In re Hornung

• Decision Date: 11 March 2010
• Docket Number: No. 09-51461.,09-51461.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re Richard W. HORNUNG and Kristin L. Hornung, Debtors.

425 B.R. 242

In re Richard W. HORNUNG and Kristin L. Hornung, Debtors.

No. 09-51461.

United States Bankruptcy Court, M.D. North Carolina, Winston-Salem Division.

March 11, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Brian Hayes, Concord, NC, for Debtor.

MEMORANDUM OPINION

THOMAS W. WALDREP, JR., Bankruptcy Judge.

This matter came before the Court on January 26, 2010 upon the Motion of Bankruptcy Administrator for Dismissal of Case Pursuant to Sections 707(b)(1) and 707(b)(3) (the "Motion to Dismiss"), filed by the United States Bankruptcy Administrator on October 20, 2009. At the hearing, Brian P. Hayes appeared on behalf of the above-referenced debtors (the "Debtors") and Robert E. Price, Jr. appeared on behalf of the Bankruptcy Administrator. After consideration of the Motion to Dismiss, the evidence presented at the hearing, the arguments of the parties, and the relevant law, the Court will grant the Motion to Dismiss.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), which this Court has the jurisdiction to hear and determine.

II. FACTS

In April of 2006, the Debtors listed their house for sale after entering into a contract for the purchase of a new house. On March 16, 2007, the Debtors closed on their new house, despite not having sold their previous one. The Debtors financed the purchase of their new house with two interest-only loans, both of which were secured by deeds of trust on the house.¹ The Debtors did not make a down payment toward the purchase price.

For the next fifteen months, the Debtors continued to market their former house for sale. They made numerous improvements in an effort to sell it, such as new paint, granite countertops, and new carpeting, totaling in excess of $8,900.00. During this period, the Debtors made both mortgage payments and paid all utilities on both houses. They did not rent their former house to supplement their income. On June 30, 2008, the Debtors completed a short sale on the house, which required them to contribute more than $3,000.00 to the closing.

Throughout the construction of the new house and up until August 2008, the male Debtor was employed as an information technology manager at TIAA-CREF. He earned an annual salary of $115,000.00 plus bonuses. The female Debtor has not worked since the birth of their first child in 2006. In 2007, the male Debtor reported wages of $122,897.00. In early August 2008, the male Debtor lost his job at TIAA-CREF, and, as a consequence, received a severance package that included several weeks of salary and a prorated bonus. According to the Debtors' bank statements, between August 14, 2008 and September 12, 2008, the male Debtor received approximately $40,468.93 in net income after tax withholdings. By this time, the Debtors had accumulated approximately $20,000.00 of credit card debt. In late September 2008, the male Debtor found new employment at System Maintenance Services, Inc. as a regional sales manager. The male Debtor earns an annual salary of $87,000.00 plus overtime, commissions, and bonuses. He is also reimbursed by his employer for various expenditures, including mileage, meals, and office supplies. The male Debtor earned more than $100,000.00 in 2009.

Subsequent to the sale of their previous house, the Debtors purchased a timeshare with Disney Vacation Development for approximately $32,000.00. This obligation required monthly payments of approximately $335.00 plus annual homeowners' association dues of $960.00. Although the Debtors contracted to buy the timeshare in July of 2008, just prior to the male Debtor's loss of employment, it is unclear whether the Debtors closed on their purchase of the timeshare before or after the male Debtor was laid off. In December of 2008, the Debtors withdrew approximately $2,000.00 cash to fund a family vacation to Disney World. The Debtors vacationed again in Disney World after they filed their petition.

During the first week of July 2009, the Debtors met with their attorney to discuss filing for bankruptcy protection. On July 11, 2009, the Debtors purchased two new vehicles.² The first vehicle was a 2009 Ford Fusion with a purchase price of $26,989.21 and a monthly payment of $397.22. The second vehicle was a 2009 Ford Edge with a purchase price of $42,114.94 and a monthly payment of $619.84. Together, the monthly payments on the new vehicles were $1,017.06. The male Debtor testified that they purchased the vehicles, based on the advice of their attorney, to lower their monthly vehicle payments. Prior to purchasing the new vehicles, the Debtors had leased a 2007 Ford Explorer and a 2008 Ford Expedition. The monthly payments on the leased vehicles totaled $1,337.18.

