In re Stewart, BAP No. 97-010

• Decision Date: 09 December 1997
• Docket Number: Bankruptcy No. 96-01624-W.,BAP No. 97-010
• Citation: 215 BR 456
• Parties: In re Jeffrey D. STEWART, Debtor. Jeffrey D. STEWART, Appellant, v. UNITED STATES TRUSTEE, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

215 B.R. 456 (1997)

In re Jeffrey D. STEWART, Debtor Jeffrey D. STEWART, Appellant, v. UNITED STATES TRUSTEE, Appellee.

BAP No. 97-010, Bankruptcy No. 96-01624-W.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

December 9, 1997.

COPYRIGHT MATERIAL OMITTED

Richard A. Shallcross of Brewster, Shallcross & DeAngelis, Tulsa, OK, for Appellant.

Katherine M. Vance, Assistant United States Trustee, Tulsa, OK (John E. Foulston, United States Trustee, Wichita, KS; Richard A. Wieland, Wichita, KS; Martha L. Davis, General Counsel; Jeanne M. Crouse, Attorney, Executive Office of United States Trustee, Washington, DC, with her on the brief), for Appellee.

Before CLARK, ROBINSON and MATHESON, Bankruptcy Judges.

OPINION

ROBINSON, Bankruptcy Judge.

The debtor, Jeffrey D. Stewart, appeals two orders of the United States Bankruptcy Court for the Northern District of Oklahoma. The first order dismisses his bankruptcy proceeding as a substantial abuse of the provisions of Chapter 7 pursuant to 11 U.S.C. § 707(b), and the second order concludes that the statute is constitutional.¹ The debtor contends that the Bankruptcy Court erred: in allowing the United States Trustee to commence a § 707(b) action based on the suggestion or request of a creditor; in concluding that § 707(b) is not constitutionally infirm for violating the equal protection guarantees of the Fourteenth and Fifth Amendments of the United States Constitution nor void for vagueness; in finding that his debts were "primarily consumer debts"; and in concluding that his case was a substantial abuse of the provisions of Chapter 7. For the reasons set forth below, we affirm the Bankruptcy Court.

I. JURISDICTION AND SCOPE OF REVIEW

The debtor filed a timely Notice of Appeal from final orders of the Bankruptcy Court. This Court has jurisdiction under 28 U.S.C. § 158(c). We review the Bankruptcy Court's conclusions of law de novo. Tulsa Energy, Inc. v. KPL Prod. Co. (In re Tulsa Energy, Inc.), 111 F.3d 88, 89 (10th Cir. 1997). The Bankruptcy Court's findings of fact will be rejected only if clearly erroneous. Id. Mixed questions of law and fact will be reviewed for clear error if the question is primarily factual and if the facts satisfy the proper legal standard. See Jobin v. McKay (In re M & L Bus. Mach. Co., Inc.), 84 F.3d 1330, 1338-39 (10th Cir.), cert. denied, ___ U.S. ___, 117 S.Ct. 608, 136 L.Ed.2d 534 (1996). Whether the court applied the proper legal standard or conclusions is subject to de novo review. When factual findings are premised on a proper legal standard that was improperly applied, factual findings are not entitled to the protection of the clearly erroneous standard, but are subject to de novo review. Sender v. Johnson (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1267, 1268 (10th Cir.1996).

II. BACKGROUND

The Bankruptcy Court's findings of fact are set forth in detail in Stewart I, 201 B.R. at 997-1002. With some notable exceptions, discussed below, we adopt the findings of fact, summarized as follows. The debtor, Jeffrey Stewart, married Barbara Teichner in 1978. During the first 10 years of their marriage, Stewart held various jobs and periodically went to college. During these years, they had four children and the family's standard of living was minimal. Barbara's parents helped by lending them money, which they used partly for living expenses and partly for Stewart's schooling. Stewart also obtained student loans from commercial lenders under government-sponsored programs. In 1988, Stewart entered medical school at the age of 30. In 1990, Stewart commenced a romance with Patricia, a fellow medical student; and Stewart and Barbara soon divorced. As part of the separation and divorce, Stewart signed promissory notes to Barbara's parents for the loans they made to them during their 12-year marriage. The divorce decree required Stewart to pay Barbara $500 in monthly alimony until he completed an accredited medical residency, and $25,000 in annual alimony thereafter, with a cap of $2 million (or $250,000 in the event Barbara remarried). Stewart was also required to pay child support of $2,000 per month, as well as the children's medical and educational expenses.

In 1992, Stewart graduated from medical school and commenced his internship and residency program. In June, 1996, he completed his residency in obstetrics-gynecology. After he completed the residency, Stewart delayed his practice and entered a two to three year fellowship program in perinatology, training for high risk obstetrics. During the fellowship, his base salary contract will range from $34,292 to $37,000. Current starting salaries for program graduates not yet board certified was estimated at $100,000 to $150,000 annually. Average annual earnings for board certified ob/gyn specialists range from $175,000 to $325,000, and the highest salaries exceed $500,000.

