IN RE BUSBIN , (N.D.Ga. 1989)

95 B.R. 240

In re Jamie Lee

Bankruptcy No. G87-20514-MHM.

United States Bankruptcy Court, N.D. Georgia.

January 5, 1989.

West Page 241

Harry M. Moseley, Cumming, Ga., for debtor.

Robert L. Coley, Atlanta, Ga., U.S. trustee.

Neil C. Gordon, Atlanta, Ga., for Bank South.

ORDER

MARGARET H. MURPHY, Bankruptcy Judge.

This matter is before the court on a motion filed November 25,
1987, by the United States Trustee to dismiss this case pursuant
to 11 U.S.C. § 707(b). Following notice mailed February 15,
1988, to Debtor, Debtor's attorney, Trustee, Bank South,
attorney for Bank South and the United States Trustee, hearing
was held February 29, 1988. The court permitted the parties to
file letter briefs following the hearing. On March 9, 1988,
attorney for Bank South filed a letter brief in support of the
United States Trustee's motion to dismiss.[fn1] On March 17,
1988, the United States Trustee informed the court by letter
that it would join in the brief of Bank South. On March 21,
1988, Debtor's attorney filed a letter brief in opposition to
the motion to dismiss. On July 18, 1988, Bank South filed a
supplemental letter brief.

STATEMENT OF FACTS

This case commenced October 1, 1987. Debtor's schedules list
Bank South as its sole creditor with a debt in the amount of
$1,450. Bank South's claim is based on a deficiency judgment
obtained by default against Debtor following repossession and
sale of Debtor's 1979 Ford LTD automobile. Debtor shows his
monthly net income as $1,150 and his monthly expenses as $970,
thus leaving Debtor a disposable income of $130 per month.

Prior to the filing of Debtor's petition, Bank South instituted
wage garnishment based on its judgment obtained against Debtor.
Pursuant to that garnishment, Bank South collected approximately
$896.46.[fn2] The balance unpaid to Bank South is $526.69.

The United States Trustee filed a motion to dismiss Debtor's
case pursuant to 11 U.S.C. § 707(b), alleging that Debtor has a
present ability to pay his outstanding debts, and that granting
a discharge to Debtor would be a substantial abuse of the
provisions of Chapter 7. Debtor opposes dismissal on two
grounds: (1) that the United States Trustee's motion was filed
and is being prosecuted at the instigation of Bank South who is
without standing to file such a motion; and (2) Debtor's
petition does not constitute a substantial abuse of the
provisions of Chapter 7.
West Page 242

CONCLUSIONS OF LAW

Debtor argues the United States Trustee's motion to dismiss
should be denied because it was brought and is being prosecuted
at the instigation of Bank South. Section 707(b) specifically
provides that a motion to dismiss for substantial abuse may
not be brought at the "request or suggestion of any party in
interest". Debtor argues that because the motion to dismiss was
brought at the instigation of Bank South and is being prosecuted
by Bank South, the motion should fail. If it were held, however,
that neither the court nor the United States Trustee could
pursue a motion to dismiss pursuant to § 707(b) if the grounds
for such a motion were brought to its attention by a party in
interest, parties who would otherwise make such information
available would be deterred from doing so. Additionally, the
court would be prevented from acting in cases where an abuse is
most likely to occur. In re Hudson, 56 B.R. 415 (Bankr.N.D.Oh.
1985). Both the court and the U.S. Trustee have a duty to
independently evaluate any information which may be brought to
light by a party in interest. Such a screening process will
prevent the abuse of § 707(b) by creditors seeking to use it as
a means of harassing or intimidating debtors. Therefore,
Debtors' first argument is without merit.

Debtor also argues his petition does not constitute a
substantial abuse pursuant to 11 U.S.C. § 707(b). Section 707
provides:

(a) The court may dismiss a case under
this Chapter only after notice and a
hearing and only for cause, including —

(1) Unreasonable delay by the debtor
that is prejudicial to creditors;

(2) Nonpayment of any fees and
charges required under Chapter 123 of
Title 28; and

(3) Failure of the debtor in a voluntary
case to file, within 15 days or such
additional time as the court may allow
after the filing of the petition commencing
such case, the information required
by ¶ (1) of § 521, but only on
motion by the United States Trustee.