On July 23, 2009, the Debtors filed their Chapter 7 bankruptcy petition. The Debtors' schedules reflect an outstanding indebtedness on their home of $441,799.00. The Debtors valued the home on Schedule A at $420,000.00. The tax value of the home is listed at $449,040.00. Schedules I and J show that the Debtors have monthly income of $6,068.67 and expenses of $6,000.02, resulting in monthly net income of $68.65. According to Schedule J, the Debtors' two mortgage payments total $2,985.36, including taxes and insurance. In addition, each month the Debtors spend $443.88 for utilities,³ $37.50 for homeowners' association dues, and $112.50 for home maintenance. At the hearing, it was adduced that the Debtors spend an additional $33.00 each month for pest control services and $36.95 each month for a security system, neither of which were listed on the Debtors' schedules. The Debtors' monthly housing expense totals $3,649.19, which is approximately 60% of their monthly net income at that time. According to Schedule F, the Debtors owe $31,432.37 to their unsecured creditors, consisting primarily of credit cards and lines of credit. The Debtors' current monthly income as reflected on line 12 of Form B22 is $8,789.19. The Debtors' total expense deductions listed on line 47 of Form B22 are $9,360.33, resulting in a monthly disposable income of negative $571.14.

On October 20, 2009, the Bankruptcy Administrator filed a Motion to Dismiss based on Section 707(b)(3) of the Bankruptcy Code. The Bankruptcy Administrator argues that the purchase of two new vehicles on the eve of bankruptcy shows a lack of good faith under Sections 707(b)(3)(A) and (B). The Bankruptcy Administrator also argues that the Debtors have an excessive budget and an ability to repay their debts, and that they made consumer purchases far in excess of their ability to repay.

III. DISCUSSION

The Bankruptcy Administrator seeks dismissal of the Debtors' case pursuant to Section 707(b)(3) of the Bankruptcy Code. Abuse of the Bankruptcy Code occurs under Section 707(b) when a debtor attempts to use the provisions of the Code to get a "head start" rather than a "fresh start." Green v. Staples (In re Green), 934 F.2d 568, 570 (4th Cir.1991) (providing that § 707(b) allows "a bankruptcy court to deal equitably with the situation in which an unscrupulous debtor seeks to gain the court's assistance in a scheme to take unfair advantage of his creditors"); In re Jarrell, 189 B.R. 374, 377 (Bankr. M.D.N.C.1995) (Chapter 7 is intended to give "the truly needy a fresh start, not to give those who can afford to meet their obligations a head start.") (citing In re Grant, 51 B.R. 385, 394 (Bankr.N.D.Ohio 1985)); In re Pilgrim, 135 B.R. 314, 317 (C.D.Ill.1992) (§ 707(b) is one of "more than 30 amendments to ensure that a `fresh start' does not become a `head start'.") (floor statement of Sen. Hatch, 130 Cong. Rec. S. 8891 (June 29, 1984)). For Section 707(b) to be applicable, the debts in the case must be primarily consumer debts, and it must be shown that granting the debtor a Chapter 7 discharge would involve an "abuse" of the provisions of Chapter 7. It is undisputed that the debts in this case are primarily consumer debts. The moving party, in this case the Bankruptcy Administrator, has the burden of proving abuse pursuant to Section 707. In re Sale, 397 B.R. 281, 284 (Bankr. M.D.N.C.2007).

Section 707(b)(1) of the Bankruptcy Code prescribes two alternative standards to determine whether the granting of relief would be an abuse. First, Section 707(b)(2) provides that abuse may be presumed if, under a "means test" formula, the Debtors' 60-month disposable income exceeds a particular threshold amount.⁴ Second, Section 707(b)(3) provides that, even if no presumption of abuse arises, a court may still dismiss a case based upon the particular circumstances of the case. The Bankruptcy Administrator does not assert that the Debtors failed the means test of Section 707(b)(2), so the Court need only address whether there is a basis to dismiss the case under Section 707(b)(3).

Section 707(b)(3) requires a court to consider "(A) whether the debtor filed the petition in bad faith; or (B) whether the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." Unlike the pre-BAPCPA version, "§ 707(b)(3) does not require a showing of `substantial abuse,' but a lower standard of `abuse.'" In re Mondragon, No. 05-10665, 2007 WL 2461616, *1 (Bankr.D.N.M. Aug. 24, 2007); In re Mestemaker, 359 B.R. 849, 856 (Bankr.N.D.Ohio 2007). The Bankruptcy Administrator alleges that the granting of relief would be an abuse under both the bad faith and totality of the circumstances prongs of Section 707(b)(3).

A. Bad Faith under Section 707(b)(3)(A)

In the context of bankruptcy, a "bad faith filing" is defined as "the act of submitting a bankruptcy petition that is inconsistent with the purposes of the Bankruptcy Code or is an abuse of the bankruptcy...