In re Smith

585 B.R. 168

IN RE: Michael Leon SMITH and Adriana Doraliz Smith, Debtors.

Case No.17–13529–JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed May 30, 2018

B. David Sisson, Norman, OK, for Debtor.

MEMORANDUM OPINION AND ORDER DISMISSING CASE

Janice D. Loyd, U.S. Bankruptcy Judge

I. Introduction

Before the Court is the Motion of the United States Trustee to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(1) Based on the Totality of Circumstances Under 11 U.S.C. § 707(b)(3) filed on November 29, 2017 (the "Motion") [Doc. 24] and Debtors' Response to Motion of the United States Trustee to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(1) Based on the Totality of Circumstances Under 11 U.S.C. § 707(b)(3) filed on January 5, 2018 (the "Response") [Doc. 32]. The Motion of the United States Trustee ("UST") is premised on the assertion that the "totality of the circumstances" demonstrates abuse of the provisions of the Bankruptcy Code. The Court held the evidentiary trial on the issue of abuse on May 15, 2018. After carefully considering the evidence and arguments, the Court concludes that the Chapter 7 case must be dismissed under § 707(b)(3)¹ . In accordance with Fed.R.Bankr.P. 7052 and 9014, the Court sets forth the following findings of fact and conclusions of law in support of its decision.

II. Jurisdiction

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b). Reference to the Court of this contested matter is proper pursuant to 28 U.S.C. § 157(a). This is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(A).

III. The Evidence

Debtors filed for bankruptcy relief under Chapter 7 on August 31, 2017.² Both Debtors are fifty-one years old. Debtor Michael Smith is employed in information technology, cyber security and call routing (which is the delivery of voice and technology applications to the desktop). He is presently employed at Tinker Air Force Base. Co–Debtor Adriana Smith is employed as a nurse at the Oklahoma Allergy and Asthma Clinic. Debtor Michael Smith testified that the cause of the bankruptcy was him being terminated from his employment with Energy Future Holdings on November 1, 2016. At that time his base salary was $126,800 per year plus a bonus compensation which ranged from $35,000–$100,000. His W–2 for 2016 reflected an income of $180,076.72 (but not quite for the entire year). [Debtors' Ex. 2E]. After having been unemployed for approximately eight months, he was employed by Frontier Communications in Texas at a salary of approximately $106,000 per year. He was then hired at Tinker Air Force Base.

At the time Debtors filed bankruptcy in August 2017 their original Schedule I reflected a total current gross monthly income of $12,225.58, with a take-home monthly pay of $9,398.88 [Doc. 1, Schedule I, pg. 31], living expenses of $9,329, resulting in a monthly disposable income of $69.88. [Doc. 1, Schedule J, pg. 33]. The UST analyst, John McLernon, testified that he computed the Debtors' gross income at $11,076.56, the allowable expenses under IRS and National standards of $7,169.00, resulting in a monthly disposable income of $1,319.62. This analysis would result in a sixty (60) month disposable income of $79,177.20 which, with total unsecured debt of $82,756, would result in a potential payout to unsecured creditors of 95.68%. [UST Ex. 5].

On May 8, 2018, the Debtors filed their Amended Schedules I and J which indicated a gross monthly income of $11,056.91, take-home income of $7,520.52, expenses of $8,387.22, with a resulting monthly disposable income of a negative $866.70. [Doc. 45]. The analysis by the UST of the amended schedules found a gross income of $10,836.95, a take-home pay of $7,609.51, allowable expenses of $6,751.44, with a resulting monthly disposable income of $858.07. This would result in a sixty (60) month disposable income of $51,484.20, making a potential payout to unsecured creditors of 62.21%.³ [UST Ex. 13].

The principal difference between the Debtors' and the UST's calculation of expenses was the UST reducing the Debtors': (1) transportation expenses from $1,100 to $430 because the Debtor was no longer working in Texas costing him substantial mileage and gas expense as had been the case pre-petition; (2) reducing by $771.86 the Debtor's voluntary contributions to his Federal Thrift Savings Plan (but allowing the mandatory 4.4% contribution to the Federal Employment Retirement System of $339.62); (3) disallowing the $433 monthly payment on the Debtors' 2017 Keystone travel trailer purchased in April 2017 with an outstanding balance of $50,122 since the same was no longer necessary as living accommodations as had been the case when the Debtor was working in Texas; (4) reducing the allowable monthly payments for vehicle expense by $493.12 from $1,618.56 to $1,125.44 (primarily by capping at $970 per IRS standard vehicle ownership expense for two vehicles); and (5) disallowing the Debtors' $193.13 car payment on one of their son's vehicle. [UST Ex.13]. Debtor Michael Smith testified that he agreed the transportation expenses which he had scheduled at $1,100 was probably no longer appropriate given his change of jobs. The UST also challenged the Debtor on the financial wisdom of his $792 per month payment on his 2017 Ford 1 ton pickup purchased in December 2016 with a balance of $57,983. Debtor testified that he couldn't get a decent truck with a cheaper payment.

