Opinion
MEMORANDUM DECISION
LAURA S. TAYLOR, JUDGE United States Bankruptcy Court
Debtors Stephen Cascioppo and Rachelle Agatha (collectively, "Debtors") are a fortunate professional couple who enjoy income that is substantially greater than the applicable median income for San Diego County. Debtors suffered no catastrophic adverse life event prior to or after initiation of their chapter 7 case and, instead, filed bankruptcy to discharge an "unbearable" level of debt arising from voluntary decisions regarding debt acquisition. At issue in this case is whether Debtors should be able to discharge over $160,000 of credit card debt as well as other liabilities or whether this case should be dismissed under 11 U.S.C. § 707(b)(3)(B) because such a discharge would constitute an abuse.
A motion to dismiss a bankruptcy case is a core proceeding under 28 U.S.C. § 157(b)(2)(A). The Court has jurisdiction over core proceedings under 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California.
This Memorandum Decision follows an evidentiary hearing held on June 18, 2008 (the "Evidentiary Hearing") on the United States Trustee's Motion to Dismiss Case Pursuant to 11 U.S.C. § [sic] § 707(b)(3)(B) (the "Motion") filed on January 28, 2008. This Memorandum Decision constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
Unless otherwise specified, references to code sections herein shall refer to Title 11 of the United States Code, also referred to as the Bankruptcy Code. References to the transcript of the Evidentiary Hearing, docket #44, are abbreviated "Tr."
FINDINGS OF FACT
1. Debtors' Voluntary Filing And Their Asset, Liability, And Income Information As Of The Filing Date.
a. Debtors filed a voluntary Chapter 7 petition (the "Petition") on October 29, 2007 and, in connection therewith, filed Schedules and a Statement of Financial Affairs (the "Schedules"). The Debtors acknowledge in the Petition that their pre-petition debts are primarily consumer debts within the meaning of 11 U.S.C. § 101(8).
Docket #1. As requested in the Motion, the Court has taken judicial notice of the bankruptcy court's records in this matter pursuant to Federal Rule of Evidence 201. Specific schedules filed by the Debtors shall be referred to herein by name.
b. The Schedules disclose that Debtors owed $1,175,941.86 in pre-petition secured debt.
c. The majority of Debtors' scheduled secured debt, $1,126,770.64, related to Debtors' former home in Dorado Hills, California (the "Dorado Hills Home"). The Debtors' Statement of Intention disclosed Debtors' intention to surrender the Dorado Hills Home. Consistent therewith, a lienholder obtained an uncontested order for relief from the automatic stay on December 10, 2007, and, thereafter, the Court entered an order allowing a "short sale" of the Dorado Hills Home for $730,000. It is the understanding of the Court that the first trust deed holder agreed to waive its deficiency in connection with this sale, but it is not known whether the second trust deed holder will waive its deficiency in connection with this sale. Tr. 8:6-16.
Docket #38.
The United States Trustee offered hearsay and unsworn testimony in this regard at the Evidentiary Hearing. Tr. 8:6-16. The Debtors did not dispute the testimony, but they also indicated that they had no such agreement with the second trust deed holder.
d. Debtors also owed $49,234.22 on account of two pre-petition car loans, one secured by a 2005 Ford F150 truck and one secured by a 2006 Ford Mustang.
e. The Schedules disclose that Debtors also own a third car, a 2004 Acura, that is free and clear of any lien. The Debtors need the truck only on weekends when they travel as a family. Tr. 50:21-55, 51:1-11.
f. Debtors' Schedules listed $169,843.90 in pre-petition unsecured debt. All but $4,089.69 of this debt is described as "miscellaneous credit card debt."
g. Schedule I states that the Debtors have five dependants, all daughters, ranging in age from 17 to 11 years of age. While this statement is technically accurate, it is also true that the two older daughters do not reside regularly with the Debtors and, indeed, visited only occasionally and sporadically during the last year. Tr. 48:17-20; 57:17-23.
