§ 707(b) Motion to Dismiss - Special Circumstances

In re Castle, Case No. 06-30266 (Bankr. N.D. Ohio Sept. 11, 2006) (J. Speer). One of the joint debtors received $1,000.00 per month in child support payments. Pursuant to the means test, inclusion of this child support payment as income resulted in excess income of $800.00 per month available for unsecured claimants. However, a determination of the debtor’s “disposable income,” under 11 U.S.C. § 1325(b)(1)(B), is defined by looking at the “current monthly income received by the debtor,” excluding “child support payments, . . . for a dependent child made in accordance with applicable non-bankruptcy law to the extent reasonably necessary to be expended for such child” under 11 U.S.C. § 1325(b)(2). Thus, where a debtor is receiving child support payments, the “means test” under 11 U.S.C. § 707(b)(2)(A)(i) does not yield the same amount that must be paid into a Chapter 13 plan.

In the present case, when deducting the $1,000.00 per month child support payment and calculating the “disposable income” to pay into a Chapter 13 plan, it appeared that the debtors had no funds available to pay unsecured creditors, and consequently, would only be able to propose a zero percent plan. Thus, the debtors argued that the presumption of abuse, which arises under § 707(b)(2)(A) when, even if their case were converted to a Chapter 13 case the amount of money paid to unsecured creditors, if any, would be negligible, constituted a “special circumstance” within the meaning of 11 U.S.C. § 707(b)(2)(B)(i).

While the Court found that the term “special circumstances” is not specifically defined, the Court did find that the examples given of “special circumstances” in the Bankruptcy Code are of two specific qualities: “[a] serious medical condition or call to active duty in the Armed Forces,” and the Court found that the debtors’ proposed “special circumstances” in the present case was not of similar import. The Court reasoned that the two examples in the Code “show[ed] a commonality; they both constitute situations which not only put a strain on a debtor’s household budget, but they arise from circumstances normally beyond the debtor’s control.” Additionally, the Court reasoned that the Code does not prohibit a debtor from submitting a Chapter 13 plan of reorganization having little or no value to unsecured creditors as long as it meets the Code’s other requirements that it be proposed in good faith and meet the best interests of creditors test. Thus, the Court held that the debtor’s circumstance did not qualify as a “special circumstance” justifying an exception to the presumption of abuse of the “means test.”

COMMENT: This case presents an interesting situation where a debtor's “disposable income” is different from the debtor's means test calculation. In this case the “disposable income” was lower than the means test calculation. However, in this commentator's experience, often the figures in schedules I and J will result in a larger “net income” amount than the means test calculation. Usually this is because the IRS guidelines are more generous than what the debtors have budgeted for themselves.

A debtor's counsel faced with these facts will certainly want to argue that for debtors whose current monthly income exceeds the median, the means test “disposable income” figure is the amount that must be paid to unsecured creditors. Counsel for the trustee, however, will likely argue that having left over “net income,” as determined by schedules I and J, constitutes bad faith and will object to confirmation on this ground. One response to this is how can doing what the letter of the law allows you to do be considered bad faith? If the statute only requires a certain amount of funds, those designated as “disposable income,” to be distributed to unsecured creditors, certainly doing all that the statute requires is not bad faith.

This commentator has not seen a case on point with this issue. Any reader is encouraged to post a comment if he or she knows of a case on this issue.

§ 521 Automatic Dismissal

In re Summers, Case No. 06-40982, (Bankr. N.D. Ohio November 21, 2006) (J. Woods). When the debtor filed his voluntary petition under Chapter 13 of the Bankruptcy Code, he failed to simultaneously file schedules of assets and liabilities, a statement of financial affairs, or other information required under 11 U.S.C. § 521(a)(1). The debtor subsequently moved for an extension of time to file the required information, which was granted, however, he failed to file the required information until after the deadline.

