In re Golematis

In re: MELETIOS THOMAS GOLEMATIS, LISA LOUISE GOLEMATIS, Debtors.

Case No.: 11-52238

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - DETROIT

Dated: August 17, 2012

Chapter 7

HON. WALTER SHAPERO

OPINION GRANTING U.S. TRUSTEE'S MOTION TO DISMISS UNDER 11

U.S.C. § 707(b)(3)

The debtors, Meletios Thomas Golematis and Lisa Louise Golematis (hereinafter "Debtors"), filed a voluntary petition under chapter 7 of the U.S. Bankruptcy Code on April 29, 2011. Debtors' obligations are primarily consumer debts, and their nonpriority unsecured debts total $39,515. The United States Trustee (hereinafter "UST") filed a motion to dismiss under 11 U.S.C. § 707(b)(3) on August 4, 2011. In its motion, the UST claimed several of Debtors' expenses were excessive and not reasonably necessary. Specifically, the UST objected to monthly expenses of $1,000 for private school tuition for Debtors' two children; $400 for their children's figure skating, baseball and soccer; $266 for home maintenance; and $169 for a camper. At that point, Mr. Golematis worked full-time as a solo practitioner attorney, and Mrs. Golematis worked as a court clerk at the 28th District Court. Mr. Golematis also worked part-time as a district court magistrate at the 28th District Court. Debtors' reported a net combined average monthly income of $7,358. Their reported average monthly expenses were $7,985, which left them with a monthly deficit of $627.

Debtors' financial circumstances changed in January 2012 when Mr. Golematis started working for Hantz consulting LLC (d/b/a QDRO Express LLC), where he suffered a pay cut. Debtors' amended Schedule I indicates that Debtors' net combined average monthly income dropped to $7,064. However, at the March 19, 2012 evidentiary hearing, Debtors' counsel claimed their net combined average monthly income actually fell to $6,239.

After the UST filed the motion to dismiss, Debtors' significantly reduced their expenses. Amended Schedule J shows Debtors reduced their prior monthly tuition expense of $1,000 for private school tuition down to $295.84. They also cut their prior monthly $400 expense for their children's figure skating, baseball and soccer down to $200. Finally, they surrendered their camper. Debtors' amended Schedule J shows monthly expenses totaling $6,911.84. At the evidentiary hearing, Debtors' counsel claimed this amount was inaccurate, and the correct figure was actually $6,313. According to Debtors' counsel, the significant decrease in Debtors' stated expenses resulted from amended Schedule J overstating their home mortgage payments. These figures put forth by Debtors' counsel would result in a monthly deficit of $74.

During the evidentiary hearing, the UST reaffirmed its original position that Debtors' expenses for their children's education, skating, baseball, and soccer, as well as home maintenance were excessive. She also argued that Mrs. Golematis impermissibly makes monthly voluntary 401(k) contributions between $250 and $270, and that Debtors' should not be making $500 monthly payments on the $9,000 unsecured debt that was incurred when Mr. Golematis bought his law practice. After the court makes necessaryadjustments to Debtors' expenses, the UST believes they will have sufficient disposable income to finance a chapter 13 plan of reorganization.

Authority to dismiss a case under chapter 7 for abuse is derived from § 707(b)(1), which provides in 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."

Under § 707(b)(3)(B), when bad faith is not a factor, courts examine the totality of the circumstances in determining whether the debtor's financial situation constitutes abuse warranting dismissal. The UST carries the burden of establishing by a preponderance of the evidence the applicability of this ground for dismissal. In the Sixth Circuit a totality of the circumstances inquiry under § 707(b)(3)(B) involves an analysis of whether the debtor displays a lack of honesty or want of need, either of which alone may provide sufficient justification for dismissal. In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989); Behlke v. Eisen (In re Behlke), 358 F.3d 429, 434 (6th Cir. 2004). In this case, the UST does not allege that Debtors display a lack of honesty. Instead, the UST questions whether Debtors are in need of relief under chapter 7.