Custody of the two older daughters is shared 50/50 by Mr. Cascioppo with bis ex-wife who lives in Temecula and with whom these two daughters primarily reside. TR. 48:11-20; 57:9-19.
h. Schedule I identifies Debtors' then current net monthly income as $14,150.21. This amount includes $916.67 of distributions from Mr. Cascioppo's family trust. Mr. Cascioppo can neither invade principal nor increase trust distributions at this time. Tr. 60:19-21.
i. Schedule J identifies $18,576 of total monthly expenses. Mortgage payments on the Dorado Hills Home accounted for $10,620 of this amount. Thus, Schedule I alleges that Debtors' monthly expenses exceeded monthly income by $4,425.79.
j. Consistent with the shared custody situation discussed in footnote 2, Schedule J showed monthly alimony, maintenance, and support paid to others of $1,900. The amount of maintenance, support, and alimony may be subject to change, however, as one daughter has now reached the age of 18, has graduated from high school, and will not attend college. This will reduce support obligations by $267 per month. Tr. 66:16-20.
k. At the same time, however, Mr. Cascioppo's ex-wife currently seeks physical custody of another daughter who now resides with Debtors and in connection therewith may seek additional support in an unspecified amount. Tr. 65:13-20.
1. As of the petition date the applicable median family income for a family of seven was $93,696. Debtors received monthly income almost three (3) times this amount.
m. Mr. Cascioppo as the beneficiary of an extremely favorable employer funded retirement plan receives retirement contributions of $1,747.05 per month. Trial Exh. 3 p. 1. Mr. Cascioppo also has available to him a "flex spending plan" that provides for some tax avoidance in connection with certain healthcare expenditures. Tr. 61:10-25, 62:1-9.
n. Schedule I establishes that Ms. Agatha currently makes voluntary contributions into an employer sponsored retirement plan of $656.24 per month.
o. Schedules B and C identify over $200,000 of various forms of pre-petition exempt retirement savings.
2. Reasons For Bankruptcy Filing; San Diego Relocation.
a. There is no evidence that any negative life event such as serious illness or death, catastrophic loss, or termination of employment is the cause for Debtors' financial problems.
b. Instead, Debtors blame their financial plight, including almost $160,000 of credit card debt (and the failure to pay approximately $25,000 of 2007 taxes), on a decision to relocate to San Diego and the resultant need to: (1) maintain two households for a few months while Mr. Cascioppo resided alone in San Diego; and (2) to make unspecified improvements to their Dorado Hills Home prior to sale. Debtors allege that when the Dorado Hills Home could not be sold so as to pay off the notes it secured and their huge credit card debts, their financial position became "unbearable." Declaration of Rachelle Agatha in Opposition to the United States Trustee's Motion (Docket #30, hereinafter "Agatha Decl.") at ¶¶3 & 4.
c. The decision to relocate to San Diego was one of choice not of necessity; Debtors moved to allow Mr. Cascioppo to begin a new job that provided opportunities for financial as well as professional benefit. Tr. 52:9-23; 62:10-25 and 63:1-2. Previously, Mr. Cascioppo served as a California Superior Court Executive Officer for the County of Eldorado. Tr. 52:24-25 and 53:1. He accepted a new position with the San Diego Superior Court that provided an immediate salary increase as well as enhanced opportunities for future career advancement and additional salary increases. Tr. 62:10-25. Section 1 of Debtors' Statement of Financial Affairs indicates that Mr. Cascioppo earned $135,662 from El Dorado County in 2006, but, as Schedule I demonstrates, he anticipated annualized income of $144,123.60 in his new position.
d. Ms. Agatha is a certified public accountant who promptly obtained employment as a CPA with Sharp Healthcare after she moved to San Diego. Tr. 33:2-4 and Agatha Decl. ¶4. A comparison of Schedule I and Section 1 of Debtors' Statement of Financial Affairs indicates that Ms. Agatha's salary also increased from $109,166 in 2006 to an annualized gross income of $114,072.48. Ms. Agatha's actual income for 2007 apparently cumulated to slightly below her 2006 salary level due to transition between jobs.
e. The Debtors appear to be sophisticated and intelligent. There is no evidence that their financial decisions to date were the result of any factor beyond their control.
3. Debtors' Responses To The Motion.
a. In response to the Motion, Debtors submitted revised Schedule I ("Revised Schedule I") and revised Schedule J ("Revised Schedule J") as Exhibit A to the Agatha Declaration. A review of the Debtors' various Schedules I and J indicates, among other things, that Debtors incur expenses and, in connection therewith, enjoy a life style sufficiently above the median standard for San Diego County.
b. Revised Schedule J shows a significant decrease in expenses related to Debtors' housing as a result of the surrender of the Dorado Hills Home. Debtors now rent a home for $3,500 per month. Their current rent expense, alone, while substantially less than their previous mortgage payments, is over $1,000 above the applicable IRS Standard for housing plus utilities for a family of five or greater. In selecting this rental, the Debtors rejected one more expensive rental. Agatha Decl. ¶7a.