The debtor began making payments under his proposed plan of reorganization, and the trustee filed a motion to dismiss or for alternative relief under 11 U.S.C. § 105 or Federal Rule of Bankruptcy Procedure 9024(b)(6) to clarify the effect of the debtor’s failure to file the required documents timely. Like the court in In re Riddle, 344 B.R. 702 (Bankr. S.D. Fla. 2006), the court grappled with the effect of the “automatic” dismissal under 11 U.S.C. § 521(i). The debtor’s counsel recognized that the required information had been untimely filed, however, he argued that, if the court were to enter an order dismissing the case, he would move to vacate that order. The trustee was inclined to acquiesce in a vacation of any dismissal entry, as the debtor had been making plan payments in compliance with the proposed plan, and the trustee explained at the hearing that his filing of the motion to dismiss was merely to prevent the debtor’s full performance under the plan without a subsequent dismissal.

The Court found that no creditor had been prejudiced by the debtor’s late filing of the required information and determined that the language requiring a debtor to file the required information “unless the court orders otherwise,” contained in § 521(a)(1), does not prohibit a court from “ordering otherwise” if the required documents are not filed by the 46th day after the date of the filing of the petition. Accordingly, the Court held that the debtor’s case was not dismissed on the 46th day after the petition was filed. Additionally, hedging its bet, the Court alternatively held that, to the extent that a court of appeals may construe the statute to have automatically dismissed the case on the 46th day, the dismissal was vacated and the case reinstated as if it had not been dismissed, granting the alternative relief requested in the trustee’s motion.

COMMENT: An alternate reason for a court to decline to enter an order automatically dismissing the case, absent a request by a party in interest, can be found in the language of section 521(i)(2), which allows a party in interest to request an order from the court dismissing the case. If the case is truly to be “automatically” dismissed under section 521(i)(1), then there never would be a reason for a party in interest to request such dismissal. Thus, truly automatic dismissals would render the language of section 521(i)(2) superfluous, and, of course, courts are to attempt to interpret statutes such that all language chosen by Congress has meaning. Of course this interpretation makes the term “automatically” superfluous, but this may be preferable to rendering an entire subsection of the Bankruptcy Code obsolete.

Perhaps the best way to reconcile an automatic dismissal with the opportunity for a request by a party in interest for dismissal is the phrase “unless the court orders otherwise,” which Judge Woods found determinative of the issue in this case. Upon the 46th day after the petition is filed, the court must either put on an order dismissing or order otherwise by allowing the debtor more time to file. If the court orders otherwise, a party in interest has the opportunity to request and receive a dismissal.

§ 707(b) Motion to Dismiss - Presumption of Abuse and Totality of Circumstances

In re Simmons, Case No. 05-81355 (Bankr. N.D. Ohio Dec. 11, 2006) (J. Shea-Stonum)[1]. This decision discusses a motion to dismiss, filed by the U.S. Trustee, pursuant to 11 U.S.C. §§ 707(b)(1) and 707(b)(3).

The debtor, a single parent with one child and steady employment as an IT consultant, owned a residence he valued at $275,000.00 on Schedule A, with three corresponding secured claims, scheduled on Schedule D, of $253,591.57. The debtor indicated that his residence would be surrendered.

In his motion to dismiss, the U.S. Trustee’s first contention was that the debtor had not accurately completed the means test form, and that if the means test form were accurately completed, a presumption of abuse would arise under § 707(b)(2). Further, the U.S. Trustee argued that the debtor would not be able to rebut the presumption of abuse and that his case should, therefore, be dismissed pursuant to § 707(b)(1). The U.S. Trustee’s second contention was that, even if no presumption of abuse would arise, the case should be dismissed pursuant to § 707(b)(3) because the debtor had an ability to repay a significant portion of his debt.

Section 707(b)(2)(A)(iii)(I) sets forth one of several amounts that a debtor may deduct from his “current monthly income” and provides as follows:

(iii) The debtor’s average monthly payments on account of secured debt shall be calculated as the sum of -- (I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; . . .;

Divided by 60.

The U.S. Trustee argued that because the debtor indicated in his petition that he would be surrendering his residence that he could not deduct from his “current monthly income” the monthly payments due on the three mortgages.

