In re Hardigan
OPINION AND ORDER ON SUNTRUST BANK’S AND THE UNITED STATES TRUSTEE’S MOTIONS TO CONVERT OR DISMISS
Dеbtor filed his Chapter 7 case on March 7, 2012. On May 17, 2012, Sun-Trust Bank (“STB”), a creditor in the case, filed a Motion to Convert to Chapter 11 or, in the Alternative, to Dismiss (“STB’s Motion to Convert or Dismiss”). Dckt. No. 28.
The remaining issues raised by both Motions to Convert or Dismiss under 11 U.S.C. §§ 707(b)(3) and 706 were tried on January 25, 2013. Based on the stipulations of the parties, the evidence introduced at trial, and the record in this matter, the Court now enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Debtor is a sixty-year-old cardiologist. On the petition date, Debtor resided in a home located at 1 W. Bluff Drive in Savannah, Georgia (the “Bluff Drive Property”). This home was purchased in 2006 for $1,725,000.00 by One Bluff Drive LLC (“OBD”), a company of which Debtor is the sole owner, member, and manager. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 49-51. The purchase of the Bluff Drive Property was financed by Sun-
Prior to the petition, Debtor also owned two investment rental and vacation properties in Colorado. STB held the mortgages on these properties, and the mortgages were cross-collateralized by the Bluff Drive Property. The first Colorado property was sold after about a year, but Debt- or kept the second property until, at STB’s urging, Debtor sold the property in 2010 for $2,300,000.00.
Debtor is currently employed as a principal in a local cardiology practice, Savannah Cardiology, PC. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶ 71. He formerly earned a substantial additional salary as a contract cardiologist providing coverage аt Meadows Regional Medical Center in Vidalia, Georgia, approximately 100 miles from the location of his principal practice in Savannah. Debtor’s Exh. 14. He took on this job of seventy hours per month, in addition to his full-time medical practice, to attempt to deal with the financial difficulties that led to the filing of this case. That contract terminated in 2012. Debtor’s Exh. 16. Because his principal practice already consumes 70-80 hours per week, Debtor has not attempted to replace the income derived from this outside work which, because of his exhausting regular schedule, is not reasonable to continue indefinitely.
While his 2011 and 2012 earnings showed substantially higher income as a product of this part-time work with Meadows Regional, the Debtor’s income from Savannah Cardiology is the relevant income for the pending motion. In 2011, Debtor grossed $422,000.00 and netted $196,000.00 from that practice. Movant’s Exh. 12. In 2012, his gross was $519,000.00 and his net was $201,000.00. Debtor’s Exh. 13. At trial, Debtor testified that pending adjustments in Medicare and Medicaid could potentially further decrease his salary. Recent cuts have already caused Debtor’s net income from his cardiology practice to decline by approximately 20%.
Debtor has three adult sons. His wife passed away in 2004, and so Debtor’s househоld size is one. On the petition date, Debtor owned five automobiles free and clear of liens, three of which were not in working condition. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 85-86. One vehicle was sold for scrap and the proceeds of that sale went to the Chapter 7 Trustee. Id. at ¶ 89. Debtor currently drives a thirteen-year-old Mercedes, and Debtor’s sons have two of the vehicles. Id. at ¶¶ 87-88. Debtor maintains several term life insurance policies for the benefit of his sons. Id. at ¶ 82. The aggregate death benefit on the Debtor’s term-life in
Debtor’s major debts at filing were $1,700,000.00 to STM for his residence, a $905,000.00 construction loan from STB for a renovation to his residence, and a $875,000.00 disputed claim by K.A.P., Inc. (“K.A.P.”) for unpaid cost overruns on the renovation project. These debts were evidenced in Debtor’s schedules, which he filed with his petition and later amended on June 7, 2012. Dckt. Nos. 1 and 39. The amendments to Debtor’s schedules showed a reduced value of his real estate collateral (from $1,740,000.00 to $1,500,000.00), an increased amount of disputed liability to K.A.P. (from $550,000.00 to K.A.P.’s current claim of $875,524.35), and an increased amount of unsecured nonpriority dеbt, largely based on guaranty obligations to STB. Id.; see also Mov-ant’s Exh. 8. Debtor also amended his schedules to show that his debts were primarily consumer in nature and removed from Schedule J the monthly payment amount for the second mortgage on Debt- or’s residence. Dckt. No. 39.
Debtor’s home has been foreclosed on, and so the potential unsecured claim on the STM loan is $200,000.00. Thus, his maximum exposure for unsecured claims by STM, STB, and K.A.P. is approximately $2,000,000.00. He also personally guaranteed $6,200,000.00 for STB loans to Savannah Cardiology. Movant’s Exh. 8, Dckt. No. 39 at 9-10. However, his personal liability on these claims is capped at approximately 25% of that total or around $1,500,000.00.