c. This significant decrease in housing expense and other small decreases in housing related expenses such as utilities and property insurance, however, is offset by substantial increases in other expense areas and the addition of significant expenses not previously scheduled. Agatha Decl. ¶7a-c; Trial Exh. 2 at 3.
d. Revised Schedule J reflects expenses related to Debtors' three automobiles of $1,250 per month. Agatha Decl. ¶7c, Trial Exh. 2 at 3. This represents a $700 per month increase over the original Schedule J car related expenses. Car payments remain the same at $1,171 per month for two of the three vehicles.
e. Revised Schedule J includes $780 for childcare. Agatha Decl. ¶7d; Trial Exh. 2 at 3. Childcare is allegedly necessary in order to provide transportation to school for the three children now aged twelve through fifteen. Id.
f. Revised Schedule J significantly increases claimed expenses for food from $900 to $1,250 per month. Trial Exh. 2 at 3.
g. The most significant increase reflected in Revised Schedule J is in the area of taxes. The Debtors' real property taxes of $583 are no longer scheduled. However, the Debtors testified that they have underpaid 2007 taxes significantly such that on a post-petition basis they will be required to pay $2,076 monthly for twelve months to clear the arrearage. Agatha Decl. ¶ 9. They also schedule significant monthly estimated tax payments that were previously unscheduled. Agatha Decl. ¶10; Trial Exh.2 at 3.
h. The Debtors continue to spend $691 monthly on cable, internet, and telecommunication expenses including expenses related to seven cell phones. Tr. 50:1-6. Mr. Cascioppo has a separate cell phone provided by his employer, although it is not clear from the testimony whether Debtors included this phone among the seven. Id.
i. Debtors' Revised Schedule I reflects increases in income for both Debtors in 2008. Trial Exh. 2. Thus, Debtors' gross income has increased from $14,150.21 on Schedule I to $16,324.61 on Revised Schedule I. Id. The evidence, including the post-petition salary increase reflected in Revised Schedule I, establishes that the Debtors should enjoy regular income hereafter.
j. The result of the revisions is an admitted decrease in the amount by which the Debtors' expenses exceeded income from a negative of $4,425.79 a month on Schedule I to a negative of $1,672.89. Trial Exh. 2 at 3.
k. At the Evidentiary Hearing, Debtors attempted to introduce evidence of additional unscheduled expenses. See Trial Exh. 4, 5 and 6. These included attorneys' fees related to a post-petition custody and child support dispute initiated by Mr. Cascioppo against his ex-wife and evidence allegedly establishing actual food and clothing expenses from March 2008 through May 2008 in higher amounts than those set forth in Revised Schedule J. Id.; Tr. 58:10-22. Food expenditures allegedly averaged $1,684.27 per month as opposed to $900 on Schedule J and $1,250 on Revised Schedule J. Trial Exh. 4 & 5. Clothing expenses allegedly averaged $833.06 over the three month period as compared with $500 as set forth in Schedule J and Revised Schedule J. Id.
l. Notwithstanding these allegedly increased expenses, Ms. Agatha testified that with the exception of the $ 1,000 per month of attorneys' fees payable on account of Mr. Cascioppo's custody battle, the Debtors would "be fine" Tr. 45:16-17. Consistent with this testimony, the Debtors' closing brief states that: "... Debtors [sic] monthly expenses exceed their income by $1,080.36 each month." Debtors' Closing Brief 4:4-5.
Docket #47.
4. The United States Trustee Provides Calculations Indicating Debtors' Ability To Pay A Portion Of Their Unsecured Claims Even Assuming Many Of Debtors' Alleged Expenses.
a. The United States Trustee filed three declarations of bankruptcy analyst Randall A. Horton; the first with the Motion (hereinafter "Horton Decl. #1" at Docket #26), one with the Reply filed by the United States Trustee (herein after "Horton Decl. #2" at Docket #40), and the third with the United States Trustee's Final Brief (hereinafter "Horton Decl. #3" at Docket #48). Mr. Horton testified regarding the first two declarations and his calculations. Tr. 17-31. The Court will not summarize the exact calculations in detail in these findings, but notes, generally, that Mr. Horton's calculations persuasively establish that even if Debtors' expense allocations are true in many respects, that the Debtors have the ability to repay their creditors significantly. These calculations consistently and, in the opinion of the Court, appropriately do not include voluntary retirement contributions by Ms. Agatha and make appropriate modifications to both income and taxes in connection therewith. These calculations are provided in the alternative and utilize, in some cases, an IRS Guideline figure in an area such as housing while others utilize the actual rental expense of the Debtors. While these calculations do not consistently utilize the exact numbers as advanced by the Debtors, and in particular do not utilize the new expense evidence provided for the first time at the Evidentiary Hearing, they evidence an ability on the part of the Debtors to pay, at a minimum, $50,000 of their unsecured claims. Tr. 31:5-11.
b. The United States Trustee strongly objected to the introduction of the new expense evidence at the Evidentiary Hearing and reserved its right to object to other expense items as not reasonably necessary for the support of the Debtors and their family. Tr. 10:8-14.