The court looked at the plain meaning of the statute and determined that § 707(b)(2)(A)(iii)(I) was drafted with reference to amounts “scheduled as contractually due to secured creditors.” The court found that this argument ignored the unconditional manner in which § 707(b)(2)(A)(iii)(I) was drafted and found that the Trustee’s version read into that statutory provision a subjective, post-petition element that Congress did not include. The court reasoned that filing a petition in bankruptcy does not eliminate a debtor’s liability for debts due as of the date of filing, and a debtor will remain liable on such debts until, generally, a discharge is granted. Likewise, the court reasoned that a debtor’s liability is also not eliminated upon the surrender of the collateral that serves as security for a debt. So reasoning, the court concluded that had Congress intended in § 707(b)(2)(A)(iii)(I) to limit which secured debts could be deducted from a debtor’s “current monthly income,” it could have qualified the language used as it did in subsection (II) at that same statutory provision, which permits a deduction of “additional payments due to secured creditors” only if such payments are for certain collateral that is “necessary for the support of the debtor and the debtor’s dependents.” Therefore, the court concluded that because a debtor’s contractual liability is not eliminated upon the filing of a bankruptcy petition, Congress’s use of the words “scheduled as contractually due” suggests that, for purposes of § 707(b)(2)(A)(iii)(I), a debtor may deduct from his “current monthly income” the total of all payments that are, as of the time of the filing, due in each of the 60 months following the petition date on any secured debt that is rightfully listed on Schedule D, regardless of whether the debtor will remain liable on such debt in the future.

The U.S. Trustee further argued that the debtor’s stated intention to surrender his residence should preclude him from deducting mortgage payments due on that property from his “current monthly income.” The court found that this argument ignored the fact that the surrender of property which acts as security for a debt does not eliminate a debtor’s contractual obligation on the underlying debt, nor does the argument recognize the fact that a debtor who states an intention to surrender property may ultimately be able to negotiate an affordable reaffirmation agreement with a secured creditor so as to retain the collateral that acts as security for the debt or obtain funds needed to redeem the property pursuant to 11 U.S.C. § 722.

In furtherance of its side, the U.S. Trustee directed the court’s attention to line 35 of the means test form, which permits deductions of “the actual monthly expenses that [debtor] will continue to pay for the reasonable and necessary care and support of an elderly, chronically ill, or disabled member of [debtor’s] household or member of [debtor’s] immediate family who is unable to pay for such expense.” The court found that while it is true that some portions of the means test form permit a debtor to make deductions for only actual expenses that the debtor will continue to have in the future, § 707(b)(2)(A)(iii)(II) is simply not one of those sections, and the court refused to read into that statutory provision a forward looking element that Congress did not include.

Additionally, the U.S. Trustee took issue with the $235.00 deduction that the debtor had claimed in excess housing utility costs because the debtor failed to demonstrate that the additional amount was reasonable and necessary. Section 707(b)(2)(A)(ii)(B) sets forth another amount that a debtor may deduct from his “current monthly income” and provides as follows:

(ii)(B) In addition, the debtor’s monthly expenses may include an allowance for housing and utilities, in excess of the allowance specified by the Local Standards for housing and utilities issued by the Internal Revenue Service, based on the actual expenses for home energy costs if the debtor provides documentation of such actual expenses and demonstrates that such actual expenses are reasonable and necessary. In support of his ‘excessive’ expenses, the debtor attached to his response to the motion to dismiss, a copy of his February, 2006 gas bill and requested that the court ‘take judicial notice from the auditor’s card attached to the debtor’s Schedule A that the size of the debtor’s residence is 4,483 total square fee and the house was built in the year 1902, prior to the commencement of the common practice of installation of insulation in dwellings.’

The U.S. Trustee argued that the debtor should not be allowed to deduct any excess housing and utility costs because of his stated intention to surrender the residence. As with the subsection discussed above, the court found that subsection (ii)(B) was not drafted to include a forward looking element. Instead, a debtor is permitted to deduct “excessive” housing and utility expenses if, as of the filing date, (1) such expenses exist; (2) such expenses are reasonable and necessary; and (3) the debtor provides documentation of such actual expenses.

