In Re Johnson
- Reporters:
- , , ,
- Before:
- Bowie
ORDER ON MOTION TO DISMISS OF UNITED STATES TRUSTEE
PETER W. BOWIE, Chief Judge.
The United States Trustee has moved to dismiss this Chapter 7 case under
This Court has subject matter jurisdiction over the proceeding pursuant to
BACKGROUND
Steven and Michelle Johnson (Debtors) filed their petition on April 14, 2008. The Debtors’ scheduled property includes their residence in Escondido, California (Residence). The Debtors built the approximately 4,000 square foot Residence in May of 2003. Unfortunately for Debtors, shortly after the Residence was completed, Mr. Johnson, an airline pilot, had to accept a $60,000 cut in pay. The Debtors list the value of the Residence at $900,000, and the debt secured by it at nearly $1,100,000. The monthly mortgage expense for the Residence is $6,060, and total expenses associated with the property are scheduled at $8,286.
Debtors use a portion of the premises to operate Mrs. Johnson’s non-profit dog rescue operation. Generally, Mrs. Johnson keeps and cares for six dogs on the property at a time. The operation is not revenue-generating.
The United States Trustee premises the motion to dismiss on the argument that Debtors’ expenses to pay their mortgage and to maintain their Residence are unreasonably high. If they would give up the property they could purchase or rent at substantially lower expense, and in so doing they would free up income for the benefit of unsecured creditors. Therefore, the argument goes, allowing these Debtors to receive a discharge under Chapter 7 would constitute an abuse of Chapter 7.
DISCUSSION
The United States Trustee contends that the Debtors’ monthly housing expense, made up primarily of the mortgage payment, is unreasonably high and urges the Court to consider this an abuse under the totality of circumstances of
What makes the issue so difficult is trying to discern what interplay, if any, Congress contemplated as between subsection (b)(2) — the Means Test — and subsection (b)(3) — totality of the circumstances. A number of people anticipated during the years of debate over bankruptcy reform that Congress was going to set caps on allowable expenses for debtors as part of the structure of the Means Test. Indeed, Congress imported into the Means Test the “National Standards and Local Standards” issued by the Internal Revenue Service “for the area in which the debtor resides....”
In sharp contrast to the foregoing, the very next subpart,
(in) The debtor’s average monthly payments on account of secured debts shall be calculated as the sum of—
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and
(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under Chapter 13 of this title, to maintain possession of the debtor’s primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor’s dependents, that serves as collateral for secured debts; ....
In other words, if a debtor has a long-term secured obligation (contractually due for 60 months or longer), those net amounts are added onto the Means Test calculation on top of the IRS Local Standards, such as for housing. Moreover, those amounts are not subject to any specified cap, whether as a percentage of the IRS Standards, a dollar amount, or even a “reasonable and necessary” standard.
If the foregoing is how the Means Test of
A much bigger impact flows from the decision to let debtors deduct their totalaverage monthly secured debt payments, with no express requirement that the collateral be necessary or the amount of the debt be reasonable. The omission of those limits appears intentional, for the very next sentence in the Code, which allows an additional deduction of cure payments, is expressly limited to cure payments necessary to retain possession of a few crucial assets like a principal residence and motor vehicle needed for the debtors and dependents. The unlimited secured debt deduction bought the support of home mortgage lenders and when Congress threw in limits on cramdown in Chapter 13, got the automobile industry on board as well. This deduction, however, virtually assures that an extremely small number of debtors will emerge as can-pays.
The authors observed:
After cutting that gaping hole in the means test, Congress authorized a long list of additional deductions.... Among these are deductions such as starting a health savings account or purchasing family health insurance at the time of filing, continuing to provide care for elderly or disabled household members even if the debtor has no legal obligation to do so, and private school expenses of $1500 per year per child. These deductions advance policies far different from maximum repayment of unsecured creditors.
Congress could have made the means test meaner than it is, and the pass rate lower. However, Congressional decisions to serve other important policies and carry support for enactment led to changes which substantially reduced the number of debtors the means test will exclude from chapter 7.
Id. at 676-77.
While it is a side issue to the present analysis, the authors go on to argue “that the means test is now the exclusive ability to pay test.”
