of the docket in the above-captioned chapter 7 case and the docket in the debtor's prior chapter 13 case filed in this court as case no 15–24131 on May 21, 2015, and dismissed on September 27, 2015. The court also treats the debtor's letter dated January 4, 2016, Exhibit 3 to the United States trustee's motion, as an admission by the debtor under Federal Rule of Evidence 801(d)(2).
A hearing on the motion was held on February 23, 2016. Appearances were noted on the record. The court heard and considered the statements and arguments of counsel made during the hearing. This memorandum decision constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a) made applicable by Federal Rules of Bankruptcy Procedure 7052 and 9014. For the reasons explained below, the United States trustee's motion will be GRANTED.
Jurisdiction and Venue
Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. This matter is a core proceeding that a bankruptcy judge may hear and determine. 28 U.S.C. §§ 157(b)(2)(A) and (O). To the extent it may ever be determined to be a matter that a bankruptcy judge may not hear and determine without consent, the parties nevertheless consent to such determination by a bankruptcy judge. 28 U.S.C. § 157(c)(2). Venue is proper under 28 U.S.C. § 1409.
The debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on September 30, 2015. The debtor also filed the required Schedules and Statement of Financial Affairs with her petition. The debtor's petition states that her debts are primarily business debts.
The debtor's Schedules list total debt of $165,127: Schedule D lists a $38,496 loan secured by the debtor's 2013 Acura MDX; Schedule E lists two tax claims totaling $32,500; and Schedule F lists $94,129 in general unsecured claims of which $53,123 are student loans the debtor incurred to attend nursing school, leaving a remaining non-student loan balance of $41,006.
There is no dispute that the debtor's Acura loan ($38,496) and the non-student loan general unsecured claims ($41,006) are consumer debts. Undisputed consumer debts thus total $79,502 which translates to 48.14% of total debt.
The present dispute concerns the proper classification of the debtor's student loan debt of $53,123. The United States trustee asserts the student loan debt is—in whole or at least 20% attributed to child care and travel expense—consumer debt. The debtor maintains her student loan debt is non-consumer or business debt. If the United States trustee is correct, the student loan debt plus the other undisputed consumer debt will exceed 50% of the total debt which means the debts in this case are "primarily consumer debts." Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th Cir.1988) ("Thus, when ‘the most part’—i.e., more than half—of the dollar amount owed is consumer debt, the statutory threshold [of § 707(b) ] is passed."). If the debtor is correct, the United States trustee will have failed to satisfy its burden of demonstrating the debts in this case are "primarily consumer debts" because consumer debt will remain below the 50% threshold, in which case the motion to dismiss must be denied.
The debtor did not dispute the relevant facts recited by the United States trustee in her opposition. See LBR 9014–1(f)(1)(B) ("Failure to file the separate statement [of disputed material factual issues] shall be construed as consent to resolution of the motion and all disputed material factual issues pursuant to Fed.R.Civ.P. 43(c)."). And the evidentiary record closed when the reply was filed. See LBR 9014–1(f)(1)(C).
The debtor incurred the $53,123 in student loans listed in her Schedules to pay for nursing school. According to the debtor, she incurred the student loans to "get an education" in the nursing profession and avail herself of additional employment and business opportunities. The debtor borrowed the maximum amount of $10,000 per year and those funds were paid directly to the debtor and not an educational institution.
The debtor was unemployed while she attended nursing school. Debtor's counsel confirmed this on the record during the hearing held on February 23, 2016. Because she was unemployed, the debtor states she received food stamps and shared a bedroom with her grandmother while she attended nursing school.
The debtor is unable to document how she spent the student loan funds. She estimates that she used $3,000 per semester (or $6,000 per year) for tuition and $1,000 per semester (or $2,000 per year) for books and supplies. Since the debtor was unemployed while she was enrolled in nursing school, and consistent with statements in the debtor's letter of January 4, 2016, the court can infer that the remainder of the student loan funds—$2,000 per year—were used for travel and child care expenses. These calculations create a ratio whereby 80% of the student loans—or $42,498.40—were used for direct education expenses and 20%—or $10,624.60—were used for travel and child care expenses.
