LAMAR W. DAVIS, JR., Bankruptcy Judge.
Debtor filed his Chapter 7 case on March 7, 2012. On May 17, 2012, SunTrust Bank ("STB"), a creditor in the case, filed a Motion to Convert to Chapter 11 or, in the Alternative, to Dismiss ("STB's Motion to Convert or Dismiss"). Dckt. No. 28.
The remaining issues raised by both Motions to Convert or Dismiss under 11 U.S.C. §§ 707(b)(3) and 706 were tried on January 25, 2013. Based on the stipulations of the parties, the evidence introduced at trial, and the record in this matter, the Court now enters the following Findings of Fact and Conclusions of Law.
Debtor is a sixty-year-old cardiologist. On the petition date, Debtor resided in a home located at 1 W. Bluff Drive in Savannah, Georgia (the "Bluff Drive Property"). This home was purchased in 2006 for $1,725,000.00 by One Bluff Drive LLC ("OBD"), a company of which Debtor is the sole owner, member, and manager. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 49-51. The purchase of the Bluff Drive Property was financed by SunTrust
Prior to the petition, Debtor also owned two investment rental and vacation properties in Colorado. STB held the mortgages on these properties, and the mortgages were cross-collateralized by the Bluff Drive Property. The first Colorado property was sold after about a year, but Debtor kept the second property until, at STB's urging, Debtor sold the property in 2010 for $2,300,000.00.
Debtor is currently employed as a principal in a local cardiology practice, Savannah Cardiology, PC. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶ 71. He formerly earned a substantial additional salary as a contract cardiologist providing coverage at Meadows Regional Medical Center in Vidalia, Georgia, approximately 100 miles from the location of his principal practice in Savannah. Debtor's Exh. 14. He took on this job of seventy hours per month, in addition to his full-time medical practice, to attempt to deal with the financial difficulties that led to the filing of this case. That contract terminated in 2012. Debtor's Exh. 16. Because his principal practice already consumes 70-80 hours per week, Debtor has not attempted to replace the income derived from this outside work which, because of his exhausting regular schedule, is not reasonable to continue indefinitely.
While his 2011 and 2012 earnings showed substantially higher income as a product of this part-time work with Meadows Regional, the Debtor's income from Savannah Cardiology is the relevant income for the pending motion. In 2011, Debtor grossed $422,000.00 and netted $196,000.00 from that practice. Movant's Exh. 12. In 2012, his gross was $519,000.00 and his net was $201,000.00. Debtor's Exh. 13. At trial, Debtor testified that pending adjustments in Medicare and Medicaid could potentially further decrease his salary. Recent cuts have already caused Debtor's net income from his cardiology practice to decline by approximately 20%.
Debtor has three adult sons. His wife passed away in 2004, and so Debtor's household size is one. On the petition date, Debtor owned five automobiles free and clear of liens, three of which were not in working condition. Statement of Facts Not in Dispute, Dckt. No. 87 at ¶¶ 85-86. One vehicle was sold for scrap and the proceeds of that sale went to the Chapter 7 Trustee. Id. at ¶ 89. Debtor currently drives a thirteen-year-old Mercedes, and Debtor's sons have two of the vehicles. Id. at ¶¶ 87-88. Debtor maintains several term life insurance policies for the benefit of his sons. Id. at ¶ 82. The aggregate death benefit on the Debtor's term-life insurance
Debtor's major debts at filing were $1,700,000.00 to STM for his residence, a $905,000.00 construction loan from STB for a renovation to his residence, and a $875,000.00 disputed claim by K.A.P., Inc. ("K.A.P.") for unpaid cost overruns on the renovation project. These debts were evidenced in Debtor's schedules, which he filed with his petition and later amended on June 7, 2012. Dckt. Nos. 1 and 39. The amendments to Debtor's schedules showed a reduced value of his real estate collateral (from $1,740,000.00 to $1,500,000.00), an increased amount of disputed liability to K.A.P. (from $550,000.00 to K.A.P.'s current claim of $875,524.35), and an increased amount of unsecured nonpriority debt, largely based on guaranty obligations to STB. Id.; see also Movant's Exh. 8. Debtor also amended his schedules to show that his debts were primarily consumer in nature and removed from Schedule J the monthly payment amount for the second mortgage on Debtor's residence. Dckt. No. 39.
