In re Klinger
| Decision Date | 12 March 2021 |
| Docket Number | Case No. 18-33456 |
| Parties | In Re: Mark W. Klinger Debtor(s). |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio |
The court incorporates by reference in this paragraph and adopts as the findings and orders of this court the document set forth below. This document has been entered electronically in the record of the United States Bankruptcy Court for the Northern District of Ohio.
MEMORANDUM OF DECISION AND ORDER REGARDING MOTION TO DISMISS
This case is before the court on the United States Trustee's ("the UST") motion to dismiss Debtor's Chapter 7 case for abuse under 11 U.S.C. §§ 707(b)(1) and (b)(3) [Doc. # 72] and Debtor's objection [Doc. # 75]. The court scheduled this matter for an in-person evidentiary hearing, subject to re-evaluation in light of the ongoing COVID public health emergency. [Doc. # 73]. A supplemental procedures order issued converting the in-person hearing to a virtual hearing. [Doc. # 77]. The parties filed and the court approved the Joint Request of the United States Trustee and Debtor to Dispense with the Evidentiary Hearing, File Stipulation of Facts, Stipulate to Admission of Exhibits, and Have the Court Decide the Matter upon Briefs. [Doc. ## 79 and 80]. As a result of the Joint Request, the parties filed an Amended Document Stipulation. [Doc. # 83]. In accordance with the deadlines set forth in the order approving the Joint Request, the UST filed a supplemental brief. [Doc. # 84].
The district court has jurisdiction over this Chapter 7 case pursuant to 28 U.S.C. § 1334(a) as a case under Title 11. It has been referred to this court by the district court under its general order of reference. 28 U.S.C. § 157(a); General Order 2012-7 of the United States District Court for the Northern District of Ohio. Proceedings to determine a motion to dismiss under § 707(b) are core proceedings that this court may hear and decide. 28 U.S.C. § 157(b)(1), (b)(2)(J) and (O).
Having considered the briefs and the evidence presented, and having reviewed the entire record in this case, the court will grant the UST's motion to dismiss for the following reasons, which constitute the court's findings of facts and conclusions of law. Fed. R. Bankr. P. 9014(c); Fed. R. Bankr. P. 7052; Fed. R. Civ. P. 52(a).
Debtor is a production manager for Estabrook Assembly Service in Berea, Ohio where he has been employed for three decades. . Debtor is divorced and has no dependents. Debtor filed his voluntary Chapter 7 petition on November 3, 2018, with primarily consumer debts. . At the time the petition was filed, Debtor's Schedule I and J showed net monthly income of $2,164.92 and expenses of $4,314.50, resulting in an apparent monthly spending deficit of $2,149.58. . Schedule D shows total secured debt of $193,800, including $168,998 secured by Debtor's home in Lakeside Marblehead, Ohio and a $24,802 home equity loan also secured by his home. [Id. at pp. (2-37)-(2-38)]. Debtor's petition at Schedule E/F lists nonpriority debts totaling $25,542.35. [Id. at pp. (2-39)-(2-42)]. The unsecured nonpriority debt consists primarily of credit card and charge account debt. Debtor's Statement of Financial Affairs lists his gross income for 2018 at $50,625.12 as of the date the petition was filed. . It also lists his gross income to have been $117,172.00 for 2017 and $116,065.20 for 2016. .
Debtor's Official Form 122A-1, at part 2, determines whether the means test applies. It shows that Debtor's annualized current monthly income at the time of filing this case was $61,529.04. . The median income in Ohio in 2018 for a family the size of Debtor's family (one) was $48,441.00, requiring application of the means test. Debtor's Official Form 122A-2, the means test calculation, determined there was no presumption of abuse. [Id. at pp. (2-12)-(2-19)].
At the December 13, 2018, Meeting of Creditors, upon inquiry from the Chapter 7 Trustee, Debtor explained that he had received bonuses from his employer in the past, had not received a bonus for 2018 and had no expectation of a bonus for 2018. Post-petition, Debtor received a $50,000 2018 bonus from his employer translating to a net payment after taxes of $32,425.00 . In March 2019, the Chapter 7 Trustee moved for turnover of Debtor's net 2018 end of year bonus as property of the estate. Following an evidentiary hearing and briefing on the Chapter Trustee's motion,the court denied the motion for turnover. [UST Ex. 10]. Following that decision, the Chapter 7 Trustee filed a "no asset" report indicating there was no property available for distribution from the estate to Debtor's unsecured creditors. [Doc. # 69].
