Ng v. Farmer (In re Ng)

• Decision Date: 07 September 2012
• Docket Number: Bankruptcy No. 10–02001.,BAP No. HI–11–1702–PaJuH.
• Parties: In re Christopher Dean NG and Sheila Marie Ng, Debtors. Christopher Dean Ng; Sheila Marie Ng, Appellants, v. David C. Farmer, Trustee; United States Trustee, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

477 B.R. 118

12 Cal. Daily Op. Serv. 11,197

2012 Daily Journal D.A.R. 12,665

In re Christopher Dean NG and Sheila Marie Ng, Debtors.

Christopher Dean Ng; Sheila Marie Ng, Appellants,

v.David C. Farmer, Trustee; United States Trustee, Appellees.

BAP No. HI–11–1702–PaJuH.

Bankruptcy No. 10–02001.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on July 19, 2012.

Decided Sept. 7, 2012.

Jean Christensen, Honolulu, HI, argued, for appellants Christopher Dean Ng and Sheila Marie Ng. Terri Hawkins Didion, Honolulu, HI, argued, for appellee United States Trustee.

Before: PAPPAS, JURY and HOLLOWELL, Bankruptcy Judges.

OPINION

PAPPAS, Bankruptcy Judge.

Christopher Dean Ng and Sheila Marie Ng (“Debtors”) appeal the bankruptcy court's order dismissing their chapter 7 ¹ case under § 707(b)(3)(B). We AFFIRM.

FACTS

On June 30, 2010, the date Debtors filed a chapter 7 bankruptcy petition, Mr. Ng was employed as an electronic technician for GE International. According to Debtors' original Schedule I, Mr. Ng received $7,439.47 as his monthly salary; he was also eligible for overtime compensation. In addition, he received a military pension of $1,439.88 per month. Mrs. Ng was not employed and had no income.

From Mr. Ng's monthly salary, he made a voluntary contribution of $520.74 to an employer 401(k) plan, and a $343.42 payment on a pension loan. According to their original Schedule J, Debtors' monthly expenses totaled $5,225.00, which included a $300.00 payment on a prepetition income tax liability.

Unsecured debt listed on the Debtors' original Schedule F was $38,261.00, which included three student loans and three credit card accounts. A priority federal tax claim was listed on Schedule E for $10,213.11. Schedule D listed secured claims totaling $484,830.70, of which Debtors suggested that $112,480.70 was unsecured because the assets securing the claims were worth less than the debts. The bankruptcy court would later find that Debtors' primary purpose for filing for bankruptcy relief was to surrender their former residence and discharge the mortgage debt secured by the property in the amount of $464,602.18.

The United States Trustee (“the UST”) filed a motion on November 22, 2010 to dismiss the Debtors' bankruptcy case under § 707(b)(1) alleging that granting relief to Debtors would constitute an abuse of the provisions of chapter 7. In particular, according to the UST, a presumption of abuse arose as provided under § 707(b)(2) because: (a) Debtors' income was understated and well above the state median, and (b) they had taken a mortgage deduction on their means test form for real property that the Debtors intended to surrender, thus triggering a presumption of abuse.

The UST also argued that dismissal was in order because, as set forth in § 707(b)(3)(B), based on the totality of the circumstances, Debtors had the financial ability, without hardship, to repay their creditors. In addition to a general challenge based on the amount of Debtors' income, the UST highlighted three areas of concern in gauging their ability to pay their debts: Debtors' voluntary retirement plan contributions, their pension loan repayments, and the existence of the tax debt that could be repaid through a chapter 13 plan.

Debtors opposed dismissal. Regarding § 707(b)(2), they asserted that no presumption of abuse arose in their case because they were allowed to claim the mortgage deduction under the means test even though they intended to surrender the house. They opposed dismissal under § 707(b)(3)(B) because: (1) the bankruptcy court has discretion to determine if retirement contributions are a reasonably necessary expense; (2) it was correct for them to take a monthly expense on Schedule J for a prepetition tax liability because, under a hypothetical chapter 13 plan, they would be required to pay the priority tax claim in full; and (3) they disagreed with the UST's calculations of income and expenses.

The bankruptcy court conducted its first hearing on the UST's dismissal motion on January 19, 2011. After hearing from counsel for Debtors and the UST, the court took the issues under submission.

On February 9, 2011, the bankruptcy court entered a Memorandum of Decision concerning the dismissal motion. The court denied the motion to dismiss under § 707(b)(2), ruling that the Debtors “are permitted to deduct their mortgage payments notwithstanding their intentions to surrender the Property.” Memorandum of Decision at 7, February 9, 2011.² However, the bankruptcy court ordered a further hearing be held on dismissal under § 707(b)(3)(B) to allow the parties to submit additional evidence and information on whether the bankruptcy filing was an abuse under the totality of the circumstances. In doing so, the court expressed particular concern with the Debtors' monthly retirement contributions and pension loan repayments.

