In re Canales

• Decision Date: 31 October 2007
• Docket Number: No. LA 2:07-14196 ER.,LA 2:07-14196 ER.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
• Parties: In re Vanessa Patricia CANALES, Debtor.

Page 658

377 B.R. 658

In re Vanessa Patricia CANALES, Debtor.

No. LA 2:07-14196 ER.

United States Bankruptcy Court, C.D. California, Los Angeles Division.

October 31, 2007.

Thomas B. Ure, Ure, Ranieri & Associates, Los Angeles, CA, for Debtor.

Richard K. Diamond, Danning, Gill, Diamond & Kollitz, Los Angeles, CA, Chapter 7 Trustee.

MEMORANDUM OF DECISION

ERNEST M. ROBLES, Bankruptcy Judge.

The means test of 11 U.S.C. § 707(b) stands out as among the foremost changes to bankruptcy law enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). At its core, the means test seeks to determine whether a debtor can repay a portion of his or her debt. If so, then the debtor will be channeled into Chapter 13 and will be required to repay a specific amount of debt as a precondition to relief. If not, however, then the debtor will be allowed to proceed in Chapter 7 toward liquidation and possible discharge.

This case requires the Court to examine a subpart of the means test that has caused considerable disagreement among bankruptcy courts nationwide. Specifically, the central issue in this case is whether 11 U.S.C. § 707(b)(2)(A)(ii)(I) permits a Chapter 7 debtor who owns her vehicle free and clear of any loan or lease payments to claim a transportation ownership deduction for purposes of calculating her disposable monthly income under the means test. After considering the issue in depth and for the reasons discussed infra in Part III, the Court concludes that a debtor in Chapter 7 may not claim a transportation ownership deduction for a vehicle that she owns free and clear of any loan or lease payments.

I. Jurisdiction

As a general principle, U.S. bankruptcy courts exercise jurisdiction by referral over all core bankruptcy proceedings. The Court has jurisdiction over this matter, pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), General Order No. 266 of the United States District Court for the Central District of California, and 28 U.S.C. § 157(b). The U.S. Trustee's Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2) and (3)(B) and Contingent Motion to Extend Bar Date for Filing Complaint Under 11 U.S.C. § 727 Objecting to Debtor's Discharge is a core proceeding because dismissal of a bankruptcy case arises only in bankruptcy. See Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir.1995).

II. Statement of Facts and Procedural History

On May 22, 2007, Debtor Vanessa Patricia Canales ("Debtor") filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code. The Debtor is a school teacher for the Los Angeles Unified School District. In the months preceding her filing, the Debtor struggled under a new payroll system implemented by the school district that resulted in fluctuating monthly income payments. This system, among other factors, contributed to the Debtor's decision to file for bankruptcy.

The Debtor is listed on the title to three vehicles. On the one hand, the Debtor's mother and sister drive two of these vehicles. See Opposition at 4. Both vehicles serve as security for loans, and the Debtor's mother and sister make payments on those loans. See id. The Debtor makes no payments on these vehicles. See id. On the other hand, the Debtor drives the third vehicle, a 2000 Chevrolet Malibu worth approximately $3,995. See id. Unlike the other two vehicles, the third vehicle is paid for in full and thus there are no loan or lease payments for the vehicle. See id. As a consequence, although the Debtor is listed on the title to all three vehicles, she makes ownership payments on none of them. See id.

In filing for bankruptcy, the Debtor submitted a Statement of Current Monthly Income and Means Test Calculation for Use in Chapter 7 ("Form 22A"). Subsequently, the Debtor twice updated her income and means test calculations by filing an Amended Statement of Current Monthly Income and Means Tests Calculation for Use in Chapter 7 ("Form B22A").¹ The Debtor filed her most recent Form B22A on June 28, 2007.²

On Form B22A, the Debtor checked the box indicating that the presumption of abuse of Chapter 7 arises in light of a monthly disposable income of $301.96. However, the Debtor also listed an additional monthly expense for union dues of $171.62 in Part VII of Form B22A, which was not taken into consideration when calculating the Debtor's monthly disposable income, but which the Debtor contends should be an additional deduction from her current monthly income.³ Although uncertainty remains on this issue, the Court will assume for the sake of argument that the Debtor's union dues should be deducted from her monthly disposable income.

In completing Form B22A, the Debtor claimed a deduction of $475 under the Local Standards for transportation ownership or lease expenses for one vehicle.⁴ See Form B22A, Line 23. In addition, the Debtor claimed a deduction of $353 under the Local Standards for transportation expenses related to vehicle operation for one vehicle. See Form B22A, Line 22. As a result, the Debtor seeks to deduct transportation expenses both for ownership costs and for operation costs.

