In Re Crink
MEMORANDUM OPINION
This matter came before the Court on February 3, 2009 upon the Motion of Bankruptcy Administrator for Dismissal of Case Pursuant to Sections 707(b)(1) and 707(b)(3) (the “Motion to Dismiss”) filed by the United States Bankruptcy Administrator on September 5, 2008. At the hearing, John H. Boddie appeared on behalf of the above-referenced debtors (the “Debtors”) and Robert E. Price, Jr. appeared on behalf of the Bankruptcy Administrator. After consideration of the Motion to Dismiss, the evidence presented at the hearing, the arguments of the parties, and the relevant law, the Court will grant the Motion to Dismiss.
I. JURISDICTION
The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August
II FACTS
The Debtors and their youngest daughter moved to North Carolina from California in 2003. They sold their California home for approximately $700,000. The Debtors moved so that Mr. Crink could accept a position in Greensboro as Senior Executive Vice President of DeCoro USA Ltd. (“DeCoro”), the American subsidiary of an Italian-owned furniture company based in China.
In August of 2003, the Debtors purchased a house at 2807 Lake Forest Drive, Greensboro, North Carolina (the “House”). At the time that the Debtors purchased the House, they were debt free. Title to the House was put in the name of the Crink Family Trust, a living trust that the Debtors established in 2002 or 2003. The House is located in New Irving Park, a prestigious Greensboro neighborhood. It has just less than 5,000 square feet of living space with five bedrooms and four and one-half bathrooms. The Debtors purchased such a large house to accommodate future children and Mr. Crink’s mother in her old age, as well as to entertain guests during the annual furniture market in nearby High Point, North Carolina.
The House was purchased for $680,000.00. The Debtors made a $30,000.00 down payment and financed the remainder of the purchase price through a $550,000.00 fixed rate loan secured by a first priority deed of trust on the House and a $100,000.00 variable rate, interest-only loan secured by a second priority deed of trust on the House. Shortly after they moved in, the Debtors discovered two major problems: (1) drainage issues that necessitated the installation of a French drainage system, and (2) decay in load-bearing columns at the front of the House. The Debtors obtained a $50,000.00 variable rate, interest-only loan to pay for the costs of these repairs, and they secured the loan with a third priority deed of trust on the House.
In October 2005, the Debtors’ debt was limited to the three deeds of trust on the House. 1 Mr. Crink testified that he believed that the Debtors would be able to pay off all three mortgages within five years, primarily due to an anticipated initial public stock offering by DeCoro. On October 25, 2005, Mr. Crink received written notice that his employment with DeCo-ro would be terminated effective November 25, 2005. DeCoro also notified Mr. Crink that it would enforce the non-competition provision and the non-solicitation provision (the “Restrictive Provisions”) contained in his January 26, 2003 employment agreement. The non-competition provision prevented Mr. Crink from selling items similar to those sold by DeCoro for one year, and the non-solicitation provision prevented him from calling on DeCoro’s customers for two years.
Immediately after Mr. Crink was terminated, the Debtors listed the House for sale with a real estate broker. Mr. Crink believed that the House would sell and that the Debtors would then move into a rental home for approximately $1,800.00 per month, allowing the Debtors to address the rest of their debt. However, the House did not sell.
In early 2006, Mr. Crink was offered a position with a Chinese furniture company that would have provided annual compensation of $225,000.00 and the opportunity for a $300,000.00 bonus. He was prevent
When the Restrictive Provisions expired in November of 2007, Mr. Crink identified a position with PeopLoungers LLC, a furniture manufacturing company based in Tupelo, Mississippi. He interviewed in December of 2007 and accepted a position as Executive Vice President in January of 2008, Mr. Crink’s annual salary at Peo-pLoungers began at $200,000.00.
