In re Kruse, Case No. 14–15001–7
| Decision Date | 12 February 2016 |
| Docket Number | Case No. 14–15001–7 |
| Citation | 545 B.R. 581 |
| Parties | In re: Steve Glen Kruse and Camilla Lynn Redmond Kruse, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Daniel R. Freund, Eau Claire, WI, for Debtors.
This case was originally a chapter 13 that was converted first to a chapter 11 and then to a chapter 7. The United States Trustee filed a Motion to Dismiss Pursuant to Section 707(b). The Debtors object.
Debtors Steve and Camilla Kruse filed a voluntary chapter 13 petition on November 26, 2014. The Debtors own a house near Cumberland, Wisconsin valued at $325,000. It is subject to a mortgage claim of $527,040.54. The Debtors concluded that their unsecured debts (including the undersecured portion of their mortgage) made them ineligible for chapter 13 relief and converted to chapter 11 in January 2015.
The Debtors' schedules in the chapter 11 disclosed monthly income after payroll deductions of $10,318.28 and expenses of $7,339.87, leaving $2,978.41 in net monthly income. Shortly after filing their schedules, the Debtors completed and filed a Chapter 11 Statement of Current Monthly Income that listed monthly income of $16,264.55.
The U.S. Trustee filed a Motion to Convert or Dismiss the chapter 11. The motion referenced approximate income of $18,000 per month. It also drew information from the operating reports that monthly expenditures seemed to equal or exceed the income. The U.S. Trustee argued there was excessive consumer spending on dining, entertainment, gifts, clothes, travel, horses, and other consumer goods, leaving nothing for creditors. This pattern of spending was, according to the U.S. Trustee, "cause" for dismissal or conversion under 11 U.S.C. § 1112(b)(4)(A).
After failing to originally include certain income, the Debtors had significant work to complete on their tax returns, including amending previous returns and manually re-entering three years of financial data lost due to a computer failure. The Debtors concluded they did not know how long it would take to finish their tax returns or propose a plan. Although they filed an objection in response to the Motion to Convert or Dismiss, at the hearing the Debtors told the Court they did not oppose conversion. The Court then converted the case to a chapter 7.
The Debtors have since completed amending their tax returns. The Debtors owe delinquent taxes of $137,348.38 to the Internal Revenue Service.
A more recent Form 22A filed in September 2015 lists negative net monthly income—a deficit—of $5,928.34. This amount is skewed because it deducts $4,248.88 per month for payment related to the Cumberland house. However, the Debtors are making no such payments and have not for a long period of time.
The Debtors moved to Arkansas in March 2014. They allowed their friends to live in the Cumberland house rent-free. The Debtors stopped making payments on the Cumberland house in July 2014.
The holder of the mortgage on the Cumberland house obtained relief from stay and filed a foreclosure action. The action waives a deficiency judgment. The Debtors do not resist the foreclosure. If the foreclosure action is completed as currently pleaded, there would be no unsecured claim on the Cumberland house to include in the bankruptcy. This would reduce the unsecured claims to a level where the Debtors may be eligible to file a chapter 13.
The U.S. Trustee now asserts that dismissal under section 707(b) is warranted for abuse. The U.S. Trustee argues that: (1) without the expenses related to the Cumberland house, the presumption of abuse would arise; (2) the totality of the circumstances warrants dismissal for abuse; (3) the Debtors have a sufficiently high monthly income to support paying off creditors and, therefore, should not receive a chapter 7 discharge; and (4) the Debtors have engaged in excessive consumer spending that, if reined in, would allow them to make payments to creditors.
The Debtors do not dispute that there is substantial monthly income that would permit some repayment to creditors. Based on their income, the Debtors would not have been eligible to file for chapter 7. Nonetheless, the Debtors argue the motion to dismiss is improper and should be barred by judicial estoppel. The Debtors first argue that because the U.S. Trustee filed the Motion to Dismiss or Convert their chapter 11 to chapter 7, the Court should not permit the U.S. Trustee to bring a motion to dismiss the chapter 7. They next argue that section 707(b) does not apply to this case because the Debtors did not originally file under chapter 7. Lastly, the Debtors argue the totality of the circumstances does not show abuse.
