In re Price

• Decision Date: 28 June 2002
• Docket Number: BAP No. NV-01-1627-BKRY.,Bankruptcy No. 01-32123.
• Citation: 280 B.R. 499
• Parties: In re Thomas W. PRICE, Debtor. Thomas W. Price, Appellant, v. United States Trustee, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

280 B.R. 499

In re Thomas W. PRICE, Debtor Thomas W. Price, Appellant, v. United States Trustee, Appellee.

BAP No. NV-01-1627-BKRY.

Bankruptcy No. 01-32123.

United States Bankruptcy Appellate Panel, Ninth Circuit.

Argued and Submitted May 24, 2002.

Filed June 28, 2002.

John A. White, Jr., White Law Chartered, Reno, NV, for Thomas W. Price.

Nicholas Strozza, Office of the United States Trustee, Reno, NV, for the United States Trustee.

Before: BRANDT, KLEIN, and RYAN, Bankruptcy Judges.

OPINION

BRANDT, Bankruptcy Judge.

Debtor Thomas W. Price appeals the bankruptcy court's order dismissing his chapter 7¹ case for substantial abuse under § 707(b). We AFFIRM.

I. FACTS

Price filed for chapter 7 relief on 18 June 2001. According to his schedules, he owed secured debts of $167,469, priority debts of $19,356.50, and unsecured nonpriority debts of $135,727.31 ($322,552.81 total). Attached to debtor's petition was an exhibit entitled "Explication of Nature of Debt," categorizing the scheduled debts as either "personal" or "business." According to the exhibit, Price owed $72,150.86 in personal debt and $101,690.95 in business debt, for a total of $173,841.81. Not included in either category were secured debts totaling $141,511 to Bank of America and Wilshire Credit,² and a $7,200 priority debt to Price's ex-wife. The latter debt was for health insurance payments debtor was required to pay under the couple's divorce decree. Price does not explain why he excluded this item from his listing of personal debt, but its inclusion or exclusion is not dispositive. According to Price's amended income and expense schedules, his total monthly income was $7,273.34, with monthly expenses of $4,775.97, leaving disposable income of $2,497.37 per month.

The United States Trustee ("UST") timely moved to dismiss Price's case for substantial abuse under § 707(b), arguing that Price's debts were primarily consumer debts when the debt secured by his residence was included, and that Price could fund a chapter 13 plan paying 55% to unsecured creditors over 36 months, or 92% over 60 months. Price responded, and, after a hearing, the bankruptcy court entered an order on 28 September 2001 conditionally dismissing the case, unless Price converted the case to chapter 13 by 25 October. The court later stayed the order to 23 November. After we denied debtor's motion for a stay, the bankruptcy court entered a final order of dismissal on 7 December 2001. Price timely appealed.

II. JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 and § 157(b)(1), (b)(2)(A), and (b)(2)(O), and we do under 28 U.S.C. § 158(c).

III. ISSUE

Did the bankruptcy court abuse its discretion in dismissing Price's chapter 7 case for substantial abuse under § 707(b)?

IV. STANDARD OF REVIEW

We review a bankruptcy court's decision to dismiss a chapter 7 case for substantial abuse under § 707(b) for an abuse of discretion. Gomes v. United States Trustee (In re Gomes), 220 B.R. 84, 86 (9th Cir. BAP 1998). A court necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). Before we may reverse under the abuse of discretion standard, we must be definitely and firmly convinced that the bankruptcy court committed a clear error of judgment. AT & T Universal Card Servs. v. Black (In re Black), 222 B.R. 896, 899 (9th Cir. BAP 1998).

V. DISCUSSION

Section 707(b) provides:

[a]fter 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....

This provision requires the moving party to establish that the debtor owes primarily consumer debts and that granting chapter 7 relief represents a substantial abuse of that chapter. Gomes, 220 B.R. at 86. Despite his concession at hearing that both of these elements were satisfied, Price argues the dismissal of his case was error.