(b) After notice a hearing, the court, on
its own motion or on a motion by the
United States Trustee, but not at the
request or suggestion of any party in
interest, may dismiss a case filed by an
individual debtor under this Chapter
whose debts are primarily consumer
debts if it finds that the granting of
relief would be a substantial abuse of
the provisions of this Chapter. There
shall be a presumption in favor of
granting the relief requested by the
debtor.[fn3]

Section 707(b) was enacted as a part of the Bankruptcy
Amendments and Federal Judgeship Act of 1984 (hereinafter "1984
Amendments"), in response to criticisms leveled at the
Bankruptcy Reform Act of 1978 (hereinafter "Bankruptcy Code") by
the consumer credit industry.[fn4] The legislative history of
§ 707(b) indicates its enactment was the result of perceived
abuses by Chapter 7 and Chapter 13 debtors which resulted from
the liberal provisions of the Bankruptcy Code.[fn5] The
provisions of the Bankruptcy Code which were blamed for such
abuses were the expansive automatic stay, the overly generous
exemption standards, the broadened scope of discharge
protection, the Debtor's unfettered choice to elect a no-asset
Chapter 7 liquidation, and the lack of any meaningful payment
requirement as the condition to confirmation
West Page 243
of Chapter 13 plans. Breitowitz, New Developments in Consumer
Bankruptcy: Chapter 7 Dismissal on the Basis of "Substantial
Abuse", 59 Amer.Bankr.L.J. 327 (1985).[fn6] As a result of the
increase in the number of bankruptcies which followed the
enactment of the Bankruptcy Code, the consumer credit industry
alleged it suffered significant losses. Id. A study conducted by
the Credit Research Center affiliated with the Krannert School
of Management of Purdue University concluded that a significant
percentage of the number of persons filing for relief under
Chapter 7 would be able to pay most or all of their debts from
their excess disposable income without undue hardship. Id. Those
debtors were, however, filing Chapter 7 petitions under which
creditors received nothing on their claims. The proposals made
to Congress, including proposals which would limit access to
Chapter 7 based on a debtor's ability to pay his debts under
Chapter 13, failed to gain sufficient support for enactment
prior to 1984. Id. Then, amidst the frenetic legislating in 1984
to amend the Bankruptcy Code to overcome the constitutional
defect identified in Northern Pipeline Construction Co. v.
Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d
598 (1982), Congress passed the Consumer Credit Amendments,
including the enactment of § 707(b). No definition of the term
"substantial abuse" is contained in § 707(b) or elsewhere in the
Bankruptcy Code. The Senate Report which accompanied the
enactment of § 707(b), however, sheds some light on
Congressional intent behind the passage of § 707(b):

This provision represents a balancing of
two interests. It preserves the fundamental
concept embodied in our bankruptcy
laws that debtors who cannot
meet debts as they come due should be
able to relinquish non-exempt property in
exchange for a fresh start. At the same
time, however, it upholds creditors' interests
in obtaining repayment where such
repayment would not be a burden.
Crushing debt burdens and severe financial
problems place enormous strains on
borrowers and their families. Family
life, personal emotional health, or work
productivity often suffers. By enabling
individuals who cannot meet their debts
to start a new life, unburdened with
debts they cannot pay, the bankruptcy
laws allow troubled borrowers to become
productive members of their communities.
Nothing in this bill denies such
borrowers with unaffordable debt burdens
bankruptcy relief under Chapter 7.
However, if a debtor can meet his debts
without difficulty as they become due,
use of Chapter 7 would represent a substantial
abuse.

S.Rep. No. 98-65 to accompany S. 445, 98 Cong., 1st Sess. (1983)
p. 43. Thus, it appears that the primary purpose for the
enactment of § 707(b) was to provide for dismissal of the
Chapter 7 cases of debtors who can pay their debts from their
excess disposable income.

Bank South contends the recent decision of the Ninth Circuit in
Zolg v. Kelly, 841 F.2d 908 (9th Cir. 1988), is the last of a
long line of cases which uniformly hold that a debtor's ability
to pay his debts defines substantial abuse. In the Kelly case,
the debtors filed a Chapter 7 bankruptcy petition primarily to
discharge a judgment debt of approximately $25,000. Before
filing bankruptcy, the Kellys paid off all their unsecured
creditors, consolidating some of their debt into their secured
line of credit. Mr. Kelly sold his one-third interest in his law
firm for the nominal sum of $100. The Kellys listed $181,350 in
assets and $147,000 in debts secured by mortgages against their
home. The debtors claimed a $50,000 homestead exemption. The
debtors also listed an excess monthly income of $441. Their
actual excess monthly income was substantially more because
certain of their monthly expenses were found by the bankruptcy
court to be excessive. In re Kelly, 57 B.R. 536 (Bankr.Ariz.
1986).