Id.
at 678. This Court disagrees with that blanket conclusion. For example, a Means Test analysis is required to recognize a secured obligation contractually due at the time of filing, even though a debtor has no intent to make the payment because the collateral will be surrendered. In that instance, the Means Test may be “passed”, but still result in dismissal under
As noted earlier, during the Congressional struggles over the bill, it was anticipated by some that Congress would set bright line allowances for various expenses. And, as just discussed, in some areas they did, while in others they set no caps, such as in secured debt. Had Congress set caps across the board, the present debate probably would not exist. Now, however, courts are confronted with the argument that each court is charged,
As noted above, this Court is persuaded there are circumstances that warrant dismissal under
Considering the first option, the Court acknowledges that one of the purported goals of the Means Test and EAPCPA was to move more debtors to Chapter 13 in the expectation of generating a return to unsecured creditors that would not be available in a Chapter 7. That said, in determining whether dismissal is warranted if a debtor does not consent to conversion to Chapter 13, or Chapter 11, it seems appropriate to examine whether a return might be generated in either of those Chapters that would not exist in a Chapter 7. In doing so, however, the Means Test of
The third option largely speaks for itself. Congress has closed the door to bankruptcy relief under
Which leaves us with the second option. With all the foregoing in mind, the United States Trustee’s motion asks the Court to conclude that Congress intended the Court to force debtors to sell or walk away from their primary residences when the expenses of hanging onto the property are higher in some measure than the IRS Standards. Moreover, because there is no presumption of abuse under
This Court must be candid and acknowledge that the United States Trustee’s argument has appeal on multiple levels. This Court was one of those that expected Congress to set some caps, including on home mortgage expenses, in part because there is an appearance issue of the efficacy of bankruptcy when individuals who are known in their community to have obtained relief continue to live in the same nice home or drive the same nice car simply because there is no equity in either for a trustee to realize for the benefit of creditors. (Of course, it is not at all clear how often that might really happen, and this Court suspects much more often the house or car has been lost to the lenders by foreclosure or repossession.)
On another level there is the spectre of the individual debtor trying to hang on to the proverbial “McMansion”. In the minds of many, including this Court, there is a point at which allowing an individual debtor relief from unsecured debt while sinking most income into maintaining the debt service on such a property seems egregious.
On yet another level, judges generally prefer to be vested with discretion, rather than having to mechanically apply one formula or another.
If this Court were writing on a blank slate, or were a member of Congress working on the legislation, the foregoing issues would be firmly in mind. At the same time, the Court is aware that there may have been many other policy concerns that resulted in compromises or rearranged priorities. To the extent Congress’ decision to not put some cap on secured debt under
Another point that should not be overlooked is the continuing priority that secured debt enjoys throughout the Bankruptcy Code. Indeed, such protection was expanded as to certain vehicles in Chapter 13 under the so-called “hanging paragraph” which follows
In a similar vein, it would seem quite ironic if Congress went through all it did to establish the assertedly more objective Means Test in place of individual discretion, only to turn around in
In grappling with these issues, multiple courts have looked to pre-BAPCPA case law for guidance in understanding the totality of the circumstances under
Based on the record as before this Court, and the corresponding analysis set out above, the Court concludes that Congress did not intend that consumers would be denied access to Chapter 7 solely because of the amount of their mortgage payment on their principal residence.
Notwithstanding that conclusion, this Court has also examined pre-BAPCPA decisions concerning the totality of circumstances test as it was understood under the former
(1) Whether the debtor has a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims;
(2) Whether the debtor’s petition was filed as a consequence of illness, disability, unemployment, or some other calamity;
(3) Whether the schedules suggest the debtor obtained cash advancements and consumer goods on credit exceeding his or her ability to repay them;
(4) Whether the debtor’s proposed family budget is excessive or extravagant;
(5) Whether the debtor’s statement of income and expenses is misrepresentative of the debtor’s financial condition; and
(6) Whether the debtor has engaged in eve-of-bankruptcy purchases.
In re Price, 353 F.3d 1135, 1139-40 (9th Cir.2004).
One of the foremost factors to be considered under the totality of circumstances is “whether the debtor has, a likelihood of sufficient future income to fund a Chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims____”
Price,
353 F.3d at 1139. Standing alone, this might seem to indicate that a court should consider all of a debt- or’s income and expenses anew under the “totality of circumstances” test. However, as already discussed, the Means Test also finds its way into the confirmation analysis in both Chapters 13 and 11 as provided in
The only other
Price
factor theoretically in play in the present case is whether the “proposed family budget is excessive or extravagant”. Of course, the United States Trustee’s focus is on the part of the budget that involves the primary residence expenses the bulk of which is the mortgage payment. So, in at least one sense, we are back to the core issue of whether that can be considered under the new
CONCLUSION
For the foregoing reasons, the motion to dismiss brought by the United States Trustee under
IT IS SO ORDERED.
Notes
. In its