The renovation project claim originates from a dispute between Debtor and K.A.P., which was hired to do a complete renovation to Debtor’s home. After difficulties with plans and specifications supplied at no cost by K.A.P., Debtor engaged his own architect, and K.A.P. provided a base bid for the project of $1,100,000.00 to be funded by STB. Debtor’s Exh. 1. Debt- or has paid that amount in full and periodic reports from K.A.P. showed the project as 97% complete in October 2008. Debt- or’s Exh. 6 and 9.
However, in December 2008 K.A.P. billed an additional $276,000.00 (Debtor’s Exh. 7), showed a balance due of $234,000.00 in February 2009 (Debtor’s Exh. 9), and finally claimed cost overruns due of $314,000.00 in April 2009. Debtor’s Exh. 10. These bills were largely undocumented, and Debtor testified that his inquiries into the bases for these overruns went unanswered.
To deal with the potential K.A.P. claim, Debtor had obtained a commitment from STB to advance another $350,000.00. Debtor tried to resolve the dispute until K.A.P. filed a contractor’s lien in May 2009 for $544,000.00. Debtor’s Exh. 11. When this occurred, Debtor decided not use the advanced $350,000.00 and returned it to STB. Both K.A.P. and STB sued Debtor. On the eve of trial, K.A.P. and Debtor entered into a week-long mediation with the assistance of the presiding Superior Court Judge. A settlement amount of $200,000.00 was determined, but any settlement was contingent on a feasible settlement with STB, and Debtor’s negotiations with STB were unsuccessful.
Debtor filed his bankruptcy case a week after this mediation. Prior to the petition, Debtor had incurred $161,125.52 in legal fees and expenses defending the K.A.P. and STB claims. Dckt. No. 130. As of February 4, 2013, Debtor had incurred $176,212.18 in legal fees and expenses in connection with that litigation. Id. K.A.P. initiated an Adversary Proceeding (No. 12-4069) against Debtor on October 17, 2012, asserting that its claim is non-dis-chargeable. Dckt. No. 80. This Court has allowed K.A.P. and Debtor to go forward with their state court litigation to determine the amount, if any, of Debtor’s liability to K.A.P. for the renovation project, but has retained jurisdiction on the issue of dischargeability of K.A.P.’s claim under 11 U.S.C. § 523(a). A.P. Dckt. No. 13. At the hearing, the Court estimated K.A.P.’s claim to be $115,000.00.
Movants and Debtor entered into a Statement of Facts Not in Dispute, which was filed with the Court on October 30, 2012. Statement of Facts Not in Dispute. Dckt. No. 87. The Court adopts the parties’ stipulations numbered 1-117 in full and incorporates this document by reference into this Order.
At trial, the parties agreed to the following additional stipulations:
(1) Claims 5, 6, 7, and 8 are claims of STB;
(2) Debtor’s budget expense (Mov-ant’s Exh. 4-A, Dckt. No. 82, Line 13c) of $6,608.33 per month is a post-salary deduction for debt owed to LMC Funding.4
(3) Movant’s Exhibit 4-A, dated September 9, 2012, shows disposable monthly income of $9,897.44 after Debtor’s medical group deducts his pro-rata share of debt service on personal guaranties to STB and after the additional $6,608.33 per month is paid directly to LMC Funding.
(4) Movants do not challenge the propriety of either of the above deductions from Debtor’s income.
(5) Movants do challenge the propriety of Debtor’s expenditures of some $3,900.00 per month comprised of:
(a) Insurance premium of $1,170.00 per month to purchase a term policy on Debtor’s life worth $9,000,000.00 in death benefits to his adult sons;
(b) Bookkeeper expenses of $575.00 per month;
(c) Support of his adult sons for a рortion of auto expenses of $600.00 per month and $800.00 per month in direct assistance;
(d) Recreation expenses of $666.00 per month; and
(e) Storage unit expenses of $175.00 per month.
Debtor, STB, and the UST filed post-hearing briefs on February 4, 2013. Dckt. Nos. 124, 126, and 123. In their briefs, each party calculated and presented the Court with a projected payout over five years to unsecured creditors in a hypothetical Chapter 11 case, using various expense and income amounts. Ultimately, Debtor projected a payout of 21.9%, the UST pro
The Chapter 7 Trustee is currently holding for distribution approximately $185,000.00, which includes Debtor’s 2011 tax refund of $137,000.00. Trustee’s Oct. 2012 Interim Report, Dckt. No. 88; Debt- or’s Exh. 12. Debtor’s 2012 tax refund will likely be around $110,000.00. These tax refund amounts are due to a net operating loss carryforward that will be consumed in 2012 and, going forward, will not shield any of Debtor’s income from tax liability. Debtor’s Brief, Dckt. No. 124 at 3; see also Debtor’s Exh. 12.
LEGAL STANDARD
Currently pending before the Court are STB’s and the UST’s Motions to Convert or Dismiss. Dckt. Nos. 28 and 36. Mov-ants primarily seek conversion or dismissal under 11 U.S.C. § 707(b)(3)(B), but as an initial matter, the Court will analyze their secondary arguments under 11 U.S.C. §§ 707(b)(3)(A) and 706(b).
