In re Kelly, Bankruptcy No. 85-00783.

• Decision Date: 23 January 1986
• Docket Number: Bankruptcy No. 85-00783.
• Citation: 57 BR 536
• Parties: In re Thomas G. KELLY, Pauline A. Kelly, Debtors.
• Court: U.S. Bankruptcy Court — District of Arizona

57 B.R. 536 (1986)

In re Thomas G. KELLY, Pauline A. Kelly, Debtors.

Bankruptcy No. 85-00783.

United States Bankruptcy Court, D. Arizona.

January 23, 1986.

Dennis M. Breen, III, Tucson, Ariz., for debtors.

Alan Solot, Tucson, Ariz., Trustee.

Michael McGrath, Tucson, Ariz., for Zolg.

Gerald Hirsch, Tucson, Ariz., for Tucson Realty and Trust Co.

ORDER

WILLIAM A. SCANLAND, Bankruptcy Judge.

This Order shall constitute the Court's findings of fact and conclusions of law.

This matter is before the Court on its own Order to Show Cause why the Debtors' chapter 7 proceedings should not be dismissed pursuant to 11 U.S.C. § 707(b) as a substantial abuse of the provisions of that chapter. The Debtors were represented at the hearing by Dennis Breen. Creditor Tucson Realty and Trust Company appeared by Gerald Hirsch, and creditor Robert Zolg appeared by Michael McGrath.

Prior to filing their chapter 7 on December 16, 1984, the Debtors were involved as plaintiffs in a protracted state court litigation based upon an alleged fraud in connection with the Debtors' purchase of their current residence. The Debtors were unsuccessful at the trial level and pursued their action by appeal to both the Arizona Court of Appeals and the Arizona Supreme Court. Said appeals were likewise to no avail and the upshot of the litigation was a judgment against the Debtors for the attorneys' fees expended by the prevailing defendants in the case aggregating $25,000.00.

The Debtors now seek to have that $25,000.00 judgment discharged in their chapter 7 proceedings. It is significant that the Debtors list no other unsecured debts on their schedules. In fact, the only other debts listed by the Debtors on their schedules are three consensual liens aggregating $147,000.00 against the Debtors' residence. Schedule B-1 states the market value of the residence is $175,000.00. The Debtors claim a $50,000.00 homestead exemption.

Debtor Thomas Kelly, an attorney, reported a salary of $51,150.00 in 1983, and $49,200.00 in 1984. He reports a current gross income of $5,100.00 per month, and take-home pay of $3,719.84 per month. Mrs. Kelly reports no income. The schedules show assets of $182,000.00.

In reviewing the Debtors' file this Court was immediately struck by the fact that the Debtors listed an excess of $441.84 in monthly income over monthly expenses. The Debtors list certain monthly expenses which the Court deems excessive, exemplary of which is $500.00 for monthly recreational expense.

The Order to Show Cause issued pursuant to 11 U.S.C. § 707(b) and a hearing was held thereon. The Debtors were present but no testimony was taken. Debtors' counsel presented oral argument to the Court basically reiterating the arguments set forth in his written response to the Order to Show Cause. Additionally, the Court reviewed the transcript of the Rule 2004 examination of Debtor Thomas Kelly taken postpetition by the attorneys for the judgment creditors.

11 U.S.C. § 707(b) was added by the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA"), Pub.L. No. 98-353, 98 Stat. 333, and is applicable to the case at bar. Section 707(b) provides:

"(b) After notice and hearing the court, on its own motion and 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."

A fair reading of section 707(b) leads to the conclusion that two basic inquiries are germane to a determination by the Court under that section. First, is the debtor one whose debts are primarily consumer debts? Second, would the granting of relief to that debtor be a substantial abuse of the provisions of chapter 7? The second sentence of section 707(b) clearly indicates that any doubts should be resolved in the debtor's favor consistent with the spirit of title 11 and the concept of "fresh start."

It should be noted at the outset that very little guidance is available to the Court in the way of precedent. This Court is aware of several reported decisions involving section 707(b). The Bankruptcy Code nowhere defines the term "substantial abuse" nor does it define what constitutes "primarily consumer debts."

Debtors' counsel has strenuously argued that the obligations of the Debtors are not primarily consumer debts and that section 707(b) is thus not applicable to this chapter proceeding.

The term "consumer debt" is a technical term defined in the Code to mean "a debt incurred by an individual primarily for a personal, family or household purpose." 11 U.S.C. § 101(7).

The Debtors only list two classes of debt. The first is the judgment representing attorneys' fees incurred by the prevailing defendants in the Debtors' state court litigation. While the subject matter of the Debtors' litigation related directly to the purchase of their residence the litigation itself and the attorneys' fees incurred therein by the prevailing parties arose only incidentally thereto. Whether the judgment for fees constitutes a consumer or non-consumer obligation need not be decided here since that judgment represents only 14.5 per cent of the Debtors' total obligations, the remainder of which have been found to be consumer in nature. Thus, the characterization of the judgment as a non-consumer obligation would not alter the finding that the obligations of the Debtors are "primarily" consumer debts.

The second class of debt listed by the Debtors is represented by the three consensual liens against the Debtors' residence totaling $147,000.00. The Debtors do not argue that the moneys borrowed against the residence do not represent debts incurred primarily for personal, family or household purposes. Rather, the Debtors assert that the aggregate debt of $147,000.00 cannot be utilized in the calculation of consumer debt because that debt is secured by real property. To support their position the Debtors cite the Court to the legislative history under section 101(7) which states that "a consumer debt does not include a debt to any extent the debt is secured by real property." 124 Cong.Rec. p. H. 11090 (Sep. 28, 1978); Bankruptcy Service — L.Ed, Legislative History § 81:3.

It is significant that the legislative history cited by the Debtors relates to the passage of the Bankruptcy Relief Act of 1978, Pub.L. No. 95-598. In contrast, section 707(b) was added by the BAFJA of 1984 in an attempt to curb what was widely perceived as a misuse of the bankruptcy proceeding by persons not suffering economic hardship. 130 Cong.Rec. 7497 (daily ed June 29, 1984).

Only one reported case to date has analyzed the term "primarily consumer debts" as used in section 707(b) in the context of whether or not a mortgage debt should be included therein. The bankruptcy court in In re Mitchell W. Bryant, 12 B.C.D. 565 (Bkrtcy.W.D.N.C.1984) found...