In re Cutler, Case No. 08-15568-AJM-7A (Bankr. S.D. Ind. 7/9/2009)

• Decision Date: 09 July 2009
• Docket Number: Case No. 08-15568-AJM-7A.
• Parties: IN RE: DAVID GARY CUTLER, KELLY SUE CUTLER, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

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IN RE: DAVID GARY CUTLER, KELLY SUE CUTLER, Debtors.

Case No. 08-15568-AJM-7A.

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

July 9, 2009.

Gary L. Hostetler, Nicolette Mendenhall, Attorneys for the Debtors.

Jeannette Eisan Hinshaw, Attorney for the UST Case Trustee.

ORDER DENYING UST'S MOTION TO DISMISS PURSUANT TO 11 U.S.C. §§707(b)(1),(2) and (3)

ANTHONY J. METZ III, Bankruptcy Judge

Background

The Debtors filed this chapter 7 case on December 15, 2008. According to their Chapter 7 Statement of Current Monthly Income and Means Test Calculation (B22A), the Debtors were above median income debtors. The B22A indicated that the presumption of abuse did not arise, primarily because the Debtors' claimed a $5700.98 deduction for mortgage payments on their residence which they intended to surrender. The Debtors' Schedules I and J showed monthly income of $3447.21 and monthly expenses of $7708.66 for a monthly shortfall of $4261.45.

The United States Trustee ("UST") moved to dismiss the case under §§707(b)(1), (2) and (3) (the "UST's Motion"). Under §707(b)(2), the UST challenged the mortgage deduction.¹ Under §707(b)(3), the UST claimed that the Debtors' income was greatly understated because, as of the date of the hearing on the UST's Motion, Mr. Cutler had obtained permanent employment with an annual salary of $125,000. Hearing on the UST's Motion was held on June 8, 2009 wherein the Debtors appeared by counsel Gary Hostetler and Nicolette Mendenhall; the UST appeared by counsel Jeannette Eisan Hinshaw. At the conclusion of the hearing, the UST requested additional time to file a supplemental brief discussing the issue of to what degree the "totality of the circumstances" test under §707(b)(3) should include the Debtors' post petition financial circumstances. That supplemental brief was filed on June 17, 2009.

Discussion §707(b)(2)(A)(iii) — Allowance of Mortgage Deduction

Under the means test, it is presumed that the granting of relief would be an abuse of the chapter 7 provisions if a chapter 7 consumer debtor's "monthly disposable income" exceeds $182.50. 11 U.S.C. §707(b)(2)(A)(i). The means test allows above median income debtors to deduct certain expenses in computing their "monthly disposable income". Among such deductible expenses are the "Average Monthly Payments" found on Line 42 of B22, which are calculated as the sum of "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...divided by 60". 11 U.S.C. §707(b)(2)(A)(iii)(I). (Italics added). The Debtors here included in their "Average Monthly Payments" their first and second mortgage payments on their residence in the aggregate of $5700.98. This large deduction, in turn, resulted in a negative "monthly disposable income" and thus, the "presumption of abuse" did not arise.

The UST urges disallowance of the deduction because the means test is "forward looking" and contemplates a deduction only for those mortgage payments that actually will be paid in the future. Although case law can be found on both sides of this issue, a clear majority considering the deduction in the chapter 7 context has rejected this argument, citing that the means test is a "snapshot" of the debtor's financial circumstances as of the petition date and the deduction should be allowed if the debtor was contractually obligated to make the payments as of that date. The "plain meaning" of the language found in §707(b)(2)(A)(iii)(I) is read to allow the deduction because such amounts are "contractually due" — they are amounts the debtor is contractually bound to make as of the petition date — and, "nothing the debtor does or does not do changes the fact that the scheduled payments remain contractually due". In re Nockerts, 357 B.R. 497, 500 (Bankr. E.D. Wis. 2006)(citations omitted). A bankruptcy court in this Circuit reasoned:

The plain language of §707(b)(2)(A)(iii) requires the debtor to deduct the amount due under her contracts for secured debt regardless of whether she intends to redeem, reaffirm or surrender the property. If Congress had intended otherwise, it could easily have said so, excluding secured debt where the debtor has stated an intention to surrender the collateral. Or Congress could have specified that only payments the debtor actually intended to make post petition should be deducted from income. But Congress did neither. Congress' choice of language shows a clear intent not to impose any such limit on debtors.

