In re White

• Decision Date: 02 July 2014
• Docket Number: No. 13–12043.,13–12043.
• Citation: 512 B.R. 822
• Court: U.S. Bankruptcy Court — Northern District of Mississippi
• Parties: In re Michael Alex WHITE, Debtor.

512 B.R. 822

In re Michael Alex WHITE, Debtor.

No. 13–12043.

United States Bankruptcy Court, N.D. Mississippi.

Signed July 2, 2014.

R. Gawyn Mitchell, R. Gawyn Mitchell, Columbus, MS, for Debtor.

MEMORANDUM OPINION AND ORDER GRANTING UNITED STATES TRUSTEE'S MOTION TO DISMISS PURSUANT TO 11 U.S.C. § 707(b)

JASON D. WOODARD, Bankruptcy Judge.

This matter came before the Court for hearing on April 23, 2014, on the Motion to Dismiss Pursuant to 11 U.S.C. § 707(b) (the “Motion”) (Dkt. # 83) filed by the United States Trustee (the “Trustee”) in the chapter 7 bankruptcy case of Michael Alex White (the “Debtor”). At the hearing on the Motion, Sammye Tharp appeared as attorney for the Trustee, and Gawyn Mitchell appeared as attorney for the Debtor. The Debtor and Ronnie Walker, a bankruptcy analyst with the Trustee's office, also appeared and testified. Following the hearing, both the Debtor and the Trustee submitted letter briefs to the Court (Dkts. # 108 and 109, respectively), citing additional authority for their respective positions.

This Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334(b) and the United States District Court for the Northern District of Mississippi's Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc dated August 6, 1984. This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(A), (L), and (O). The Court has considered the pleadings, admitted evidence, argument of counsel, and applicable law. In this case, the Court must determine whether an above-median chapter 7 debtor, in completing the means test form, may deduct payments to formerly secured creditors on property the Debtor intended to surrender on the petition date, and has in fact surrendered during the pendency of the case. For the reasons set forth below, this Court concludes that § 707(b)(2)(A)(iii) allows for deduction of payments to secured creditors only if those payments are to actually be made.

I. FINDINGS OF FACT¹

The Debtor filed his chapter 7 petition for relief on May 7, 2013 (Dkt. # 1).² The Debtor is currently 64 years old, but will turn 65 later in 2014. He is a physician who practiced as an anesthesiologist for approximately 32 years until he was determined to be disabled in 2008 as the result of hearing loss. After ceasing practice as an anesthesiologist, the Debtor opened a medical practice devoted to pain management. In 2011, the Debtor was investigated by the Drug Enforcement Agency (“DEA”). He voluntarily surrendered his license to prescribe controlled substances (“License”) to the DEA in October 2011 in anticipation of criminal charges he expected to be filed against him. The Debtor was indicted by a federal grand jury on February 22, 2012, for his alleged involvement in a diet pill conspiracy, but a jury acquitted the Debtor of all charges in November 2012. The Debtor has been attempting to regain his License from the DEA so he can reopen his pain management practice. He filed a lawsuit against the DEA on April 5, 2013, seeking reinstatement of the License. That lawsuit was dismissed when the district court determined that it did not have subject matter jurisdiction, because the Debtor had failed to first exhaust his administrative remedies as required by federal law.

The Debtor is married and has a stepdaughter who lives with him and his wife. The Debtor's current Schedule I reflects a monthly household income of $15,386.75, which includes $15,000 in private disability insurance payments to him. The remainder of the household income is attributable to his wife's self-employment income of $386.75.³ The Debtor's disability insurance payment will decrease to around $10,000.00 upon his 65th birthday, but he will be eligible for approximately $2,400.00 in Social Security benefits at the same time. The Debtor listed $1,766,833.00 in secured debt, $30,757.97 in unsecured priority debt, and $211,523.72 in general unsecured debt in his bankruptcy schedules (Dkt. # 7, 20). He is ineligible for relief under chapter 13 of the Bankruptcy Code because he is above the debt limits permitted in chapter 13. 11 U.S.C. § 109(e).

The Debtor's secured debt included $997,000 to the Bank of Vernon (“BOV”) and $263,000 to Central Leasing Company (“CLC”), each formerly secured by his home in Lowndes County, Mississippi (Dkt. # 7, 20). The Debtor also scheduled $384,000 owed to Green Tree Servicing, LLC (“GTS”), formerly secured by a Pennsylvania lodge, and $25,000 owed to BOV, formerly secured by an X-ray Machine (Dkt. # 7). The Debtor's Statement of Intention, Schedules, Statement of Financial Affairs, and other documents filed on June 3, 3013, reflect that the Debtor intended from the beginning of this case to surrender the home, the lodge, and the X-ray machine to the secured creditors (Dkt. # 7). The Debtor did surrender the home to BOV on July 19, 2013, BOV foreclosed, and the Debtor is leasing it back from an entity owned by BOV at a cost of $3,000.00 per month. The lodge and the X-ray machine were also surrendered to the respective lienholders, which have also foreclosed.