Bad Faith under 11 U.S.C. § 707(b)(3)(A)
The UST argues that Debtor’s case should be converted or dismissed under § 707(b)(3)(A) because Debtor’s case was filed in bad faith. Section 707(b)(3)(A) provides that in considering whether the granting of relief would be an abuse, “the court shall consider whether the debtor filed the petition in bad faith.” 11 U.S.C. § 707(b)(3)(A). Once the movant puts the debtor’s good faith at issue, the burden shifts to the debtor to establish his good faith. In re McKay,
As support for his contention that Debtor’s case was filed in bad faith, the UST asserts that Debtor “misrepresented his monthly expenses, misrepresented his true financial condition, sought to evade means test review by falsely claiming that this case involved primarily non-consumer debt, and disguised rather than disclosed his ability to repay creditors.” UST’s Brief Dckt. No. 126 at 13. The UST also suggested that Debtor had a retaliatory
I have examined the UST’s contentions and find them to be without merit. Debt- or’s designation that this case involved primarily non-consumer debt is excusable in light of the complexity of his financial affairs. The character of his debt is related to the question of the size of his guaranty liability, which at one time was unlimited and was later capped. He amended his schedules to correct certain errors, and although the schedules were not further amended, no one was misled and all parties were made aware of the capped guaranty liability and Debtor’s overall financial circumstances. I find no basis for a bad faith finding from these facts. See Hibbard,
Therefore, Debtor’s case should not be dismissed or converted pursuant to 11 U.S.C. § 707(b)(3)(A) as a bad faith filing.
Conversion under 11 U.S.C. § 706(b)
Movants seek conversion of Debt- or’s case to Chapter 11 pursuant to § 706(b) of the Bankruptcy Code, which states: “On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.” 11 U.S.C. § 706(b). The burden is on the moving parties to show that the case should be converted. In re Home Network Builders, Inc.,
A case may only be converted to Chapter 11 if Debtor may be a debtor under Chapter 11. 11 U.S.C. § 706(d) (“Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.”). The statute fails to delineate any specific grounds for conversion, but a court “‘should consider anything relevant that would further the goals of the Bankruptcy Code.’ ” In re Gordon,
STB relies on the same evidence from its § 707(b)(3) motion, discussed infra, to support conversion under § 706(b) and does not provide any separate grounds for conversion. See STB’s Brief, Dckt. No. 123. The UST delves somewhat into discrete grounds for conversion under § 706(b), arguing that “all interested parties would benefit from converting this case to chapter 11,” including Debtor, who he argues would benefit from the protection of the automatic stay while he continues his litigation with K.A.P. UST’s Brief, Dckt. No. 126 at 14-15.
Courts have relied on various factors to determine whether conversion under § 706(b) is appropriate. The UST, citing Gordon, mentions several of these factors
The UST argues that the facts of this case are similar to those in Gordon, and thus a similar result (conversion under § 706(b)) should follow. UST’s Brief, Dckt. No. 126 at 15. In Gordon, however, the debtor was not subject to the abuse provisions of § 707(b) as Debtor here is because that debtor did not have primаrily consumer debts. I find that Gordon is distinguishable. More importantly, I find that where both § 706 and § 707(b) may apply, the more specific provisions of § 707(b) should take precedence. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, — U.S. -,
As originally written, § 706 dealt only with conversion and § 707 dealt only with dismissal. Later amendments included the remedy of conversion in § 707(b), but only with respect to consumer debtors. Thus, for non-consumer debtors such as Gordon, § 706 is the only avenue to convert a Chapter 7 case. For consumer debtors, however, both sections apply. Because § 707(b) is the more comprehensive of the two, § 707(b) should be used exclusively for deciding conversion issues when the issue is bad faith or abuse. All that remains under § 706 for a consumer debtor is whether a discretionary conversion is warranted for reasons other than those that fit into the body of law interpreting bad faith and abuse under § 707(b).
Movants contend that Debtor’s case is abusive, and that it should be dismissed or converted to Chapter 11. 11 U.S.C. § 707(b)(1) provides in relevant part:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or IB of this title it if finds that the granting of relief would be an abuse of the provisions of this chapter.
In assessing whether a filing is abusive under § 707(b)(3)(B) the Court must consider whether the “totality of the circumstances ... of the debtor’s financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3)(B). The burden is on the mov-ants to establish by a preponderance of the evidence that Debtor’s filing is abusive. In re Cribbs,
This Court has previously utilized a totality of the circumstances analysis-that required an assessment of eight non-exclusive factors.
(1) Can Debtor, from anticipated income and reasonable budget adjustments, repay a meaningful amount of his debt? Is Debtor eligible for a Chapter 13 or Chapter 11 case that hypothetically would pay a substantial or meaningful dividend to creditors over a five-year repayment period?
(2) Does Debtor have a stable source of future income sufficient to repay a meaningful amount of debt and still provide an opportunity to restore himself to a stable financial position?
(3) Did Debtor experience some unforeseeable calamity that triggered the filing?
