U.S. Tr. v. Harms (In re Harms)

612 B.R. 288

IN RE: Damien W. HARMS and Casey M. Harms, Debtors.

United States Trustee, Movant,

v.Damien W. Harms and Casey M. Harms, Respondents.

Case No. 18-22406-GLT

United States Bankruptcy Court, W.D. Pennsylvania.

Signed January 29, 2020

George M. Conway, Esq., Office of the United States Trustee, Philadelphia, PA, Attorney for the United States Trustee

Bryan P. Keenan, Esq., Bryan P. Keenan & Associates, P.C., Pittsburgh, PA, Attorney for Damien and Casey Harms

MEMORANDUM OPINION

GREGORY L. TADDONIO, UNITED STATES BANKRUPTCY JUDGE

Told that they cannot receive a chapter 7 discharge because their net monthly income indicates that such relief would be an abuse under the totality of circumstances of their financial situation,¹ the debtors Damien W. and Casey M. Harms now want a "do-over." Asserting that Schedule J , which was relied upon by the Court, never provided an accurate picture of their monthly expenses, the Harmses now seek reconsideration based on an Amended Schedule J² that increases their expenses by $568.06 to include expenditures "inadvertently omitted" from their original schedules.³ The United States Trustee (the "Trustee") opposes reconsideration, arguing that the Harmses are trying to improperly recast the facts underpinning the Court's judgment.⁴ Because the Court finds the Harmses' belated attempt to supplement the record lacks merit and signals bad faith, the Motion to Reconsider will be denied.

I. BACKGROUND

Although no presumption of abuse arose in this case,⁵ the Trustee moved to dismiss pursuant to 11 U.S.C. § 707(b)(3)(B),⁶ contending that the totality of the circumstances of the Harmses' financial situation nonetheless signaled abuse.⁷ He argued that certain expenses, including payments for prepetition taxes and student loan obligations, should be counted towards disposable income (rather than deducted from it), and therefore show an ability to repay creditors. After a hearing and oral argument, consideration of the motion to dismiss was consolidated with two other cases presenting common legal questions. At the Court's direction, both the Trustee and the Harmses filed additional briefs and reply briefs.⁸ At no time did any party request an evidentiary hearing or otherwise suggest that the record before the Court—including the bankruptcy schedules—was deficient.

On October 1, 2019, the Court entered a Memorandum Opinion concluding that the Trustee sustained his burden under section 707(b)(3)(B) as to the Harmses.⁹ To avoid confusion, the Court will address only those aspects of its opinion relevant to the Motion to Reconsider .

Generally, the Court "d[id] not discern any bad faith in this chapter 7 filing,"¹⁰ and found that "[t]he Harmses' expenses appear reasonable and necessary, though perhaps slightly understated," specifically noting the absence of an expense for telephone, cell phone, internet, and cable services.¹¹ That said, the Court held that debts could not be treated as monthly expenses on Schedule J if it would favor those creditors over other similarly situated creditors.¹² The Court determined that the Harmses' monthly student loan payments constituted disposable income in an "ability to pay" analysis under section 707(b)(3)(B),¹³ but payments to the Internal Revenue Service, their only priority creditor, did not.¹⁴ Recognizing that the tax obligation should be satisfied in 18 months, the Court found that funds would be available for the remaining 42 months of a hypothetical 60-month chapter 13 plan.¹⁵ As a result, the Court reasoned that the Harmses had the ability to pay general unsecured creditors $31,978.80 over 60 months in a hypothetical chapter 13 case and yield a dividend to their general unsecured creditors of approximately 27%.¹⁶ Absent other compelling facts, the Court held that the Harmses' "ability to repay creditors is significant enough that allowing them to obtain a chapter 7 discharge would be an abuse under the totality of the circumstances."¹⁷ Rather than dismiss the case outright, the Court afforded them a brief opportunity to consider conversion to chapter 13.

The Motion to Reconsider , filed ten days later, seizes on the Court's observation that the Harmses' expenses appeared "slightly understated" and posits the Court made a "significant finding despite not having all the necessary information before it at the time of decision."¹⁸ The Harmses assert that they "inadvertently omitted" their monthly cable, internet, and telephone expenses (for lack of a better term, the "Telecommunications Expenses") from Schedule J ,¹⁹ and attached statements establishing that these expenses existed at the commencement of the case.²⁰ They also state that they "failed to adequately list reasonable living expenses associated with raising a toddler/child" or "include a reasonable line item ... [for] an Emergency Fund," and insist that these expenses were in place at the time of filing.²¹ They do not, however, explain why these additional expenses (the "Added Expenses") were omitted from Schedule J .