Beginning on June 10, 2007, the House was listed with a third real estate broker, Leslie Hecht. The House was listed for $737,000.00 based on neighborhood compa-rables, the original purchase price, and the repairs that the Debtors made. The House was shown approximately 45 times, generating two offers. The Debtors determined one of the offers to be a “hoax.” The other offer, made in March of 2008 for $682,500.00, came from Rik and Brenda Gates, who were relocating from New York. The Debtors did not accept the offer because it was contingent on the Gates selling their New York home. According to Ms. Hecht, it was unlikely the contingency would have been fulfilled. On May 20, 2008, the Gates made a second offer of $670,000.00. At that time, the Debtors owed approximately $660,000.00 on their three mortgages. After paying expenses associated with the sale, the Debtors realized they would end up $38,000.00 to $40,000.00 short of paying off their debts associated with the House. The Debtors asked their mortgage lender, Wells Fargo, whether it would forgive any deficiency from the sale. Wells Fargo responded that it would take up to twelve weeks to make a decision. The Gates refused to wait and withdrew their offer. After realizing that they would not be able to sell the House for enough to pay off their mortgages, 2 the Debtors decided to file bankruptcy.
On May 31, 2008, the Debtors filed their Chapter 7 bankruptcy petition. On September 5, 2008, the Bankruptcy Administrator filed the Motion to Dismiss, which came on for final hearing on February 3, 2009.
III. DISCUSSION
The Bankruptcy Administrator seeks dismissal of the Debtors’ case pursuant to Section 707(b)(3) of the Bankruptcy Code, which is one of the changes to the Code produced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”). Abuse of the Bankruptcy Code occurs under Section 707(b) when a debtor attempts to use the provisions of the Code to get a “head start” rather than a “fresh start.”
Green v. Staples (In re Green),
Section 707(b)(2), also known as the “means test,” provides a presumption of “abuse” if a debtor’s disposable income over 60 months exceeds a threshold amount. 3 Section 707(b)(7) exempts debtors whose income is below the median of their state from the means test. In this case, the Bankruptcy Administrator does not assert that the Debtors failed the means test. While the Debtors are well above the median income for a family of three 4 in North Carolina, their expenses are such that the Debtors have negative disposable monthly income, and there is no presumption of abuse under Section 707(b)(2).
The inquiry into abuse does not, however, end with Section 707(b)(2). Section 707(b)(3) provides a basis for dismissal even when no presumption of abuse arises under the means test.
In re Lipford,
A. Should a Debtor’s Ability to Pay Be Considered as Part of the Totality of the Circumstances Test?
At the hearing on the Motion to Dismiss, the Debtors objected to the admission of any evidence related to their ability to pay their creditors because, they argued, BAPCPA restricts any analysis of their ability to pay to Section 707(b)(2) and therefore their ability to pay cannot be considered under Section 707(b)(3). The
1. Plain Language
When interpreting a statute, a court starts with its plain language.
U.S. Dept. of Labor v. North Carolina Growers Ass’n,
The Debtors’ interpretation of Section 707(b), which excludes consideration of their ability to pay from the “totality of the circumstances ... of the debtor’s financial situation” test, does not comport with the plain meaning of the statute. It is difficult to envision a situation where the totality of a bankruptcy debtor’s financial situation does not include the debtor’s ability to repay her debts. A debtor’s income and expenses, and the resulting ability to pay, are central to the assessment of a debtor’s financial situation.
In re Booker,
The Debtors’ interpretation of Section 707(b) fails to recognize that the means test of Section 707(b)(2) simply provides a presumption, “an easily applied formula for determining when the court should
presume
that a debtor is abusing the system by filing a chapter 7 petition.”
In re Fowler,
Consider the application of Section 707(b)(3)(B) to the below median income debtor. Debtors with below median incomes are exempted from the means test by Section 707(b)(7). The effect of this exemption is that the means test cannot be used to determine the ability of a below median income debtor to pay. If the debt- or’s ability to pay is not considered under Section 707(b)(3)(B), then there would be no mechanism under BAPCPA for a court to consider the ability of a below median income debtor to pay her creditors in making a determination of abuse. Such a re-suit is inconsistent with the intent of Congress to require that those debtors with an ability to pay do so. In fact, the argument that ability to pay should not be considered for below median income debtors has been rejected by several courts.