The Trustee contends that this case should be presumed an abuse of the BankruptcyCode under § 707(b)(2)⁴ or, in the alternative, that the case presents an abuse under § 707(b)(3)(B), after consideration of the totality of the circumstances. While the Trustee takes issue with many of the Debtor's claimed expenses that exceed the Internal Revenue Service's (“IRS”) standard allowance, and some of those expenses would be due to be disallowed upon review, the parties agree that whether or not the Debtor's case is presumed abusive turns on the Court's determination of whether the secured payments on surrendered property are properly deducted on Line 42 of Debtor's Official Form B22A, the Chapter 7 Statement of Current Monthly Income and Means Test Calculation. The Debtor's Amended Form B22A (the “Means Test Form”) (Dkt. # 28) includes the following deductions for collateral which the Debtor always intended to, and in fact did, surrender: $10,000.00 for the average monthly payment to BOV for the first mortgage on the Debtor's home, $4,400.00 for the average monthly payment to CLC on the second mortgage on the Debtor's home, $416.67 for the average monthly payment to BOV for the X–Ray machine, and $4,048.00 for the average monthly payment to GTS, for the mortgage on the Pennsylvania lodge. This results in a total deduction of $18,864.67 in monthly payments on secured claims that the Debtor both did not intend to pay at the time he filed this bankruptcy case, and is not paying, going forward.⁵ The Trustee contends that the inclusion of these phantom payments is improper, and that the Debtor's case must therefore be presumed to be an abusive filing under § 707(b)(2).

II. CONCLUSIONS OF LAW

A. The Means Test, Generally.

Section 707(b) applies to individual debtors with primarily consumer debts. The parties agree that the Debtor is an individual and that his debts are primarily consumer debts. Section 707(b)(2) of the Bankruptcy Code mandates dismissal (or consensual conversion) of a chapter 7 case filed by an individual debtor with primarily consumer debts when the granting of relief would be an abuse of the provisions of chapter 7. The objective financial test—known as the “means test”—that determines whether or not the presumption of abuse arises under § 707(b)(2) is embodied in Official Form B22A. In re Benedetti, 372 B.R. 90, 92 (Bankr.S.D.Fla.2007).

If a debtor's current monthly income is lower than the state median income for a household of the same size, then the means test does not apply.⁶11 U.S.C. § 707(b)(7). The Means Test Form prepared by the Debtor reflects that the Debtor's currently monthly income is $15,500.00, which translates to a yearly income of $186,000.00 (Dkt. # 28). The Debtor's income far exceeds Mississippi's median income of $46,062.00 for a family of three ⁷, and therefore, the means test appliesin this case. Under the means test, a debtor may claim IRS local standard deductions for a variety of expenses, such as housing and transportation, but a debtor is instead permitted to claim higher actual expenses for secured debt payments. A presumption of abuse arises if a debtor's current monthly income, reduced by the allowed deductions and multiplied by 60, is not less than the lesser of (I) 25 percent of the debtor's unsecured claims, or $7,475.00, whichever is greater, or (II) $12,475.00. § 707(b)(2)(A)(i).

The Means Test Form as prepared by the Debtor indicates that the presumption of abuse does not arise, because the deductions taken by the Debtor for monthly payments on secured debt for collateral the Debtor surrendered leaves him with a negative monthly disposable income of $8,116.53 (Dkt. # 28). The Trustee concedes that if the Debtor is permitted to deduct the secured payments on the surrendered property, then the Debtor does not have enough income for the presumption of abuse to arise.

Removing the deductions for the surrendered home, lodge, and X-ray machine, but adding back in the local standard deduction for housing of $772, yields a positive monthly disposable income of $10,748.14 without even considering the Trustee's objections to other deductions taken by the Debtor. If these phantom deductions are disallowed, the presumption of abuse does arise, and, absent a showing of “special circumstances” (which were not alleged by the Debtor), the Debtor would not qualify for relief under chapter 7 of the Bankruptcy Code. § 707(b)(2)(B). The Debtor concedes this point. Hence, the parties agree that the means test analysis in this case turns on whether the Debtor may deduct the phantom payments under 707(b)(2)(A)(iii). That subsection provides:

The debtor's average monthly payments on account of secured debts shall be calculated as the sum of—

(I) the total of all amounts scheduled as contractually due to secured creditors in each month...