545 B.R. 581
Bankr. W.D. Wis.2016Background
- Debtors Steve and Camilla Kruse filed chapter 13 (Nov 2014), converted to chapter 11 (Jan 2015), and then converted to chapter 7 at a hearing where debtors consented to conversion. The U.S. Trustee previously moved to dismiss or convert the chapter 11 case.
- Debtors own a Wisconsin home valued at $325,000 with a mortgage claim of $527,040.54; they stopped paying the mortgage in July 2014, friends live there rent-free, and a foreclosure waives a deficiency if completed.
- Debtors reported high monthly income on various filings (Form 22A and chapter 11 schedules: roughly $14k–$16k/month gross; chapter 11 schedules showed $2,978.41 net monthly surplus). Later filings showed large, inconsistent expenses (including $4,248.88 for the Cumberland house despite no payments being made).
- Debtors owe substantial delinquent federal taxes (approximately $137,348.38) and had to reconstruct tax returns after a computer failure; they spent significant income on items the U.S. Trustee characterized as excessive consumer spending.
- The U.S. Trustee moved to dismiss the chapter 7 under 11 U.S.C. § 707(b) for abuse, arguing (1) the means-test presumption of abuse arises once improper Cumberland-house deductions are excluded, and (2) the totality of circumstances (ability to pay, excessive expenses, lack of pre-filing calamity, inaccurate schedules) warrants dismissal. Debtors argued judicial estoppel, that § 707(b) doesn’t apply to converted cases, and that there was no abuse.
Issues
| Issue | U.S. Trustee's Argument | Kruse (Debtors') Argument | Held |
|---|---|---|---|
| Judicial estoppel from prior motion to convert | U.S. Trustee consistently sought dismissal or conversion; now may move to dismiss chapter 7 | Debtors: Trustee’s prior alternative motion (dismiss or convert) bars a later dismissal motion after conversion | Court: No judicial estoppel; Trustee’s positions were consistent and Debtors chose conversion; estoppel not warranted |
| Applicability of § 707(b) to converted cases | § 707(b) applies to cases that are converted to chapter 7; § 348(a) deems converted case as filed under chapter 7; policy prevents loophole | Debtors: § 707(b) applies only to cases originally filed under chapter 7, so it shouldn’t apply here | Court: § 707(b) applies to converted cases; policy and § 348(a) support application |
| Presumption of abuse under § 707(b)(2) (means test) | Excluding illegitimate Cumberland-house deductions, debtors’ income triggers the means-test presumption of abuse | Debtors contest some line-item deductions and timing but do not dispute substantial income | Court: Presumption of abuse arises based on review of the schedules and Form 22A iterations |
| Totality of circumstances under § 707(b)(3) | Debtors have stable, high income, unreasonable/inflated expenses, no pre-filing calamity, ability to repay — totality supports dismissal | Debtors deny abuse and argue dismissal would jeopardize tax-payment ability; defend expenses as legitimate | Court: Even aside from presumption, totality (ability to pay, overstated/unreasonable expenses, no calamity, inaccurate schedules) warrants dismissal for abuse |
Key Cases Cited
- Grochocinski v. Mayer Brown Rowe & Maw, LLP, 719 F.3d 785 (7th Cir. 2013) (describing judicial estoppel factors and equitable, discretionary nature)
- New Hampshire v. Maine, 532 U.S. 742 (2001) (factors guiding judicial estoppel analysis)
- Advanced Control Solutions, Inc. v. Justice, 639 F.3d 838 (8th Cir. 2011) (holding § 707(b) applies to cases converted to chapter 7)
- Resendez v. Lindquist, 691 F.2d 397 (8th Cir. 1982) (§ 348(a) effect: converted case deemed filed under converted chapter for certain purposes)
- Crandon v. United States, 494 U.S. 152 (1990) (statutory interpretation requires reading statute in context and considering overall design and policy)