In re Decker

535 B.R. 828

In re: David M. Decker, and Marilyn L. Decker, Debtors.

Case No. A14–00065–GS

United States Bankruptcy Court, D. Alaska.

Signed March 31, 2015

Robert P. Crowther, Anchorage, AK, for Debtors.

MEMORANDUM ON UNITED STATES TRUSTEE'S MOTION TO CONVERT CASE TO CHAPTER 11

GARY SPRAKER, United States Bankruptcy Judge

The United States Trustee (“UST”) moves to convert this chapter 7 bankruptcy proceeding to chapter 11 pursuant to 11 U.S.C. § 706(b).¹ The UST argues that debtors David and Marilyn Decker (“Debtors”) should be required to use their monthly net income to pay their creditors within a reorganization. Debtors oppose the motion. They contend that the UST impermissibly seeks to extend the “means test” found in § 707(b) to compel conversion of individual chapter 7 debtors under § 706(b). They argue that since Congress has excepted debtors whose debts are not primarily consumer debts, such as themselves, from the means test, the UST may not circumvent that statutory limitation under the discretionary conversion provisions found in § 706(b). Debtors assert they are instead entitled to remain in chapter 7 to address their significant tax debt and other financial problems. Having carefully reviewed the evidence and arguments presented, the court will exercise its discretion to convert this case to chapter 11.

CASE BACKGROUND

A. History of Debtors' Financial Problems.

Debtors filed their chapter 7 petition on March 12, 2014, to address their financial problems. They trace those problems back to 2009 when their oldest daughter required medical treatment for severe head and neck pain. Unfortunately, their daughter needed considerable medical treatment that left her addicted to prescription pain medication. When her access to prescription medication ended, she turned to illegal drugs. Mrs. Decker testified that since her daughter's initial medical problems began, much of Debtors' time and finances have been devoted to her medical problems, and, subsequently, to her recovery from addiction. Debtors have paid for this daughter's living expenses and rehabilitation. Additionally, Debtors say that their daughter stole substantial amounts from them to finance her addiction, further exacerbating their financial troubles. Mrs. Decker testified that her daughter, who was 26 years old at the commencement of the case, is presently receiving treatment in Southern California. Although she is currently doing well, Mrs. Decker explained that her daughter's recovery is a slow, daily process that will take time to complete. Consequently, Debtors plan to continue to provide financial support for their daughter postpetition.²

The financial drain of assisting their daughter is only half of Debtors' financial story. Indeed, their troubles appear to have started several years earlier. Since 2005, the Deckers have had ongoing tax issues with the Internal Revenue Service (“IRS”), although the problem may not have manifested itself until 2007 when the IRS assessed them with deficiencies for tax years 2005 and 2006.³ At the evidentiary hearing, Mrs. Decker readily admitted that their tax problems were a major reason for their bankruptcy. The evidence confirms this fact. The IRS has filed Proof of Claim No. 2–1 for taxes, interest, and penalties, totaling $204,189.84. The oldest tax liabilities were assessed on January 1, 2007, for Mrs. Decker's outstanding interest owed on unpaid income taxes for tax year 2005. According to its proof of claim, the IRS has annually issued a tax assessment for one, or both, of the Deckers from 2007 through 2012.

Mrs. Decker testified that their tax problems were the result of a failure to withhold sufficient funds from substantial retirement payments she receives. However, she stated that they had always filed their tax returns. When asked why they had not corrected their tax problems sooner, given that they have continued for almost a decade, Mrs. Decker offered only that things had fallen through the cracks. She said that they were living in California and her husband had been in school. During that time, she was still working as a teacher spending as much as 12 to 14 hours on the job and commuting 50 miles each way to work. She also pointed out that they had sought help with their tax problems from a tax relief organization, although when remains unclear. According to Mrs. Decker, the agency proved to be a fraud and closed after they had paid it about $4,000.00.

B. The Bankruptcy.

In their petition, the Deckers identified their debts as primarily business debts. Their schedules reflect total liabilities of $425,847.49. Of this amount, $22,002.00 is attributable to secured claims for vehicle loans, although Debtors also list the IRS as a secured creditor for an uncertain amount. Debtors list $102,283.79 in priority tax debt to the IRS. The scheduled unsecured, nonpriority debts total $285,057.06. Of this sum, $81,569.69 is owed to the IRS for additional taxes and interest, $15,683.14 is owed to the State of California for “California income tax liabilities,” and $16,407.22 is owed to the State of Alaska, Public Advocacy for “[a]ny and all claims” in the amount of $16,407.22.⁴

For purposes of the Bankruptcy Code, the IRS tax debt is categorized as non-consumer debt.⁵ The debts owed to the State of California and to the Alaska Public Advocacy office also appear to be non-consumer debts. These three creditors hold the majority of the Deckers' debts. For this reason, Debtors do not have primarily consumer debts, and are excepted from the means test analysis required under § 707(b). The UST does not challenge the characterization of Debtors' debts as primarily non-consumer in nature.

