Opinion
Case No. 09-76184.
August 25, 2010
OPINION GRANTING MOTION TO DISMISS CHAPTER 7 CASE PURSUANT To 11 U.S.C. § 707(b)(2)(A) AND (3)
This matter came before the Court upon the United States Trustee's Motion to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2)(A) and (3). (Docket No. 13). Debtor filed a Response to the Motion and a Declaration of Special Circumstances for Determination of Disposable Income Under Form B22A. An evidentiary hearing was held and the parties were given the opportunity to submit post-hearing briefs.
BACKGROUND
The Debtor, David Roach, filed his voluntary chapter 7 petition on November 24, 2009. He is fifty-four years old, and married with no dependents. His spouse is not a debtor in this proceeding.
Debtor has been employed as a computer engineer since 1997 and grosses approximately $98,500 annually. His spouse is unemployed and is collecting unemployment compensation. As of the hearing date, that compensation was expected to be discontinued by the end of July 2010, although it might have been extended since then. Debtor's spouse is currently enrolled at Thomas M. Cooley Law School. There was no testimony or evidence to suggest that she is currently seeking employment. Debtor testified that his spouse has obtained student loans to attend law school and that a portion of such will be used for living expenses.
Debtor's Schedule J includes mortgage payments for two properties (each property is encumbered by two mortgages). One property is owned solely by the Debtor and is located at 457 Dexter Avenue, Ypsilanti, Michigan. The other is owned solely by the Debtor's spouse and is located at 454 Westlawn, Ypsilanti, Michigan. They both currently reside in the Westlawn home. Prior to marrying his current spouse and moving to the Westlawn property, Debtor resided at the Dexter property. Contrary to what is indicated on his Schedule J, Debtor stated that he is no longer making mortgage payments on the Dexter property, which were $815.02 on a first mortgage and $97.41 on a second mortgage. Debtor is currently paying both mortgages on the Westlawn property, which are $1,400.00 and $91.28.
In addition to the normal joint living expenses such as food, utilities, etc., Debtor also pays certain obligations for which his wife alone is liable. These include monthly expenses for the mortgages on the Westlawn property ($1,491.28) and credit card payments ($300).
Debtor's Schedule J also includes an expense of $1,044 per month for the repayment of a 401(k) loan to Debtor. The loan was taken in December 2006 in the amount of $50,000 and it is expected to be paid off by January 2011. Debtor testified that, contrary to what is indicated on his Schedule I, the loan payments are being paid voluntarily from his bank account. He also testified that he used the loan proceeds to pay down some of his unsecured debt, which at the time the loan was taken was between $80,000 and $90,000. In addition to these 401(k) loan repayments, Debtor also contributes $819.86 per month to his 401(k). Debtor lists $95,156.00 in unsecured non-priority debts on his Schedule F.
The United States Trustee moved to dismiss this case asserting that it would be an abuse of chapter 7 to grant the Debtor a discharge. Debtor's Form B22A Means Test Calculation indicates that a presumption of abuse arises in this case under 11 U.S.C. § 707(b)(2). Debtor argues that his obligation to repay his 401(k) loans establishes "special circumstances" sufficient to rebut the presumption of abuse. The United States Trustee argues that Debtor's 401(k) loan repayment does not qualify as "special circumstances," and that Debtor has failed to rebut the presumption of abuse.
DISCUSSION
Dismissal of a chapter 7 case is governed by 11 U.S.C. § 707. Section 707(b)(1) provides, in part,
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
Section 707(b)(2)(A)(I) draws a bright line test by quantifying what is considered abuse. There is a presumption that a debtor is abusing chapter 7 if the debtor has a certain level of disposable income, after deducting specific expenses, sufficient to produce a benchmark dividend to unsecured creditors. Once a presumption of abuse arises, it may only be rebutted under § 707(b)(2)(B) upon a showing of "special circumstances." Even if the presumption of abuse is rebutted, pursuant § 707(b)(3), the Court may dismiss a case if the petition was filed in bad faith or if the totality of the circumstances of the debtor's financial situation demonstrates abuse.
In this case, the United States Trustee relies on both § 707(b)(2) and (3).
Presumption of Abuse under § 707(b)(2)
It is not in dispute that the presumption of abuse arose in this case. However, Debtor argues that his 401(k) loan repayment is a necessary additional expense that qualifies as a "special circumstance" sufficient to rebut the presumption of abuse.
Section 707(b)(2)(B)(I) provides, in relevant part:
In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
Congress did not provide an exhaustive list of "special circumstances" but it did provide specific examples of such (serious medical condition and call to Armed Forces). "[B]oth examples given by Congress share `a commonality; they both constitute situations which not only put a strain on a debtor's household budget, but they arise from circumstances normally beyond the debtor's control.'" In re Egebjerg, 574 F.3d 1045, 1054 (9th Cir. 2009) (quoting In re Castle, 362 B.R. 846, 951 (Bankr. N.D. Ohio 2006).