(4) Were the debts incurred over a significant period of time, consistent with Debtor’s ability to manage them, or were they the result of recklessness or unrealistic expectations about ability to repay, such as occurs in a pre-bankrupt-cy spending spree?
(5) Did Debtor make good faith efforts prior to filing to deal with the debt without resorting to bankruptcy?
(6) Is Debtor using the bankruptcy process to restore Debtor’s financial stability and obtain a fresh start, or to improve Debtor’s financial standing, for example, by retaining all valuable property secured by outstanding debts and discharging unsecured debt in order to enable the retention of substantial assets?
(7)Are there other factors concerning the nature of Debtor’s obligations that aggravate or mitigate the impact of Debtоr’s past behavior or future prospects?
The Court will now assess these factors as they pertain to whether the totality of the circumstances indicates Debtor’s case should be dismissed or converted as abusive.
(1) Can Debtor, from anticipated income and reasonable budget adjustments, repay a meaningful amount of his debt ? Is Debtor eligible for a Chapter 13 or Chapter 11 case that hypothetically would pay a substantial or meaningful dividend to creditors over a five-year repayment period ?
This case is pending as a Chapter 7 case. Currently the Trustee is holding for distribution $185,000.00 which, after estimated expenses of administration, will yield a dividend to unsecured creditors of approximately 6.6% in this Chapter 7 case. Debtor, STB, and the UST have submitted their projections in post-trial briefs, and I have reviewed their analyses of the additional sums a hypothetical Chapter 11
Even in this “best case scenario” from Debtor’s view, by most any standard, Movants have carried the burden of showing that the “ability to pay” element of a totality of the circumstances analysis has been met.
It is noteworthy that the Court in In re Attanasio,
Clearly, with BAPCPA the bar was lowered from “substantial abuse” to “abuse,” and a debtor enters Chapter 7 with no presumption in his favor. Yet conceptually the historic notion persists that abuse should not be predicated solely on having “sufficient income to pay some substantial part of [the] indebtedness” unless there is an ability to make such payments “without difficulty, as they become due.” In re Balaja,
Having concluded that Debtor’s “ability to pay” supports a finding of abuse, but that other factors must be considered, I now proceed to analyze those factors.
(2) Does Debtor have a stable source of future income sufficient to repay a meaningful amount of debt and still provide an opportunity to restore himself to a stable financial position?
Debtor has a stable future income. This generally supports a finding of abuse; however, considering Debtor’s age and the time horizon to complete a five-year payout to get a “fresh start” and reestablish some semblance of his pre-calamity condition, this factor does not weigh in favor of a finding of abuse.
The Legislative History to the pre-BAPCPA version of § 707(b) explained the goal of a “fresh start”:
This provision represents a balancing of two interests. It preserves the fundamental concept embodied in our bank-ruptey laws that debtors who cannot meet debts as they come due should be able to relinquish nonexempt property in exchange for afresh start. At the same time, however, it upholds creditors’ interests in obtaining repayment where such repayment would not be a burden. Crushing debt burdens and severe financial problems place enormous strains on borrowers and their families. Family life, personal emotional health, or work productivity often suffers. By enabling individuals who cannot meet their debts to start a new life, unburdened with debts they cannot pay, the bankruptcy laws allow troubled borrowers to become productive members of their communities. Nothing in this bill denies such borrowers with unaffordable debt burdens bankruptcy relief under Chapter 7. However, if a debtor can meet his debts without difficulty as they become due, use of Chapter 7 would represent a substantial abuse.
S.Rep.No. 65, 98th Cong., 1st Sess. 53-54 (1983) (emphasis added). This explanation of how § 707(b) was meant to be applied pre-BAPCPA has been referred to by the United States Courts of Appeal for both the Eighth and Ninth Circuits as “the best available evidence of Congress’s intent in enacting section 707(b).” In re Walton,
Instead of requiring dismissal of a Chapter 7 case whenever the debtor had sufficient income to pay some substantial part of his or her indebtedness, as with the future income test, ‘substantial abuse’ was seen as requiring dismissal only where the debtor has sufficient income to pay all of his or her indebtedness, without difficulty, as it becomes due ... If requiring repayment by a debtor of his debts would be a burden that would place an enormous strain on the debtor or the debtor’s family, or otherwise cause family life, personal emotional health or work productivity to suffer, then that would be one indication that the debtor cannot meet debts as they become due.
Attanasio,
Since BAPCPA did not adopt a pure bright line “future income” test in § 707(b)(3) I find that the “totality” inquiry must be analyzed within the context of a fresh start in which debtor has the opportunity to restore himself to a measure of financial health. See In re White,
At age sixty, a five-year payout based on a minimalistic lifestyle leaves Debtor with a limited time frame in which to obtain the restoration to financial health that a properly-applied fresh start requires. He is in good health, highly skilled, and obviously capable of long hours of work, but within the horizon of a Chapter 11 plan it is foreseeable that Debtor might not be able to maintain the grueling schedule he has had until now. And in the final analysis,
Moreover, the K.A.P. claim creates a major impediment to Debtor obtaining a timely fresh start if he is forced into a Chapter 11 case. As it stands now, as discussed earlier, a projected dividend of 6.6% to unsecured creditors in this Chapter 7 includes the estimated K.A.P. claim of $115,000.00. However, K.A.P. is seeking a ruling that its asserted claim of $875,000.00 is nondischargeable. That issue may take months or years to resolve. In the meantime, K.A.P. would have no incentive to support a Chapter 11 plan that is- projected to pay just over 20% of its smaller estimated claim, leaving an uncollected bаlance for it to collect more than five years from now. Further, the other unsecured creditors whose debts are dis-chargeable will have no incentive to support a plan in which K.A.P. is paid a higher percentage than they are.