A. Primarily Consumer Debt

"Consumer debt" is "debt incurred by an individual primarily for a personal, family, or household purpose[.]" § 101(8). In Zolg v. Kelly (In re Kelly), 841 F.2d 908, 912-13 (9th Cir.1988), the Ninth Circuit held that consumer debt includes secured debt incurred for personal, family, or household purposes. The court rejected the Kellys' argument that debts secured by real property could never be consumer debts, which they based on floor statements made in the House and Senate prior to enactment of the Bankruptcy Reform Act of 1978. The circuit considered the plain language of the Code (specifically, the definition of "debt" — liability on a claim, § 101(12) — and "claim" — any right to payment, whether secured or unsecured, § 101(5)(A)), along with references in other provisions of the Code to "consumer debts which are secured by property of the estate," § 521(2), and "consumer debt secured by real property," § 524. The Kelly court concluded: "The statutory scheme so clearly contemplates that consumer debt include debt secured by real property that there is no room left for any other conclusion." Kelly, 841 F.2d at 912. The court ruled that the debts secured by the Kellys' residence, one for the purchase of the home, and the other for home improvements and the repayment of credit card debts:

fit comfortably within the Code's definition of consumer debt. It is difficult to conceive of any expenditure that serves a `family ... or household purpose' more directly than does the purchase of a home and the making of improvements thereon.

Id. at 913 (footnote omitted).

The Kelly court went on to hold that the "primarily consumer debts" threshold of § 707(b) is crossed when more than one half the dollar amount of total debt is attributable to consumer debts. Id. Price's total debts are $322,552.81. According to the exhibit to his petition, his personal debts total $72,150.86. If both debts secured by Price's residence are included (the first, $120,000, incurred to purchase the home, and the second, $21,511, for home improvements), then Price's consumer debt totals at least $213,661.86 ($220,861.86 with the debt to his ex-wife), well over half his total debt. His debts are primarily consumer debts within the meaning of § 707(b) as construed in Kelly.

Nevertheless, Price contends that his mortgage debts should not be included in the calculation of "consumer debts" under § 707(b). Although the Ninth Circuit specifically rejected the consideration of only the ratio of unsecured consumer debt to unsecured non-consumer debt in the § 707(b) calculus, 841 F.2d at 913 n. 4, Price first argues that Kelly's holding with respect to consumer debts is dicta. He contends the holding was not necessary to the court's decision, because the Kellys' non-mortgage obligations were primarily consumer debts. Apart from their mortgage debts, the Kellys owed $25,000 in consumer debt and $20,000 in business debt. Thus, the argument goes, more than half the non-mortgage debt was consumer debt, so it was unnecessary to characterize the mortgage debt.

While this may be so, rendering that holding of Kelly dicta, the only other circuit which has addressed the question reached the same conclusion: In re Booth, 858 F.2d 1051 (5th Cir.1988), and Price cites no case holding, as he would have us do, that mortgage debt is not part of the § 707(b) analysis. As noted in a case including debtor's purchase money mortgage as consumer debt in that analysis:

Although there has been some suggestion that a debt secured by real property should not be a consumer debt, the overwhelming majority of courts consider first (purchase money) mortgages on residential property to be consumer debts, and second (or later) mortgages to be consumer debt, to the extent that the loan proceeds are used for non-business purposes, such as consolidating other consumer debt or for home improvement.

In re Praleikas, 248 B.R. 140, 144-145 (Bankr.W.D.Mo.2000) (footnotes omitted). See also Deborah Sprenger, Annotation, What Are "Primarily Consumer Debts," under 11 U.S.C.A. § 707(b), Authorizing Dismissal of Chapter 7 Bankruptcy Case If Granting Relief Would Be Substantial Abuse of Chapter's Provision, 101 A.L.R.Fed. 771, § 5 (1991).

Price's second argument is that, even if debts secured by real property can be consumer debts, purchase money mortgages should not be so treated. According to Price, § 707(b) embodies the pre-Code policy favoring granting discharges to merchants over consumers, but treating purchase money mortgages as consumer debts in the § 707(b) analysis discriminates against homeowners, in violation of policies favoring home ownership in federal housing laws and the Internal Revenue Code. Price complains that a non-homeowner with the same amount of trade debt and disposable income is eligible for a chapter 7 discharge while he is not, only because he borrowed money to purchase a home, a result that he apparently believes, without explication, discourages home ownership.

Price's argument on these points is singularly devoid of authority pertinent to the issues at hand, consisting largely of generalities from secondary sources. He never lays out a rationale (beyond the impact on him) connecting his premise — that interpreting § 707(b) as the bankruptcy court did interferes with the other federal policies he mentions — to his conclusion that the section doesn't mean what virtually every court which has looked at it has said it does.

Next, Price argues that exempt property (presumably meaning debt secured by exempt property) is not consumer debt within the meaning of...