On May 2, 1996, Stewart filed a Chapter 7 petition in bankruptcy.² Stewart scheduled $23,066 in assets, which included partial interests in 22 tracts of real estate, as well as a 1990 Range Rover and a 1978 Datsun. Stewart scheduled debts totaling $2,548,440.37; all but $15,244 of this debt was unsecured or priority debt. The scheduled debt included $2,000,000 owed to Barbara, $272,133 in known student loans plus several unknown amounts, and $230,000 owing to Barbara's parents.

After the United States Trustee filed a motion to dismiss, Stewart amended his bankruptcy schedules, slightly decreasing the value of his assets, and increasing his liabilities to $2.6 million. He moved his $2 million debt to his ex-wife from Schedule F to Schedule E (which had been omitted from the original schedules). In his Schedule E he reported claims totaling $2,004,500, consisting of Barbara's claim (still listed at $2 million) plus $4,500 in federal and state taxes. His amended Schedule F increased his debt owed to his former in-laws to about $320,000 and claimed student loans of about $218,000, with a total general unsecured debt of $582,509. The Bankruptcy Court noted that although Stewart had set Barbara's claim at $2 million, Barbara had remarried, and thus her claim must be reduced to $250,000.

Stewart further amended his schedules claiming monthly take home pay of $2,556, with a projection showing average monthly income in 1996 of $3,403. The amended schedules listed monthly expenses of $7,966, for a monthly deficit of income under expenses of $4,563.

Stewart's total debts are approximately $837,009³, including the $250,000⁴ marital debt to Barbara, the $218,000 in student loans from commercial lenders, and the $320,000 debt to his former in-laws. Half of the total debt amount of $837,009 is about $418,505. The marital debt of $250,000 plus the $320,000 owed to the former in-laws exceeds half; or the $218,000 student loan debt plus either the $320,000 owed to the former in-laws, or the $250,000 in marital debt, exceeds half of the total debt.

The Bankruptcy Court relied on the following findings of fact in reaching the conclusion that there was substantial abuse:

(1) The debtor, along with his doctor wife, have considerable future earning potential (201 B.R. at 1006) (2) The student loan debts are not dischargeable, and the main effect of the case would be to discharge the debtor\'s debts to his former wife and her parents and his children, which he appears to have "no intention of honoring" (id.);

(3) The debtor exaggerated his debts and expenses and minimized his income. While he was not required to include his non-debtor wife\'s income in his schedules, his failure to do so presented a "seriously misleading picture of his actual financial status" (id.);

(4) The debtor\'s lifestyle was extravagant —he spends $4,500 more than he takes home every month (id. at 1007);

(5) His new wife obtained a chapter 7 discharge under effectively fraudulent circumstances just prior to marrying the debtor (id.);

(6) Although the debtor is ineligible for Chapter 13 relief, Chapter 11 is available to him (id.);

(7) There was no emergency, disaster, or untenable situation to be remedied when he filed bankruptcy (id.); and

(8) "Ch. 7 relief would result in little or no dividend to creditors, and would amount to a reward for Stewart\'s own financial improvidence and judicial blessing of an unconscionably one-sided, opportunistic adjustment of Stewart\'s relationship with his domestic creditors" (id. at 1008).

Stewart I, 201 B.R. at 1006-1008. The debtor contests findings (2), (3), (5), and (6).

With regard to finding (2), Stewart argues that the Bankruptcy Court's finding that he had no intention of honoring his child support obligations is baseless. However, the Bankruptcy Court found that he had no intention of honoring the notes to his in-laws, nor his marital and child support obligations, based on the course of the state court litigation, the timing of his petition in bankruptcy, and other circumstances (such as buying an expensive recreational vehicle while refusing to pay his children's medical bills). Stewart testified that he is not seeking to discharge his guaranteed student loans. See Transcript, p. 139. Stewart also testified that he wants Barbara to pay her share of the children's educational expenses even though he is obligated to pay the full amount. Id. at p. 200-01. We do not find that the Bankruptcy Court clearly erred with regard to finding (2).

However, we find no support in the record for finding (3). The Bankruptcy Court found that the debtor exaggerated his debts and expenses and minimized the income he disclosed and that his failure to include Patricia's income and expenses presented "a seriously misleading picture of his actual financial status." Although Stewart did not include Patricia's income in his schedules, he did distinguish total household expenses from his share of the expenses. He also submitted her 1995 Form 1040-A as an exhibit at trial. See id. at p. 164.

Although Stewart scheduled...