This alone makes any possible Chapter 11 plan confirmation dubious in the short run, and if the K.A.P. claim is nondis-chargeable, Debtor will not be able to address 80% of whatever that claim is until after completion of a Chapter 11 more than five years hence.
In contrast, if this case continues as a Chapter 7, all unsecured creditors will be paid pro-rata, perhaps within months. Debtor will receive a discharge of all his debt that is not tainted by any misconduct. Immediately thereafter, he will have to address the potential nondischargeability of the K.A.P. claim, and if it is so determined, he will pay it from future income over perhaps several years. If the debt is nondischargeable, this is as it should be. The point is, however, that in Chapter 7 he will be able to begin paying on the final claim that may impair his fresh start at least five years earlier than if he is forced into a Chapter 11.
(3) Did Debtor experience some unforeseeable calamity that triggered the filing or did Debtor simply pyramid debt until it became unmanageable?
Debtor, а hardworking, well-compensated, and highly skilled professional, incurred debt on a personal residence, two vacation/investment homes in Colorado, and commercial property related to his medical practice. Unforeseeably to him the real estate market collapsed, threatening financial ruin in the commercial arena and eviscerating his very large equity in the vacation/investment homes. He suffered substantial cost overruns
(4) Were the debts incurred over a significant period of time, consistent with Debtor’s ability to manage them or are they the result of recklessnеss or unrealistic expectations about ability to repay, such as a pre-bankruptcy spending spree?
The period of time over which the debts were incurred does not support a finding of abuse. Debtor’s major debts accrued years before his bankruptcy filing, and they certainly were not incurred in a last minute spending spree, which if such facts were present, would lead to a different conclusion regarding abuse. See, e.g., Truax,
(5) Did Debtor make good faith efforts prior to filing to manage the debt without resorting to bankruptcy?
Debtor appears at all times to have dealt fairly and honorably with his creditors. He historically has had large debts, both personal and investment in nature, but earned substantial income as a physician and was managing his debt until the unprecedented and unforeseeable economic meltdown from 2008 forward destroyed his equity in his residence, and decimated his equity in investment property. He then agreed to sell the investment property to pay the secured debt, but lost most of his equity in it. He toоk on the back-breaking additional burden of seventy hours of monthly emergency room work in a nearby community in order to fund his debts, attempt to complete his home renovation, and ultimately fund his defense of what he considered an excessive claim of lien by K.A.P. A week-long mediation presided over by a well-respected Superior Court Judge reached a numerical settlement, but Debtor, strapped for cash, and unable to finance that sum could not consummate the settlement.
No witness called by STB or the UST testified, nor were any documents introduced to contradict or negate my conclusion that Debtor dealt at all times with his lenders in a forthright and cooperative way to resolve his debt crisis. For example, despite the huge losses in value of the vacation/investment home, Debtor, at the urging of his lenders on his primary residence, sold his Colorado property and paid that debt off.
In the final analysis, his lenders chose not to extend additional funds to him in order to payoff the K.A.P. lien or to provide long-term financing for his home, which he believed he could fund. This is not to suggest anything negative concerning the lenders’ actions, as it is entirely likely that given the debt size compared to shrinking asset values, it simply was not a loan the lenders could underwrite. The point is, unlike the debtor in this Court’s decision in In re James,
These circumstances lead me to the conclusion that in dealing with his creditors he acted in an appropriate fashion, and so this factor does not support dismissal.
(6) Is Debtor using the bankruptcy process to restore Debtor’s financial stability and obtain a fresh start, or to improve Debtor’s financial standing, for example, by retaining all valuable property secured by outstanding debts and discharging unsecured debt in order to enable the retention of substantial assets?
I find that Debtor is not using the bankruptcy process to “game” the system. To the contrary, he has sold or surrendered all his personal real estate, has reduced his secured debt and, whatever the outcome of these Motions to Convert or Dismiss, will retain little, if anything, in the way of secured property.
(7) Are thеre other factors concerning the nature of Debtor’s obligations that aggravate or mitigate the impact of Debtor’s past behavior or future prospects?
