In re Keating, 03-54474.

• Decision Date: 05 September 2003
• Docket Number: No. 03-54474.,03-54474.
• Parties: In re Patrick J. KEATING, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

298 B.R. 104

In re Patrick J. KEATING, Debtor.

No. 03-54474.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

September 5, 2003.

COPYRIGHT MATERIAL OMITTED

John C. Lange, Gold, Lange & Majoros, PC, Southfield, MI, for Debtor.

Paul J. Randel, Detroit, MI, for U.S. Trustee.

OPINION DENYING UNITED STATES TRUSTEE'S MOTION TO DISMISS PURSUANT TO 11 U.S.C. § 707(b)

MARCI B. MCIVOR, Bankruptcy Judge.

The United States Trustee filed a Motion to Dismiss Pursuant to 11 U.S.C. § 707(b) for substantial abuse of the provisions of Chapter 7 of the Bankruptcy Code. In determining whether the filing a Chapter 7 case constitutes substantial abuse of the bankruptcy system, the Court must look to the totality of the circumstances surrounding the filing of the case. In this case, after reviewing the filed pleadings and considering the testimony presented at an evidentiary hearing, this Court DENIES the United States Trustee's motion for the reasons set forth below.

I. FACTUAL BACKGROUND

The Debtor, Patrick J. Keating filed a Chapter 7 petition on May 21, 2003. The United States Trustee filed this motion to dismiss under § 707(b) claiming that the Debtor's Chapter 7 bankruptcy constitutes a substantial abuse of the provisions of Chapter 7. The Trustee's motion alleges that the Debtor has substantial income, earning $63,000 per year (with no dependants), and that the Debtor's expenses are inflated. Specifically, the Trustee takes issue with the following expenses: (1) a monthly 401(k) loan repayment of $237; (2) a monthly 401(k) contribution of $262; (3) a monthly food budget of $400; (4) a monthly transportation budget (not including car payment) of $225; (5) a monthly recreation budget of $100; (6) a monthly auto payment of $565; (7) miscellaneous expenses of $100 per month; and (8) "association fees" of $195 per month. In essence, the Trustee argues that, with a little "belt tightening", the Debtor could have sufficient income over and above his expenses so that, had the Debtor filed a Chapter 13 bankruptcy, the unsecured creditors would receive a meaningful dividend.

The Debtor, in his filed pleadings, responds to the Trustee's allegations regarding his expenses, claiming that they are not excessive. With respect to the 401(k) loan repayment of $237, the Debtor claims that he is required by his employer to repay this loan, that if he does not repay the 401(k) loan, he will be forced to pay taxes on these funds, and that he will have to pay a penalty for early withdrawal. The Debtor does not address the Trustee's objection to his $262 per month 401(k) contribution. The Debtor argues that his food expense is reasonable because it represents only $4.44 per meal. The Debtor argues that his transportation expenses are reasonable because the Debtor drives 2000 miles per month and his vehicle gets 20 miles per gallon. Thus, he uses approximately 100 gallons per month at $1.70 per gallon. The Debtor estimates that he spends between $55 and $75 per month on maintenance of his vehicle. Thus, his actual transportation expenses range from $225 to $245 per month.

In response to the Trustee's other objections, the Debtor admits that he spends approximately $100 per month on recreation but argues that this is reasonable. The Debtor admits that his lease payment is $565 per month, but argues that his lease imposes a substantial penalty for early termination. The Debtor also states that his lease expires in May 2004, at which time he will seek to lease a less-expensive vehicle. The Debtor admits that he spends approximately $100 per month on miscellaneous expenses but argues that $3.33 per day is not unreasonable for the small continuous expenses the incurred to survive and go to work each day.

The last disputed expense is the "Association Fees" of $195 per month. The Debtor resides in a condominium. The Debtor states that the "Association Fees", which include monthly water and sewer charges are required under the Condominium Bylaws. Failure to pay the monthly "Association Fees" can result in late charges, and the Condominium Association can place a lien on the Debtor's condominium to secure any arrearages. In sum, the Debtor argues that all his expenses are reasonable and that there is no additional income available to distribute to creditors.

The following additional facts were presented at the evidentiary hearing:

1. In 2001, the Debtor earned approximately $55,000.00. In 2002, the Debtor earned $34,170.00, and in 2003, the Debtor believes he will earn approximately $63,000.00.