Debtor's home has been foreclosed on, and so the potential unsecured claim on the STM loan is $200,000.00. Thus, his maximum exposure for unsecured claims by STM, STB, and K.A.P. is approximately $2,000,000.00. He also personally guaranteed $6,200,000.00 for STB loans to Savannah Cardiology. Movant's Exh. 8, Dckt. No. 39 at 9-10. However, his personal liability on these claims is capped at approximately 25% of that total or around $1,500,000.00.
The renovation project claim originates from a dispute between Debtor and K.A.P., which was hired to do a complete renovation to Debtor's home. After difficulties with plans and specifications supplied at no cost by K.A.P., Debtor engaged his own architect, and K.A.P. provided a base bid for the project of $1,100,000.00 to be funded by STB. Debtor's Exh. 1. Debtor has paid that amount in full and periodic reports from K.A.P. showed the project as 97% complete in October 2008. Debtor's Exh. 6 and 9.
However, in December 2008 K.A.P. billed an additional $276,000.00 (Debtor's Exh. 7), showed a balance due of $234,000.00 in February 2009 (Debtor's Exh. 9), and finally claimed cost overruns due of $314,000.00 in April 2009. Debtor's Exh. 10. These bills were largely undocumented, and Debtor testified that his inquiries into the bases for these overruns went unanswered.
To deal with the potential K.A.P. claim, Debtor had obtained a commitment from STB to advance another $350,000.00. Debtor tried to resolve the dispute until K.A.P. filed a contractor's lien in May 2009 for $544,000.00. Debtor's Exh. 11. When this occurred, Debtor decided not use the advanced $350,000.00 and returned it to STB. Both K.A.P. and STB sued Debtor. On the eve of trial, K.A.P. and Debtor entered into a week-long mediation with the assistance of the presiding Superior Court Judge. A settlement amount of $200,000.00 was determined, but any settlement was contingent on a feasible settlement with STB, and Debtor's negotiations with STB were unsuccessful.
Debtor filed his bankruptcy case a week after this mediation. Prior to the petition, Debtor had incurred $161,125.52 in legal fees and expenses defending the K.A.P. and STB claims. Dckt. No. 130. As of February 4, 2013, Debtor had incurred $176,212.18 in legal fees and expenses in connection with that litigation. Id. K.A.P. initiated an Adversary Proceeding (No. 12-4069) against Debtor on October 17, 2012, asserting that its claim is non-dischargeable. Dckt. No. 80. This Court has allowed K.A.P. and Debtor to go forward with their state court litigation to determine the amount, if any, of Debtor's liability to K.A.P. for the renovation project, but has retained jurisdiction on the issue of dischargeability of K.A.P.'s claim under 11 U.S.C. § 523(a). A.P. Dckt. No. 13. At the hearing, the Court estimated K.A.P.'s claim to be $115,000.00.
Movants and Debtor entered into a Statement of Facts Not in Dispute, which was filed with the Court on October 30, 2012. Statement of Facts Not in Dispute, Dckt. No. 87. The Court adopts the parties' stipulations numbered 1-117 in full and incorporates this document by reference into this Order.
At trial, the parties agreed to the following additional stipulations:
Debtor, STB, and the UST filed post-hearing briefs on February 4, 2013. Dckt. Nos. 124, 126, and 123. In their briefs, each party calculated and presented the Court with a projected payout over five years to unsecured creditors in a hypothetical Chapter 11 case, using various expense and income amounts. Ultimately, Debtor projected a payout of 21.9%, the UST projected
The Chapter 7 Trustee is currently holding for distribution approximately $185,000.00, which includes Debtor's 2011 tax refund of $137,000.00. Trustee's Oct. 2012 Interim Report, Dckt. No. 88; Debtor's Exh. 12. Debtor's 2012 tax refund will likely be around $110,000.00. These tax refund amounts are due to a net operating loss carryforward that will be consumed in 2012 and, going forward, will not shield any of Debtor's income from tax liability. Debtor's Brief, Dckt. No. 124 at 3; see also Debtor's Exh. 12.
