In re Burgher

• Decision Date: 30 September 2015
• Docket Number: Case No. 12–14410–SBB
• Citation: 539 B.R. 868
• Parties: In re: Eugene Duane Burgher, and Theresa Lynn Burgher, Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

539 B.R. 868

In re: Eugene Duane Burgher, and Theresa Lynn Burgher, Debtor.

Case No. 12–14410–SBB

United States Bankruptcy Court, D. Colorado.

Signed September 30, 2015

Entered: October 28, 2015

Phillip Jones, Grand Junction, CO, for Debtors.

ORDER GRANTING MOTION TO DISMISS CHAPTER 7 CASE PURSUANT TO 11 U.S.C. § 707(b)(1) BASED ON PRESUMPTION OF ABUSE ARISING UNDER 11 U.S.C. § 707(b)(2), OR, IN THE ALTERNATIVE, BASED ON A FINDING OF ABUSE UNDER 11 U.S.C. § 707(b)(3)

Sidney B. Brooks, United States Bankruptcy Judge

THIS MATTER is before the Court following Eugene Duane and Theresa Lynn Burgher's (“Debtors”) voluntary conversion of their case from Chapter 13 to Chapter 7. The United States Trustee (“UST”) has filed a Motion to Dismiss the Debtors' case under Chapter 7 pursuant to 11 U.S.C. § 707(b)(1)¹ for presumption of abuse under § 707(b)(2) or based on a finding of abuse under § 707(b)(3). The Debtors argue that § 707(b) does not apply to cases converted from Chapter 13 to Chapter 7. The Debtors concede that if this Court were to determine that § 707(b) applies in cases that are converted to Chapter 7, then their case should be dismissed. The UST's Motion to Dismiss dated October 29, 2014 can be found at the Court's Docket number 83. The Debtors' Response dated November 18, 2014 can be found at the Court's Docket number 89. The sole issue before this Court is the discrete inquiry of whether § 707(b) applies to cases that are converted to Chapter 7 from other chapters under the Bankruptcy Code.

A. FACTUAL BACKGROUND

Debtors' Chapter 13 case and related Statement and Schedules

The Debtors filed for bankruptcy relief under Chapter 13 of the Bankruptcy Code on March 12, 2012. On March 26, 2012, the Debtors filed with the Court a Statement of Financial Affairs (“SOFA”) and Schedules² and a Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (“Form 22C”).³ On August 21, 2012, this Court confirmed a Chapter 13 Plan of reorganization in the Debtors' Chapter 13 case.⁴

Line 1 of the SOFA reflects that in the years 2009 and 2010, the Debtors had combined annual gross incomes of $144,442 and $149,781, respectively.⁵ Line 15 of Form 22C reflected that the Debtors' annualized current monthly income, calculated using six months of the Debtors' pay advices immediately preceding the bankruptcy filing, was $145,236.⁶ Line 16 of Form 22C further reflected that at the time of the Filing of their Chapter 13 case, the Debtors' were above the median family income of $87,405 for the State of Colorado.⁷

Moreover, Debtors' Schedule I reflected that in 2012, the Debtors' household included three dependent children, aged 14, 18, and 7 and the Debtors' gross monthly income was $12,103.⁸ Debtors' Schedule J reflected monthly expenses of $9,503 and a monthly net disposable income of $4,922.⁹ Additionally 7, Line 59 Form 22 C reflected that based on the national and local standards applicable to the Debtors' case, the Debtors' had a net monthly disposable income of $3,651.39.¹⁰

Pursuant to their Form 22C disposable income, the Debtors' showed an ability to pay their non-priority unsecured creditors a total sum of $216,752.40 over a course of five years (monthly disposable income of $3,651.39 multiplied by 60 months minus unpaid attorney's fees and costs in the amount of $2,231). The confirmed Chapter 13 Plan proposed to pay allowed claims for non-priority unsecured creditors (“Class Four”) a total sum of $10,680.71 over a period of five years.¹¹ The confirmed Plan further provided that the “Debtors will increase the payments as necessary in order to pay the Class Four creditors 100%[.]”¹²

Ultimately, the amount of Class Four claims filed with the Court in the Debtors' Chapter 13 case totaled $29,019.19.¹³ The Debtors never modified their plan to provide 100% of the $29,019.19 amount in Class Four Claims.

Debtors' Voluntary Conversion to Chapter 7

Rather, two years and four months into their plan payments, on August 11, 2014, the Debtors filed a Notice of Conversion of Case from Chapter 13 to Chapter 7 pursuant to § 1307(a).¹⁴ The same day, the Court entered a docket text order converting the Debtors' case to Chapter 7.¹⁵ The Debtors did not file updated Schedules I and J or a Chapter 7 Applicable Statement of Current Monthly Income and Means Test Calculation Forms (“Form 22A”) in their Chapter 7 case.