DISCUSSION
11 U.S.C. § 707(b)(3)(B) allows dismissal of a debtor's chapter 7 case where the debtor owes primarily consumer debts and where: "the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." The plain language of section 707(b)(3)(B) requires that the Court evaluate both a debtor's pre and post petition financial position as well as other relevant factors. See, e.g. In re Pennington, 348 B.R. 647, 651 (Bankr.D.Del. 2006) (financial condition at the time of hearing may be considered). The goal of this inquiry is to generally identify abuse, but most particularly to determine whether a debtor's receipt of a discharge under chapter 7 would constitute abuse because the debtor has the ability to make some payment to creditors. See In re Mestemaker, 359 B.R. 849, 855 (Bankr. N.D. Ohio 2007) (clearly, Congress intended debtors who have the ability to pay debt to do so). Thus, a debtor's actual debt paying ability is the critical point of inquiry. Id.; In re Lenton, 358 B.R. 651, 663-664 (Bankr. E.D. Pa. 2006); Pennington, 348 B.R. at 651. In conducting this inquiry, this Court considered all sources of income, all types of expenses, and all changes reasonably anticipated as demonstrated by the evidence submitted to the Court.
The parties agree that the Debtors' pre-petition debt is primarily consumer debt.
Debtors enjoy benefits far greater than most. They enjoy professional careers that appear to be rewarding to them, both in terms of compensation and job challenge. Their salaries place them well above the median income for San Diego County, and the income the Debtors enjoy appears to be stable. While Ms. Agatha's job is new, she is a CPA. As a professional she has marketable job skills that she can continue to utilize to the benefit of her family. Significantly, she located employment at an enhanced salary after her move to San Diego. Similarly, Mr. Cascioppo has been employed in the California Superior Court System for a significant period of time. He left his prior job as a court executive in the Eldorado County Superior Court, to pursue an opportunity with the San Diego Superior Court that pays slightly more money and offers a better chance for long term professional advancement. Thus, the Court concludes easily that the Debtors will have steady cash flow from employment in the future.
In addition to the cash flow that can reasonably be expected from employment, Mr. Cascioppo is also the beneficiary of a family trust which provides steady monthly income. Although the Trust does not allow him to invade principal or to increase income in any appreciable fashion in the near future, it provides another source of reliable income.
Finally, the Debtors, unlike most who seek discharge under chapter 7, have significant retirement savings. The Debtors came into bankruptcy with more than $200,000 of exempt retirement savings. In addition, Mr. Cascioppo continues to be supported by generous employer contributions. The paystub provided to the Court by Debtors (Trial Exh. 3) evidences that his employer deposits approximately $1,747.05 per month on his behalf into a tax deferred retirement account. Ms. Agatha has also increased retirement savings through post-petition contributions. Trial Exh. 3 at 2. Thus, the Debtors also have a "nest egg" for their retirement years, which continued to grow during the course of their bankruptcy case and should grow through employer contributions hereafter.
In summary, the Debtors earn more than three times the median income for this community. As a result, their gross income exceeds the median for a family of seven by $185,541 and the median for a family of five by $199,341. They also have a high level of anticipated job security and their trust income and assets and past and future retirement savings provide additional protection. In short, by any estimation, Debtors enjoy income and other financial resources that are substantially above the average for this community. In determining whether abuse exists in connection with section 707(b)(3)(B), the Court can and should closely scrutinize any case where debtors enjoy income far above the median -especially when no adverse life events exist. In re Wadsworth, 383 B.R. 330, 333 (Bankr. N.D. Ohio 2007).
In light of their significant income and retirement savings, the Court anticipated evidence of some non-economic difficulty that complicated Debtors' lives and caused the financial crisis that resulted in a bankruptcy. However, there is no evidence of any such difficulties. The clouds on Debtors' horizons are few. Debtors have not suffered from catastrophic loss or termination of employment, and neither death, disability nor serious illness has touched Debtors or their children. The only dark clouds that follow Debtors are their significant financial problems. Thus, this is not a case where the Debtors' financial problems arose from circumstances beyond their control.