Currently pending before the Court are STB's and the UST's Motions to Convert or Dismiss. Dckt. Nos. 28 and 36. Movants primarily seek conversion or dismissal under 11 U.S.C. § 707(b)(3)(B), but as an initial matter, the Court will analyze their secondary arguments under 11 U.S.C. §§ 707(b)(3)(A) and 706(b).
The UST argues that Debtor's case should be converted or dismissed under § 707(b)(3)(A) because Debtor's case was filed in bad faith. Section 707(b)(3)(A) provides that in considering whether the granting of relief would be an abuse, "the court shall consider whether the debtor filed the petition in bad faith." 11 U.S.C. § 707(b)(3)(A). Once the movant puts the debtor's good faith at issue, the burden shifts to the debtor to establish his good faith. In re McKay, 463 B.R. 915, 925 (Bankr.S.D.Ga.2010) (Davis, J.); In re Smith, 229 B.R. 895, 897 (Bankr.S.D.Ga. 1997) (Dalis, J.). Good faith must be determined on a case-by-case basis, considering whether the provisions, purpose, or spirit of the bankruptcy laws have been abused. Smith, 229 B.R. at 897. Bad faith can be demonstrated by "concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct or gross negligence." In re Hibbard, 448 B.R. 296, 300 (Bankr.S.D.Ga.2009) (Davis, J.) (quoting In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991)). Additionally, "bad faith can be established, inter alia, by a debtor's failure to significantly reduce his or her current lifestyle to pay creditors." Smith, 229 B.R. at 898.
As support for his contention that Debtor's case was filed in bad faith, the UST asserts that Debtor "misrepresented his monthly expenses, misrepresented his true financial condition, sought to evade means test review by falsely claiming that this case involved primarily non-consumer debt, and disguised rather than disclosed his ability to repay creditors." UST's Brief, Dckt. No. 126 at 13. The UST also suggested that Debtor had a retaliatory
I have examined the UST's contentions and find them to be without merit. Debtor's designation that this case involved primarily non-consumer debt is excusable in light of the complexity of his financial affairs. The character of his debt is related to the question of the size of his guaranty liability, which at one time was unlimited and was later capped. He amended his schedules to correct certain errors, and although the schedules were not further amended, no one was misled and all parties were made aware of the capped guaranty liability and Debtor's overall financial circumstances. I find no basis for a bad faith finding from these facts. See Hibbard, 448 B.R. at 301 (no finding of bad faith where omissions and errors on schedules were due to an innocent misunderstanding of the information sought or inadequate or sloppy record keeping and reporting). On the contrary, Debtor has exhibited good faith throughout his case by surrendering his home, driving a thirteen-year-old car, negotiating with creditors to avoid bankruptcy, and being cooperative with the Chapter 7 Trustee and other parties.
Therefore, Debtor's case should not be dismissed or converted pursuant to 11 U.S.C. § 707(b)(3)(A) as a bad faith filing.
Movants seek conversion of Debtor's case to Chapter 11 pursuant to § 706(b) of the Bankruptcy Code, which states: "On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time." 11 U.S.C. § 706(b). The burden is on the moving parties to show that the case should be converted. In re Home Network Builders, Inc., 2006 WL 3419791, at *4 (D.N.J. Nov. 22, 2006); In re Ryan, 267 B.R. 635, 639 (Bankr.N.D.Iowa 2001).
A case may only be converted to Chapter 11 if Debtor may be a debtor under Chapter 11. 11 U.S.C. § 706(d) ("Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter."). The statute fails to delineate any specific grounds for conversion, but a court "`should consider anything relevant that would further the goals of the Bankruptcy Code.'" In re Gordon, 465 B.R. 683, 692 (Bankr.N.D.Ga.2012) (quoting In re Lobera, 454 B.R. 824, 854 (Bankr.D.N.M.2011)). The Court should also consider whether conversion would "inure to the benefit of all parties in interest," an inquiry that takes into account whether there would be grounds to dismiss the case once it has been converted to Chapter 11 under 11 U.S.C. § 1112(b). Home Network Builders, Inc., 2006 WL 3419791, at *3 (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. at 94 (1978)).
