In re Suttice

• Decision Date: 09 January 2013
• Docket Number: No. 6:12–bk–21006–SC.,6:12–bk–21006–SC.
• Citation: 487 B.R. 245
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re Rufus SUTTICE and Karen Dianne Polley–Suttice, Debtor(s).

487 B.R. 245

In re Rufus SUTTICE and Karen Dianne Polley–Suttice, Debtor(s).

No. 6:12–bk–21006–SC.

United States Bankruptcy Court,

C.D. California,

Riverside Division.

Jan. 9, 2013.

Leon G. Workman, Workman Law Office, Palm Desert, CA, Arnold H. Wuhrman, Serenity Legal Services, Murrieta, CA, for Debtors.

ORDER AND AMENDED OPINION DENYING MOTION TO DISMISS FOR ABUSE

SCOTT C. CLARKSON, Bankruptcy Judge.

Before this Court is a Motion to Dismiss Case for Abuse pursuant to 11 U.S.C. § 707(b)(1) and (b)(3)¹ (the “Motion to Dismiss”), filed by Movant Peter C. Anderson, the United States Trustee for the Central District of California (the “U.S. Trustee”).

BACKGROUND

Mr. Rufus Suttice and Mrs. Karen Polley–Suttice, 85 and 69 years old respectively, filed a chapter 7 bankruptcy petition on May 3, 2012. [Dk. 1]. The Debtors included a Chapter 7 Statement of Current Monthly Income and Means–Test Calculation, indicating that a presumption of abuse under § 707(b)(2) did not arise. [Dk. 1 at 51]. The Debtors' Second Amended Schedule I and J reflect a combined monthly income of $8,532.90, consisting of: $1,072.90 from social security benefits, combined pension or retirement income of $6,572.00, Veteran Affairs Benefits of $488.00, and family contributions of $400.00 [Dk. 66 at 3], and expenses totaling $7,635.96 per month [Dk. 66 at 4], leaving a net balance of $896.94 per month in surplus income. [Dk. 66 at 4].

On June 18, 2012,² the U.S. Trustee filed a statement of presumed abuse. [Dk. 21]. On July 16, 2012,³ the U.S. Trustee filed the Motion to Dismiss, arguing that the Debtors have a monthly surplus income of $1,874.75, based upon the Debtors' First Amended Schedules, and that their case should be dismissed for abuse. [Dk. 29 at 4:18–19]. On September 7, 2012, a substitution of attorney was filed, substituting-in the Debtors' current counsel. [Dk. 49]. On October 3, 2012, the Debtors filed an opposition stating that their prior counsel had both overstated their income and understated their expenses. [Dk. 58 at 6]. Specifically, the expenses omitted from Schedule J included an additional mortgage payment, HOA dues, homeowner's insurance, and personal grooming, which would reduce the Debtors' net surplus income to $1,116.07 per month. [Dk. 58 at 5:13]. The Debtors later filed a Second Amended Schedule I and Schedule J, which reflect a current net surplus income of $896.94 per month. [Dk. 66 at 4].

The hearing on the Motion to Dismiss was held on November 14, 2012. Relying on the Ninth Circuit case In re Price, 353 F.3d 1135 (9th Cir.2004), the U.S. Trustee argued that the Debtors' chapter 7 should be dismissed as abusive based on the totality of the circumstances of the Debtors' financial situation pursuant to § 707(b)(3)(B). The U.S. Trustee focused its argument on one of several factors enumerated in Price for determining abuse—the Debtors' ability to fund a chapter 13 plan. The U.S. Trustee further argued that social security benefits may be taken into account when assessing the ability of the Debtors to fund a chapter 13 plan for purposes of § 707(b)(3)(B). [Dk. 29, 3 n. 4]. The U.S. Trustee argued that Price remains operative law post-enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), and that subsequent cases in the Ninth Circuit continue to honor Price as guiding authority.

The Debtors' counsel argued in his opposition brief that “a debtor's case should not be dismissed solely due to surplus income which is not otherwise included in the means test,” and that including social security income in a § 707(b)(3)⁴ analysis would circumvent the means test of § 707(b)(2). [Dk. 58 at 7:5–7]. Debtor's counsel asserted that if the Debtors converted to chapter 13, they would not be compelled to remit their social security income to the plan. [Dk. 58 at 7:8–12] (citing In re Welsh, 465 B.R. 843, 852–55 (9th Cir.BAP2012)).⁵ Debtors' counsel concluded that because, under Welsh, a finding of bad faith in chapter 13 under § 1325(a)(3) may not be based solely on “the mere fact that the debtor has excluded income or deducted expenses that the Code allows” ( Welsh, 465 B.R. at 855), therefore, the same principle applies in chapter 7. [Dk. 58 at 7:7–8]. At the hearing, Debtors' counsel further argued that the “ability to pay” factor from Price was abrogated by BAPCPA. Debtors' counsel argued in the alternative that even if Pricewas not abrogated by BAPCPA, the totality of the circumstances of this case do not demonstrate abuse, based on the Debtors' live testimony regarding current and future anticipated expenses related to their age, health, and medical conditions.

