In re Orlando

In re: ADAM R. ORLANDO Debtor

Case No. 17-41616-CJP

UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS CENTRAL DIVISION

July 30, 2018

Chapter 7

MEMORANDUM OF DECISION REGARDING UNITED STATES TRUSTEE'S MOTION TO DISMISS

The United States Trustee, William K. Harrington (the "U.S. Trustee"), moves (i) to dismiss the chapter 7 case of the debtor, Adam R. Orlando (the "Debtor"), because his case is presumed to be an abuse of the provisions of chapter 7 pursuant to 11 U.S.C. § 707(b)(1) and (2)(A)(i)¹ and (ii) to extend the time to object to discharge pursuant to § 727 and file a motion to dismiss pursuant to § 707(b)(1) and (3) (the "Motion"). The Debtor objects to dismissal of his case, contending that his student loan obligations are special circumstances that rebut the presumption of abuse and, alternatively, that his debts are not primarily consumer debts such that the U.S. Trustee cannot seek dismissal under § 707(b) in any event. The U.S. Trustee responds that, among other things, the Debtor is judicially estopped from asserting that his debts are not primarily consumer debts. Upon consideration of the Motion, opposition thereto filed by the Debtor, further briefing submitted by the parties, and the entire record of this case, including that neither party requested an evidentiary hearing, for the reasons discussed below, the Motion is allowed.

I. Background

The Debtor filed his chapter 7 petition on September 5, 2017. He stated under the pains and penalties of perjury that his debts were primarily consumer debts in response to both Part 6, Question 16, of his petition and Part 3, Question 6, of his statement of financial affairs. According to the Debtor's summary of schedules, his liabilities include $25,046.00 in secured debt, $6,026.00 in priority debt, and $170,262.00 in unsecured debt, of which $123,547.00 is attributed to student loans. On Schedule I, the Debtor listed a $1,096.00 monthly expense for "Student Loan." Schedule E reflects the following student loan debt: $37,092.00 owed to "Aes/nct," $23,899.00 owed to "Fed Loan Serv," and $62,556.00 owed to "Wells Fargo." On his statement of financial affairs, the Debtor stated that in the 90 days before he filed for bankruptcy, "ACS" and "Fed Loan Serv" received payments of $600 or more, as the former was paid $1,062.00 and the latter was paid $882.00.

The U.S. Trustee filed his Motion on November 20, 2017.² On December 22, 2017, the Debtor filed an objection (the "Objection") to the Motion. The day before the Court held its January 10, 2018 hearing on the Motion (the "Hearing"), the Debtor filed a motion to amend his statement of current monthly income, Official Form 122A-1, and means test, Official Form 122A-2 (hereinafter, the "Means Test"), which the Court allowed. The Debtor's amended Official Forms 122A-1 and -2 reflect that (1) the Debtor removed an $836.00 alimony and maintenance payment in Part 1, Question 3, of his statement of current monthly income and, as to his means test calculation: (2) reduced his vehicle operation expenses from $500.00 to$250.00 in Part 2, Item 12; (3) removed a $324.68 net ownership or lease expense for a second vehicle in Part 2, Item 13f; (4) removed a $1,096.00 deduction for student loan payments in Part 2, Item 33d; and (5) added a $1,090.00 expense adjustment for student loans as special circumstances in Part 4, Item 43.

At the Hearing, the parties agreed that, although the Motion was based on the calculations contained in the Debtor's original means test, the amended Means Test was now the operative document and that the presumption of abuse still arose. While certain concerns raised in the U.S. Trustee's Motion were resolved by the Debtor removing the $836.00 alimony and maintenance payment and reducing his vehicle operation expense to $250.00 in the amended Means Test, the parties disputed whether student loan payments constituted special circumstances that would rebut the presumption of abuse. In an order that entered after the Hearing (the "Order"), the Court required the Debtor to file an affidavit and brief in support of his assertion that his student loan payments were special circumstances and gave the U.S. Trustee an opportunity to respond.

The Debtor filed his brief and affidavit in accordance with the Order. One week later, he filed a motion to amend his petition to reflect that his debts were not primarily consumer debts, which motion remains pending. The U.S. Trustee filed a responsive brief. Neither party has requested an evidentiary hearing regarding the Motion. As a result, the Court concludes that the matter is ripe for determination on the existing record.