In re Pennington,
Finally, it is important to note that every other court to have considered this issue has held that a debtor’s ability to repay her creditors plays some role when applying the totality-of-the-circumstances test of Section 707(b)(3)(B).
See, e.g., Booker,
2. Pre-BAPCPA Precedent
The phrase “totality of the circumstances of the debtor’s financial situation” is not defined in the Bankruptcy Code. However, pre-BAPCPA cases are still instructive for interpreting Section 707(b)(3),
In re dePellegrini,
The Fourth Circuit, in
Green,
(1) Whether the bankruptcy petition was filed because of sudden illness, calamity, disability or unemployment;
(2) Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay;
(3) Whether the debtor’s proposed family budget is excessive or unreasonable;
(4) Whether the debtor’s schedules and statement of current income and expenses reasonably and accurately reflect the debtor’s true financial condition; and
(5) Whether the petition was filed in good faith.
Id.
The Fourth Circuit also stated “that the majority of the cases hold that the debtor’s ability to repay is the primary factor to be considered.”
Id.
Section “707(b)(3) incorporates a ‘totality of the circumstances’ standard, which courts pre
3. Legislative History
The Debtors argue that the Congressional Record suggests that, by adopting the means test, Congress intended to exclude consideration of a debtor’s ability to pay from a Section 707(b)(3) analysis. But no clear indication of Congressional intent can be gleaned from the legislative history. Conflicting statements exist.
Cf.
151 Cong. Rec. S1842-43 (March 1, 2005) (“Some have attempted to criticize this commonsense safeguard as somehow taking away bankruptcy protection. Let me be clear. The means test does no such thing. All it does is identify those who can repay at least some of their debts. It makes certain they enter into a chapter 13 reorganization and repayment plan rather than let them simply walk away from their obligations, no matter how steep or outrageous .... The means test contained in this bill will provide a uniform standard to bankruptcy judges to evaluate the ability of bankruptcy filers to repay debts.”) (statement of Sen. Hatch)
with
151 Cong. Rec. S1787 (February 28, 2005) (“The means test
helps
the courts determine who can and cannot repay their debts and, perhaps, more importantly, how much they can afford to pay.”) (statement of Sen. Hatch) (emphasis added). The Court will heed the words of the Supreme Court and the Fourth Circuit: “The intent of Congress as a whole is more apparent from the words of a statute than from a patchwork record of statements inserted by individual legislators and proposals that may never have been adopted by a committee, much less an entire legislative body, and this truth gives rise to ‘the strong presumption that Congress expresses its intent through the language it chooses.’ ”
Sigmon Coal Co., Inc. v. Apfel,
The Court concludes that a debtor’s ability to pay her creditors must be considered in the context of a Section 707(b)(3)(B) analysis.
B. Does This Case Constitute an Abuse of Chapter 7 Pursuant to Section 707(b)(8)(B)?
In the Fourth Circuit, a review of the Green factors is necessary to a determination of abuse under Section 707(b)(3)(B).
1. Excessive or Unreasonable Family Budget
Courts look to the facts of a case to determine whether debtors have an excessive or unreasonable family budget. The Bankruptcy Administrator argues that the Debtors’ housing payment renders their budget unreasonable and that the House is too expensive. In spite of the fact that they have tried to sell the House for the better part of three years, the Debtors now want to keep the House and pay the mortgage payments. 10
In considering whether housing expense are excessive, due regard should be given to the size of the family, their reasonable needs, and the cost of alternative housing. Furthermore, a court should not unduly depreciate a debtor’s longstanding, traditional ties to a homestead.