The evidence regarding the reason for Debtors' financial problems is slim. Ms. Agatha, in her declaration and in her testimony, blames these difficulties on the family's need to maintain two separate households during the period when Mr. Cascioppo moved from his job in Eldorado County to a job in San Diego County. The Court, frankly, finds this explanation inadequate given the quantum of debt involved. Whatever the cause or causes, however, the Debtors were unable to maintain payments on $1,126,770.64 of debt secured by their prior residence. As a result of the current housing market, the Debtors were unable to refinance the house or sell it for an amount sufficient to pay this debt in full. In addition, Debtors underpaid their 2007 income taxes by approximately $25,557 and amassed credit card debt of more than $160,000. Ultimately, the Debtors found this situation unbearable, and initiated a chapter 7 case. The Court notes that while the move may have created some financial hurdles, given the very positive short and long term benefits to the Debtors from the move, it is not the kind of catastrophic life event that points in favor of a discharge. Indeed, Debtors, in effect, argue that they should be allowed to discharge debt incurred largely - if not solely - to allow them enhanced income and professional advancement in the future. But, bankruptcy allows a fresh start - not a jumpstart at the expense of creditors - as the Debtors request. Wadsworth, 383 B.R. at 334. If the Debtors have the ability to repay their obligations in meaningful part, they should do so.
The Debtors entered their chapter 7 case with substantial debt. However, they have decreased their debt from pre-petition levels. The United States Trustee's counsel represented at the time of the hearing that the Debtors closed a short sale on the Dorado Hills Home and that the senior lender has agreed to waive any deficiency resulting from this sale. The United States Trustee also suggests that the second trust deed lender may have made a similar agreement. The Court finds this substantially less likely given that the second trust deed lender did not receive any significant payment, but it is possible. Thus, the Debtors have remaining unsecured debt of $169,843.90 to approximately $296,559.
This number is based on the total amount of scheduled general unsecured claims plus the amount scheduled by the Debtors as the amount of the second trust deed lien on the Dorado Hills Home, assuming deficiency is not waived.
Having cleared some but not all of their Dorado Hills Home related debt, the Debtors still face automobile secured debt, substantial pre-petition credit card debt, and other unsecured debt. They claim a total inability to pay any portion of their pre-petition debt due to current expenses incurred in maintaining and supporting their family. The Debtors are the parents of five daughters who appear to be normal healthy teenagers. As a result, they base their estimated expenses on a family of seven. It is worth emphasizing, however, that Debtors are double dipping when they ask the Court to assume that they are a seven person family. They ignore the custody arrangement and age of Mr. Cascioppo's two older children. These "children" do not principally live with Debtors and during the prior year visited only sporadically. Tr. 57:20-23. Mr. Cascioppo pays significant child support and spousal support that is deducted as an expense from his overall income. His ex-wife, however, provides some measure of support for these two children who live with her in Temecula. Further, Mr. Cascioppo testified that his 18 year old daughter will not attend college, that he will soon cease paying child support of $267 for this daughter.
The evidence before the Court also indicates that with the exception of recent attorneys' fees related to a resumption of warfare related to Mr. Cascioppo's divorce, the family is doing "fine." Ms. Agatha testified that except for these attorneys' fees they were able to meet their post-petition bills on a regular basis. Thus, the Debtors admit that their expenses exceed their liabilities by no more than $1,080.36. Debtors' Closing Brief 4:4-5. As will be discussed below, the family enjoys a lifestyle that shows no evidence of economy or of any particular distress or belt tightening and, thus, they are doing "fine" even though their budget includes numerous items that are beyond those reasonably necessary for their maintenance and upkeep.
At issue in this case is whether, given the totality of the circumstances, the Debtors' situation warrants dismissal under 11 U.S.C. § 707(b)(3)(B). The United States Trustee bears the burden on this issue. The United States Trustee does not assert that this is the case where fraud is involved. The Court agrees. This is not a case of bad people doing bad acts. However, an examination of the totality of the circumstances requires the Court to look closely at this case to determine not whether the filing of the bankruptcy was abusive, but whether the result of a discharge in chapter 7 - discharge of all unsecured debt - would be abusive. The Court having examined the totality of the circumstances in this case, concludes that it would be abusive for the Debtors to receive a complete discharge of debts in this case and, as a result, dismissal is appropriate.
