Opinion
Case No. 17–53498
03-06-2018
IN RE: Mark D. STACKHOUSE, Susan R. Stackhouse, Debtors.
Robert J. Morje, Columbus, OH, for Debtors.
Robert J. Morje, Columbus, OH, for Debtors.
MEMORANDUM OPINION ON MOTION OF U.S. TRUSTEE TO DISMISS CHAPTER 7 CASE
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for hearing on January 16, 2018, (the "Hearing") to consider the Motion of the United States Trustee to Dismiss Pursuant to 11 U.S.C. § 707(b)(3) with Memorandum and Affidavit in Support (Doc. # 17) (the "Motion to Dismiss"), filed by the United States Trustee (the "UST") on September 5, 2017; and Mark and Susan Stackhouse's (the "Debtors") Memorandum Contra Motion of US Trustee to Dismiss (Doc 17) (Doc. # 26) (the "Response"), filed on December 1, 2017. The UST moves to dismiss the Debtors' case under 11 U.S.C. § 707(b)(3)(B), arguing that granting the Debtors a Chapter 7 discharge would be an abuse of the provisions of the Bankruptcy Code because the Debtors have the ability to significantly repay their creditors. Present at the Hearing were Shane Flannery, on behalf of the UST, and Robert Morje, representing the Debtors. Erik Van Bramer ("Bramer"), paralegal specialist for the UST, and Mr. Stackhouse ("Stackhouse") also attended the Hearing and presented testimony. At the conclusion of the Hearing, the Court ordered the parties to submit post-trial briefs addressing whether the Debtors' discretionary financial support for their non-dependent adult child and voluntary 401(k) contributions constitute permissible expenditures for purposes of determining abuse. On February 6, 2018, the United States Trustee's Post–Trial Brief in Support of Motion to Dismiss [Docket No. 17] (Doc. # 29) (the "UST's Post Trial Brief") and Debtors Brief (Docket 17) (Doc. # 30) (the "Debtors' Post Trial Brief") were filed. The Court, having considered the record and the arguments of the parties, draws the following findings and conclusions.
I. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05–02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding pursuant to 28 U.S.C. § 157. Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. FINDINGS OF FACT
The Debtors filed their joint petition for relief under Chapter 7 of the Bankruptcy Code on May 31, 2017. Before he was a truck driver, Stackhouse worked as an extruder technician for YUSA Corp. During his employment with YUSA Corp., Stackhouse injured his shoulder in an industrial accident. In 2004—after spending roughly five years on disability—Stackhouse left his job as a technician and was retrained as a truck driver. He ultimately found employment as a truck driver with Melvin Stone Company in May, 2007, where he continues to work. Mrs. Stackhouse is a cake decorator for Dairy Queen, where she has worked for ten years. Schedules I and J show that the Debtors have a combined monthly income of $5,607.47 and combined monthly expenses of $6,311, resulting in monthly net income of < $703.53>. Both Debtors are laid off in the winter months; they receive unemployment benefits but that monthly income is less than half their normal income. The most recent layoffs comprised 20% of the annual work weeks. Stackhouse is concerned that his continued truck driving may cause his shoulder to become permanently disabled.
No medical expert witness testimony was presented regarding the effect (if any) Stackhouse's shoulder injury will have on his ability to work in the future.
The petition and schedules record total assets of $82,442, which primarily consist of the real property located at 918 Yeoman St., Washington Court House, OH 43160 (the "Property") valued at $25,000, three automobiles with a combined value of $10,500, and a pension account valued at $44,642. The schedules reflect total liabilities of $208,714.34, of which $146,125.34 is listed as unsecured non-priority debt, consisting primarily of credit card and student loan debt.
The Debtors make voluntary contributions to their retirement plan in the amount of $455 per month.
The Debtors purchased the Property in 1991 for $40,000. In 2015, severe flood waters destroyed the Property's basement and sewer system, rendering the Property uninhabitable. Unfortunately, the Debtors' homeowner's insurance policy did not cover the damage to the Property. For the last year and a half, the Debtors have been renting an apartment in Washington Court House, Ohio, and a storage unit to store various household goods. The Debtors spend $169 in monthly storage unit fees and are currently looking for a new home.
