STEVEN RHODES, Bankruptcy Judge.
The issue before the Court is whether the debtors, who earn, and spend, over $509,000 per year, are entitled to relief under chapter 7 of the bankruptcy code. The Court concludes that the answer is no. Accordingly, the Court finds that there is "cause" to dismiss this case under 11 U.S.C. § 707(a). The case is therefore dismissed.
The debtors' schedule I discloses income of $39,400 per month from their joint medical practice.
These payments are $800 per month each for two Mercedes and $426 for a BMW. Schedule I also does not include the income necessary to fund payments of $1000 per month that the debtors pay to support a niece and that is not disclosed on schedule J. Thus, the debtors' total monthly income is at least $42,446 and their yearly income is at least $509,352.
Schedule J discloses the following monthly expenses for the debtors' primary residence:
Mortgage payment $13,219 Second mortgage payment $1,284 Electricity and heating fuel $541 Water $145 Telephone $57 Landscape $132 Cable and internet $220 Association dues for personal residence $26 Alarm $20 Trash $28 Snow removal $42 _______ Total $15,714
Schedule J discloses the following monthly expenses for a Florida home:
Mortgage payment $3,084 Association dues $1,833 Electricity $30 ______ Total $4,947
Schedule J discloses the following monthly expenses for a rental home:
Mortgage on rental home $1,996 Association dues for rental property $13 Water for rental home $17 Second mortgage payment $608 ______ Total $2,6344
Schedule J also discloses the following extraordinary expenses:
Comcast for mother-in-law $89 Food $1,500 Recreation $320 Care of elderly mother $540 Education expenses for two children $4,575
Schedule J discloses total expenses of $39,380, leaving only $20 of monthly net income. However, as noted, schedule J does not disclose the payments totaling $2,046 on the debtors' three vehicles and $1,000 for the support of the niece. It also does not include whatever expenditures the debtors make with their additional withdrawals from their medical practice. Thus, the debtors' expenses are at least $42,426 per month, or $509,112 per year.
Schedule D discloses secured debts of $3,417,423 on the debtors' three homes and their commercial building.
Schedule F discloses unsecured claims of $6,671,939. These are mostly on account of guaranties of failed real estate investments in Florida. According to this schedule, the debtors owe David Bartley, one of the movants, $329,485, and they owe Pacifica Loan Four LLC, the other movant, $3,815,352.
The determination of whether the record establishes "cause" to dismiss a case under 11 U.S.C. § 707(a)is committed to the sound discretion of the Court. Indus. Ins. Servs. v. Zick (In re Zick), 931 F.2d 1124, 1126 (6th Cir.1991) ("A bankruptcy court decision to dismiss pursuant to 11 U.S.C. § 707(a) will be reversed only for abuse of discretion."). In that case, the Sixth Circuit observed that the several circumstances that § 707(a) identifies as constituting "cause" for dismissal are not exclusive. The court stated, "We are satisfied that the word `including' is not meant to be a limiting word." Id.
The court went on to hold, "We are persuaded that there is good authority for the principle that lack of good faith is a valid basis of decision in a `for cause' dismissal by a bankruptcy court." Id. at 1127. Particularly instructive in this case is the following from Zick:
Id. at 1128. In Krohn, the Sixth Circuit further held, "Among the factors to be considered in deciding whether a debtor is needy is his ability to repay his debts out of future earnings. . . . That factor alone may be sufficient to warrant dismissal." 886 F.2d at 126 (citations omitted).
Accordingly, the Court concludes that in both Zick and Krohn, the Sixth Circuit held that a debtor's continuing lavish lifestyle would support a finding of bad faith sufficient to warrant dismissal under § 707(a).
The Court finds that this case was not filed in good faith and that therefore there is cause to dismiss. The debtors' monthly expenses of at least $42,426 reflect a lifestyle that can only be described as extravagant and lavish. It is certainly unprecedented in this Court's experience in chapter 7 cases. By any objective measure, the debtors simply do not need chapter 7 relief.
It is significant that the debtors did not attempt to argue that they are unable to repay a meaningful portion of their debts through a chapter 11 plan or otherwise. Such an argument would have been frivolous. Many of their monthly expenses simply cannot be justified as reasonably necessary for the support of their family, including: $15,714 for their primary residence; $4,947 for their vacation home in Florida; $2,634 for their rental property that has a negative cash flow; $1,500 for food; $320 for recreation; $4,575 for private school; and $2,046 for three luxury vehicles. Dr. Rahim gave no testimony to justify any of these expenses.