The United States Trustee, while reserving the right to challenge the reasonableness of individual expenses, does not focus on most of the actual line items in Debtors' various Schedule J budgets. Instead, she assumes Debtors' alleged actual expenditures in most instances and then demonstrates that, notwithstanding these expenses, the Debtors remain capable of repaying a substantial portion of their unsecured debt. The Court finds the testimony of Randall Horton and his analysis in this regard to be compelling. Mr. Horton, assuming many, but not all of the Debtors' expense numbers, still found that they had the capability of paying almost 30% of their creditors on a worst case basis (without taking into account the waiver of deficiency on the first mortgage on the Dorado Hills Home). Horton Decl. #2 ¶4. The Court acknowledges that Mr. Horton's numbers do not include the Debtors' newest numbers for clothes, food, and support dispute legal fees among other items. However, they do include in some scenarios numbers for telecommunications, rent, and transportation that the Court finds either frankly excessive or, at a minimum, well above what is reasonable and necessary for the Debtors to enjoy not a bare bones existence but a rich and full one in San Diego County.
The United States Trustee's analysis does focus on the Debtors' repayment of 2007 taxes. Horton Decl. #2 ¶3.0.; Tr. 29:6-25, 30:1-25, 31:1-11. While the United States Trustee agrees that repayment must occur, she focuses on the fact that taxes could be repaid over time in a chapter 13 or 11 plan and/or that if taxes are paid in one year that funds previously utilized for tax payments will be available in later years for payment to pre-petition creditors. The Court agrees that the existence of unpaid 2007 taxes does not justify the conclusion that Debtors could not repay pre-petition debt. Indeed, by the Debtors' own admission, counting every expenditure they currently make, reasonable or otherwise, after 2007 taxes are paid they will have an excess of income over liabilities of $990 per month. As a result, the Court finds that the Debtors can, in fact, make payments to their creditors at a level well above the level justifying a finding of abuse.
The Court notes that without any reductions in spending it might take more than a year, but the analysis is the same, and as discussed hereafter expenditure reduction should be assumed in calculating a reasonable level of debt.
The Court, in analyzing the evidence and reviewing the arguments also took a searching look at the Debtors' various Schedule Js and their allegations regarding their ability to repay their debts. The Debtors claim to have no ability to pay any portion of their pre-petition debt. The Court, after reviewing the evidence, finds this assertion not credible. The Court agrees that the Debtors will not be able to repay all of their pre-petition debt. However, the Court strongly believes that the evidence establishes that Debtors have the ability to pay a meaningful portion of this debt if, on a post-petition basis, they make appropriate modifications to their lifestyle for the short period of time necessary to make these payments under a chapter 13 or 11 plan. The question of what those economies should look like is a question for a later day, but the Court is well satisfied after reviewing the evidence in this case that appropriate areas for economy exist and that abuse exists where those economies are not adopted to allow payment to creditors. In reaching this conclusion, the Court focuses on the following:
The Court, having concluded that the Debtors can make payments to their creditors notwithstanding payment of Mr. Cascioppo's custody battle attorneys' fees, does not decide at this time whether such expenses are reasonably necessary for section 707(b)(3)(B) purposes.
1. Housing.
The Debtors rent a house for $3,500; this amount is substantially more than Applicable IRS Standards for a house plus utility expenses for a family of seven in San Diego County. The Debtors' filing is quite deceptive on this point, however, since five, not seven, people actually reside in the house on a full time basis. Again, Mr. Cascioppo's two oldest daughters apparently resided in the house only "sporadically" during the past year. Thus, while the Court will not determine what type of house the Debtors should rent, the Court is comfortable that they are renting well above the median in the relevant market and that a perfectly acceptable rental at a lower cost is available. In short, some portion of Debtors' rent could be applied towards payment of their creditors' claims while providing the Debtors' family with a comfortable home. See, e.g. Wadsworth, 383 B.R. at 334-335 (finding mortgage expenses excessive); In re Zayas, 2007 WL 987240 at *4 and *5 (Bankr. N.D. Ohio 2007).