In re Randle, 358 B.R. 360, 363 (Bankr. N. D. Ill. 2006) aff'd by In re Randle, 2007 WL 2668727 (N. D. Ill"). See also, In re Rudler, 388 B.R. 433 (1^st Cir. BAP 2008) In re Goble, 401 B.R. 261 (Bankr.S. D. Ohio 2009); In re Ralston, 400 B.R. 854 (Bankr. M.D. Fla. 2009); In re Guerriero, 383 B.R. 841 (Bankr. D. Mass. 2008); In re Makres, 380 B.R. 30 (Bankr. N. D. Okla. 2007). Unpublished cases allowing the deduction include In re Crawley, 2009 WL 902359 (Bankr. E. D. Va.) and In re Castillo, 2008 WL 4544476 (Bankr. S. D. Fla.).² But see, In re Burden, 380 B.R. 194 (Bankr. W. D. Mo. 2007); In re Skaggs, 349 B.R. 594 (Bankr. E. D. Mo. 2006).

The UST argues that the words "scheduled as" that precede "contractually due" should be taken to mean that the deduction is allowed only if the debt is scheduled as a secured debt that the debtor will pay in each of the 60 months after the bankruptcy filing. This argument, too, has been soundly rejected in that "scheduled as contractually due" does not refer to the bankruptcy schedules. Rather, "there is no bankruptcy schedule that requires the debtor to list `all amounts contractually due to secured creditors in each month of the 60 months following the date of the petition'. So there is no bankruptcy schedule to which §707(b)(2)(A)(iii) could refer". Randle, 358 B.R. at 365.

In addition to the "total of all amounts scheduled as contractually due" as set forth in §707(b)(2)(A)(iii)(I), subpart II of that section allows "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..." to be included in computing a debtor's "average monthly payments". The UST points to subpart (II) — subpart I's "conjunctive partner" — in arguing that the use of the word "additional" in subpart II makes it clear that it is an extension of subpart I and therefore subpart I refers to payments that are to be actually made. However, subpart II merely allows a deduction for payments needed to cure any pre petition arrearage on a residence. The Burden court disallowed the mortgage deduction in subpart I based on the "additional" language of subpart II primarily because it would be inconsistent to allow a chapter 13 debt to deduct a mortgage payment on a surrendered residence but to deny the same chapter 13 debtor a deduction for the pre petition arrearage on the mortgage. However, "[w]hile these considerations may be relevant in the context of an objection to confirmation of a chapter 13 plan, they are not germane to the calculation of the means test to determine whether it is presumptively abusive for a debtor to receive chapter 7 relief". Castillo, at *3.

Finally, the UST argues that allowing the deduction for mortgage payments on a surrendered residence is contrary to the Congressional intent in enacting BAPCPA, which was to require debtors to "repay creditors the maximum they can afford". UST brief in Support of Motion to Dismiss, p. 8. Repayment to creditors may have been one of the goals behind BAPCPA, but Congress' intent in creating the means test under §707(b)(2) was to eliminate judicial discretion and replace it with a "mechanical" formula to determine abuse in chapter 7 cases. Rudler, 388 B.R. at 439; Randle, 358 B.R. at 363 ("Congress' intent to use a standardized or mechanical test and avoid reliance on individualized information as much as possible is demonstrated throughout §707(b)(2)"); Guerriero, 383 B.R. at 847 ("[t]he deduction of secured payments due at the time of the petition filing — even if the debtor intends to eventually surrender the property — is consistent with the mechanical, discretion-void nature of the means test"). Applying the mechanical formula, the Court has determined that the Debtors' line 42 deduction for their mortgage payments should be allowed. Besides, a debtor's ability to deduct a mortgage payment which he is contractually obligated to pay on his bankruptcy petition date should be no more suspect than a debtor's ability to deduct transportation ownership expenses for a car he owns free and clear as of the petition date. See, In re Ross-Tousey, 549 F.3d 1148 (7^th Cir. 2008). The Court will not address the other challenges to the Debtors' B22 as, even if the UST were successful, there would not be sufficient disposable income for the presumption of abuse to arise. Because the presumption does not arise, there is no need to address the Debtors' contention that the presumption is rebutted by special circumstances.

§707(b)(3)(B) — "The Totality of the Circumstances"

The UST in the alternative has moved to dismiss the case under the "totality of the circumstances" test found in §707(b)(3)(B). The "totality of the circumstances" test has its origins under pre-BAPCPA law, even though pre-BAPCPA §707(b) did not refer to "totality of the circumstances". Pre-BAPCPA §707(b) did allow for a chapter 7 case to be dismissed where the granting of relief would be a substantial abuse of the provisions of chapter 7, and the circuits adopted various "tests" in determining "substantial abuse". However, the Fourth Circuit's "totality of the circumstances" test that evolved under pre-BAPCPA law "was adopted by name in BAPCPA §707(b)(3)(B), suggesting that something other than an ability to pay is required to succeed on a motion to dismiss under this section". Nockerts, 357 B....