The debtor is now employed as a nurse with the University of California, Davis. According to the debtor's pay advices, the debtor's gross monthly income is $12,335.74 which is a little more than $148,000 annually. The debtor's monthly "take home" pay is $6,251.83.
The debtor drives a 2013 Acura MDX for which she pays $942 per month, plus an additional $485 per month for insurance and operating expenses. The debtor makes voluntary contributions of $969.32 per month to a retirement plan. She pays $450 monthly towards student loans. The debtor also spends $375 per month on telephone, internet, and cable. And she spends $280 per month on entertainment and recreation. The debtor also claims a $100 per month employment education expense and a $150 per month pet food and care expense in this case that were not claimed in the chapter 13 Schedule J filed four months earlier.
The debtor filed a chapter 13 petition on May 21, 2015, case no. 15–24131, and with her petition she filed a proposed chapter 13 plan. Citing Parks v. Drummond (In re Parks), 475 B.R. 703 (9th Cir. BAP 2012), on June 30, 2015, the chapter 13 trustee objected to confirmation of the debtor's plan on the basis that "[t]he debtors' [sic] voluntary post-petition retirement contributions [of $801 per month] are disposable income under 11 U.S.C. § 547(b)(7) and therefore such income must be applied to make plan payments under 11 U.S.C. § 1325(b)(1)." Stating in civil minutes filed on July 21, 2015, that it intended to follow Parks the court sustained the chapter 13 trustee's objection and denied confirmation of the debtor's plan in a civil minute order entered on July 24, 2015. Two months later, on September 25, 2015, the debtor filed an ex-parte application to dismiss her chapter 13 case which the court granted in an order filed on September 27, 2015. Three days after the debtor's chapter 13 case was dismissed, the debtor filed this chapter 7 case on September 30, 2015. She increased voluntary contributions to her retirement plan from $801 claimed in her prior chapter 13 case to $969.32 now claimed in this case.
This is a $45 per month increase from the $330 per month the debtor claimed in the chapter 13 Schedule J she filed four months earlier.
This is a $98 per month increase from the $182 per month the debtor claimed in the chapter 13 Schedule J she filed four months earlier.
The United States trustee has calculated, and the debtor did not dispute, that, at a minimum, by eliminating or reducing the Acura payment and voluntary retirement contributions, and by paying unsecured student loan debt pro-rata with all other unsecured claims, the debtor would have net monthly income of $769.55. Elimination of or reductions to the internet, phone, and cable expense and the monthly discretionary spending for entertainment and recreation would also increase the debtor's net monthly income.
There are two prerequisites to dismissal under § 707(b)(1) : (i) the debtor has primarily consumer debt; and (ii) the bankruptcy court finds that granting the debtor's petition would be an abuse of chapter 7. Price v. U.S. Trustee (In re Price), 353 F.3d 1135, 1138 (9th Cir.2004) (citation omitted). The Bankruptcy Code defines consumer debt as "debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. § 101(8). The Ninth Circuit "look[s] to the purpose of the debt in determining whether it falls within the statutory definition." Kelly, 841 F.2d at 913 (citation omitted); see also Price, 353 F.3d at 1139 ; Stine v. Flynn (In re Stine), 254 B.R. 244, 249 (9th Cir. BAP 2000) ("It is the purpose for which the debt was incurred that determines whether it is a consumer debt.") (citation omitted). "Debt incurred for business ventures or other profit-seeking activities is plainly not consumer debt for purposes of section 707(b)." Kelly, 841 F.2d at 913.
The moving party bears the burden of proof to support a § 707(b)(1) motion by a preponderance of the evidence. Aspen Skiing Company v. Cherrett (In re Cherrett), 523 B.R. 660, 668 (9th Cir. BAP 2014) (citation omitted). The debtor, however, bears the burden of demonstrating a profit motive in order to establish that a debt is nonconsumer or a business debt. In re Palmer, 542 B.R. 289, 297 (Bankr.D.Colo.2015) ; see also In re Liegey, 2009 WL 3817902 at *4 (Bankr.M.D.Pa.2009).