STB relies on the same evidence from its § 707(b)(3) motion, discussed infra, to support conversion under § 706(b) and does not provide any separate grounds for conversion. See STB's Brief, Dckt. No. 123. The UST delves somewhat into discrete grounds for conversion under § 706(b), arguing that "all interested parties would benefit from converting this case to chapter 11," including Debtor, who he argues would benefit from the protection of the automatic stay while he continues his litigation with K.A.P. UST's Brief, Dckt. No. 126 at 14-15.
Courts have relied on various factors to determine whether conversion under § 706(b) is appropriate. The UST, citing Gordon, mentions several of these factors
The UST argues that the facts of this case are similar to those in Gordon, and thus a similar result (conversion under § 706(b)) should follow. UST's Brief, Dckt. No. 126 at 15. In Gordon, however, the debtor was not subject to the abuse provisions of § 707(b) as Debtor here is because that debtor did not have primarily consumer debts. I find that Gordon is distinguishable. More importantly, I find that where both § 706 and § 707(b) may apply, the more specific provisions of § 707(b) should take precedence. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ U.S. ___, 132 S.Ct. 2065, 2070-71, 182 L.Ed.2d 967 (2012) (A well-established canon of statutory interpretation is that the specific governs the general, particularly when the two are parts of the same statutory scheme).
As originally written, § 706 dealt only with conversion and § 707 dealt only with dismissal. Later amendments included the remedy of conversion in § 707(b), but only with respect to consumer debtors. Thus, for non-consumer debtors such as Gordon, § 706 is the only avenue to convert a Chapter 7 case. For consumer debtors, however, both sections apply. Because § 707(b) is the more comprehensive of the two, § 707(b) should be used exclusively for deciding conversion issues when the issue is bad faith or abuse. All that remains under § 706 for a consumer debtor is whether a discretionary conversion is warranted for reasons other than those that fit into the body of law interpreting bad faith and abuse under § 707(b).
Movants contend that Debtor's case is abusive, and that it should be dismissed or converted to Chapter 11. 11 U.S.C. § 707(b)(1) provides in relevant part:
In assessing whether a filing is abusive under § 707(b)(3)(B) the Court must consider whether the "totality of the circumstances... of the debtor's financial situation demonstrates abuse." 11 U.S.C. § 707(b)(3)(B). The burden is on the movants to establish by a preponderance of the evidence that Debtor's filing is abusive. In re Cribbs, 387 B.R. 324, 332-33 (Bankr. S.D.Ga.2008) (Davis, J.); In re McKay, 463 B.R. 915, 920 (Bankr.S.D.Ga.2010) (Davis, J.); In re Ricci, 456 B.R. 89, 104 (Bankr. M.D.Fla.2009); In re Golematis, slip copy, 2012 WL 3583154, at *2 (Bankr.E.D.Mich. Aug. 17, 2012).
This Court has previously utilized a totality of the circumstances analysis that required an assessment of eight non-exclusive factors.
The Court will now assess these factors as they pertain to whether the totality of the circumstances indicates Debtor's case should be dismissed or converted as abusive.
This case is pending as a Chapter 7 case. Currently the Trustee is holding for distribution $185,000.00 which, after estimated expenses of administration, will yield a dividend to unsecured creditors of approximately 6.6% in this Chapter 7 case. Debtor, STB, and the UST have submitted their projections in post-trial briefs, and I have reviewed their analyses of the additional sums a hypothetical Chapter 11
Even in this "best case scenario" from Debtor's view, by most any standard, Movants have carried the burden of showing that the "ability to pay" element of a totality of the circumstances analysis has been met.
It is noteworthy that the Court in In re Attanasio, 218 B.R. 180 (Bankr.N.D.Ala. 1998), concluded that reviewing ability to pay in the abstract was so subjective and value-based as to risk lack of equal and uniform treatment of debtors. The court suggested the proper framework was by reference to objective data of overall expenses in similar households.