Next, the U.S. Trustee argued that even if the debtor had accurately completed the means test form so that a presumption of abuse did not arise, the case should still be dismissed pursuant to § 707(b)(3), which sets forth the following:

(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 a presumption in subparagraph (A)(i) that 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 reduction as sought by the debtor) of the debtor’s financial situation demonstrates abuse.

The U.S. Trustee argued that the debtor’s ability to repay a significant portion of his unsecured debt, coupled with the fact that the debtor appeared to have stable employment and one dependent, demonstrated that the totality of the circumstances in the case warranted a dismissal under § 707(b)(3). To support the argument, the United States Trustee cited to pre-BAPCPA cases interpreting the meaning of “substantial abuse.” In response, the debtor contended that the enactment of the means test contained in § 707(b)(2) rendered all the judicially-created pre-BAPCPA standards moot and that when a presumption of abuse does not arise pursuant to § 707(b)(2), a case can be dismissed pursuant to § 707(b)(3) only upon a “strong showing” of debtor dishonesty and debtor actions that are manifestly unreasonable under the debtor’s circumstances.

The court examined the few reported cases with regard to whether a debtor’s ability to repay a portion of his debts can be considered under the § 707(b)(3) totality of the circumstances test if, pursuant to the means test form, that debtor has “current monthly income” that is equal to or below the applicable state median. In doing so, the court found instructive Congress’ use in § 707(b)(3) of the phrase “totality of the circumstances.” Prior to BAPCPA’s addition of subsection (b)(3), courts could consider whether to dismiss a Chapter 7 case only under subsection (b)(1) and only if the granting of a Chapter 7 discharge would be a “substantial abuse,” and because Congress did not define the term “substantial abuse,” courts were left to determine its meaning and did so by looking at what they consistently termed the “totality of the circumstances” surrounding the debtor’s case. In considering what factors should make up this “totality of the circumstances” test, the majority of cases held that it included the debtor’s ability to pay his debts. Given the magnitude of pre-BAPCPA cases that considered a debtor’s ability to pay within the context of the “totality of the circumstances,” the court agreed that “[i]t would be counterintuitive to construe the same phrase, as used in BAPCPA, to exclude a consideration of the debtor’s ability to pay.” However, because the debtor had not presented any evidence regarding the U.S. Trustee’s challenge under § 707(b)(3) at the hearing on the matter, the court, by separate order, scheduled an evidentiary hearing on this issue.


Comment:

Whether the ability to pay should be considered under section 707(b)(3) is an issue that is likely to remain in contention as the two arguments fleshed out in this opinion both have merit. The argument not followed by Judge Shea-Stonum states that the means test sets forth the Congressional standard of what constitutes an “ability to repay debts” and for courts to substitute their own standards for when a debtor can pay would render the means test superfluous. This position makes the most sense to this author. For Congress to set forth an extremely detailed outline of when a debtor shall be presumed to be able to pay, but then intend to allow a bankruptcy court to conduct its own analysis independent of pages of statutory text by using the phrase “totality of the circumstances” strains the meaning of section 707(b)(3) beyond what the text will allow. One theme of BAPCPA is to limit the discretion, for better or worse, of bankruptcy judges. Clearly, one area in which Congress wanted this discretion limited is in the 707(b) substantial abuse context. It is unlikely that Congress would have left so large a loophole for bankruptcy judges to substitute their own standard of a debtor's ability to pay for Congress’ heavily detailed standard.

As for whether a debtor can deduct from his income mortgage payments on a residence that he intends to surrender, Judge Shea-Stonum’s decision based on the language of section 707(b)(2)(A)(iii)(I) is compelling. This section may have been poorly drafted as the import of most means test deductions from income seem to be directed at determining what a debtor would be able to pay into a Chapter 13 plan. If the debtor were to surrender the collateral, full mortgage payments would no longer be required and the funds available to unsecured creditors would be greater. However, the mandate to interpret a statute according to its plain meaning does not allow a bankruptcy court to make such an interpretation.


[1] The decision discussed here can be found by reviewing the docket of this case on PACER. It has been removed from the Court’s website of unreported decisions.