2. Transportation.
The Debtors own three automobiles. These three automobiles are extremely expensive to operate and loan payments in connection with two of the cars are also significant. Apparently the truck is only used for weekend driving when the five (or seven?) family members travel together. It is not unreasonable to assume that the Debtors could consolidate to reduce their car ownership to two vehicles, one of which is used both to commute and to transport the family. The Court roughly finds that one third of the Debtors' car maintenance expenses are unnecessary for the reasonable maintenance and upkeep of the family. Because both of the financed vehicles were purchased within the 910 days prior to the current bankruptcy filing, they may be unable to avoid payment in full under a chapter 13 plan. However, by surrendering one vehicle they would significantly, if not entirely, reduce this debt and free up cash to make creditor payments. Wadsworth, 383 B.R. at 334.
3. Communications.
The Debtors pay almost $700 for cable, internet usage, landline telephones, and seven cell phones. Mr. Cascioppo has an additional cell phone that he uses for work. Tr. 49:17-21. The Debtors' creditors cannot be expected to indulge the family in such expenses as they are clearly excessive. See, e.g. In re Gonzalez, 378 B.R. 168, 174 (Bankr. N.D. Ohio 2007).
4. Ms. Agatha's Voluntary Retirement Contribution.
Ms. Agatha asked that the Court reduce income by amounts that she deposits into a retirement fund. As noted, the Debtors' retirement picture is promising given the substantial amount of retirement funds they have amassed to date and the fact that Mr. Cascioppo is receiving retirement contributions from his employer of $1,747.05 per month. The United States Trustee argues and the Court agrees that there is no reason to reduce the amount available to creditors by the amount that Ms. Agatha determines to use in this fashion. See, Wadsworth, 383 B.R. at 334-335. This reduction should be eliminated with a resultant increase in income available to pay creditors. The Court acknowledges that this increase would not be dollar for dollar given the tax consequences.
5. Post-Petition "Actual Expenses."
The Debtors ask the Court to utilize their "actual expenses" for food, clothes, paper products, etc. based on information provided in Revised Schedule J and at the evidentiary hearing. The United States Trustee objected to the introduction of evidence provided at the evidentiary hearing on the grounds that it was not submitted on a timely basis, is not supported by corroborating documentation, and is unfairly prejudicial. The Court agrees that this evidence is of limited if any evidentiary value, but will not strike it. However, this evidence has no probative value as an indicia of the appropriate monthly expense for food and clothing. First, without any detailed information as to the actual purchases, the Court cannot determine the cause for substantial expenditure increases over both Schedule J and Revised Schedule J levels. These expenditures, even if actual and "basic," could reflect bulk purchases or seasonal shopping with resultant decreases in later months. Thus, the Court rejects this summary data as indicative of an annualized average. And, even if the Court accepts that Debtors actually spent these amounts, the Court is not required to conclude that spending at this level is reasonably necessary for the support of the Debtors and their children. The IRS guidelines may not be a ceiling, but they are relevant and helpful points of comparison. In re Eckard, 2008 WL 859155 *4 (Bankr. N.D. Ohio March 31, 2008). Here, the Debtors' expenses for food, clothing, utilities, telecommunication, and other such items, far exceed IRS Standards for a family of seven.
While the Court agrees that the Debtors appear to be engaging in inappropriate gamesmanship by profering this evidence for the first time at trial, the United States Trustee is not prejudiced given the Court's decision - a decision reached even after this evidence is evaluated.
And again, the Court emphasizes the significant problem with the use of seven person family IRS Applicable Guidelines as the starting point. The evidence is clear; for most purposes this is a family of five - not seven. As a result the expenses for food, etc. even more significantly overstate the amount allowed by the IRS Applicable Guidelines and reasonably required by Debtors' family. The Court notes that this is one of many areas where the Debtors show no attempt at economy. As a result, the Court reasonably determines that reductions in this area can occur without depriving the family of a reasonably appropriate standard of living. The Debtors correctly note that the Court must consider actual expenditures, but incorrectly infer that the Court is bound by the Debtors' spending decisions. If this were the case, abuse could not be found even in cases involving outrageous excess. The Court declines to adopt a rule that, to use a tired but apt phrase, leaves the fox to guard the hen house.
The Court's analysis of the Debtors' expenditures indicates that with appropriate economy and belt tightening funds are available to make some payment to creditors. Eliminating voluntary pension contributions and the third car or truck and the reduction in support obligations more than erases the shortfall of $1,086.36. Reasonable belt tightening in other areas, even if expenditures continue to exceed IRS Standards, allows Debtors to make additional or alternative funds available to creditors. The Court finds no evidence that these reductions will deprive the Debtors of anything reasonably necessary for their maintenance. Indeed, given the total absence of evidence of any previous attempt at economy, the Court finds that Debtors have a variety of areas, probably not limited to the ones indentified above, where they can make appropriate short term economic adjustments.