Clearly, with BAPCPA the bar was lowered from "substantial abuse" to "abuse," and a debtor enters Chapter 7 with no presumption in his favor. Yet conceptually the historic notion persists that abuse should not be predicated solely on having "sufficient income to pay some substantial part of [the] indebtedness" unless there is an ability to make such payments "without difficulty, as they become due." In re Balaja, 190 B.R. 335, 340 (Bankr.N.D.Ill. 1996). When this concept is coupled with the statutory command that the "totality of the circumstances" should demonstrate abuse, it is clear to me that ability to pay remains only one of the factors a court should rely upon, despite several other courts' finding that ability to pay, standing alone, is sufficient to support a finding that abuse has occurred. Compare, e.g., U.S. Trustee v. Harris, 960 F.2d 74, 77 (8th Cir. 1992) (ability to pay alone can be a sufficient reason for finding abuse), and In re Henebury, 361 B.R. 595, 607 (Bankr. S.D.Fla.2007) ("[T]he ability to pay, standing alone, is sufficient."), with In re Green, 934 F.2d 568, 572 (4th Cir. 1991). (Ability to pay is the primary factor to be considered, but other factors must also be considered alongside it), and Cribbs, 387 B.R. at 334 ("[T]he Trustee must show more than just Debtors' ability to pay."), and In re Cemal, 396 B.R. 649, 655 (Bankr. E.D.Va.2004) (ability to pay is one of many factors and cannot serve as the sole basis for dismissing a Chapter 7 case for substantial abuse).
Having concluded that Debtor's "ability to pay" supports a finding of abuse, but that other factors must be considered, I now proceed to analyze those factors.
Debtor has a stable future income. This generally supports a finding of abuse; however, considering Debtor's age and the time horizon to complete a five-year payout to get a "fresh start" and reestablish some semblance of his pre-calamity condition, this factor does not weigh in favor of a finding of abuse.
The Legislative History to the pre-BAPCPA version of § 707(b) explained the goal of a "fresh start":
S.Rep.No. 65, 98th Cong., 1st Sess. 53-54 (1983) (emphasis added). This explanation of how § 707(b) was meant to be applied pre-BAPCPA has been referred to by the United States Courts of Appeal for both the Eighth and Ninth Circuits as "the best available evidence of Congress's intent in enacting section 707(b)." In re Walton, 866 F.2d 981, 983 (8th Cir.1989) (quoting Zolg v. Kelly (In re Kelly), 841 F.2d 908, 914 (9th Cir.1988)). Additionally, the court in Attanasio explained:
Attanasio, 218 B.R. at 236-39, nn. 90, 92.
Since BAPCPA did not adopt a pure bright line "future income" test in § 707(b)(3) I find that the "totality" inquiry must be analyzed within the context of a fresh start in which debtor has the opportunity to restore himself to a measure of financial health. See In re White, 49 B.R. 869, 873 (Bankr.W.D.N.C.1985) (dismissal of case disfavored where such dismissal would force debtor to labor "without incentive and without the opportunity to improve his position that is so fundamental to what is referred to as the `American way of life.'"); cf. Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (purpose of Bankruptcy Act is to give the honest but unfortunate debtor "a new opportunity in life and a clear field for future effort ... [which] would be of little value to the wage-earner if he were obliged to face the necessity of devoting the whole or a considerable portion of his earnings for an indefinite time in the future to the payment of indebtedness incurred prior to his bankruptcy.").
At age sixty, a five-year payout based on a minimalistic lifestyle leaves Debtor with a limited time frame in which to obtain the restoration to financial health that a properly-applied fresh start requires. He is in good health, highly skilled, and obviously capable of long hours of work, but within the horizon of a Chapter 11 plan it is foreseeable that Debtor might not be able to maintain the grueling schedule he has had until now. And in the final analysis,
Moreover, the K.A.P. claim creates a major impediment to Debtor obtaining a timely fresh start if he is forced into a Chapter 11 case. As it stands now, as discussed earlier, a projected dividend of 6.6% to unsecured creditors in this Chapter 7 includes the estimated K.A.P. claim of $115,000.00. However, K.A.P. is seeking a ruling that its asserted claim of $875,000.00 is nondischargeable. That issue may take months or years to resolve. In the meantime, K.A.P. would have no incentive to support a Chapter 11 plan that is projected to pay just over 20% of its smaller estimated claim, leaving an uncollected balance for it to collect more than five years from now. Further, the other unsecured creditors whose debts are dischargeable will have no incentive to support a plan in which K.A.P. is paid a higher percentage than they are.