In determining whether a debtor is sufficiently needy to justify granting relief under chapter 7, this Court analyzes whether the debtor has an ability to repay its unsecured nonpriority creditors. Krohn, 886 F.2d at 126. This analysis allows consideration of both prepetition and postpetition circumstances. U.S. Trustee v. Cortez, 457 F.3d 448, 455 (5th Cir. 2006)("Section 707(b) does not condition dismissal on the filing of bankruptcy being [an abuse] but rather on the granting of relief, which suggeststhat in determining whether to dismiss under § 707(b), a court may act on the basis of any development occurring before the discharge is granted"). A debtor's ability to pay is assessed by looking to the amount of disposable income the debtor has available, and whether that income could feasibly finance a chapter 13 plan of reorganization.

A debtor's "disposable income" is defined as that income received by a debtor that is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor. 11 U.S.C. § 1325(b)(2). This determination is made by the Court, and thus, when assessing the amount of disposable income available to a debtor, the Court is not required to accept at face value the financial figures put forth by the debtor. In re Gonzalez, 378 B.R. 168, 173 (Bankr. N.D. Ohio 2007). Instead, in its role as trier-of-fact, the Court may make downward adjustments in a debtor's expenses where it is determined that such expenses are not reasonably necessary. Id. While a debtor is not required to live in poverty to defeat a § 707(b)(3) motion to dismiss, he may still be required to engage in some good, old-fashioned belt tightening. Krohn, 886 F.2d at 128. In this case, after the Court adjusts Debtors' expenses, it becomes apparent that they have sufficient disposable income to finance a chapter 13 plan of reorganization.

A. Debtors' Expenses

1. Private School Tuition

Private school tuition payments are reasonably necessary expenses when some compelling circumstance exists. In re Webb, 262 B.R. 685, 690 (Bankr. E.D. Tex. 2001). A compelling circumstance exists if a child has a particular educational need that requiresprivate schooling, or if the public school alternative would be academically inadequate. Id. at 691-692. In re Webb involved the archetypical compelling circumstance. In Webb, the court held that a compelling circumstance existed where debtor's son had Attention Deficit Hyperactive Disorder and moderate to severe Generalized Anxiety Disorder which prevented him from assimilating into a public school environment. Id. at 690-691. A medical doctor who specialized in child and adolescent psychiatry even testified that the student's impairments placed him at risk for substance abuse, and that the student's academic progress would be impeded in a public school. Id. at 688.

Mere preference for private schooling is not sufficient. Consider In re Watson, 299 B.R. 56 (Bankr. D. R.I. 2003), aff'd 403 F.3d 1 (1st Cir. 2005), the facts of which closely parallel the case at bar. Debtors in that case, devout Catholics, spent $750 per month for parochial school tuition for their two minor children. In re Watson, 299 B.R. at 57. They did not claim their children's educational needs required private schooling, but instead simply wanted their children educated within a religious atmosphere. Id. at 58. In affirming the courts below that found debtors' parochial school tuition payments not reasonably necessary, The First Circuit Court of Appeals wrote,

"We can appreciate the importance attached by the Watsons to the religious values of a parochial school education. Still, it is not impossible to inculcate those values outside of a school, and the court could reasonably conclude, in the circumstances presented here, that it would be improper to impose the added expense on the Watsons' unpaid creditors where the children's educational needs could otherwise be met in the public schools." 403 F.3d at 8.

A debtor is not required to prove the existence of a special educational need, because a compelling circumstance also exists when the public school alternative is shown to be academically inadequate. In re Webb, 262 B.R. at 691-692. Many cases have been decided because the debtor failed to make this showing. For example, in In reMacDonald, 222 B.R. 69, 72 (Bankr. E.D. Pa. 1998), the court found that spending $175 per month for parochial school tuition was not reasonably necessary because the debtors did not claim the local public schools were deficient. Similarly, the Court in Univest-Coppell Village, Ltd. V. Nelson, 204 B.R. 497, 500 (E.D. Tex. 1996), based its finding that $395 per month parochial school tuition payments were not reasonably necessary on the fact that debtors' older daughter attended public school and that the debtor-father stated he did not have problems with the education offered there.

However, even if no compelling circumstance exists, one unpublished yet often-cited case, In re Grawey, 2001 WL 34076376 (Bankr. C.D. Ill. Oct. 11, 2001), held that private school tuition payments can be reasonably necessary expenses if they are financed by eliminating other reasonably necessary expenses...