Pursuant to the Final Report filed by the Chapter 13 Trustee in the Debtors' Chapter 13 case, at the time of the conversion of the Debtors' case, Class Four creditors had received $0 in distribution from payments made under the Debtors' confirmed Chapter 13 plan.¹⁶ Pursuant to the Debtors' confirmed plan, Class Four was to begin receiving distributions after payments to Class One, Two and Three were complete.¹⁷ Indeed, payments made under the Debtors' Chapter 13 Plan, which payments were properly distributed by the Chapter 13 Trustee under the confirmed Plan, were distributed to Debtors' Counsel (Class One Claim), non-dischargeable tax debts (Class One Claim); secured lenders on Debtors' residence (Class Two Claim); vehicles (Class Three Claim); and the Chapter 13 Trustee's administrative fees.¹⁸

UST's Motion to Dismiss Debtors' Chapter 7 case

Two months following the conversion of the Debtors' case to Chapter 7, on October 29, 2014, the UST filed a Motion to Dismiss Debtors' Case under §§ 707(b)(1) and (b)(2) or, in the alternative, under §§ 707(b)(1) and (b)(3).¹⁹ On November 18, 2014, the Debtors timely filed an Objection to the UST's Motion to Dismiss.²⁰ The only defense advanced by the Debtors is legal argument that § 707(b) applies to cases filed as a Chapter 7 case, and not to cases converted to Chapter 7 from Chapter 13.²¹

Importantly, at a non-evidentiary hearing held on May 5, 2015, the Debtors, through counsel, stipulated that if the Court were to determine that § 707(b) applies to cases converted to Chapter 7, then the Debtors' case should be dismissed under § 707(b). At the same hearing, the Debtors and the UST also agreed that the issue at hand was purely legal in nature and could be considered and resolved by the Court by way of legal briefs. Subsequently, the parties timely submitted their briefs to this Court.

This Court, having considered the parties' legal briefs, and reviewed and considered applicable case law on the issue, hereby makes the following findings of facts and conclusions of law in favor of the UST and against the Debtors.

B. DISCUSSION

Unlike Chapter 13, where a debtor is allowed “to obtain a discharge of his debts if she pays her creditors a portion of her monthly income in accordance with a court-approved plan[,]”²² individual debtors under Chapter 7, as a quid pro quo exchange for a discharge, “liquidate their nonexempt assets, rather than dedicate their future income, to repay creditors.”²³

Here, the Debtors' initially filed their case under Chapter 13 of the Bankruptcy Code and then converted the case to Chapter 7.

The UST seeks dismissal of the Debtors' Chapter 7 case, contending that the Debtors' financial situation reflects that the Debtors are able to pay their creditors in a manner that makes granting of relief to Debtors under Chapter 7 presumptively abusive under § 707(b)(2) and requires dismissal under § 707(b)(1). Alternatively, the UST contends that even if the presumption of abuse does not arise under § 707(b)(2), the totality of circumstances of the Debtors' case supports an actual finding of abuse under § 707(b)(3) and requires dismissal under § 707(b)(1). Because the Debtors have not filed current schedules I and J or Form 22A in their Chapter 7 case, the UST relies on Schedules I and J and Form 22C filed in the Debtors' Chapter 13 case.

I. BACKGROUND AND MODUS OPERANDI OF § 707(b)

Section 707(b) was added to Bankruptcy Code in 1984 as part of the Bankruptcy Amendments and Federal Judgeship Act²⁴ and was amended extensively in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”).²⁵ The BAPCPA amendments were intended to restrict eligibility for relief under Chapter 7 of the Bankruptcy Code by making “it harder for individuals who can repay their debt to file for bankruptcy under Chapter 7....”²⁶

Post BAPCPA, § 707(b) now provides that a Chapter 7 case may be dismissed, or converted to a Chapter 11 or 13 with consent of a debtor, to prevent abuse of the Chapter 7 provisions. Specifically, § 707(b)(1) provides, in part, as follows:

...the court, on its own motion or on a motion by the United States trustee, [bankruptcy case] trustee ... may dismiss a case filed by an individual debtor under this chapter [Chapter 7] whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of [the Bankruptcy Code] ... if it finds that the granting of relief would be an abuse of the provisions of this chapter [Chapter 7].²⁷

In turn, together §§ 707(b)(2) and (b)(3) provide two alternatives pursuant to which a court can find relief under Chapter 7—abusive.

Pursuant to § 707(b)(2), a bankruptcy court “shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under [subsection (b)(2)(A) ]” is greater than the threshold amounts in subsections (b)(2)(A)(i)(I) or (b)(2)(A)(i)(II).²⁸ The statutory formula set forth in § 707(b)(2) is referred to as the “Means Test.” In practice, a debtor determines Means Test eligibility by filing out a Form 22A.

If a debtor's disposable income, as determined by the Means Test, exceeds the threshold prescribed in §§ 707(b)(2)(A)(i)(I) or (b)(2)(A)(i)(II), then the debtor's case is presumptively abusive and subject to dismissal under § 707(b)(1).²⁹ However, under § 707(b)(2)(B), a debtor may rebut a presumption of abuse under the Means Test “by demonstrating special circumstances ... that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”³⁰ In...