The Debtors have a non-dependent 28 year-old daughter who lives and works in Berea, Kentucky. The daughter has a college degree in human resources and works for a hospital, but earns only about $17,000 annually. The daughter is a single mother and her child's father has failed to make child support payments. The Debtors provide their daughter and granddaughter with the bulk of their financial support. The Debtors give their daughter $900 a month in general financial assistance and pay the monthly loan payments of $265 on a 2011 Toyota Corolla. Without the financial support, the daughter likely would be unable to afford a car and pay her family's medical expenses. Additionally the Debtors pay $1,200 per month on their daughter's student loans. They are unsure whether they are obligated to pay the loans.
The daughter and granddaughter suffer from migraines and apparently their health insurance does not cover treatment for this.
The UST filed its Motion to Dismiss pursuant to 11 U.S.C. § 707(b)(3)(B), claiming that the totality of the Debtors' financial circumstances demonstrates abuse. The UST primarily argues that the Debtors should not be permitted to make the discretionary general support payments and student loan repayments for their daughter at the expense of the Debtors' creditors. If these two expenses were excluded (and the amounts included in disposable income), the Debtors would be able to repay approximately $83,760 to general unsecured creditors over five years, which represents a 57.32% repayment to the Debtors' unsecured non-priority creditors. The UST also raises concerns with the Debtors' voluntary contributions to their retirement plan, the payment on the 2011 Toyota Corolla, and the storage unit fees. The UST argues in their post-trial brief that if all of the above expenses were excluded, the Debtors would have $2,285 in monthly disposable income. Over the course of a 60 month plan, this disposable income would generate roughly $137,100 and repay 93.8% of the Debtors' general unsecured debt.
According to their schedules, the Debtors have unsecured non-priority debt totaling $146,125.34.
The Debtors are above-median-income debtors. As a result, the applicable commitment period for any Chapter 13 plan they proposed would be five years unless the plan proposed to pay 100% of all allowed unsecured claims over a shorter period of time. See 11 U.S.C. § 1325(b)(4).
III. CONCLUSIONS OF LAW
A. The Standard for Dismissal Under 11 U.S.C. § 707(b)(3)(B)
In a Chapter 7 case in which the debts are primarily consumer debts, the court may—after notice and a hearing—dismiss the case "if it finds that the granting of relief would be an abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b)(1). In determining whether granting relief would be an abuse, the court must consider "(A) whether the debtor filed the petition in bad faith; or (B) [whether] the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." 11 U.S.C. § 707(b)(3)(A) and (B). The UST argues that the totality of the circumstances of the Debtors' financial situation demonstrates abuse. Under this standard, it is the UST's burden to prove, by a preponderance of the evidence, that dismissal is appropriate. In re Weixel , 494 B.R. 895, 901 (6th Cir. BAP 2013) ("When the UST moves to dismiss a case under § 707(b), it has the burden of proving abuse by a preponderance of the evidence.").
A "consumer debt" is a "debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. § 101(8). There is no dispute that the Debtors are burdened primarily with consumer debt.
Dismissal under § 707(b)(3)(B) is appropriate when the debtor is either "dishonest" or "non-needy." Behlke v. Eisen , (In re Behlke ), 358 F.3d 429, 434 (6th Cir. 2004) (citing In re Krohn , 886 F.2d 123, 126 (6th Cir. 1989) ). When determining whether a debtor is "needy," the court should consider the debtor's "ability to repay his debts out of future earnings." Behlke , 358 F.3d at 434 (quoting Krohn , 886 F.2d at 126 ) (internal quotations omitted). "[T]his factor 'alone may be sufficient to warrant dismissal.' " Behlke , 358 F.3d at 434 (quoting Krohn , 886 F.2d at 126 ). The court should also consider:
[W]hether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities.
Behlke , 358 F.3d at 434 (quoting Krohn , 886 F.2d at 126 ). The Court will address each factor in turn.
Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), the standard for dismissal under § 707(b)(3)(B) was "substantial abuse." In re Weixel , 494 B.R. at 901. BAPCPA changed this standard to the "lesser standard" of "abuse." Id. The change "reflects Congress's intent to limit the availability of Chapter 7 bankruptcy relief to those deserving of a fresh start." Id. Although Behlke and Krohn were decided pre-BAPCPA, their holdings are still applicable under the current version of § 707(b)(3)(B). See id. (citing In re Goble , 401 B.R. 261, 276 (Bankr. S.D. Ohio 2009) ).
B. The Debtors Have the Ability to Significantly Pay Their Creditors
Regarding the first factor, the Court finds that the Debtors have a significant ability to repay their debts out of future earnings. "One consideration relevant to the first factor, whether the Debtor has the ability to repay debts, is whether the Debtors have sufficient disposable income to fund a hypothetical chapter 13 plan." In re Beckerman , 381 B.R. 841, 845 (Bankr. E.D. Mich. 2008) (citing Behlke , 358 F.3d at 435 ). "Disposable income is defined under the Bankruptcy Code as income received by the debtor which is not reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor. " In re Beckerman , 381 B.R. at 845 (emphasis added) (citing 11 U.S.C. § 1325(b)(2)(A)(i) ). The Bankruptcy Code does not define the term "dependent." However, in In re Lofty , the court held that the debtors' adult son and grandson were not "dependents" as that term is used in § 1325(b). In re Lofty , 437 B.R. 578, 585 (Bankr. S.D. Ohio 2010) (denying confirmation of Chapter 13 plan for violation § 1325(b)(1)(B) ). The court reasoned that the debtors were not legally obligated to provide support, the son and grandson were not listed as dependents on the debtors' schedules, and there was no evidence that the debtors claimed the son and grandson as dependents for tax purposes. Id. at 585.
In the instant case, as in Lofty , the Debtors' daughter and granddaughter are not the Debtors' dependents as that term is used in § 1325(b). To be sure, they rely heavily on the Debtors for financial support; however, the Debtors did not list them as dependents on their schedules and there is no evidence in the record indicating that the Debtors have a legal obligation to provide for them or that the daughter suffers from a debilitating disability that impairs her ability to support herself or her child. See id. ("[M]ore than a purely moral obligation is required to qualify as a dependent as that term is used in § 1325(b).") (citing In re Clements , 185 B.R. 903 (Bankr. M.D. Fla. 1995) ). Nor is there any evidence that the Debtors claimed them as dependents for tax purposes. Thus, the Debtors have not established that the daughter and granddaughter are legal dependents for which the Debtors may expend their disposable income at the expense of unsecured creditors.
Because they are not dependents, the $265 monthly car payments and $900 monthly general financial assistance payments are purely discretionary. Courts have routinely held that discretionary payments for non-dependent adult children are not reasonable and necessary. See, e.g. , In re Beckerman , 381 B.R. 841, 851 (Bankr. E.D. Mich. 2008) (debtors' financial support for three adult children—including college tuition payments—are not reasonable and necessary) (citing In re Siemen , 294 B.R. 276, 279 (Bankr. E.D. Mich. 2003) ); In re Baker , 400 B.R. 594, 599 (Bankr. N.D. Ohio 2009) ("[T]he Debtor has not shown a special circumstance in support of her assertion that her voluntary payments towards her daughter's educational expenses are permissible deductions from her income."); In re Davis , No. 08–32507, 2008 WL 4279547, at *5, 2008 Bankr. LEXIS 2905, at *14 (Bankr. N.D. Ohio Sept. 12, 2008) ("Debtor's expenses for her non-dependent adult children are discretionary and, while her desire to assist her children may be commendable, she is not free to do so at the expense of her prepetition creditors.") (citing In re Walker , 383 B.R. 830, 838 (Bankr. N.D. Ga. 2008) ); In re Pfahler , No. 07–30044, 2007 WL 2156401, at *2, 2007 Bankr. LEXIS 2526, at *6–7 (Bankr. N.D. Ohio July 26, 2007) ("While a parent's desire to assist a child who is pursuing a college degree is laudable, a debtor is not free to do so at the expense of his unsecured creditors.").