This alone makes any possible Chapter 11 plan confirmation dubious in the short run, and if the K.A.P. claim is nondischargeable, Debtor will not be able to address 80% of whatever that claim is until after completion of a Chapter 11 more than five years hence.
In contrast, if this case continues as a Chapter 7, all unsecured creditors will be paid pro-rata, perhaps within months. Debtor will receive a discharge of all his debt that is not tainted by any misconduct. Immediately thereafter, he will have to address the potential nondischargeability of the K.A.P. claim, and if it is so determined, he will pay it from future income over perhaps several years. If the debt is nondischargeable, this is as it should be. The point is, however, that in Chapter 7 he will be able to begin paying on the final claim that may impair his fresh start at least five years earlier than if he is forced into a Chapter 11.
Debtor, a hardworking, well-compensated, and highly skilled professional, incurred debt on a personal residence, two vacation/investment homes in Colorado, and commercial property related to his medical practice. Unforeseeably to him the real estate market collapsed, threatening financial ruin in the commercial arena and eviscerating his very large equity in the vacation/investment homes. He suffered substantial cost overruns
The period of time over which the debts were incurred does not support a finding of abuse. Debtor's major debts accrued years before his bankruptcy filing, and they certainly were not incurred in a last minute spending spree, which if such facts were present, would lead to a different conclusion regarding abuse. See, e.g., Truax, 446 B.R. at 645 (highlighting a questionable purchase fifteen days before the filing date of a $26,413.83 new car). The history of Debtor's accruing debts has been outlined clearly elsewhere in this Order and needs no further elaboration. This line of inquiry does not support a finding of abuse.
Debtor appears at all times to have dealt fairly and honorably with his creditors. He historically has had large debts, both personal and investment in nature, but earned substantial income as a physician and was managing his debt until the unprecedented and unforeseeable economic meltdown from 2008 forward destroyed his equity in his residence, and decimated his equity in investment property. He then agreed to sell the investment property to pay the secured debt, but lost most of his equity in it. He took on the back-breaking additional burden of seventy hours of monthly emergency room work in a nearby community in order to fund his debts, attempt to complete his home renovation, and ultimately fund his defense of what he considered an excessive claim of lien by K.A.P. A week-long mediation presided over by a well-respected Superior Court Judge reached a numerical settlement, but Debtor, strapped for cash, and unable to finance that sum could not consummate the settlement.
No witness called by STB or the UST testified, nor were any documents introduced to contradict or negate my conclusion that Debtor dealt at all times with his lenders in a forthright and cooperative way to resolve his debt crisis. For example, despite the huge losses in value of the vacation/investment home, Debtor, at the urging of his lenders on his primary residence, sold his Colorado property and paid that debt off.
In the final analysis, his lenders chose not to extend additional funds to him in order to payoff the K.A.P. lien or to provide long-term financing for his home, which he believed he could fund. This is not to suggest anything negative concerning the lenders' actions, as it is entirely likely that given the debt size compared to shrinking asset values, it simply was not a loan the lenders could underwrite. The point is, unlike the debtor in this Court's decision in In re James, 414 B.R. 901, 916 (Bankr.S.D.Ga.2008) (Davis, J.), who "made no efforts to seek a non-bankruptcy remedy to deal with [her] debt," Debtor
These circumstances lead me to the conclusion that in dealing with his creditors he acted in an appropriate fashion, and so this factor does not support dismissal.
I find that Debtor is not using the bankruptcy process to "game" the system. To the contrary, he has sold or surrendered all his personal real estate, has reduced his secured debt and, whatever the outcome of these Motions to Convert or Dismiss, will retain little, if anything, in the way of secured property.