DISCUSSION

Under § 707(b)(1), the Court may dismiss a chapter 7 case of an individual debtor whose debts are primarily consumer debts if the court finds that granting a discharge would be an abuse ⁶ of chapter 7. Section 707(b)(2) provides two standards for determining “abuse” under § 707(b)(1). First, abuse is presumed if the debtor fails the means test of § 707(b)(2), based on his current monthly income.⁷ Second, the Court may find actual abuse if the petition was filed in bad faith ( § 707(b)(3)(A)) or if “the totality of the circumstances ... of the debtor's financial situation demonstrates abuse” ( § 707(b)(3)(B)). The instant Motion to Dismiss seeks dismissal based only on the totality of the circumstances test of § 707(b)(2)(B).⁸

The phrase “totality of the circumstances” is not defined in the Bankruptcy Code, and § 707(b)(3)(B) itself provides no guidance as to what factors might bear on the bankruptcy court's inquiry, other than its plain text, which states that the totality of circumstances should relate to “the debtor's financial situation.” In re Ng, 477 B.R. 118, 126 (9th Cir. BAP 2012). Nonetheless, the Ninth Circuit case of Price provides several non-exhaustive factors indicative of abuse under § 707(b)(3)(B), namely:

1. Whether the debtor has a likelihood of sufficient future income to fund a chapter 11, 12, or 13 plan which would pay a substantial portion of the unsecured claims;

2. Whether the debtor's petition was filed as a consequence of illness, disability, unemployment, or some other calamity;

3. Whether the schedules suggest the debtor obtained cash advancements and consumer goods on credit exceeding his or her ability to repay them;

4. Whether the debtor's proposed family budget is excessive or extravagant;

5. Whether the debtor's statement of income and expenses is misrepresentative of the debtor's financial condition; and

6. Whether the debtor has engaged in eve-of-bankruptcy purchases.

In re Price, 353 F.3d 1135, 1139–40 (9th Cir.2004). Under the first Price factor—ability to fund a chapter 13 plan—the Court is invited to consider the likelihood of the Debtors being able to fund a chapter 13 plan based on future income. Although the ability to fund a chapter 13 plan is an important factor that, “standing alone,” will justify a § 707(b) dismissal, it “does not compel a section 707(b) dismissal of the petition as a matter of law.”

In re Price, 353 F.3d 1135, 1139–40 (9th Cir.2004) (citing In re Kelly, 841 F.2d 908, 914 (9th Cir.1988) (original emphasis)). Resolution of the matter at bar turns on a question of law that remains unsettled in the Ninth Circuit—whether the court should include social security income in its analysis of the totality of the circumstances of the debtor's financial situation under § 707(b)(3)(B). As set forth below, the Court finds that because the Debtors' social security income is protected by the Bankruptcy Code from forced inclusion in a chapter 13 plan and by 42 U.S.C. § 407 of the Social Security Act, the Court should not take into account the Debtors' social security income when assessing their ability to pay under the totality of the circumstances test of § 707(b)(3)(B). Notwithstanding this analysis, the Court finds that the exigent circumstances of this case militate strongly against a finding of abuse under § 707(b)(3)(B).

I. Post–BAPCPA Totality of the Circumstances Factors

The post-BAPCPA case law indicates that the Price factors continue to serve as the primary test of what factors a court should use to review the totality of the circumstances within the Ninth Circuit. In In re Wells, a post-BAPCPA case decided in 2009, the court stated:

[T]here is little case law interpreting the phrase [totality of the circumstances] under BAPCPA. Prior to BAPCPA, the Ninth Circuit looked to the “totality of the circumstances” to interpret the term “substantial abuse” in former § 707(b). Because Congress retained the phrase “totality of the circumstances” in BAPCPA, the court may look to pre-BAPCPA case law to construe the meaning of that phrase under § 707(b)(3).

In re Wells, 08–14549–B–7, 2009 WL 159663 (Bankr.E.D.Cal. Jan. 21, 2009). Indeed, courts have recognized § 707(b)(3) to be a codification of pre-BAPCPA case law. In re Ng, 477 B.R. 118, 126 (9th Cir. BAP 2012) (citing In re Clark, 2012 WL 1309549 *1–2, 2012 Bankr.LEXIS 1639 *4 (Bankr.N.D.Cal.2012) (quoting In re Stewart, 383 B.R. 429, 432 (Bankr.N.D.Ohio 2008)); In re Stewart, 410 B.R. 912, 922 (Bankr.D.Or.2009)). Similarly, courts within the Ninth Circuit have held that Price is still controlling for determining abuse under § 707(b)(3). See In re Baeza, 398 B.R. 692, 696 (Bankr.E.D.Cal.2008); In re Lamug, 403 B.R. 47, 54 (Bankr.N.D.Cal.2009); In re Pak, 343 B.R. 239, 244 (Bankr.N.D.Cal.2006); and most recently In re Ng, 477 B.R. 118, 126 (9th Cir. BAP 2012). This Court agrees with the conclusions of the Ninth Circuit BAP in In re Ng, and finds that the factors outlined in Price provide meaningful guidance to the Court in examining the totality of the circumstances.

II. The Ability to Pay Factor and Social Security Income

The first Price factor is the ability of the debtor to fund a chapter 13 plan. If a debtor has the ability to fund a chapter 13 plan, that fact alone is sufficient to justify a finding of...