On July 27, 2007, the U.S. Trustee filed the Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2) and (3)(B) and Contingent Motion to Extend Bar Date for Filing Complaint Under 11 U.S.C. § 727 Objecting to Debtor's Discharge ("Motion"). In the Motion, the U.S. Trustee argues that the Debtor has erroneously completed the means test calculations in Form B22A. See Motion at 9-10. The U.S. Trustee submits the Declaration of Wendy Carole Sadovnick ("Sadovnick Decl."), a bankruptcy analyst employed by the Office of the United States Trustee for the Central District of California, in support of numerous corrections to the Debtor's Form B22A. Sadovnick proposes multiple changes to the Debtor's Form B22A,. see Sadovnick Decl. ¶¶ 6-11, but the most significant correction is eliminating the Debtor's claimed deduction for transportation ownership expenses, see id. at ¶ 7. The U.S. Trustee argues that the Debtor is not eligible for the transportation ownership deduction because she owns the vehicle free and clear. See Motion at 10-.13; Supp. Brief at 10-17. Additionally, the U.S. Trustee asserts that, even if the Debtor is eligible for the transportation ownership deduction, the case should be dismissed under 11 U.S.C. § 707(b)(3)(B) because the totality of the circumstances underlying the Debtor's financial situation demonstrate abuse of Chapter 7. See Motion at 13-20; Supp. Brief at 17-28. Lastly, if the Court rejects dismissal pursuant to § 707(b)(2) and (3), the U.S. Trustee requests an order extending the bar date for the filing of a complaint for the denial of discharge under § 727. See Motion at 20-21.

In response, the Debtor filed the Opposition to Motion of the United States Trustee to Dismiss Case Under 11 U.S.C. § 707(b)(2) and (3)(b) ("Opposition"). In the Opposition, the Debtor argues that the case should not be dismissed for abuse. Finally, the U.S. Trustee filed the Reply to Debtor's Opposition to Motion to Dismiss Pursuant to 11 U.S.C. § 707(b)(2) of the Bankruptcy Code ("Reply").

The Court heard argument on the Motion on September 20, 2007. At that time, the Court requested additional briefing from the parties. Accordingly, the U.S. Trustee submitted the Supplemental Brief in Support of United States Trustee's Notice of Motion and Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2) and (3)(B) ("Supp.Brief") and the Request for Judicial Notice in Support of Supplemental Brief in Support of United States Trustee's Notice of Motion and Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2) and (3)(B). The Debtor filed no supplemental briefing with the Court.

III. Discussion

In the Motion, the U.S. Trustee requests that the Court dismiss the Debtor's Chapter 7 petition pursuant to 11 U.S.C. § 707(b)(1). The U.S. Bankruptcy Code authorizes a court to dismiss a case filed under Chapter 7 after a finding of abuse. See 11 U.S.C. § 707(b)(1). In pertinent part, § 707(b)(1) provides:

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, ..., if it finds that the granting of relief would be an abuse of the provisions of this title.

11 U.S.C. § 707(b)(1). Section 707(b) thus vests the court with discretion to determine whether a case should be dismissed, but conditions any such dismissal on notice and a hearing, a finding that the debtor's debts are primarily consumer debt, and a finding that granting the debtor relief would be an abuse of Chapter 7. See 11 U.S.C. § 707(b)(1).

As a preliminary matter, the U.S. Trustee brought the Motion on regular notice and the Court heard the matter on September 20, 2007. This satisfies the requirement of notice and a hearing. See 11 U.S.C. § 707(b)(1).

Next, the Court concludes that the Debtor's debts are "primarily consumer debts" for purposes of dismissal under § 707(b)(1). See 11 U.S.C. § 101(8); 11 U.S.C. § 707(b)(1). In § 101(8), the Bankruptcy 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 U.S. Court of Appeals for the Ninth Circuit interprets the term "primarily" in § 707(b)(1) to require that the overall ratio of consumer to non-consumer debt is greater than fifty percent. See Zolg v. Kelly (In re Kelly), 841 F.2d 908, 913 (9th Cir.1988). Here, the Debtor herself indicates in her petition that the nature of her debt is primarily consumer debt. Accordingly, the Debtor falls within the scope of § 707(b)(1) as a debtor with primarily consumer debt.

The remaining hurdle of § 707(b)(1) thus represents the crux of this case and requires ...