Courts disagree regarding whether or not 401(k) loan repayments are expenses that qualify as "special circumstances." Some courts have found that they do. See In re Lenton, 358 B.R. 651, 662 (Bankr. E.D. Pa. 2006) (allowing 401(k) loan repayment as a special circumstance, but ultimately dismissing under a totality of the circumstances because evidence showed that the loans would be repaid in full within the plan period allowing a substantial amount to be paid to creditors); In re Thompson, 350 B.R. 770 (Bankr. N.D. Ohio 2006), rev'd, 370 B.R. 762 (N.D. Ohio 2007). Other courts have found that the mere obligation to repay a 401(k) loan is not itself a special circumstance. See In re Egebjerg, 574 F.3d 1045, 1053 (9th Cir. 2009); Eisen v. Thompson, 370 B.R. 762 (N.D. Ohio 2007), rev'g 350 B.R. 770 (Bankr. N.D. Ohio 2006); In re Smith, 388 B.R. 885, 888 (Bankr. C.D. Ill. 2008); In re Mowris, 384 B.R. 235, 240 (Bankr. W.D. Mo. 2008); In re Turner, 376 B.R. 370, 378 (Bankr. D. N.H. 2007).
This Court agrees with the line of cases finding that, "[w]ithout more, a situation as common as the withdrawal of one's retirement funds cannot be a `special circumstance' within the accepted definition of this term." Egebjerg, 574 F.3d at 1053 (quoting In re Thompson, 370 B.R. 762, 773 (N.D. Ohio 2007)). If the withdrawal of such is not "special" or uncommon, its repayment cannot be. It has been indicated that there may be situations in which the underlying reasons for taking out a 401(k) loan may constitute special circumstances. See In re Tauter, 402 B.R. 903, 906-7 (Bankr. M.D. Fla 2009). In this case, Debtor testified that he withdrew the $50,000 from his 401(k) in order to pay down amounts owed on his credit cards. He testified that he had been using his credit cards each month to meet an approximately $1,000 deficit in his monthly budget and that he had accumulated between $80,000 and $90,000 in credit card debt. Appropriate to that set of facts is: "[T]he fact that [the debtor] borrowed from those retirement funds and now wishes to pay the loans back is not a life altering circumstance of the kind referenced in the statute. It is simply the consequence of a prior financial decision." Egebjerg, 574 F.3d at 1053 (quoting In re Smith, 388 B.R. at 888)). By that measure, the circumstances that led Debtor to borrow from his 401(k) were not special, but instead were the result of his general inability to live within his means and to keep up with his obligations to creditors.
It should also be noted that the facts of this case differ from those in the Thompson and Lenton cases, which the Debtor cites to support his position. In the Thompson and Lenton cases, the Courts found that the 401(k) repayments qualified as special circumstances because the loans were not taken on the eve of bankruptcy, the funds were used to address the debtors' financial difficulties, and the payroll deductions fro the 401(k) loan repayments were mandatory. In this case, although the loan was not taken on the eve of bankruptcy and the funds were used to pay down credit card debt, the 401(k) loan repayments are being made voluntarily from Debtor's bank account, not through mandatory payroll deductions. That latter fact is most significant because, unlike the Debtors in the Thompson and Lenton cases, whose only options to terminate the obligation to repay the loan were to either quit their jobs or repay the loan in full, Debtor's failure to repay the 401(k) loan will not have a negative effect on his employment. In this case, Debtor has a reasonable alternative available to him to avoid the extra expense of the 401(k) loan payments, i.e.: he can choose to convert this case to chapter 13.
The statutory language talks about special circumstances "such as a serious medical condition or a call or order to active duty in the Armed Forces." The term "special" itself embodies a concept of rarity or unusualness. The given statutory examples are of a character that differ widely from the facts in this case. As a matter of statutory construction, this Court at least, concludes the use of those examples both explains and circumscribes the legislators' intentions to circumstances of similar importance. The statute also requires not only that the circumstances be "special," and of the indicated character, but also that they "justify additional expenses or adjustments of the current monthly income for which there is no reasonable alternative." In this Court's view, Debtor's arguments fail on all of these points and, as a result, the Debtor has not borne his burden of rebutting the presumption of abuse.
Section 707(b)(3)
In those cases where the presumption of abuse does not arise or is otherwise rebutted, and where bad faith is not a factor, the Court is directed to consider the totality of the circumstances in determining whether dismissal for abuse is warranted. 11 U.S.C. § 707(b)(3)(B).
Because the Debtor has failed the rebut the presumption of abuse under 707(b)(2) by showing "special circumstances," it is unnecessary for the Court to consider the totality of the circumstances to determine whether dismissal for abuse is warranted.
Were the Court to engage in that inquiry it is worth noting that if Debtor converted his case to chapter 13, the 401(k) loan could be paid in full through the chapter 13 plan and after the 401(k) loan is paid in full (which would be by about January 2011), $1,044 per month would be available as disposable income, allowing approximately $55,000 to be paid to unsecured creditors.
CONCLUSION
For the reasons set forth above, an order should be entered conditionally granting the United States Trustee's Motion to Dismiss pursuant to 11 U.S.C. § 707(b)(2) and (3) unless, within 20 days from the entry of said order, Debtor converts to a chapter 13 proceeding. The United States Trustee shall present such an appropriate order.