This case illustrates the complexity and conceptual difficulty of applying what is intended solely as a consumer bankruptcy body of law to a fact pattern atypical of a consumer bankruptcy case. By definition, Debtor is, and has been stipulated to be, subject to § 707(b) which requires as a threshold that the debts be “primarily
Debtor • is liable for approximately $1,500,000.00 as a guarantor of STB debts incurred with his professional. colleagues for commercial purposes. He also services debt to LMC Funding as a condition of his employment. Still, the claim on his personal residence exceeded $2,700,000.00 at filing, and debt on a personal residence is widely accepted to be “consumer” debt,
The great intangible and mitigating factor in Debtor’s case is that had he spurned STB’s request and refused to liquidate his valuable investment property in Colorado at what may have been the market bottom, two things would likely be different. By now, he might have seen real estate prices rebound to a level where a current sale would yield him some of the $2,000,000.00
Consumer Debt_Minimum_Maximum
_STM $1,700,000.00 $1,700,000,00
_SIB_$905,000.00 $905,000.00
_K.A.P. $115,000.00
Total $2,720,000.00 $3,480,000.00
Non-Consumer Debt_Minimum_Maximum
_Colorado Property $1,360,000.00
_Guaranty Debt_$1,360,000.00
Total
Historically, his total debt service obligations were primarily non-consumer in nature. Had he not done his very best to deal with his debt crisis by liquidation of
This factor is a mitigating one in arriving at a holistic view of whether this Debt- or has been abusive which, as I have held, requires a “corrupt, deceitful, perversion of the Bankruptcy Code.” McKay,
CONCLUSIONS OF LAW
So what is the correct result for a case such as this, which, if filed under Chapter 11 could theoretically pay as much as 15% more, or $377,000.00 more to creditors over a five-year period than his pending Chapter 7, when, other than the magnitude of payments, there is no evidence whatsoever that Debtor has abused the bankruptcy process? The answer lies not only in the statute, which I have already concluded evidences that Congress made a policy decision not to base a “totality” grounds dismissal solely on ability to pay, but within the historical context that debt relief has in our laws and traditions.
At least from the founding of this Republic, there has been a recognition of the critical role of a system for debt relief in a vibrant free market. Article I of the United States Constitution provides, among Congress’s powers, the right to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. This enshrined, as supreme federal law, the concept of debt relief, which came to these shorеs 280 years ago with the founding of Georgia, the Thirteenth British Colony. Here in Savannah in 1733, General James Oglethorpe was sent with a charter that envisioned a fresh start in a new land, free of debt, for English citizens who had been imprisoned for unpaid debt.
Whereas we are credibly informed, that many of our poor subjects are, through misfortunes and want of employment, reduced to great necessity insomuch as by their labor they are not able to provide a maintenance for themselves and families; and if they had means to defray their charges of passage, and other expences, incident to new settlements, they would be glad to settle in any of our provinces in America where by cultivating the lands, at present waste and desolate, they might not only gain a comfortable subsistence for themselves and families, but also strengthen our colonies and increase the trade, navigation and wealth of these our realms ... Know ye therefore, that we have ... willed, ordained, constituted and appointed ... James Oglethorpe ... and such other persons as shall be elected in the manner herein after mentioned, and their successors to be elected in the manner herein after directed ... and shall be one body politic and corporate, in deed and in name, [known] by the name of the Trustees for establishing the colony of Georgia in America.
SELECT CHARTERS AND OTHER DOCUMENTS Illustrative of the History of the United States, 1606-1775 at 236-237 (William MacDonald ed., The Macmillan Company 1899).
Since that time, bankruptcy legislation has evolved, but in 1978 the modern Bankruptcy Code was adopted. The Bankruptcy Reform Act of 1978 evolved from a
The principal purpose of the modern Bankruptcy Code is to “grant a ‘fresh start’ to the ‘honest but unfortunate debt- or.’ ” Marrama v. Citizens Bank,
In 2005 BAPCPA dropped the word “substantial” but readopted the concept of “abuse” as a limit on the types of debtor behavior that could be excused in permitting access to a Chapter 7 discharge. Congress created a mathematical formula in the means test to assist in screening new Chapter 7 eases in § 707(b)(2). If a debtor fails the means test, that debtor is presumed to have abused the system and can be denied access to the Court in a Chapter 7 case. For those who “pass” the means test, Congress provided in § 707(b)(3) an alternate avenue to the same end if a court finds the debtor to have filed “in bad faith” or if the “totality of the circumstances ... demonstrates abuse.”
In McKay I held that the relеvant inquiry is whether there has been an abuse of the Bankruptcy Code, rather than a mere mechanical assessment of various factors. McKay,
In this case the record is devoid of any evidence that Debtor fits into the abusive category of debtors. I have prеviously ruled that Debtor did not “fail” the means test, based as it is on facts as they existed at the moment of filing, so no adverse presumption of abuse arises. In re Hardigan, Case No., Dckt. No. 111 (Bankr.S.D.Ga. Dec. 20, 2012) (Davis, J.). Looking forward, the only circumstance which has been demonstrated is Debtor’s ability to fund a partial, but meaningful repayment of his debt. However, there is no evidence of any misconduct, shady or unethical dealings with his creditors, or concealment or misrepresentation of his financial condition. Based on the foregoing, I find that Movants have not proven by a preponderance of the evidence under 11 U.S.C. § 707(b)(3)(B) that Debtor’s Chapter 7 is an abuse of the letter and spirit of the Bankruptcy Code policy of providing a fresh start to the honest, but unfortunate debtor.
