Opinion
Case No. 06-12159.
April 3, 2007
MEMORANDUM OF DECISION ON ORDER DENYING MOTION TO DISMISS
Presently before the Court is a Motion and Memorandum of Law to Dismiss Chapter 7 Case Pursuant to 11 U.S.C. § 707(b)(2) ("Motion") (Doc. 20) filed by Saul Eisen, the United States Trustee for Region 9 ("UST"). By his Motion, the UST seeks dismissal of this case as "an abuse of the provisions of [chapter 7]." See 11 U.S.C. § 707(b)(1). In support, the UST argues that a presumption of abuse arises in this case pursuant to the "means test" set forth in § 707(b)(2).
ISSUE
Only one aspect of the means test equation is at issue. The Debtors intend to surrender their residence. The issue is whether, under 11 U.S.C. § 707(b)(2)(A)(iii), the Debtors qualify for an expense allowance for payments on secured debt when no payments will be made because the Debtors intend to surrender the property securing the debt.
STATUTE
The means test equation is set forth in § 707(b)(2)(A)(i), which provides:
In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lessor of —
(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $6,000, whichever is greater; or
(II) $10,000.
The component at issue in this case is the deduction set forth in § 707(b)(2)(A)(iii), which provides:
The debtor's average monthly payments on account of secured debts shall be calculated as the sum of —
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and
(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts;
divided by 60.
ANALYSIS
Two courts in this district have already held that debtors are permitted to take a § 707(b)(2)(A)(iii)(I) deduction even if they intend to surrender the collateral. See In re Sorrell, Ch. 7 Case No. 06-31720, 2007 WL 211276 (Bankr. S.D. Ohio Jan. 26, 2007) (Waldron, J.); see also In re Graham, Ch. 7 Case No. 06-54764, 2007 WL 685945 (Bankr. S.D. Ohio March 7, 2007) (Preston, J.) (adopting Sorrell). This Court agrees with Sorrell and Graham.
Sorrell and Graham side with the majority of courts to address this issue. See In re Galyon, No. 06-11985 WV, 2007 WL 883394 (Bankr. W.D. Okla. Mar. 22, 2007); In re Longo, No. 06-30781, 2007 WL 836762 (Bankr. D. Conn. Mar. 19, 2007); In re Mundy, No. 1-06-BK-00875MDF, 2007 WL 620971 (Bankr. M.D. Pa. Mar. 1, 2007); In re Harr, No. 06-31270, 2007 WL 521221 (Bankr. N.D. Ohio Feb. 20, 2007); In re Hartwick, No. 06-10749-JMD, 2007 WL 518617 (Bankr. D.N.H. Feb. 12, 2007); In re Zak, No. 06-41241, 2007 WL 143065 (Bankr. N.D. Ohio Jan. 12, 2007); In re Randle, No. 06-B-05929, 2006 WL 3734351 (Bankr. N.D. Ill. Dec. 19, 2006); In re Nockerts, 357 B.R. 497 (Bankr. E.D. Wis. 2006); In re Simmons, 357 B.R. 480 (Bankr. N.D. Ohio 2006); In re Singletary, 354 B.R. 455 (Bankr. S.D. Tex. 2006); In re Hartwick, 352 B.R. 867 (Bankr. D. Minn. 2006); In re Walker, No. 05-15010-WHD, 2006 WL 1314125 (Bankr. N.D. Ga. May 1, 2006); but see In re Ray, No. 06-03988-DD, 2007 WL 690131 (Bankr. D.S.C. Feb. 28, 2007); In re Harris, 353 B.R. 304 (Bankr. E.D. Okla. 2006); In re Skaggs, 349 B.R. 594 (Bankr. E.D. Mo. 2006).
Most of the arguments that the UST raises in this case are arguments that he raised in Sorrell. As to these arguments, this Court adopts the Sorrell analysis.
There is one additional argument that the UST raises in this case that is worthy of clarification. At oral argument, the UST placed particular emphasis upon the statutory language "due to secured creditors in each month of the 60 months following the date of the petition." See § 707(b)(2)(A)(iii)(I). The UST takes the position that nothing is "due" to a secured creditor during this period if a debtor surrenders the collateral. The UST argued as follows:
Counsel: Once that property is surrendered, your Honor, in a chapter 7, that debt is discharged. The contract has to be reaffirmed on the date of filing. The mortgage has to be reaffirmed on the date of filing for those debts to be contractually due in the sixty months after the date of filing. The Court disagrees.When a contractual debt is discharged, it remains contractually due. Debts are not extinguished by the discharge. See, e.g., In re Patterson, 297 B.R. 110, 112-13 (Bankr. E.D. Tenn. 2003). A leading treatise explains:
Although a bankruptcy discharge has been referred to as extinguishing or releasing the discharged debt, this description is an oversimplification and potentially misleading. The effect of a discharge is defined in Code § 524(a) and (b). Code § 524, however, does not address the continuing validity of the discharged debt. Rather, Code § 524(a) provides that a discharge voids any judgment "to the extent that [it] is a determination of the personal liability of the debtor" and places an injunction on "an act" to collect the debt as a personal liability of the debtor. Thus, the effect of a discharge is to interpose a permanent barrier against debt collection rather than absolve the underlying debt retroactively.
3 W. Norton, Bankruptcy Law and Practice 2d § 48:2, p. 48-5 to 48-6 (2006).
If discharge meant that a contractual debt was no longer contractually due, then the secondary liability of a guarantor or surety would also be affected. Yet, this is not the case. See 11 U.S.C. § 524(e) ("discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt"). As noted by the Tenth Circuit:
"[A] discharge in bankruptcy does not extinguish the debt itself but merely releases the debtor from personal liability. The debt still exists, however, and can be collected from any other entity that may be liable." The courts have reconfirmed this basic principle in case after case permitting creditors whose claims have been discharged vis-a-vis the bankrupt to recover on the same claims from third parties in a variety of settings.
In re Western Real Estate Fund, Inc., 922 F.2d 592, 600-01 (10th Cir. 1991) (quoting In re Lembke, 93 B.R. 701, 702 (Bankr. D.N.D. 1988)); see also In re Applewood Chair Co., 203 F.3d 914, 918-19 (5th Cir. 2000) (secondary obligor remains liable notwithstanding discharge of debt of primary obligor); In re Star Phoenix Mining Co., 147 F.3d 1145, 1147 n. 2 (9th Cir. 1998) (same); Moore, Owen, Thomas Co. V. Coffey, 992 F.2d 1439, 1449 (6th Cir. 1993) (same) ; In re Sure-Snap Corp., 983 F.2d 1015, 1019 (11th Cir. 1993); First Fidelity Bank v. McAteer, 985 F.2d 114, 118 (3rd Cir. 1993) (same).
CONCLUSION
For the foregoing reasons, the Court holds that the Debtors qualify for an expense allowance for payments on secured debt, under § 707(b)(2)(A)(iii)(I), even though the Debtors intend to surrender the property securing the debt. Consequently, the Motion will be DENIED. An order to this effect will be entered.