On June 9, 2011, in connection with Mr. Ng's employment, Debtors relocated from the island of Hawaii to Maui. Since they were not reimbursed by Mr. Ng's employer for relocation moving expenses, Debtors disclosed to the UST in a July 17, 2011 declaration that they had terminated the monthly retirement plan contribution, and that the prepetition pension loan had been repaid.

The bankruptcy court conducted a status conference on the motion to dismiss on September 22, 2011. The UST informed the court that Debtors' retirement contributions had stopped, and that the prepetition pension loan had been repaid. The UST also informed the court that Debtors had submitted updated pay advices to the UST indicating that Mr. Ng received a substantial increase in income over the amount reflected in Debtors' Schedule I. The court directed Debtors to submit revised Schedules I and J and set the final hearing on dismissal under § 707(b)(3)(B) for November 16, 2011.

Debtors submitted amended Schedules I and J on October 3, 2011. Mr. Ng's gross monthly salary had indeed increased from $7,439.00 to $8,804.77. Even though the Debtors had advised the UST in the declaration that they had stopped making the contribution to the 401(k) plan, their amended schedule showed that they resumed pension contributions of $264.16 per month. Further, the amended schedules disclosed that Debtors had again borrowed against Mr. Ng's pension and were making monthly payments of $289.68 to repay that loan.

According to the amended schedules, Debtors claimed their monthly gross income from all sources was $10,295.85 (which included the military pension). The amended Schedule J showed increased monthly expenses, including $400.00 per month for back taxes. Debtors' monthly net income was now allegedly $165.43.

The UST submitted a supplemental brief on the motion to dismiss under § 707(b)(3)(B) on October 26, 2011. The UST analyzed Debtors' original and amended schedules, along with the pay advices recently submitted by the Debtors. The UST calculated that, based on the pay advice for the period ending September 18, 2011, year-to-date earnings from Mr. Ng's employment should be $99,508.10, or $11,347.40 per month.³ Adding the income from the military pension, the UST argued that Debtors had understated their monthly income in their schedules by more than $2,500.00. Additionally, the UST challenged Debtors' renewed 401(k) contribution, the pension loan repayment, and their continued payment of the prepetition tax debt. Based on these calculations, the UST argued that the bankruptcy court should dismiss the case under § 707(b)(3)(B) because, considering the totality of the circumstances, Debtors clearly had the ability to pay their debts from their future earnings without hardship.

On November 2, 2011, Debtors filed a further opposition to the UST's dismissal motion, contending that: (1) the increase in Mr. Ng's pay was the result of overtime hours and there was no expectation that the overtime would continue; (2) the voluntary retirement contributions are not unreasonable given Mrs. Ng's health problems; (3) the new retirement loan was used by Debtors to pay about $8,000.00 in moving expenses. Debtors' declarations were offered to support these expenses and to detail Mrs. Ng's health issues. The declaration from Mr. Ng also provided updated pay advices through November 13, 2011, showing a decrease in his income between September 18 and November 13.

At the beginning of the second hearing on the motion to dismiss on November 16, 2011, the bankruptcy court indicated its concern with what it felt were the dilatory tactics of Debtors:

You know, I'm troubled with this case. It's taken too long. The U.S. Trustee's office is clearly being jerked around. The facts, the arguments, everything changes on the Debtors' side when things are raised by the Office of the United States Trustee. The case—it's a chapter 7 case. It's—it's a year and a half old. On the other hand, if we believe everything that the Debtors say, there is a certain sympathetic push on their side.

Hr'g Tr. 2:23–3:5, November 16, 2011. After hearing arguments of counsel, the bankruptcy court ruled that Debtors “do have the ability to file a plan in chapter 13.” Id. at 23:18–20. The court granted the UST's motion to dismiss the Debtors' bankruptcy case under § 707(b)(3)(B).

The bankruptcy court entered extensive findings of fact and conclusions of law and an order dismissing the bankruptcy case on November 28, 2011. In making its decision, the court applied the criteria in Price v. U.S. Tr. (In re Price), 353 F.3d 1135, 1139–40 (9th Cir.2004), to determine if the totality of the circumstances justified dismissal under § 707(b)(3). The court pointed out that, even if it accepted Mr. Ng's most recent declaration, with accompanying new pay advices that showed a decrease in annualized monthly income, and even if the court were to allow the pension contributions and pension loan repayments challenged by the UST, Debtors would still have $2,201.33 in net monthly income with which they could...