On April 28, 2020, the UST moved to dismiss Debtor's petition for abuse under 11 U.S.C. § 707(b)(1) and (b)(3).
Where debts are primarily consumer debts, the court may, after notice and hearing, dismiss a Chapter 7 case "if its finds that the granting of relief would be an abuse of provisions [Chapter 7]." 11 U.S.C. § 707(b)(1). The purpose of this policy is to require debtors with the ability to pay their debts to pay all or a portion of their debts and not use Chapter 7 to escape those liabilities. In re Jacob, 447 B.R. 535, 539 (Bankr. N.D. Ohio 2010) (citation omitted). Under § 707(b)(2) and (3), Congress provided two methods by which abuse may be proven. Section 707(b) was enacted by Congress as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). Section 707(b)(2)(A) sets forth an extensive "means test" calculation to determine whether there is a presumption of abuse. The second method, under § 707(b)(3), requires the court to consider "(A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances . . . of the debtor's financial situation demonstrates abuse." The UST's motion relies on this second basis for dismissal.
Before BAPCPA, courts considered dismissals for "substantial abuse" under § 707(b) based upon "totality of the circumstances." See, e.g., In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989); In re Price, 353 F.3d 1135, 1139 (9th Cir. 2004). As noted by the Sixth Circuit:
In determining whether to apply § 707(b) to an individual debtor, then, a court should ascertain from the totality of the circumstances whether he is merely seeking an advantage over his creditors, or instead is "honest," in the sense that his relationship with his creditors has been marked by essentially honorable and undeceptive dealings, and whether he is "needy" in the sense that his financial predicament warrants the discharge of his debts in exchange for liquidation of his assets. See 4 Collier, supra, ¶ 707.07, at 707-20. Substantial abuse can be predicated upon either lack of honesty or want of need.
In re Krohn, 866 F.3d at 126. Congress incorporated this judicially created construct in § 707(b)(3). While pre-BAPCPA case law applying these concepts remains helpful in determining abuse under § 707(b)(3), under BAPCPA Congress lowered the standard for dismissal from "substantial abuse" to "abuse." In re Mestemaker, 359 B.R. 849, 856 (Bankr. N.D. Ohio 2007).
The UST does not contend that Debtor filed his Chapter 7 petition in bad faith. Instead, the UST argues that the totality of the circumstances of Debtor's case demonstrates an ability to repay his creditors as he has disposable income available to make a meaningful payment to them. Under a totality of the circumstances test, the court determines whether a debtor is "needy" and whether "his financial predicament warrants the discharge of his debts" in a Chapter 7 case. See Behlke v. Eisen (In re Behlke), 358 F.3d 429, 434 (6th Cir. 2004). The plain meaning of § 707(b)(3)(B)'s reference to "debtor's financial situation" includes a debtor's actual income and expenses, since such information is the starting point for any analysis of an individual's situation. In re Mestemaker, 359 B.R. at 854. In making this determination, the court may consider both prepetition and post-petition circumstances, including the debtor's financial circumstances as they existed at the time the motion was heard. In re Goble, 401 B.R. 261, 276 (Bankr. S.D. Ohio 2009). To facilitate this inquiry, Debtor submitted updated Schedules I and J to the UST to show his actual financial situation in 2020. .
Factors relevant to determination of the totality of the circumstances include the ability to repay debts out of future earnings, which alone may be sufficient under some circumstances to warrant dismissal. See In re Krohn, 886 F.2d at 126. Other factors considered are "whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities." Id. at 126-27.
As the movant, the UST bears the overall burden of demonstrating, by a preponderance of the evidence, that Debtor's case should be dismissed. In re Weixel, 494 B.R. 895, 901 (B.A.P. 6th Cir. 2013).
The issues targeted by the UST in this case under the totality of the circumstance test are: (1) Debtor's voluntary contributions to his 401(k) plan at Estabrook; (2) Debtor's history of earning end of year bonuses and understated income in general; (3) Debtor's excessive expenses, especially a current food and housekeeping supplies budget of $900/month; (4) known imminent reductions in Debtor's obligations to his former spouse; (5) the timing of Debtor's filing; and (6) Debtor's...
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