Debtors' Schedules reflect that they own no real property, but lease a house for $2,900.00 per month from a third party. Their personal property, valued at $35,275.98, is either encumbered by liens or exempt.⁶

C. Monthly Income and Expenses.

Both debtors are in their early 60's. Mr. Decker is employed as a physician's assistant with Conoco Phillips. He earns $13,587.09 in monthly gross wages. Schedule I reflects monthly payroll deductions for taxes and insurance, as well as voluntary contributions of $1,632.00 to a retirement plan, presumably with Conoco Phillips, and $1,205.04 to repay a prepetition retirement loan. Mrs. Decker is retired and receives monthly payments from two separate pension plans totaling roughly $5,000.00. Although Mr. Decker continues to work, he receives monthly pension payments of roughly $5,000.00 as well. Together, they currently receive $10,298.68 per month from pensions. Debtors, therefore, have monthly gross income of $23,855.77, which is reduced to $17,452.43 by mandatory and voluntary payroll deductions.

Debtors claim $17,582.32 in monthly expenses, leaving them with a negative $129.89 per month in net income. Most significantly, they claim $3,743.00 in vehicle payments per month. Additionally, they include $1,000.00 per month for payments on “non-dischargeable tax obligations,” and $3,525.00 in payments to support their adult children and Mr. Decker's mother, who lives with them.⁷

The UST challenges most of the deductions and expenses discussed above, and several others, as inaccurate or inappropriate. During the hearing, Mrs. Decker conceded that several expenses were too high, or inaccurate. Specifically, she agreed that the monthly health insurance payments in the amount of $600.00 could be deleted, because those insurance premiums were already reflected as a deduction from Mr. Decker's monthly wages. Additionally, the monthly expense for support of Mr. Decker's mother was not accurate. In reality, his mother contributes $500.00 per month towards Debtors' household expenses.⁸ The $500.00 expense for her support should actually be counted as income.

The UST also challenged Mr. Decker's voluntary retirement contribution, the monthly retirement loan repayment, and the monthly payment for nondischargeable tax obligations. Debtors have not provided any specifics as to these items. While their Schedule B discloses “Mr. Decker's rights in the retirement plan of the Conoco Phillips [sic],” the nature of that retirement interest is not defined, and no value is provided. Similarly, no evidence was presented regarding the $1,000.00 budgeted for payment of the tax obligation. The court is left at a loss as to whether such payments were actually being made, if they were made pursuant to any agreement, and, if so, the terms of such agreement.

Mrs. Decker further admitted that their scheduled vehicle expenses were overstated. Debtors' Schedule J includes monthly expenses totaling $3,743.00 for vehicles. This amount is comprised of $1,643.00 for “[c]ar payments for vehicle 1,” and a separate entry of $2,100.00 for “[t]otal payments, all vehicles.” Under examination by her counsel during the hearing, Mrs. Decker conceded that they had double counted the car payments. She agreed that the $2,100.00 amount should be deleted.

Despite this concession, the UST maintains that Debtors still overstate their monthly car payments. Four vehicles are listed on Schedule B: a 2006 Subaru Baja, a 2006 Subaru Impreza, a 2010 Chevrolet HRR, and a 2005 Pontiac Grand Prix. Debtors listed secured debts against each of these vehicles. Mrs. Decker drives the Chevrolet HHR, and testified that she pays about $500.00 per month for the vehicle. Mr. Decker drives a 2003 or 2004 Ford Escape that has roughly 153,000 miles on the engine. This vehicle is not listed in Debtors' Schedules.

While Debtors have reaffirmed two of the four vehicle loans, neither of the reaffirmed debts is for the HHR used by Mrs. Decker. Shockingly, the two loans that were reaffirmed are for vehicles that are not operational. Mrs. Decker testified that the two Subarus have significant engine problems. She estimates it would take roughly $5,000.00 to repair each one. According to the Reaffirmation Agreements for these vehicles, Debtors pay $328.00 a month for the Impreza,...