This case illustrates the complexity and conceptual difficulty of applying what is intended solely as a consumer bankruptcy body of law to a fact pattern atypical of a consumer bankruptcy case. By definition, Debtor is, and has been stipulated to be, subject to § 707(b) which requires as a threshold that the debts be "primarily
Debtor is liable for approximately $1,500,000.00 as a guarantor of STB debts incurred with his professional colleagues for commercial purposes. He also services debt to LMC Funding as a condition of his employment. Still, the claim on his personal residence exceeded $2,700,000.00 at filing, and debt on a personal residence is widely accepted to be "consumer" debt,
The great intangible and mitigating factor in Debtor's case is that had he spurned STB's request and refused to liquidate his valuable investment property in Colorado at what may have been the market bottom, two things would likely be different. By now, he might have seen real estate prices rebound to a level where a current sale would yield him some of the $2,000,000.00
Consumer Debt Minimum Maximum
STM $1,700,000.00 $1,700.000.00
STB $ 905,000.00 $ 905,000.00
K.A.P. $ 115,000.0020 $ 875,000.0021
Total $2,720,000.00 $3,480,000.00
Non-Consumer Debt Minimum Maximum
Colorado Property $1,360,000.0022 $2,300,000.0023
Guaranty Debt $1,360,000.0024 $1,500,000.0025
Total* $2,720,000.00 $3,800,000.00
* As noted supra, Debtor is paying $6,600.00 monthly to LMC Funding. Although he is
not personally liable to LMC for the debt, it is a condition of his employment. The
requirement that he divert his personal cash flow to service this commercial debt
renders it, in effect, though not by definition, a personal non-consumer obligation.
Historically, his total debt service obligations were primarily non-consumer in nature. Had he not done his very best to deal with his debt crisis by liquidation of
This factor is a mitigating one in arriving at a holistic view of whether this Debtor has been abusive which, as I have held, requires a "corrupt, deceitful, perversion of the Bankruptcy Code." McKay, 463 B.R. at 920; see also In re Hibbard, 448 B.R. 296, 300 (Bankr.S.D.Ga.2009) (Davis, J.) ("[I]t is correct to say that the ultimate conclusion in these cases depends on whether a debtor passes the `smell test' after consideration of all the factors. That is, upon consideration of those factors, is a bankruptcy court left with the conviction that the debtors have ... abused the bankruptcy process?").
So what is the correct result for a case such as this, which, if filed under Chapter 11 could theoretically pay as much as 15% more, or $377,000.00 more to creditors over a five-year period than his pending Chapter 7, when, other than the magnitude of payments, there is no evidence whatsoever that Debtor has abused the bankruptcy process? The answer lies not only in the statute, which I have already concluded evidences that Congress made a policy decision not to base a "totality" grounds dismissal solely on ability to pay, but within the historical context that debt relief has in our laws and traditions.
At least from the founding of this Republic, there has been a recognition of the critical role of a system for debt relief in a vibrant free market. Article I of the United States Constitution provides, among Congress's powers, the right to establish "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. CONST. art. I, § 8, cl. 4. This enshrined, as supreme federal law, the concept of debt relief, which came to these shores 280 years ago with the founding of Georgia, the Thirteenth British Colony. Here in Savannah in 1733, General James Oglethorpe was sent with a charter that envisioned a fresh start in a new land, free of debt, for English citizens who had been imprisoned for unpaid debt.
SELECT CHARTERS AND OTHER DOCUMENTS ILLUSTRATIVE OF THE HISTORY OF THE UNITED STATES, 1606-1775 at 236-237 (William MacDonald ed., The Macmillan Company 1899).
Since that time, bankruptcy legislation has evolved, but in 1978 the modern Bankruptcy Code was adopted. The Bankruptcy Reform Act of 1978 evolved from a
The principal purpose of the modern Bankruptcy Code is to "grant a `fresh start' to the `honest but unfortunate debtor.'" Marrama v. Citizens Bank, 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). This concept encapsulates the two, sometimes competing, goals for a balanced bankruptcy process. One is to provide relief to citizens who have suffered severe financial setbacks in order to lift the desperation caused by overwhelming debt and discharge certain obligations to allow the debtor a "new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Grogan v. Gamer, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)). The other is to protect certain creditors who Congress has deemed to have an interest that outweighs the debtor's interest in a fresh start and prevent abuse or fraud by debtors. Id. at 287, 111 S.Ct. 654. For example, obtaining a discharge has been curtailed as to certain types of debt and by certain types of misconduct. These are now codified in 11 U.S.C. §§ 523 and 727. Other provisions apply a good faith standard to debtors seeking to reorganize their debt structure. 11 U.S.C. §§ 1325(a)(3), 1129(a)(3). And in Chapter 7 cases, beginning in 1984, the Court could deny relief entirely if the case constituted a "substantial abuse." In re Krohn, 886 F.2d 123, 125-26 (6th Cir. 1989).