Primarily Consumer Debts
The United States trustee appears to initially argue that student loans are or should be per se consumer debt because education is a benefit inherently personal, that is, it is instilled in a person's mind and can never be separated from the person. See In re Stewart, 201 B.R. 996, 1004 (Bankr.N.D.Okla.1996) ("Stewart I"); see also In re Millikan, 2007 WL 6260855 at *5 (Bankr.S.D.Ind.2007). The United States trustee cites no case in which a court has held that student loans are per se consumer debt and conceded during the hearing none were found. In that regard, the court agrees with In re Rucker, 454 B.R. 554 (Bankr.M.D.Ga.2011), to the extent that court declined to adopt "a per se rule to characterize student loan debts as consumer debt or non-consumer debt under § 707(b)." Therefore, the court declines to adopt a per se rule that holds all student loans are always consumer debt.The court also questions whether it is appropriate to apportion a debt into consumer and non-consumer components and then count the consumer component under § 707(b)(1). The United States trustee has not cited a published opinion or unpublished decision in the Ninth Circuit in which an individual debt was apportioned and counted in that manner. On the contrary, at least one court in the Ninth Circuit has held this approach is improper. See In Hopkins v. Marble (In re Kempkers), 2012 WL 4953076 at *2 & n.5 (Bankr.D.Idaho 2012).
The "Stewart" line of opinions came close. In Stewart I, the bankruptcy court announced that "student loans in general should be treated as ‘consumer debt,’ at least absent unusual facts or factors [.]" Stewart I, 201 B.R. at 1005. The Tenth Circuit Bankruptcy Appellate Panel affirmed, but declined to adopt a per se rule. Stewart v. United States Trustee (In re Stewart), 215 B.R. 456, 465 (10th Cir. BAP 1997) ("Stewart II") The Tenth Circuit Court of Appeals affirmed and was also skeptical of per se rule. Stewart v. United States Trustee (In re Stewart), 175 F.3d 796, 806 (10th Cir.1999) ("Stewart III").
In Kempkers, the court examined the meaning of "consumer debt" under § 101(8) in the context of § 547(c)(9). Recognizing that it was instructed by the Ninth Circuit to determine a debt's primary purpose, the court stated:
[T]he language of § 101(8) is clear that a[sic] individual debt is either entirely a consumer debt or it is not. That provision requires that a debt be categorized as a ‘consumer debt’ if the debt was incurred ‘primarily for a personal, family, or household purpose.’ (emphasis added). Put another way, dividing a single debt into both consumer debt and non-consumer debt is inappropriate; the total amount of a debt will be counted as consumer debt, even if a portion of it was incurred by the debtor for a business purpose.
Id. at *2 (emphasis in original).
The court also noted that its conclusion was consistent with a leading treatise discussing the apportionment issue. See Id. at n.5 (citing 2 COLLIER ON BANKRUPTCY ¶ 101.08 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) ("If a debt is incurred partly for business purposes and partly for personal, family[,] or household purposes, the term ‘primarily’ in the definition suggests that whether the debt is a ‘consumer debt’ should depend upon which purpose predominates ... a debt should be fully classified as a consumer debt or business debt according to its primary purpose."). Cherrett appears to support this conclusion as well in that it cited the 15th edition of Collier for a nearly identical proposition. Cherrett, 523 B.R. at 670.
The court in Kempkers did, however, recognize that the Fifth Circuit has taken a different approach to classifying debt. Id. at n.5. In In the Matter of Booth, 858 F.2d 1051 (5th Cir.1988), the Fifth Circuit counted a portion of a loan secured by a mortgage as consumer debt but attributed the balance of the same loan to non-consumer debt because part of the loan had been used by the debtor in a business venture. Id. at 1055. Apparently, the Tenth Circuit does the same thing. See Stewart III, 175 F.3d at 806–807. And so has at least one lower court. See In re McDowell, 2013 WL 587312 at *7 and n.5 (Bankr.S.D.Tex.2013).