Rather, the debtors' only substantial defense to the motion is that because their debts are business debts rather than consumer debts, ability to pay, on its own, is not sufficient to establish their bad faith. Specifically, they argue that only a consumer case can be dismissed based on ability to pay because § 707(b) authorizes such a dismissal only in a consumer case. They further argue that § 707(a) does not authorize the dismissal of a chapter 7 case based on ability to pay.
In support, the debtors rely on Perlin v. Hitachi Capital Am. Corp., 497 F.3d 364 (3d Cir.2007). In that case, the Third Circuit agreed with the Sixth Circuit's holding in Zick that a lack of good faith can constitute "cause" to dismiss under § 707(a). Id. at 369. The Third Circuit also held that § 707(b) does not by implication "prohibit a bankruptcy court from considering a debtor's income and expenses under section 707(a)." Id. at 370. The Third Circuit summarized the basis for this conclusion as follows:
The Third Circuit did, however, agree with the debtors' second argument. Relying on legislative history, the Third Circuit held that "a debtor's ability to repay his debts out of disposable income is not a sufficient reason to dismiss a bankruptcy petition under section 707(a)." Id. at 372.
There are three difficulties with the debtors' reliance on the Third Circuit's decision in Perlin. The first is that Perlin is inconsistent with the Sixth Circuit's decision in Zick. As discussed above, Zick quoted and relied on language in Krohn in holding that § 707(a) does authorize dismissal of a chapter 7 case filed by a debtor whose debts are primarily business debts when the debtor does not need bankruptcy relief.
Second, Perlin is inconsistent with the Supreme Court's uniform pronouncements that bankruptcy is for the "honest but unfortunate debtor." Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).
In Perlin, the debtors' annual income was $370,000. According to the Third Circuit, they "expended a considerable amount of money on certain luxury items, such as two Lexus automobiles and private school tuition totaling $5,000 per month. In addition, they have saved more than $430,000 for their retirement." 497 F.3d at 367-68. In applying the legislative history rather than the binding precedent from the Supreme Court, the Third Circuit never found that the Perlins were "honest but unfortunate." Nor could it. There is nothing "unfortunate" about an annual income of $370,000 or owning two Lexus automobiles. There is nothing "honest" about debtors who can pay a substantial portion of their debt but choose not to, and for no just reason. The debtors in Perlin did not treat their creditors with any
The third difficulty with the debtors' reliance on Perlin is that its reference to legislative history was inappropriate. The Supreme Court has cautioned, "But it is the statute, and not the Committee Report, which is the authoritative expression of the law[.]" City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 337, 114 S.Ct. 1588, 1593, 128 L.Ed.2d 302 (1994). And the Sixth Circuit has added, "Committee Reports are unreliable `as a genuine indicator of congressional intent[.]'" Princeton Univ. Press v. Michigan Document Servs., Inc. 99 F.3d 1381, 1411 (6th Cir. 1996).
For these reasons, the Court rejects the debtors' reliance on the Third Circuit's decision in Perlin.
The trustee did not file a formal objection to the motion. However, the trustee's attorney appeared at the initial hearing and then testified at the evidentiary hearing. Her point in both instances was that there are substantial assets that can be administered for the benefit of creditors. At the evidentiary hearing, she estimated that at least $200,000 worth of assets could be administered.
Nevertheless, it is clear that a chapter 11 plan would distribute much more to creditors than would chapter 7 administration, as would the creditors' garnishment and executions remedies under state law. Accordingly, the Court concludes that the availability of assets for administration in chapter 7 does not undermine the Court's finding of cause to dismiss.
There is cause to dismiss this bankruptcy case under 11 U.S.C. § 707(a). The debtors did not file their case in good faith. Their annual income of over $500,000 compels the conclusion that they could pay a meaningful dividend to their creditors if they would make the effort to reduce their lavish expenses that fairness to their creditors requires. Nothing in the bankruptcy code suggests that a debtor who has primarily business debts but who can pay those debts is entitled to chapter 7 relief.
The case is dismissed.
Id. at 372.