The following table compares the expenses reflected on Schedule J to those listed in Amended Schedule J :²²

 Monthly Expense Schedule J Amended Difference
Schedule J
   Rental or home ownership expense                           $737.19        $737.19
   Home maintenance, repair, and upkeep expenses              $100.00        $100.00
   Electricity, heat, natural gas                             $250.00        $250.00
   Water, sewer, garbage collection                           $134.51        $134.51
   Telephone, cell phone, internet, satellite, and cable           $0        $289.58      +$289.58
   services
   Food and housekeeping supplies                             $850.00        $850.00
   Childcare and children's education costs                 $1,083.33      $1,083.33
   Clothing, laundry, and dry cleaning                        $100.00        $100.00
   Personal care products and services                             $0        $100.00      +$100.00
   Medical and dental expenses                                $167.00        $167.00
   Transportation                                             $303.33        $303.33
   Entertainment, clubs, recreation, newspapers,              $100.00        $150.00       +$50.00
   magazines, and books
   Vehicle Insurance                                          $104.00        $104.00
   IRS Repayment Plan                                          $75.00         $75.00
   Car Payments for Vehicle 1                                 $435.76        $435.76
   Student Loan W                                             $255.00        $201.78       -$53.22
   Student Loan H                                             $260.00        $241.70       -$18.30
   Auto Maintenance                                           $150.00        $150.00
   Gifts                                                           $0        $100.00      +$100.00
   Emergency                                                       $0        $100.00      +$100.00
   Total Monthly Expenses $5,105.12 $5,673.18 +$568.06

It is worth noting that while the Harmses' monthly student loan expenses decreased, the impact of this change (given the Court's prior ruling) is to reduce available disposable income. Even more curious, the Harmses' combined monthly income on Amended Schedule J , which should simply mirror line 12 of Schedule I , decreased even though they did not amend that schedule:

 Combined Monthly Income $5,070.60 $5,029.99 -$40.61

As a result of the increased expenses and reduced income on Amended Schedule J , the Harmses' monthly net income dropped substantially.

 Monthly Net Income -$34.52 -$643.19 -$608.67

Based on the revised expenses in Amended Schedule J , the Harmses would not have any disposable income to devote a chapter 13 plan during a hypothetical 60-month term. Even without accepting their new combined monthly income figure, they would have monthly net income of negative $159.10 after the Court adds back their student loan and tax payments. Accordingly, the Harmses' request that the Court reconsider its order and permit them to obtain a chapter 7 discharge.

The Trustee filed an opposition, arguing that the Harmses cannot satisfy the standard for relief under Fed. R. Civ. P. 60,²³ or even the more permissive standard Fed. R. Civ. P. 59(e),²⁴ because they do not offer any supportable reason why the record should be supplemented at this late stage with facts that were known to them on the petition date. In response, the Harmses sidestep the issue by asserting that the Court "properly took judicial notice of the omitted facts in Schedule ‘J’ " in the Memorandum Opinion .²⁵ Their rationale is not fleshed out, but appears to place significance on the dubious characterization that the Court judicially noticed "omitted facts" rather than the avowed absence of expenses.

At the hearing on the Motion to Reconsider , the Harmses asserted that they were entitled to relief under Fed. R. Civ. P. 60(b)(1) because they omitted additional expenses from Schedule J by mistake or inadvertence.²⁶ Noting that the "omitted facts"—i.e. , the expenses—were germane to the Court's ruling, the Harmses emphasized that Fed. R. Bankr. P. 1009(a) permits amendment of a debtor's schedules at any time before the case is closed. They essentially argued that the inadvertence of the omission of the Telecommunications Expenses was self-evident because nearly all debtors have such expenses and it was not in their interest to exclude an actual, provable expense. The Harmses further contend that their failure to discover the mistake earlier was not unreasonable because the motion to dismiss primarily concerned the treatment of student loan obligations and voluntary retirement contributions. Nevertheless, they could not explain why they initially omitted the Added Expenses (including their "gifts" and "emergency" line items) from Schedule J , nor could they justify the changes in their student loan...