It is not clear whether the Debtors are legally obligated to make the $1,200 monthly student loan payments; Stackhouse testified that he does not know. Based on the record, the Court is constrained to find that the student loan payments are discretionary payments. Therefore, the car payments, student loan payments, and general financial support payments are not reasonable and necessary expenses.
Even if the Debtors are liable for the debt, it may not matter: a strong body of cases hold that debtors cannot pay their student loan creditors at the expense of unsecured creditors. See , e.g. , Groves v. LaBarge (In re Groves), 39 F.3d 212, 216 (8th Cir. 1994) ("[W]e disagree with the proposition that a Chapter 13 debtor's interest in a 'fresh start' justifies separately classifying student loans for the sole purpose of preferentially repaying those accelerated debts to the prejudice of other unsecured claims ... the nondischargeability of student loan claims, by itself, does not justify substantial discrimination against other, dischargeable unsecured claims in a Chapter 13 plan."); Bentley v. Boyajian (In re Bentley), 266 B.R. 229, 239–42 (1st Cir. BAP 2001) (affirming bankruptcy court decision denying confirmation of Chapter 13 plan because the debtors proposed to pay their student loans in full while non-priority unsecured creditors were only paid 3%); McGowan v. McDermott , 445 B.R. 821, 826 (N.D. Ohio 2011) (affirming bankruptcy court decision dismissing case under § 707(b)(3)(B), reasoning that debtors generally may not favor their student loan creditors at the expense of other creditors).
The $455 monthly voluntary 401(k) contributions are also not reasonable and necessary expenses. In Behlke , the Sixth Circuit Court of Appeals affirmed a bankruptcy court's ruling that a debtor's voluntary contributions to a retirement plan were not reasonable and necessary. Behlke , 358 F.3d at 436. The decision in Behlke has generally been interpreted as standing for the proposition that a debtor's voluntary contribution to their retirement plan is not a reasonable and necessary expense. See , e.g. , In re Hodge , No. 12–35236, 2014 WL 1419852, at *4 (Bankr. N.D. Ohio Apr. 11, 2014) ("[T]he Sixth Circuit's view is that the 401–k contribution and loan repayments are impermissible deductions when determining an ability to pay under § 707(b)'s needs-based analysis ..."); In re Glenn , 345 B.R. 831, 835 (Bankr. N.D. Ohio 2006). Here, the $455 monthly voluntary 401(k) contributions are not reasonable and necessary expenses. Notwithstanding the fact that Mr. Stackhouse is concerned about the longevity of his truck driving career due to his shoulder injury, there is no evidence that the Debtors are planning on retiring any time soon, or that their employment is unstable, or that they are going to become disabled and have to rely on disability benefits. See In re Reese , 402 B.R. 43, 55 (Bankr. M.D. Fla. 2008) (for purposes of determining abuse under § 707(b)(3)(B), "[f]acts that are 'unknown or highly speculative' are not relevant to the analysis.") (citing In re Parada , 391 B.R. 492, 502 (Bankr. S.D. Fla. 2008) ). Even if Mr. Stackhouse could no longer drive a truck, there is no evidence that he cannot be retrained for different employment. Put simply, "it would be unfair to the creditors to allow the Debtors in the present case to commit part of their earnings to the payment of their own retirement fund while at the same time paying their creditors less than a 100% dividend." Behlke , 358 F.3d at 435 (citing Harshbarger v. Pees (In re Harshbarger) , 66 F.3d 775 (6th Cir. 1995) ).
The Court notes that the pre-petition funds already paid into the Debtors' retirement account are not considered property of the estate and are not considered disposable income. See Seafort v. Burden, (In re Seafort) , 669 F.3d 662, 673 (6th Cir. 2012) ("[T]he function of § 541(b)(7) was merely to clarify that pre-petition retirement contributions do not constitute property of the estate or post-petition disposable income.").
But see , In re Beckerman , 381 B.R. 841, 848 ("The reasonableness of the Debtor's expenses, including 401(k) contributions, must be determined on a case-by-case basis looking at the totality of the Debtor's individual circumstances.").