II. Discussion

A. Is the Debtor Judicially Estopped from Asserting that His Debts Are Not "Primarily Consumer Debts"?

In his brief, the Debtor asserts for the first time that the Motion should be denied because § 707(b) does not apply in that his debts, which include $6,026.00 in tax obligations and $123,547.00 in student debts, are not primarily consumer debts. The U.S. Trustee contends thatthe Debtor is judicially estopped from changing his position at this juncture in the proceedings; the Court agrees.

Judicial estoppel is an equitable doctrine. See, e.g., Perry v. Blum, 629 F.3d 1, 8 (1st Cir. 2010). "It operates to prevent a litigant from taking a litigation position that is inconsistent with a litigation position successfully asserted by him in an earlier phase of the same case or in an earlier court proceeding." Id. (internal citations omitted). "There are two generally agreed-upon conditions for the application of judicial estoppel." Guay v. Burack, 677 F.3d 10, 16 (1st Cir. 2012). First, the positions taken by the litigant "'must be directly inconsistent, that is, mutually exclusive. Second, the responsible party must have succeeded in persuading a court to accept its prior position.'" Id. (quoting Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 30 (1st Cir. 2004)). Finally,

There is also a third oft-considered factor that asks whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped. We generally have not required a showing of unfair advantage. Where unfair advantage exists, however, it is a powerful factor in favor of applying the doctrine.

Id. at 16-17 (internal quotations and citations omitted). Because judicial estoppel "protect[s] the integrity of the judicial process[, i]t is typically invoked when a litigant tries to play fast and loose with the courts." Perry, 629 F.3d at 8 (internal citations omitted).

Regarding the Court's acceptance of the litigant's prior position, the First Circuit has explained that

"Acceptance" in this context is a term of art. In order to satisfy this prerequisite, a party need not show that the earlier representation led to a favorable ruling on the merits of the proceeding in which it was made, but must show that the court adopted and relied on the represented position either in a preliminary matter or as part of a final disposition.

The showing of judicial acceptance must be a strong one. The need for a strong showing derives from the maxim that "[j]udicial estoppel is applied with caution toavoid impinging on the truth-seeking function of the court because the doctrine precludes a contradictory position without examining the truth of either statement." It follows that a proponent of judicial estoppel must affirmatively show, by competent evidence or inescapable inference, that the prior court adopted or relied upon the previous inconsistent assertion.

Perry, 629 F.3d at 11-12 (internal citations omitted). While bankruptcy courts have determined that a debtor is judicially estopped from changing a prior position after the debtor is granted a discharge, see, e.g., Guay, 677 F.3d at 18 (stating that "[a] bankruptcy court 'accepts' a position in the form of omissions from bankruptcy schedules when it grants the debtor relief, such as discharge, on the basis of those filings"); Blanchette v. Blanchette (In re Blanchette), 582 B.R. 819, 825 (Bankr. D. Mass. 2018) (concluding that judicial estoppel applied in part because court relied on debtor's prior position in debtor's schedules when it confirmed debtor's plan and granted a discharge); DiVittorio v. HSBC Bank, USA, N.A. (In re DiVittorio), 430 B.R. 26, 48 (Bankr. D. Mass. 2010) (stating that confirmation of debtor's plan was not acceptance of representations made in debtor's schedules under doctrine of judicial estoppel in same way that granting debtor relief in the form of discharge may be, as debtor could still amend schedules and plan), a court can be deemed to have accepted a debtor's prior position under other circumstances as well, including when a debtor takes an inconsistent position as to the nature of his debts after a motion to dismiss is filed by the U.S. Trustee, see In re Jones, 556 B.R. 327, 335 (Bankr. E.D. Mich. 2016).

The bankruptcy court in Jones held that a chapter 7 debtor was judicially estopped from claiming that her student loans were nonconsumer debts because the circumstances "present[ed] a classic fact sequence for application of judicial estoppel." Id. When the debtor in Jones filed her chapter 7 petition, she indicated under the pains and penalties of perjury that her debts were primarily consumer debts. After the U.S. Trustee filed a motion to dismiss her chapter 7 case forabuse under § 707(b)(3), the debtor amended her petition and means test to assert that her debts were not primarily consumer debts. The debtor changed positions because the majority of her debts were student loans, which she asserted were not consumer debts because she incurred them in an attempt to increase her income.

The bankruptcy court held that the debtor was judicially estopped from changing positions because the court and the U.S. Trustee had "relied upon Debtor's original position in this regard." Id. The court noted that there...