In this case, the court need not decide whether the debtor's student loan debt may or should be apportioned into consumer and non-consumer or business components. The court need not make that determination because the debtor has failed to satisfy her burden of demonstrating that she incurred any of the student loan debt with the necessary profit motive. Put another way, the debtor has failed to carry her burden of proof on the question of whether her student loan debt is non-consumer or business debt and, thereby, excluded from the definition of consumer debt under § 101(8) for purposes of § 707(b)(1).
The profit motive element in the consumer debt analysis is interpreted narrowly. In Cherrett, supra, the BAP looked to the primary purpose of the debtor's home loan. Upon finding the home loan was related to the debtor's employment, the BAP concluded that the home loan was not a consumer debt for purposes of § 707(b)(1). The BAP noted that the debtor hoped to realize a profit from the house and that the home loan was an integral part of his employment compensation package. In reaching its conclusion, the BAP stated: "[C]ourts generally ascribe a business purpose, rather than a personal, family or household purpose to debts which are incurred ‘with an eye toward profit’ and which are ‘motivated for ongoing business requirements." Id. at 669 (emphasis added, internal quotations and citations omitted).
Although Cherrett's "ongoing" business requirement arose in the context of a home loan, the court in Palmer, supra, adopted that narrow interpretation of the profit motive and applied it to a student loan. The court stated:
[I]n order to show a student loan was incurred with a profit motive, the debtor must demonstrate a tangible benefit to an existing business, or show some requirement for advancement or greater compensation in a current job or organization. The goal must be more than a hope or an aspiration that the education funded, in whole or in part, by student loans will necessarily lead to a better life through more income or profit. More than hindsight representations are needed to meet this burden.
Palmer, 542 B.R. at 297 (emphasis added).
The court in Palmer cited four rationales for its decision, and to support its adoption of Cherrett's narrow interpretation of the profit motive. Quoted at length because of their significance, those are as follows:
In determining a standard to use when dealing with an intangible asset such as a student loan, this Court finds that the following concepts are important:
1) The Tenth Circuit's reference to profit motive should be interpreted narrowly, in the context of whether student loans are consumer or non-consumer for the purposes of § 707(b). This is in keeping with the intent of the changes made to the Code in 2005. The so-called ‘means test’ ushered in by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (‘BAPCPA’) is based on the fundamental notion that ‘those who have the means to repay their creditors in whole or in part should do so.’ In re Millikan, 2007 WL 6260855 at *6. The purpose of the means test is to ‘weed out chapter 7 debtors who are capable of funding a chapter 13 case.’ In re Fredman, 471 B.R. 540, 542 (Bankr.S.D.Ill.2012). The means test and the provisions of § 707(b) apply only to an individual chapter 7 debtor ‘whose debts are primarily consumer debts.’ In re Peterson, 524 B.R. 808, 811 (Bankr.S.D.Ind.2015). The term ‘consumer’ should be interpreted in the context of the Act in which it appears.
2) In Stewart II, the BAP noted there may be cases ‘in which the debtor can demonstrate that the student loan was incurred purely or primarily as a business investment, albeit an investment in herself or himself, much like a loan incurred for a new business.’ 215 B.R. at 465 (emphasis added). ‘May’ is a word of limitation and means not applicable to all situations. Trying to determine, on a case-by-case basis, which set of facts equates to a business investment, rather than a personal investment, will be problematic without a narrow, objective standard to apply.
3) If the profit motive is not interpreted narrowly, it can be applied to virtually all student loans. It becomes an exception that swallows the rule. This is aptly pointed out in the Millikan case, where the court expressed concern with allowing a debtor, in hindsight, to recast the motive for incurring the debt. In
many cases, education is initially undertaken for self-improvement purposes; the fact the education also may lead to increased earning potential is often a fortunate side benefit. This is why courts have struggled with applying the profit motive test to student loans: people go to school for many different reasons, and evaluating a given student loan debt according to the student's motivation can lead to disparate or unfair results. A student loan incurred by an altruistic law student seeking to work for a non-profit should not, in equity, be viewed or treated differently than a loan incurred by a career-conscious law student seeking to work for a large, private law firm.