See In re Miller,
In this case, the Debtors purchased the House in 2003 by borrowing $650,000.00. Shortly after they moved in, the Debtors borrowed an additional $50,000.00 to make repairs to the House, for a total initial indebtedness of $700,000.00. The House has five bedrooms, measures 5,000 square feet, and is situated in a prestigious neighborhood. The Debtors reside in the House with their younger daughter. According to the Debtors’ schedules, the House is worth $478,000.00. Currently, the three mortgages on the House total approximately $660,000.00, so the Debtors have no equity in the House. The Debtors’ total monthly mortgage payment according to Schedule J is $4,661.00, or approximately forty-six percent (46%) of the Debtors’ net monthly income.
11
In addition, the Debtors’ are
The Court finds that the Debtors’ housing expense is excessive. First, the Debtors have a five-bedroom, 5,000 square foot home for a family of three. Such a large amount of space is not needed. Although the Debtors testified that they purchased a large house because they anticipated the need to accommodate future children and Mr. Crink’s mother, those needs have not materialized. Second, the Debtors do not have any long-standing traditional ties to their homestead, as the House was purchased in 2008. Third, there is no equity in the House. Finally, according to IRS guidelines, housing and utilities for a family of three in Guilford County, North Carolina should be no more than $1,479.00 per month, 13 which is less than one fourth of what the Debtors are currently spending. 14 The Debtors can find suitable housing for their family that would cost significantly less than their current home. 15
Other aspects of the Debtors’ budget are unreasonable. Schedule J lists home maintenance costs of $480.00 per month. Mrs. Crink testified that this amount consists of lawn care for $40.00 per week, a cleaning service for $100.00 every other week, extra expenses associated with trimming, and other miscellaneous repairs. Schedule J also lists a $150.00 monthly expense for cable and internet. Schedule J also shows a monthly expense of $450.00 for telephone service. Mr. Crink testified that this amount includes three cell phones, a Blackberry, and two home phones. Schedule J also includes monthly expenses of $300.00 for recreation and entertainment, an additional $60.00 for newspapers, books, and magazines, $100.00 for hair care, $100.00 for pet food, $300.00 for clothing, and $150.00 for laundry and dry cleaning. The Court finds these expenses to be excessive for a family of three in North Carolina.
The Court concludes that the Debtors’ budget is excessive and unreasonable. This factor tends to show abuse.
2. Ability to Repay
The Bankruptcy Administrator argues that if the Debtors were to obtain more affordable housing, then they would be able to repay some of their debts. An appropriate method of evaluating whether a debtor has the ability to repay his or her debts is to determine what amount of that indebtedness could be repaid in a hypothetical Chapter 13 plan.
In re Behlke,
The greater the ability to pay, the more likely the finding of abuse.
See In re Praleikas,
The Court will evaluate the Debtors’ ability to pay by considering their income and expenses as reported on their Schedules I and J.
Lipford,
It is appropriate for the Court to consider whether the expenses claimed by a debtor can be reduced significantly without depriving the debtor of adequate food, clothing, shelter, or other necessities of life.
In re McCain,
No. 05-14382C-7G,
3. Accuracy of Schedules
Inaccuracies on a debtor’s schedules tend to show abuse.
See Lip-ford,
The fact that a debtor does not file due to sudden illness, calamity, disability, or unemployment tends to show abuse.
See Lipford,
5. Cash Advances and Consumer Purchases in Excess of Ability to Repay
A debtor’s ability to repay consumer purchases and cash advances should be interpreted in a manner consistent with a debtor’s reasonable expectations of repayment at the time that the debt was incurred.
Beitzel,
During 2006 and 2007, the Debtors had no income. Their expenses were paid through the use of savings, credit cards, and a series of loans from Steve Rachlin, a business associate of Mr. Crink. Beginning in the Fall of 2006, the Debtors’ youngest daughter was enrolled at Greensboro Day School, which has an annual tuition between $13,000.00 and $14,000.00. The Debtors financed the tuition by paying $1,200.00 each month. During the 2007-2008 school year, the daughter continued to attend Greensboro Day School. 23 On at least one occasion, the Debtors made a tuition payment using a credit card.