Finally, the $169 monthly storage unit fee is not a reasonable and necessary expense; the Debtors have been renting the storage unit ever since they moved into their apartment but do not use the goods stored therein. Thus, the student loan payments, car payments, retirement account contributions, storage unit fees, and general financial support payments are not reasonable and necessary expenses and should therefore be disallowed. Without these expenses, the Debtors would have $2,285 per month of disposable income, and, over the course of a 60 month plan, could generate roughly $137,100 and repay 93.8% of the Debtors' general unsecured debt. Courts have found abuse under § 707(b)(3)(B) in cases where debtors were able to pay significantly less to their unsecured creditors. See , e.g. , Behlke , 358 F.3d at 437 (finding substantial abuse when debtors had the ability to pay a 14% dividend to unsecured creditors); In re Hodge , No. 12–35236, 2014 WL 1419852, at *5 (finding abuse when debtor had ability to pay 26% dividend); In re Davis , No. 08–32507, 2008 WL 4279547, at *6, 2008 Bankr. LEXIS 2905 at *16 (same); In re Pfahler , No. 07–30044, 2007 WL 2156401, 2007 Bankr. LEXIS 2526 (finding abuse when debtor had ability to pay 18% dividend). But see In re Croskey , No. 06–33437, 2007 WL 1302571, at *3 (Bankr. N.D. Ohio May 1, 2007) (finding abuse when the debtors had the ability to pay 100% dividend to unsecured creditors).
C. The Other Factors Weigh in Favor of Dismissal
Although a debtor's ability to pay may be enough to warrant dismissal, the Court finds that the other factors weigh in favor of dismissal as well. First, the Debtors' schedules show that they are eligible for relief under Chapter 13 of the Bankruptcy Code: their debts are less than the debt limits set forth in 11 U.S.C. § 109(e) and they have regular income to support a Chapter 13 plan. See 11 U.S.C. § 101(30). Also the Debtors are not precluded from converting their Chapter 7 case to a Chapter 13 case. See 11 U.S.C. § 706. No evidence was presented regarding whether the Debtors had attempted to obtain debt relief through private negotiations with their creditors. Nor was any evidence presented regarding the availability of state law remedies with the potential to ease the Debtors' financial woes. However—as explained above—ample evidence was presented demonstrating that the Debtors' expenses could be significantly reduced without depriving them of adequate food, clothing, shelter, and other necessities. Finally, although Stackhouse stated that he was concerned about his shoulder injury and its effect on his future as a truck driver, no medical expert witness testimony was presented on this matter, he did not indicate a need to leave the job in the immediate future, and he did not indicate that he has no other employment skills or that re-training for a different job is unavailable. See In re Reese , 402 B.R. at 55 (citing In re Parada , 391 B.R. at 502 ). On balance, the UST has shown by a preponderance of the evidence that granting the Debtors relief under Chapter 7 of the Bankruptcy Code would be an abuse.
At the Hearing, the Debtors stated that they would be open to the possibility of converting their case if the Court was inclined to grant the UST's Motion to Dismiss. The UST indicated that it would not oppose such a motion.
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IV. CONCLUSION
The Court understands the urge that parents feel to assist their children. The Court is also cognizant of the difficulties that young adults face in achieving financial independence, especially when they are saddled with massive student loan debt. However, the Debtors cannot have it both ways. It would be an abuse of the Bankruptcy Code to allow the Debtors to obtain a Chapter 7 discharge and force the unsecured creditors to walk away with nothing while simultaneously allowing the Debtors to provide significant financial support to their non-dependent adult daughter and granddaughter and engage in other discretionary spending. While the Debtors are not required to live in abject poverty, they are required to engage in a certain level of "belt tightening," which they have failed to do. See Krohn. 886 F.2d at 128 ; Tennessee Student Assistance Corp. v. Hornsby (In re Hornsby) , 144 F.3d 433, 438 (6th Cir. 1998). For all of the foregoing reasons, good cause appearing,
IT IS ORDERED that the Debtors shall have ten (10) days from the date of entry of this Memorandum Opinion to file a motion to convert their case to a case under Chapter 13 of the Bankruptcy Code, absent which the UST's Motion to Dismiss will be granted and this case will be dismissed, by separate order of the court.