In re Johnson

503 B.R. 447

In the Matter of Paul Terrence JOHNSON, Debtor.

No. 13–40162.

United States Bankruptcy Court,

N.D. Indiana,

Hammond Division.

Dec. 12, 2013.

Juan A. Perez, Jr., Perez & Perez, Indianapolis, IN, for Debtor.

Ellen L. Triebold, Office of the United States Trustee, South Bend, IN, for U.S. Trustee.

DECISION ON MOTION TO DISMISS

ROBERT E. GRANT, Chief Judge.

When it revised the Bankruptcy Code in 2005, Congress made significant changes to § 707(b) concerning the dismissal of a consumer debtor's chapter 7 case. See,11 U.S.C. § 707(b)(1)-(6). Among other things: it eliminated the presumption in favor of granting relief and reduced the standard for dismissal from “substantial abuse” to simply “an abuse,” 11 U.S.C. § 707(b)(1); it then quantified the concept of “abuse” by creating a presumption that a case is abusive if the debtor's ability to pay meets a certain threshold, 11 U.S.C. § 707(b)(2)(A)(i); and established an elaborate test designed to determine whether or not the debtor's ability to pay meets that threshold. 11 U.S.C. § 707(b)(2)(A)(ii)-(iv). If it does, § 707(b)(2)(B)(i)-(iv) specifies precisely what the debtor must do to rebut that presumption. Additionally, in those situations where the presumption either does not arise or has been rebutted, the case may still be dismissed as an abuse after considering the debtor's “bad faith” or the “totality of the circumstances ... of the debtor's financial situation.” 11 U.S.C. § 707(b)(3). Whether by chance or design, through these and other changes to § 707(b), Congress significantly restricted the amount of discretion the court had under the previous version of the statute.

As the introductory paragraph might suggest, this matter is before the court on the U.S. Trustee's motion to dismiss this case as an abuse. The motion has been filed pursuant to both § 707(b)(2), as presumptively abusive, and § 707(b)(3)(B), as abusive based upon the totality of the circumstances; propositions the debtor denies. The issues raised by the motion and the debtor's objection to it have been submitted to the court for a decision based upon the parties' stipulation of facts and the briefs of counsel.¹ The U.S. Trustee bears the burden proving that relief under chapter 7 constitutes an abuse, see, In re Hardigan, 490 B.R. 437, 447 (Bankr.S.D.Ga.2013); In re Perelman, 419 B.R. 168, 177–78 (Bankr.E.D.N.Y.2009), although it may or may not be aided by the presumption of § 707(b)(2)(A).

The first issue before the court is whether this case will be presumed to be an abuse under § 707(b)(2). Debtor's amended means test calculation claims a deduction for a monthly mortgage payment. With this deduction, the debtor's total allowed deductions exceed his “current monthly income” and there is no presumption of abuse. Yet, the debtor intends to surrender the property subject to the mortgage and so the U.S. Trustee contends the deduction is not permitted. If it is not, the presumption of abuse will arise and the debtor will be required to rebut it for the case to proceed. The issue of presumed abuse turns upon that one question: May a debtor claim a deduction for payments on secured debt where it intends to surrender the creditor's collateral?

Answering that question is a straight-forward exercise in statutory construction. Consumer Product Safety Commission v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980) (“the starting point for interpreting a statute is the language of the statute itself.”). When it devised the means test and the presumption of abuse in § 707(b)(2), Congress specifically addressed how secured debts should be handled at § 707(b)(2)(A)(iii). Payments on account of secured debts are to be included as deductions in the calculation. For amounts that are contractually due during the 60 months after the petition there are no exceptions, 11 U.S.C. § 707(b)(2)(A)(iii)(I), and it does not matter whether the debtor plans to retain or surrender the property, or what kind of property it may be. ²See, In re Rudler, 576 F.3d 37, 52 (1st Cir.2009); Lynch v. Haenke, 395 B.R. 346, 349 (E.D.N.C.2008); In re Rivers, 466 B.R. 558, 565–68 (Bankr.M.D.Fla.2012); In re Grinkmeyer, 456 B.R. 385, 387–88 (Bankr.S.D.Ind.2011); In re Vecera, 430 B.R. 840, 842–45 (Bankr.S.D.Ind.2010); Perelman, 419 B.R. at 173–76;In re Randle, 358 B.R. 360, 362–63 (Bankr.N.D.Ill.2006). Contra, In re Fredman, 471 B.R. 540 (Bankr.S.D.Ill.2012); In re Sterrenberg, 471 B.R. 131 (Bankr.E.D.N.C.2012). The plain language of the statute is the only guide needed in this situation, see, Connecticut National Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 1149–50, 117 L.Ed.2d 391 (1992); U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241–42, 109 S.Ct. 1026, 1030–31, 103 L.Ed.2d 290 (1989), and arguments to the contrary ignore that fundamental tool. This case is not a presumptive abuse of chapter 7.