This Court has jurisdiction under 28 U.S.C. §§ 1334and 157(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (J). The Court may enter final judgment. 28 U.S.C. § 157(b)(1).
123Judicial estoppel is designed to prevent "the perversion of the judicial process." Grochocinski v. Mayer Brown Rowe & Maw, LLP, 719 F.3d 785, 795 (7th Cir.2013). It protects the court from litigants "who seek to prevail, twice, on opposite theories." Id. The doctrine is a "matter of equitable judgment and discretion." Id. Despite the flexible nature of the doctrine, the Supreme Court has identified three factors to guide the court:
(1) whether a party's later position must be clearly inconsistent with its earlier position; (2) whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled; and (3) whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.
Id. (citing New Hampshire v. Maine, 532 U.S. 742, 750–51, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001)(internal quotations omitted)). The cases reiterate that these three factors are not a formula or prerequisites in any way, and other considerations may apply. New Hampshire, 532 U.S. at 751, 121 S.Ct. 1808. Because of the flexible nature of judicial estoppel, neither Grochocinski nor New Hampshire elaborate on what exactly satisfies these factors. Some circuits have developed stricter tests. See, e.g., Montrose Med. Group Participating Sav. Plan v. Bulger, 243 F.3d 773, 777–78 (3d Cir.2001)(requiring "irreconcilably inconsistent" positions, changing position in bad faith, and tailoring the use of judicial estoppel to "address the affront to the court's authority or integrity"); Johnson v. Oregon, 141 F.3d 1361, 1369 (9th Cir.1998)("If incompatible positions are based not on chicanery, but only on inadvertence or mistake, judicial estoppel does not apply."); Folio v. City of Clarksburg, 134 F.3d 1211, 1218 (4th Cir.1998)(requiring the party to be estopped to have acted "intentionally, not inadvertently" for judicial estoppel to apply). No specific test has been adopted in this Circuit.
4The Debtors argue the U.S. Trustee has taken inconsistent positions by filing a motion to dismiss or convert to chapter 7 and then—once the case was converted to chapter 7—filing a motion to dismiss the case for abuse. The Debtors argue the U.S. Trustee could have limited its first motion to a motion to dismiss, and that by including the alternative option to convert to chapter 7, it would be improper to now permit dismissal. The Debtors suggest the U.S. Trustee should have given them "notice of his intentions to possibly file a motion to dismiss." The Debtors admit they are not using and have not used their income to satisfy debts. The Debtors fail to argue against this as a basis for dismissal. Rather, they argue that because the earlier motion was in the alternative, their conduct is acceptable and dismissal now would be inconsistent with conversion in the prior motion.
The U.S. Trustee has consistently said the Debtors should not be granted relief under any chapter "unless their non-exempt assets and their disposable income are first used to satisfy their unsecured debts." In a nutshell, the Debtors' and the U.S. Trustee's positions are:
Debtor U. S. Trustee
• The U.S. Trustee put them into • The Debtors should not have been
chapter 7. in chapter 11 and chose to have
the case converted rather than
dismissed
• Taking them out of chapter 7 would
somehow deprive them of
bankruptcy protection. • While dismissal would have been
appropriate, conversion permitted a
trustee to investigate whether there
were assets to administer before
dismissal
Contrary to the Debtors' argument, the U.S. Trustee didn't merely ask the Court to convert the case. The U.S. Trustee asked for dismissal or conversion. It was actually the Debtors who made the choice. At the hearing on the Motion to Convert or Dismiss, the Debtors told the Court they didn't oppose conversion. Effectively, they communicated they opposed dismissal and consented to conversion. They could have opposed the motion in its entirety or could have agreed to dismissal. They now dislike the consequences of the choice they made. The U.S. Trustee did not take clearly inconsistent positions.
The parties did not litigate the prior motion to the point of a decision on a contested motion. Although they filed an initial objection, the Debtors changed their position at the hearing and withdrew their objection to conversion. By accepting the conversion that Debtors...
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