By 2007, the Debtors had exhausted their savings and were solely using credit cards and loans from Rachlin to pay their expenses. Mr. Crink testified that the Debtors used four or five credit cards in
6. Good Faith
The Bankruptcy Administrator did not contend that the Debtors acted in subjective bad faith in connection with the filing of their Chapter 7 petition. However, the Bankruptcy Administrator does argue that the Debtors lived beyond their means up to and during the time of their bankruptcy and that this fact weighs against a finding of good faith. The Court agrees. 25 The Debtors irresponsibly spent money on numerous non-essential goods and services during a two-year period in which they had no income. Mr. Crink made no attempt to obtain a job in another industry, and Mrs. Crink, who had no employment restrictions, made no attempt to obtain employment at all. They spent money that they did not have on a private school for their daughter, luxury vehicles for themselves, dining in expensive restaurants, pet care, and a host of other goods that they did not need and services that they could perform for themselves or do without. Their excessive and unreasonable budget demonstrates that they have continued this behavior post-petition. They filed their Chapter 7 petition with the intention of paying nothing to their unsecured creditors. Moreover, the Court concludes that the Debtors have not moved out of their House, which they tried for years to sell and has no equity, because to do so would have caused them to fail the means test under Section 707(b)(2). These circumstances demonstrate that the petition was filed in bad faith.
The standard for granting a motion to dismiss pursuant to Section 707(b)(3) is no longer “substantial abuse,” but rather just “abuse,” a lower standard. The Debtors have an excessive budget due to their unreasonable housing expenses. They did not file their petition due to any sudden illness, calamity, disability, or unemployment, and, as explained above, they filed their petition in bad faith. The Debtors have the ability to pay $2,185.44 per month to their unsecured creditors in a Chapter 13 plan, which would constitute a 42% dividend over five years. Even if the “ability to pay” factor did not support a finding of abuse, the other Green factors are more than sufficient for the Court to conclude, based on the totality of the Debtors’ financial circumstances, that allowing the Debtors to continue in a Chapter 7 would constitute an abuse of the Bankruptcy Code within the meaning of Section 707(b)(3)(B).
This opinion constitutes the Court’s findings of fact and conclusions of law. A separate order shall be entered pursuant to Fed. R. Bankr.P. 9021.
Consistent with the memorandum opinion entered contemporaneously herewith, it is ORDERED that the Motion of Bankruptcy Administrator for Dismissal of Case Pursuant to Sections 707(b)(1) and 707(b)(3), filed by the United States Bankruptcy Administrator on September 5, 2008, is granted.
Notes
. According to the Debtors’ 2005 tax return, they had $253,746.00 in income that year.
. Ms. Hecht testified that the value of the House today is likely between $500,000.00 and $599,999.00 based on recent sales. On their schedules, the Debtors assigned a value of $478,000.00 to the House, based on its tax value.
. Section 707(b)(2)(A)(I) provides: "In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of—(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $6,575, whichever is greater; or (II) $10,950.”
. The Debtors listed two children as depen-dants on Schedule I and listed a household size of four on their Form B22A. Mr. Crink has an older daughter from a previous relationship. However, Mr. Crink’s oldest daughter spent only about three weeks in Greensboro in 2008. At the hearing, the Debtors admitted that the older daughter was not their dependent and that their correct household size is three.
. Some courts have held that the debtor's ability to pay
alone
may be determinative under a Section 707(b)(3) analysis.
See In re Calhoun,
. “The heart of [BAPCPA’s] consumer bankruptcy reform consists of the implementation of an income/expense screening mechanism (‘needs-based bankruptcy relief or 'means testing’), which is intended to ensure that debtors repay creditors the maximum they can afford.”
In re Kibbe,
. For example, Section 707(b)(7) exempts below median income debtors from the means test. A similar provision could have been added exempting the consideration of an ability to pay from the Section 707(b)(3)(B) analysis for above median income debtors.