The Supreme Court's decisions in Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) and Ransom v. FIA Card Services, N.A., 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) do not change that conclusion. Those two decisions both addressed how much a chapter 13 debtor had to pay in order to have a confirmable plan. Though the Court did adopt a reality based/forward looking approach to the issue, there is a significant difference between chapter 13, where the goal is to pay creditors out of projected disposable income, and chapter 7, where the goal is liquidation and discharge and the court is not required to project debtor's future resources. The reality based approach of Hamilton and Lanning accords quite well with the purpose of chapter 13—paying creditors out of future income—but it does not mesh at all well with the formula driven approach to the presumptive abuse of chapter 7. To apply it instead of the statutory formula of § 707(b)(2)(A) would be improper. Rivers, 466 B.R. at 566–69;Perelman, 419 B.R. at 175–76;In re Sonntag, 2011 WL 3902999, *3 (Bankr.N.D.W.Va.2011). Furthermore, if the court could disregard that formula anytime someone offered a creative argument for doing so, there would be precious little need for the secondary, “totality of the circumstances,” approach to abuse of § 707(b)(3)(B). See, Rudler, 576 F.3d at 53 (“Congress may have intended the totality of the circumstances test to function as a backstop to catch those whose petitions are not presumptively abusive ... but for whom a closer look at their actual financial situation shows that they have the means to repay their creditors under chapter 13 ...”)(Lynch, J., concurring); Rivers, 466 B.R. at 568–69 (§ 707(b)(2) and § 707(b)(3) are separate parts of a two-tiered inquiry); Perelman, 419 B.R. at 177 (“debtors that pass through [the initial filter of § 707(b) ] remain subject to the full analysis of § 707(b)(3)(B).”); In re Jensen, 407 B.R. 378, 384 (Bankr.C.D.Cal.2009) (“The totality of the circumstances test is best seen as providing a chance for the Court to refine the Means Test estimate.”); Sonntag, 2011 WL 3902999, *4 (fact that the debtor will not be incurring an expense in the future is a proper consideration under § 707(b)(3)).

The fact that this case is not presumptively abusive under § 707(b)(2) does not mean that it is not an abuse of chapter 7. It only changes the way in which the U.S. Trustee must go about proving abuse. Insteadof being able to take advantage of a presumption that arises by satisfying a statutory formula—a presumption the debtor is then required to rebut by proving “special circumstances” under § 707(b)(2)(B)—the U.S. Trustee must prove abuse directly, without the aid of any presumption, based upon “the totality of the circumstances ... of the debtor's financial situation.” 11 U.S.C. § 707(b)(3)(B). See, Eugene R. Wedoff, Judicial Discretion to Find Abuse Under Section 707(b)(3), 77 Mo. L. Rev. 1035, 1040–41 (2006).

In many respects, the “totality of the circumstances” approach to abuse is the mirror image of the “special circumstances” the debtor must prove under § 707(b)(2)(B) to rebut the presumption of abuse when it arises. To rebut that presumption, the debtor is required to identify, justify, explain, and document additional expenses or adjustments to income that are not accounted for by the statutory formula and which reduce the money available to pay creditors below the statutory threshold. In just the same fashion, where the presumption of abuse does not arise, § 707(b)(3)(B) gives the U.S. Trustee the opportunity prove that there are aspects of the debtor's financial situation that are not accounted for by the statutory formula, but which, if considered, lead to the conclusion of abuse. These two provisions give each party the opportunity to have the question of abuse determined based upon the debtor's actual circumstances, using actual income and expenses, instead of through the mechanical, cookie-cutter approach of § 707(b)(2)(A). To rebut the presumption, the debtor must prove that a particular expense is actual, reasonable and necessary, and, when it is not aided by the presumption, the U.S. Trustee must prove the converse: that a particular expense is not actual, reasonable or necessary.

Proving abuse based upon the “totality of the circumstances” of § 707(b)(3)(B) does not change the standard for dismissal. It is still one of abuse. 11 U.S.C. § 707(b)(1). Neither does it completely change what constitutes an abuse. The ability to pay remains a primary and potentially sufficient consideration, although it is no longer the exclusive one and the court may consider other factors as well. See, Grinkmeyer, 456 B.R. at 389–90;Perelman, 419 B.R. at 176–77;In re James, 414 B.R. 901, 914 (Bankr.S.D.Ga.2008); In re Mestemaker, 359 B.R. 849, 856–58 (Bankr.N.D.Ohio 2007); In re Ng, 2011 WL 576067, *4 (Bankr.D.Hawai'i 2011). Furthermore, in assessing whether the debtor's ability to pay is abusive, the court should be guided by the...