In re Perelman

• Citation: 419 B.R. 168
• Decision Date: 30 October 2009
• Docket Number: No. 108-45953-jf.,108-45953-jf.
• Parties: In re Dmitry PERELMAN, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

419 B.R. 168

In re Dmitry PERELMAN, Debtor.

No. 108-45953-jf.

United States Bankruptcy Court, E.D. New York.

October 30, 2009.

COPYRIGHT MATERIAL OMITTED

Diana G. Adams, United States Trustee by William E. Curtin, Esq., Trial Attorney, Brooklyn, NY, John C. Sieck, Esq., New York, NY, for Debtor.

DECISION AND ORDER DISMISSING CHAPTER 7 CASE FOR ABUSE UNDER 11 U.S.C. § 707(b)(1), UNLESS CONVERTED TO A CASE UNDER CHAPTER 11 OR CHAPTER 13 OF THE BANKRUPTCY CODE

JEROME FELLER, Bankruptcy Judge.

Before the Court is a motion of the United States Trustee ("UST") under 11 U.S.C. § 707(b)(1) to dismiss the above-captioned Chapter 7 case of Dmitry Perelman ("Debtor") as an abuse of the provisions of Chapter 7 of the Bankruptcy Code ("Motion"). The abuse is predicated upon 11 U.S.C. § 707(b)(2), the Means-Test or, in the alternative, on 11 U.S.C. § 707(b)(3), a totality of the Debtor's financial situation. The UST does not believe that the Debtor is an individual eligible to receive an immediate unconditional discharge of personal liabilities for debts in exchange for the liquidation of non-exempt assets under Chapter 7. She contends that the Debtor has the ability to pay under a bankruptcy repayment plan a substantial portion of his indebtedness before obtaining a discharge.

There are two important issues animating this hotly contested dispute. First, whether an above-median debtor in a Chapter 7 case is allowed under the Means-Test to take deductions for payments on secured debt when the debtor states an intent to surrender the underlying collateral. Second, if the answer to the first issue is in the affirmative and the debtor as a result passes the Means-Test, meaning that there is no presumption of abuse, may the Chapter 7 case nonetheless be dismissed as an abuse based upon an ability to pay.

For the reasons hereinafter set forth, we conclude that the Debtor was allowed to take the secured debt expense deductions under § 707(b)(2)(A)(iii) and consequently passed the Means-Test. However, even though the Debtor passed the Means-Test and there is no presumption of abuse under § 707(b)(2), the totality of the Debtor's financial situation nonetheless demonstrates abuse of Chapter 7. Accordingly, the Motion of the UST is granted based on § 707(b)(3)(B) and the above-captioned Chapter 7 case is dismissed, unless converted to Chapter 11 or Chapter 13 of the Bankruptcy Code.

I.

The UST and the Debtor do not dispute the facts deemed by them to be relevant to disposition of the Motion. On September 9, 2009, the Debtor filed a voluntary petition under Chapter 7 of Title 11 of the United States Code ("Bankruptcy Code"). Along with his petition the Debtor filed all required schedules and statements, including a Chapter 7 Statement of Current Monthly Income and Means-Test Calculation on Official Form B22A ("Means-Test Form"). See 11 U.S.C. § 707(b)(2)(C); Fed. R. Bankr.P. 1007(b)(4). On the Means-Test Form, the Debtor checked off the box on the front of the form, indicating that "[t]he presumption of abuse does not arise". The debtor also filed a Chapter 7 Debtor's Statement of Intent on Official Form B8 ("Statement of Intent"). See 11 U.S.C. § 521(a)(2)(A); Fed. R. Bankr.P. 1007(b)(2).

The petition and schedules inform that the Debtor is an unmarried individual without dependants and employed as a computer network engineer for Teleris, Inc. Schedule D lists a total of $1,465,525 in secured debt. Schedule F lists $47,897 in unsecured debt consisting of outstanding pre-petition credit card indebtedness. Both in quantity of claims and amount, these debts are primarily consumer debts as defined in 11 U.S.C. § 101(8).

For purpose of the Means-Test and Schedule I, the UST and Debtor stipulated, that the Debtor's current monthly income is $11,244, and, as such, computes out to an annualized income of $134,928. See Doc. No. 17. Since in New York State the median annual income for a household size of one is $44,587, the Debtor's annual income places him in the category of an above-median debtor for purposes of the Means-Test.

As an above-median debtor, the Debtor was required to complete the expense deduction portion of the Means-Test Form. Lines 42 and 43 provide for deductions from current monthly income for future payments on debts secured by an interest in property, and if such property is a debtor's residence, a further deduction for monthly payments to cure pre-petition arrearages over a 60 month period. Schedule A states that the Debtor is the owner of two condominiums. One property is the Debtor's residence at 60 Broadway, Unit 7B, Brooklyn, New York, which property is appraised at $965,000 and is encumbered by three liens totaling $1,024,273 ("New York Property"). The other is a condominium in Lake Buena Vista Resort Village and Spa, Unit 3704, 8112 Poinciana Boulevard, Orlando, Florida, which property is appraised at $250,000 and is encumbered by two mortgages totaling $441,252 ("Florida Property"). The New York Property and the Florida Property are hereinafter collectively referred to as "the Properties".