The Court assumes through a rough and Debtors-favorable estimate that a reduction of one third of automotive expenses, 13 percent of car payments, fifty percent of Ms. Agatha's voluntary retirement contribution (a net effect after taxes), and $267 of support for Mr. Cascioppo's eldest daughter.
It appears reasonable on this record to assume salary increases and a cessation of Mr. Cascioppo's legal fees over the next three to five years, but the Court's analysis does not include such assumptions.
The United States Trustee notes and the Court acknowledges that the current abuse standard under Section 707(b)(3)(B) of the Bankruptcy Code reflects a significant statutory change under the Bankruptcy Abuse Consumer Protection Act of 2005 ("BAPCPA"). Previously, a court was required to find "substantial abuse." Various courts articulated factors which a court should evaluate in determining whether the substantial abuse standard was met in a case. Clearly the BAPCPA change in this area was intended to lower the threshold that a party seeking dismissal must meet. In re Maya, 374 B.R. 750, 754 (Bankr.S.D.Cal. 2007). However, the Court believes that under the facts of this case, even under previous case law, this case would be appropriate for dismissal.
First, the ability of the Debtor to make some payment to creditors was a significant factor, and, indeed, in many courts the controlling factor, even under the previous substantial abuse cases. See Zolg v. Kelly (In re Kelly), 841 F.2d 908, 914 (9th Cir. BAP 1988).
Second, as emphasized above, this is not a case where there is any death, disease, disaster or other outside calamity that caused the Debtors to seek bankruptcy protection. Instead, the Debtors, both knowledgeable professionals and one a certified public accountant, incurred substantial debt beyond their ability to pay. They did so, in large measure, specifically in connection with a determination to seek new employment to improve their long term prospects for financial and professional success. The Debtors, thus, not only have not pointed to compelling forces beyond their reasonable control as a reason for bankruptcy, they actually expect their creditors to fully finance their future success. The absence of life adversity as a cause of a debtor's financial problems was a factor under the substantial abuse test applied by some courts in the past and underscores the abusive nature of a discharge in this case. See, Green v. Staples (In re Green), 934 F.2d 568, 572 (4th Cir. 1991).
Similarly, the Debtors' unpaid debt is significant and includes over $160,000 of credit card debt. Debtors' testimony, while not entirely credible on this point, suggests that all credit card debt results from expenses incurred shortly before bankruptcy when Debtors determined to sell their home and move to San Diego. The incurrence of significant consumer credit card debt shortly prior to bankruptcy and well beyond the Debtors' ability to fully and appropriately repay previously was a factor in determining substantial abuse and underscores the appropriateness of an abuse finding in this case. Id.
Also, as discussed above, the Debtors' proposed family budget is clearly excessive in light of the reasonable need to economize to fund creditor payments. There is no evidence whatsoever of belt tightening - among other things the family operates two newer cars and a new truck, everyone has a cell phone, and expenditures for clothes, food, etc. are above the IRS Guidelines and continue to rise. Despite significant pre-petition retirement savings and significant post-petition employer retirement contributions, the Debtors' budget also includes voluntary retirement contributions. An excessive budget was a factor in finding substantial abuse, and such a budget exists in this case. Id.
The Court notes that, while it does not find that the Schedules contain misleading information, the Debtors have been less than candid in their response to the Motion. The Debtors' attempt to portray themselves as a seven person family for the purposes of expenses is disingenuous. In fact this is for all practical purposes a five person family with two daughters living in another home and with the expenses related to those daughters largely, if not entirely, reflected in the substantial support payments that are listed in Schedule J. This lack of candor underscores the appropriateness of an abuse finding in this case.
And finally, the Court acknowledges that it is not clear as to whether the Debtors have access to chapter 13. However, the ability to access chapter 13 is not a deciding factor in section 707(b)(3)(B) cases. Even if a chapter 11 case is the Debtors' only option, they should be required to propose a chapter 11 plan and to provide their creditors with a meaningful opportunity for repayment. Maya, 31A B.R. at 755 (inability to access chapter 13 is not dispositive); In re Zayas, 2007 WL 987240 at *3 (whether debtor will benefit from chapter 13 or 11 not controlling).
CONCLUSION
Therefore, the Court Grants the Motion of the United States Trustee Seeking a Dismissal of Case Pursuant to 11 U.S.C. § 707(b)(3)(B). The United States Trustee should submit an appropriate form of judgment promptly.