In 2005 BAPCPA dropped the word "substantial" but readopted the concept of "abuse" as a limit on the types of debtor behavior that could be excused in permitting access to a Chapter 7 discharge. Congress created a mathematical formula in the means test to assist in screening new Chapter 7 cases in § 707(b)(2). If a debtor fails the means test, that debtor is presumed to have abused the system and can be denied access to the Court in a Chapter 7 case. For those who "pass" the means test, Congress provided in § 707(b)(3) an alternate avenue to the same end if a court finds the debtor to have filed "in bad faith" or if the "totality of the circumstances ... demonstrates abuse."
In McKay I held that the relevant inquiry is whether there has been an abuse of the Bankruptcy Code, rather than a mere mechanical assessment of various factors. McKay, 463 B.R. at 920 ("[T]he ultimate focus must remain on the concept of abuse."). I reiterate that conclusion and observe that the purpose of this provision is to weed out debtors who have spent lavishly, evaded payments, dealt with creditors in an unscrupulous manner, or otherwise misbehaved in a way that may not reach the level of misconduct or fraud that would lead to denial of discharge, but who nevertheless fall short of the historic notion of what constitutes an honest, but unfortunate, debtor.
In this case the record is devoid of any evidence that Debtor fits into the abusive category of debtors. I have previously ruled that Debtor did not "fail" the means test, based as it is on facts as they existed at the moment of filing, so no adverse presumption of abuse arises. In re Hardigan, Case No., Dckt. No. 111 (Bankr. S.D.Ga. Dec. 20, 2012) (Davis, J.). Looking forward, the only circumstance which has been demonstrated is Debtor's ability to fund a partial, but meaningful repayment of his debt. However, there is no evidence of any misconduct, shady or unethical dealings with his creditors, or concealment or misrepresentation of his financial condition. Based on the foregoing, I find that Movants have not proven by a preponderance of the evidence under 11 U.S.C. § 707(b)(3)(B) that Debtor's Chapter 7 is an abuse of the letter and spirit of the Bankruptcy Code policy of providing a fresh start to the honest, but unfortunate debtor.
Certainly, in light of Debtor's earning capacity and his debt structure, these facts reach the outer limits of the concept that ability to pay, standing alone, is insufficient to support dismissal for abuse under a totality analysis. But the principle is correct, and to be faithful to that principle, this result is as well.
Pursuant to the foregoing, IT IS THE ORDER OF THIS COURT that the Motions to Convert or Dismiss filed by SunTrust Bank and the United States Trustee are DENIED. The case will remain and be administered as a Chapter 7 case.
Id. at 192 (emphasis added). The court in Attanasio also questioned whether all debtors are required to live the same lifestyle during the period of repayment.
Id. at 196; see also In re Lapke, 2008 WL 901846, at *4 (Bankr.D.Neb. Mar. 31, 2008) ("[W]hen the presumption of abuse does not arise under 11 U.S.C. § 707(b), there is no `bright line' rule as to whether a debtor's income, housing, or other expenses are so high that it would be an abuse of the provision of the Bankruptcy Code to grant Chapter 7 relief. Instead, it is akin to `you'll know it when you see it.'").
Attanasio, 218 B.R. at 210.
The guaranty debt to STB was incurred by Debtor's medical practice, and thus, it is clear that this debt was incurred with a profit motive and is non-consumer debt. As for the Debtor's Colorado property, at trial he testified that this property was a rental property. Although he also explained that the property was to be used as a vacation home, from his testimony it appears that his investment interest in the property was the primary purpose in incurring this debt rather than personal or family use. Accordingly, this debt is also non-consumer debt.
Thus, such debt is dischargeable in this Circuit. But arguably, a totality of circumstances analysis could still take into account a debtor's unlawful behavior in failing to provide mandated insurance coverage in the context of a § 707(b) motion to dismiss or convert.