The Debtors' Schedules indicated a residence valued at $375,000, a mortgage balance of $369,956 with a monthly mortgage payment of $2,240. [Doc.1]. Debtor testified that there was an arrearage on the monthly payments of approximately $16,000; however, Debtor testified that he paid all mortgage payments through his bank checking account, and that account shows that the last mortgage payment was made on April 4, 2017. [UST Ex. 8, pg. 6]. Thus, the mortgage arrearage is likely to be at least $26,880.

What became the focal point of the trial, both financially and emotionally, was the issue of the Debtor's gambling. On cross-examination the Debtor wouldn't state whether he considered himself a "professional gambler". He did testify, however, that he considered himself in the "upper echelon" of gamblers, and that he "absolutely consider myself in gambling as a business." The Debtors' Means Test reflects monthly gross business receipts of $4,850.67. [UST Ex.3, pg. 46, line 5]. The Debtor testified that this is from gambling. The Means Test further reflects that in the six months preceding the filing of bankruptcy Debtors' average monthly income from gambling was $4,850.67 and the average monthly expense for gambling was $11,718.82, resulting in an average monthly net income of a minus $6,868.15. [UST Ex. 3, pg. 58, line 5].

The Debtors' 2015 Federal Income Tax Return reflected gambling winnings of $264,329 and gambling losses of $263,975. [UST Ex. 12]. As of the date of trial, the Debtor testified that he had prepared and filed their 2016 and 2017 Federal Income Tax Returns, but copies of the returns had not been provided to the UST and were not offered as evidence at trial. However, the Debtors' Statement of Financial Affairs reflected 2016–2017 gambling losses of approximately $150,000, winnings for 2016 as "unknown", and winnings from January 1 until the filing of bankruptcy in August 2017 of $93,719 [Doc. 1, p.39, ¶ 15 & p.36 ¶ 5]. The UST's analysis of the Debtors' bank account indicated gambling expenditures of $57,257.30 for the period of April 2017 through January 2018 [UST Ex. 7) and $35,138.63 for February through April 2018. [UST Ex. 14].⁴ This is the same time period in which the Debtors have incurred a sizable arrearage claim on their home mortgage.

IV. Dismissal for Abuse Under § 707(b)

Section 707(b) was added to the Bankruptcy Code in 1984 as part of the Bankruptcy Amendments and Federal Judgeship Act and was amended extensively in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). Post–BAPCPA, § 707(b) now provides that a Chapter 7 case may be dismissed, or converted to a Chapter 11 or 13 with consent of a debtor, to prevent abuse of the Chapter 7 provisions. Specifically, § 707(b)(1) provides, in part, as follows:

... the court, on its own motion or on a motion by the United States trustee, ... may dismiss a case filed by an individual debtor under this chapter [Chapter 7] 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 [Chapter 7]. (Emphasis added).

Sections 707(b)(2) and (b)(3) provide two alternatives pursuant to which a court can find relief under Chapter 7 to be abusive. First, under § 707(b)(2), the Court can determine whether the presumption of abuse arises pursuant to the Means Test calculation of disposable income. The UST has not raised any objection on the basis that the Debtors' Means Test raises a presumption of abuse. Second, if the presumption does not arise or the presumption has been rebutted by the debtor establishing "special circumstances", the Court can evaluate whether abuse exists under the "totality of circumstances" test pursuant to § 707(b)(3). In short, courts construing § 707(b)(3) have uniformly held that satisfaction of § 707(b)(2), either because the presumption of abuse does not arise, or because the debtors have rebutted the presumption, does not preclude the trustee from seeking to dismiss a debtor's bankruptcy case for abuse under § 707(b)(3). See, e.g., In re Zaporski , 366 B.R. 758, 770 (Bankr. E.D. Mich. 2007) (finding that § 707(b)(2)(A)"offers no safe harbor to those debtors with respect to whom the statutory presumption does not arise" so that § 707(b)(2) is not a defense to a § 707(b)(3) motion to dismiss."). The moving party bears the burden of proof to support a § 707(b) motion by a preponderance of the evidence, In re Palmer, ...