. While
In re Nockerts,
. BAPCPA adopted a lower standard— “abuse” — as opposed to the pre-BAPCPA standard of “substantial abuse.”
Lipford,
. According to their Statement of Intentions and their testimony at the hearing, the Debtors plan to retain the House. Mrs. Crink testified that the House is not currently on the market. However, the Debtors also indicated that they are two months behind on their mortgage payments.
. This calculation is based on $10,106.94 of net monthly income as shown on the Debtors' amended Schedule I.
. The Debtors list the following expenses on Schedule J: $284.00 on line 2a for "Electricity and heating fuel," $130.00 on line 2b for "Water and sewer,” $450.00 on line 2c for "Telephone,” $150.00 on line 2d for "Cable & Internet,” and $480.00 on line 3 for "Home maintenance.”
. This figure is based on IRS standards as of the petition date: a $444.00 per month non-mortgage expense and a $1,035.00 per month mortgage expense.
. In fact, Schedule J indicates that the Debtors spend more on utilities alone than what the IRS standards allow for mortgage and utility expenses.
. Mr. Crink testified that in October of 2005 the Debtors planned to sell the House and move into a rental home for approximately $1,800.00 per month.
. Mr. Crink testified that he agreed, effective in January of 2009, to a $25,000 per year salary reduction and to cover the cost of his own health care. He did this because his current employer, PeopLoungers, is struggling, and the furniture manufacturing industry in general is "awful.”
. The IRS standards used are those effective on the Debtors’ petition date.
. In April of 2007, the leases on the Debtors’ vehicles (a Jaguar and a BMW X5) were coming to an end. On April 16, 2007, the Debtors agreed to a new lease on a 2007 Jaguar S-Type sedan for 36 months with a monthly payment of $663.27. On April 17, 2007, the Debtors agreed to a new lease on a 2007 Jeep Wrangler for 36 months with a monthly payment of $482.19. Their monthly vehicle lease payments total $1,145.46. According to national IRS guidelines, the ownership cost of two vehicles should be $978.00 per month.
. This figure is calculated by subtracting $7,921.50 of adjusted expenses from $10,106.94 of net income. Over 60 months, this results in a $131,126.40 distribution to unsecured creditors.
. The sale of the House might produce a deficiency that would have to be repaid in a Chapter 13 plan, thereby diluting the payout to other creditors. However, under Section 1325(a)(4), unsecured creditors must receive as much value in a Chapter 13 plan as they would have received in a Chapter 7 liquidation. Here, unsecured creditors will receive significantly more in a Chapter 13 plan. As one court put it, "less of something is better than more of nothing.”
In re Blankenship,
. Disposable income of $2,185.44 over 60 months is $131,124.40. When that figure is divided by $306,900.00 of unsecured debt and the anticipated deficiency of $50,000.00 from the House, it demonstrates the ability of the Debtors to pay a 42% dividend.
. Mr. Crink pays child support for his older daughter through an odd arrangement involving a San Francisco apartment. Mrs. Crink is the lessee of the San Francisco apartment and makes monthly rent payments of $1,350.00 to the landlord. The Debtors have subleased the apartment to a third party. The third party maltes rent payments of $1,350.00 to a California bank account. The mother of the older daughter receives child support payments from the California bank account. According to Mrs. Crink, this arrangement is necessitated by the eccentricity of the landlord, and the Debtors do not derive any financial benefit from it.
. The youngest daughter currently attends Greensboro Day School, but as of September 1, 2008, the tuition is being paid by Mrs. Crink's mother.
. The Debtors’ actual discretionary spending during this period is likely higher because the statements from several other credit cards of the Debtors were not introduced.
. While the
Green
factor of good faith may appear similar to the "bad faith” standard of abuse under Section 707(b)(3)(A), there is a difference. The
Green
factor of good faith is analyzed under Section 707(b)(3)(B), which requires a court to look to the totality of the circumstances of the debtor's financial situation.
See In re Parada,