Certainly, in light of Debtor’s earning capacity and his debt structure, these facts reach the outer limits of the concept that ability to pay, standing alone, is insufficient to support dismissal for abuse under a totality analysis. But the principle is correct, and to be faithful to that principle, this result is as well.
ORDER
' Pursuant to the foregoing, IT IS THE ORDER OF THIS COURT that the Motions to Convert or Dismiss filed by Sun-Trust Bank and the United States Trustee are DENIED. The case will remain and be administered as a Chapter 7 case.
Notes
. For this Order, citations to the main bankruptcy case [12-40484] will appear as "Dckt. No. _citations to K.A.P., Inc.’s Adversary Proceeding [12-4069] will appear as "A.P. Dckt. No_".
. Except where the precise number is material, I will utilize rounded or approximate numbers throughout this opinion.
. Debtor testified that at one time he was jointly and severally liable on certain of these obligations, but that they were later amended to reduce individual exposure to liability. STB filed four proofs of claim in this case for these guaranties and attached the personal guaranty documents that show Debtor's capped liability. Movant’s Exh. 8.
. Debtor is funding $6,608.33 per month to assist his medical practice or an entity controlled by it in paying a substantial commercial debt, the LMC Funding payment. Debtor is not personally liable for the debt, which is non-consumer in nature, but Debtor has characterized his payment obligation as a condition of employment and that characterization has not been disproved.
. Other factors under § 706 that courts have considered include the nature of the debtor's assets and business operations and whether a separate business infrastructure exists, as well as the amount of administrative expenses that would accrue in a Chapter 11 case. Ryan,
. Here, to the extent that § 706 remains relevant to this case, I find that Dеbtor has no business to reorganize, which weighs against a finding that the case should be converted. Additionally, the administrative expenses that would accrue in a Chapter 11 case would be substantial, and therefore, this factor does not support conversion. It does not appear, however, that a conversion would be futile in light of 11 U.S.C. § 1112(b) as it is not apparent at this time that any of the factors evidencing "cause” for dismissal would apply to Debtor. The principal consideration in analyzing § 706(b) is what result would benefit the creditors, debtor, other parties in interest, and the estate. In considering whether conversion would inure to the benefit of all parties, the Court agrees that the estate would benefit from conversion to Chapter 11. As noted infra, Debtor has the ability to pay a meaningful portion of his debt in Chapter 11 and the estate would be larger in a Chapter 11 as Debtor’s earnings would be able to be included pursuant to 11 U.S.C. § 1115. However, the benefit to the estate must be balanced with the impact on Debtor, and conversion under these circumstances would not further the Debtor’s interests. Debtor would not be permitted to reconvert to Chapter 7. See 11 U.S.C. § 1112(a)(3) ("The debtor may convert a case under this chapter to a case under chapter 7 of this title unless ... the case was converted to a case under this chapter other than on the debtor’s request.”). Instead, Debtor would for five years be, like the similarly situated debtor in Lobera, “trapped in a Chapter 11 proceeding that he does not need and does not want.” Lobera,
. However, in McKay I made it clear that the totality of the circumstances test is not a mere mechanical exercise. McKay,
. Debtor is not eligible for Chapter 13 because of the amount of his unsecured debt. However, Debtor is eligible for Chapter 11. See Toibb v. Radloff,
. In arriving at this number, I note that Debt- or’s counsel responded to comments made by me from the bench that the payment of $1,170.00 per month for life insurance benefits for his adult sons was questionable, by removing that expense item from his deductions. However, his budgeted housing expense of $1,250.00 for rent is unusually modest for a person of his income. If the Court needed to fine tune a budget for the purposes of this case, a higher housing expense could completely offset this life insurance expense. This would reduce the projected payout by approximately $70,000.00 ($1,170.00 x 60) and the dividend to around 19% over five years, which is only 12.4% higher than a Chapter 7 payout that could be made within a few months. I would not disallow such an adjustment in housing, and if the Debtor chose to forego the added comfort attainable with a higher living expense in order to provide for his sons, that is not, in my view, a disallowable shift of resources. See In re McKay,
. But see the comprehensive and thoughtful analysis of my colleague, the Honorable Benjamin Cohen, in In re Attanasio,
Arguably, there is an ideal level of income, absent extenuating circumstances, that will easily allow a normal family of a certain size to live a reasonable lifestyle. But does 707(b) require a debtor to apply anything received over and above that level of income, even if it is a pittance, to the payment of creditors? Or is 707(b) activated only if a debtor can pay a significant or substantial amount of money to creditors? If that is the proper question, does a ‘rich’ or relatively wealthy person not have the ability to pay a substantial amount of money to creditors, whether that is a substantial portion or percentage of his or her overall debt or not? And conversely, does a ‘poor’ or relatively impecunious person by definition not lack the ability to pay a substantial amount of money to creditors, whether thatis a substantial portion or percentage of overall debt or not?