Notwithstanding the Statement of Intent filed by the Debtor declaring his intent to surrender the Properties for which he has stopped making secured debt payments, the Debtor took a deduction of $9,171 on Line 42 of the Means-Test Form for future monthly payments on the debts secured by the Properties. He also took a deduction on Line 43 of $239.00, reflecting a monthly payment needed to cure the pre-petition arrearages on the New York Property over a 60 month period. After taking into account the deductions on Lines 42 and 43 and other deductions, the Debtor calculates that he has a negative monthly disposable income and concludes that a presumption of Chapter 7 abuse does not arise.

The UST maintains that the Debtor's deductions on Lines 42 and 43 were improper and should be disallowed. The UST recalculated the figures on the Debtor's Means-Test Form, eliminating the Line 42 and 43 deductions and adding back on Line 20B a deduction under Internal Revenue Service Local Standards for housing and utilities expenses. Based upon the recomputation, the UST ultimately concluded that the Debtor has monthly disposable income in the amount of $3,779.40, enough for him to make a substantial distribution to unsecured creditors under a bankruptcy repayment plan. See Doc. No. 20 at 2, 5 and 12. A notice of presumed abuse was filed by the UST as required by § 704(b)(1)(A), followed by a timely filing of the Motion.

II.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-8, 119 Stat 23, became effective on October 17, 2005. One goal of the BAPCPA was to "address what Congress perceived to be abuses of the bankruptcy process. Among the abuses identified by Congress was the easy access to Chapter 7 proceedings by consumer debtors, who if required to file under Chapter 13, could afford to pay some dividend to their unsecured creditors." In re Hardacre, 338 B.R. 718, 720 (Bankr. N.D.Tex.2006) (Citing 151 Cong. Rec. S2549, 2469-70 (Mar. 10, 2005)). The principal method fashioned to steer debtors away from Chapter 7 and into a bankruptcy repayment plan is a retooled version of § 707(b).

Section 707(b)(1) now provides that, the court, after notice and a hearing, may dismiss a Chapter 7 case or, with the debtor's consent, convert the case to one under Chapter 11 or Chapter 13, if the court finds that the granting of relief under Chapter 7 would be an abuse of the provisions of Chapter 7. Prior to the enactment of the BAPCPA, Section 707(b) of the Bankruptcy Code provided for the dismissal of a Chapter 7 case when the granting of relief would be a "substantial abuse" of the provisions of Chapter 7. BAPCPA altered the circumstances under which a Chapter 7 case may be dismissed by removing the "substantial" qualifier and provided for "abuse" to be determined pursuant to either the new § 707(b)(2) or the new § 707(b)(3). When a debtor's disposable income exceeds fixed amounts (i.e., when the debtor fails the Means-Test), the new § 707(b)(2) creates a presumption of abuse. When the presumption of abuse does not arise (i.e., when the debtor passes the Means-Test), the new § 707(b)(3) looks to whether the debtor filed the petition in bad faith or if the totality of the circumstances of the debtor's financial situation demonstrates abuse.

Section 707(b)(2) codifies a Means-Test which provides a formula which calculates a debtor's average monthly disposable income over a 60 month period by deducting statutorily specified allowable expenses, secured debt payments and priority debt payments from current monthly income. Current monthly income is defined in 11 U.S.C. § 101(10A) as the average monthly income of a debtor from all sources in the six month period prior to commencement of the bankruptcy case. The authorized deductions from current monthly income are detailed in § 707(b)(2)(A)(ii-iv). If the resulting income figure exceeds certain mathematical threshold amounts, the Chapter 7 bankruptcy filing is presumptively abusive. See 11 U.S.C. § 707(b)(2)(A)(i). Specifically, the mathematical threshold amounts identified in § 707(b)(2)(A)(i) that trigger a presumption of abuse are as follows: 1) if the debtor has at least $182.50 in monthly disposable income (that is, in the language of the statute, if the debtor's monthly disposable income, multiplied by 60, is not less than $10,950), abuse is presumed regardless of the amount of the debtor's non-priority unsecured debt; and 2) if the debtor has at least $109.58 of monthly disposable income (that is, in the language of the statute, $6,575 over a 60 month period), abuse is presumed if the income is sufficient to pay at least 25% of the debtor's non-priority unsecured debt. See Eugene R. Wedoff, Means Testing In The New § 707(b), 79 Am. Bankr.L.J. 231, 241-42 (2005).

The initial dispute between the Debtor and the UST in this case is the propriety...