4) A narrow standard, tied to an existing business, or to some requirement for advancement in a current job or organization, is necessary to avoid a student's aspirational goal, or a wished-for ‘hope and dream’ being the focus, as opposed to the advancement of a tangible opportunity. See, e.g., Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 204, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) (analyzing ‘vague hopes or possibilities' in the context of plan confirmation, and holding the ‘promise of future services is intangible, inalienable, and, in all likelihood, unenforceable,’ having ‘no place in the asset column of the balance sheet.’).
Palmer, 542 B.R. at 296–297 (internal footnotes omitted, emphasis in original).
The court finds Palmer and its rationales for a narrow interpretation of the profit motive tied to an existing business purposes or an advancement in a current job or organization persuasive. Palmer is rooted in, and it builds upon, Cherrett. In that respect, Palmer is consistent with authority from within the Ninth Circuit. A narrow standard that looks to an "existing" business or "current" employment also places debtors on equal footing. And, in this case, it eliminates the concern expressed by the debtor that, as a single parent, she is treated differently than an unmarried debtor with no dependents.
Turning to this case, the court is not persuaded that the debtor has met her burden of demonstrating that she incurred her student loans for an existing business or for current job advancement. The debtor was unemployed when she attended nursing school and she enrolled in the nursing program to "get" a nursing degree. Thus, by the debtor's own admission, there was no ongoing business related to nursing and it was not necessary for her to attend nursing school to advance in an existing job.
If anything, the debtor's evidence negates that she incurred her student loans for a profit motive and supports a conclusion that she pursued a nursing degree for the personal purpose of benefitting herself and her lifestyle. Whereas before the debtor obtained her nursing degree she required public assistance and shared a single bedroom, as a direct result of her student loans the debtor now makes in excess of $148,000 per year. The debtor drives a luxury vehicle for which she is able to pay almost one-thousand five-hundred dollars per month (including payment, insurance, and operating expenses). She is able to make voluntary contributions just short of one thousand dollars per month to her retirement plan. She spends almost four hundred dollars a month on telephone, internet, and cable. And she can afford nearly three hundred dollars a month for discretionary entertainment and recreational spending.
After reviewing the entire record in this case, the debtor has not carried her burden of demonstrating that her student loans were incurred for a profit motive. Therefore, the student loan debt that the debtor incurred to pursue her nursing degree is personal in nature and a consumer debt under § 101(8) for purposes of §§ 707(b)(1) and 707(b)(3)(B).
The United States trustee presented substantial evidence of abuse in that the United State trustee has sufficiently demonstrated that by modifying and/or eliminating certain expenses the debtor would have approximately $800 per month with which to repay creditors. And that's a conservative estimate. As noted above, the debtor did not dispute the United States trustee's calculations or the facts or evidence upon which those calculations are based in her opposition. Therefore, as to this part of the §§ 707(b)(1) and 707(b)(3)(B) analysis, the court concludes that the United States trustee has carried its burden of showing abuse under the totality of the circumstances. Kelly, 841 F.2d at 915 ("But a finding that a debtor is able to pay his debts, standing alone, supports a conclusion of substantial abuse.").
The debtor has failed to carry her burden of proving that she incurred her student loans with a profit motive. That permits the court to treat the entirety of the debtor's student loan debt as consumer debt. And when the amount of student loan debt of $53,123 is added to the $79,502 in other undisputed consumer debt, the debtor's total consumer debt is $132,625 which is over 80% of the total debt of $165,127. That, of course, is well over the 50% threshold required under§ 707(b)(1) to make the debts in this case "primarily consumer debts."
The court also finds that the United States trustee has carried its burden of demonstrating abuse under §§ 707(b)(1) and 707(b)(3)(B), and that granting relief in this case would be an abuse of chapter 7. The debtor did not dispute that with minor adjustments to her expenses and spending, she has the ability to repay her creditors.
Therefore, the United States trustee's motion to dismiss this chapter 7 case under §§ 707(b)(1) and 707(b)(3)(B) will be GRANTED and within fourteen days of the date of the entry of the order entered on this memorandum decision the debtor shall convert her case to one under chapter 13 of the Bankruptcy Code, failing which this chapter 7 case shall be dismissed.
A separate order will issue.