Id. at 192 (emphasis added). The court in Attanasio also questioned whether all debtors are required to live the same lifestyle during the period of repayment.
Can a court create an equal playing field for application of 707(b) unless all are required to live the same lifestyles and all have the same level of living expenses? Should one debtor be allowed to drive a bigger or more expensive car than another? Must all debtors send their children to public schools rather than private schools? Should one debtor be allowed to pay for a child's college education while another may not? Should all debtors be forbidden from giving to religious organizations and charities during the period of repayment? Should one debtor’s family be allowed to eat more or use more electricity or water or gasoline than other debtors? Should one debtor be allowed to take a vacation during the period of repayment while another is forced to stay home?
Id. at 196; see also In re Lapke,
. The Eleventh Circuit recently examined whether a debtor’s ability to pay his or her debts may be taken into account under the totality of the circumstances test in § 707(b)(3)(B) and determined that such an inquiry is permitted. In re Witcher,
. The court stated:
The key to a fair review of a debtor’s expenses and lifestyle is for the review to be based on publicly acknowledged, objective criteria, not on moral perspectives, subjective beliefs or life experiences of those making the review. The appropriate test then to assure such a review is to compare a debtor’s total family expenses to the typical expenses of debtors in similarly situated households, with [ujpward adjustments for higher costs of living attributable to a particular debtor’s family-rather than through an item by item examination. Such information is published regularly and is readily available from federal government agencies such as the U.S. Government Printing Office, or from government document departments of public libraries ....
The use of such objective criteria serves several purposes. It provides an objective starting point and reference point for all participants in the 707(b) litigation process. It provides an evidentiary basis for 707(b) determinations. It helps insure equality of treatment for similarly situated debtors. And, it bolsters the credibility of the bankruptcy court and bankruptcy process by measuring the situations of all debtors against objective criteria available to all persons.
Attanasio,
. Congress created in the means test a "needs-based test to remedy the 'inherently vague’ 'substantial abuse’ dismissal standard." In re Clary, slip copy,
. The initial base bid for the renovation was $1,100,000.00 (Debtor’s Exh. 1), and Debtor has paid that amount in full. Debtor's Exh. 9. K.A.P. filed a contractor's lien for $544,000.00 (Debtor's Exh. 11), nearly 50% above the initial estimate, and K.A.P.’s claim is currently at 5875,000.00, nearly 80% above the initial estimate.
. These facts are distinguishable from the facts in In re Allen,
. Perversely, had he refused to sell this property into a collapsing market, it is possible that this litigation would never have ensued at all. The retention of that investment property could have resulted in his debt not being "primarily” consumer debt at all — a threshold requirement to the entire § 707 process. See infra at 455-57.
. Most courts have determined that “primarily” means more than half of the total dollar amount owed. See, e.g., Stewart v. U.S. Trustee (In re Stewart),
. See In re Woodard,
As noted supra, Debtor is paying $6,600.00 monthly to LMC Funding. Although he is not personally liable to LMC for the debt, it is a condition of his employment. The requirement that he divert his personal cash flow to service this commercial debt renders it, in effect, though not by definition, a personal non-consumer obligation.
. The Code defines "consumer debt” as "debt incurred by an individual primarily for a personal, family or household purpose.” 11 U.S.C. § 101(8). The Code does not define "non-consumer debt”, but courts have held that the test for determining whether a debt is non-consumer is whether it was incurred with a profit motive. See, e.g., In re Booth,
The guaranty debt to STB was incurred by Debtor’s medical practice, and thus, it is clear that this dеbt was incurred with a profit motive and is non-consumer debt. As for the Debtor's Colorado property, at trial he testified that this property was a rental property. Although he also explained that the property was to be used as a vacation home, from his testimony it appears that his investment interest in the property was the primary purpose in incurring this debt rather than personal or family use. Accordingly, this debt is also non-consumer debt.
. Estimated based on the settlement amount from Debtor and ICA.P.’s mediation less the sum Debtor has already paid.
. Based on K.A.P.'s claim amount.
. The debt amount for Debtor's Colorado property is unknown, but if the debt exceeded this amount, his non-consumer debt would have been greater than his consumer debt.
. Based on the sales price of the Colorado property, which Debtor testified paid off his Colorado property debt to STB.
. Based on the claims STB has filed in the case for the guaranty debt. Movant's Exh. 8.
. Based on Debtor’s maximum liability under his personal guaranties. See id.
. To illustrate this distinction: in 1991, I held that intentional failure to obtain workers’ compensation insurance gives rise to a § 523(a)(6) "willful and malicious injury” exception from discharge of a debt owed to a party who was injured in an accident that would have been covered by workers compensation had the policy been provided. Hester v. Saturday (In re Saturday),
Thus, such debt is dischargeable in this Circuit. But arguably, a totality of circumstances analysis could still take into account a debtor's unlawful behavior in failing to provide mandated insurance coverage in the context of a § 707(b) motion to dismiss or convert.