2. The Debtor is employed by an automotive supplier. He has been at his current job since July 2002. Employment in the automotive field is not secure employment. If lay-offs occur, the Debtor could lose his job because he lacks seniority.

3. The Debtor missed one month of work in January 2003 because he had his appendix removed. The Debtor was not paid for this leave of absence.

4. The Debtor was unemployed from December 2001 through July 2002, when the Debtor obtained his current position.

5. Prior to the Debtor losing his job, the Debtor was paying his bills as they became due.

6. During his period of unemployment, the Debtor borrowed from his 401(k) plan and took a second mortgage on his residence to meet current expenses.

7. At the time the Debtor lost his job, the Debtor had substantial credit card debt.

8. At the time the Debtor lost his job, the Debtor had no savings.

9. During his period of unemployment, the Debtor "tightened his belt." He cancelled his cable and did not spend money on clothes.

10. The Debtor did not file for unemployment when he lost his job.

11. When Debtor filed his bankruptcy petition, the Debtor and his attorney determined that his monthly expenses exceeded his monthly income and that there was no excess income available to pay a dividend to creditors.

II. ANALYSIS

A. "Substantial Abuse" under 707(b)

A bankruptcy court may dismiss a Chapter 7 case where the debts are primarily consumer debts if the court finds that granting a discharge would be a "substantial abuse" of the Bankruptcy Code. Section 707(b) of the Bankruptcy Code provides:

After notice and a hearing, the court, on its own motion or on a motion by the United States Trustee, but not at the request or suggestion of 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 a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor.

11 U.S.C. § 707(b) (emphasis added). "In essence, § 707(b) allows a bankruptcy court to deal equitably with the unusual situation where an unscrupulous debtor seeks to enlist the court's assistance in a scheme to take unfair advantage of his creditors; it serves notice upon those tempted by unprincipled accumulation of consumer debt that they will be held to at least a rudimentary standard of fair play and honorable dealing." In re Krohn, 886 F.2d 123, 126 (6th Cir.1989).

To determine whether to dismiss a case under section 707(b), the court must look to the totality of the circumstances. Krohn, 886 F.2d at 126. Substantial abuse can be shown either 1) where the debtor has acted dishonestly or 2) where the debtor is not needy, i.e. his financial situation does not warrant a discharge in exchange for the liquidation of his assets.

In determining whether the debtor is acting honestly, the court should examine whether the debtor made substantial eve-of-bankruptcy purchases, was dishonest in filing his bankruptcy schedules and other court documents, and whether the bankruptcy was necessitated by unforeseen or catastrophic events. Id.

In determining whether a debtor is needy, the court should decide whether the debtor could pay his debts out of future earnings, i.e., whether the debtor could fund a hypothetical Chapter 13 plan. This factor alone may compel a dismissal of the case. Id. Other factors which may show neediness or a lack thereof include:

1) whether the debtor enjoys a stable source of income;

2) whether he is eligible for adjustment of his debts through Chapter 13;

3) whether there are state remedies with the potential to ease his financial problems;

4) the degree of relief obtainable through private negotiations; and

5) whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter, and other necessities.

Id. at 126-27.

In Krohn, the Sixth Circuit affirmed the bankruptcy court's dismissal of a debtor's case for substantial abuse, finding that the debtor consistently lived on credit and beyond his means. The court found that the section 707(b) statutory preference in favor of granting relief was inappropriate under the totality of the circumstances. Krohn's income was $4,015 per month and his expenses were $3,950. Even after filing his Chapter 7 petition, the debtor continued to spend excessively; his post petition expenses for a three-month period included $1,065 for dining out, lunch and recreation (in excess of the $355 he was spending on groceries), $169 for cosmetics, and $66 for cigars. He had ample future income and his financial situation was not the result of any unforeseen event or catastrophe. Based on these facts, the Sixth Circuit affirmed the bankruptcy court's dismissal of the case for substantial abuse under 707(b). Id. at 127-28.¹

Section 707(b) provides that there shall be a presumption in favor of granting the relief requested by the debtor. Further, it is not the court's role to determine the debtor's budget or to pass personal judgment on the debtor's spending habits. Even so, a determination of substantial abuse "necessitates some evaluation of the debtor's expense and income statements, and thus some scrutiny of their personal spending habits." In re Tefertiller, 104 B.R. 513, 514 (Bankr.N.D.Ga.1989).

Deciding...