The Ninth Circuit examined most of the cases which had been
decided under
West Page 244
§ 707(b) and concluded those cases were unanimous in holding
"that the principal factor to be considered in determining
substantial abuse is the debtor's ability to pay the debts for
which a discharge is sought." Kelly, 841 F.2d at 913. The Ninth
Circuit, however, went one step further by concluding that "a
finding that a debtor is able to pay his debts, standing alone,
supports a conclusion of substantial abuse." Id. at 914.

In the instant case, Debtor's excess disposable income would
allow him to pay off the entire remaining balance due to Bank
South in less than five months. Debtor could pay the entire
debt of $1,450 in less than twelve months. Therefore, if this
court employed the analysis of the Ninth Circuit in Kelly,
Debtor's ability to pay would, "standing alone", support a
finding of substantial abuse.

The analysis set forth in Kelly, however, is not without
criticism by other courts and by legal scholars. In the case of
In re Keniston, 85 B.R. 202 (Bankr.D.New Hamp. 1988), the court
adopted a narrow construction of § 707(b) espoused in a
University of Pennsylvania law review article by Karen Gross,
Preserving a Fresh Start for the Individual Debtor: The Case for
Narrow Construction of the Consumer Credit Amendments, 135
Univ.Penn.L.Rev. 59 (1986). The Keniston court concluded:

"[T]he dismissal power under § 707(b) is
not essentially different from the established
power of a bankruptcy court to
dismiss a petition under any chapter of
the Bankruptcy Code that is filed with a
lack of good faith or as an abuse of
process under §§ 105(a) and 707(a) of the
Code.

Both the law review article and the Keniston Court engage in an
extensive analysis of the Bankruptcy Code to conclude that the
focus of § 707(b) should be on whether the debtor is an "honest"
debtor as distinguished from a "dishonest" debtor rather than
focusing on the single rigid standard of whether a debtor can
repay creditors out of future income. Keniston, 85 B.R. at 222.
An honest debtor is one who has "unfortunately" incurred debts
he cannot repay; a dishonest debtor is one who has
"systematically defrauded" his creditors. Gross, 135
U.Pa.L.Rev. at 101.

An analysis of the cases cited by both Keniston and Kelly,
however, show that while courts have focused on the debtor's
ability to pay as the principal factor in determining
substantial abuse, the courts have by no means focused on
ability to pay as the sole factor for determining substantial
abuse.[fn7] In the case of In re Edwards, 50 B.R. 933
(Bankr.S.D.N.Y. 1985), the debtors' monthly net income was
$2,550. They listed $184 monthly surplus income, which would
have enabled them to pay 100% of their unsecured debt over a
three-year period. The court noted the difficulty in determining
substantial abuse based on objective data alone. The court also
noted that it should accord great weight to the debtors' own
assessment of their financial condition. After conducting a
hearing in that case, the court concluded a dismissal for
substantial abuse would be improper because facts and
circumstances not apparent in the debtors' schedules indicated
the debtors' petition was not a substantial abuse of the
provisions of Chapter 7. Specifically, the debtors had three
children and were expecting a fourth. As a result, the wife's
income would be lost while expenses due to pregnancy and child
care would increase. In addition, prior to filing the bankruptcy
petition, the debtors sought assistance from a credit
counseling service but were unable to maintain the payments
devised by that service. The credit counseling service
recommended that the debtors file bankruptcy. Thus, the
Edwards court concluded the Edwards were "honest" debtors
West Page 245
entitled to seek relief under Chapter 7.[fn8]

In the case of In re Kress, 57 B.R. 874 (Bankr.D.N.Dak. 1985),
the debtor's yearly income was $90,000 and total unsecured debts
were $38,000. The debtor overstated his expenses by $1,000 per
month. In dismissing the case, the court relied not solely on
the debtor's ability to pay but on the totality of the
circumstances, including the debtor's earning potential and his
extravagant monthly expense statement.

In the case of In re Hudson, 56 B.R. 415 (Bankr.N.D. of Oh.
1985), the court listed several factors to be considered in
determining substantial abuse. Among these were the aggregate
amount of the debtor's income, the ratio between monthly income
and monthly expenses, the percentage that could be paid to
unsecured creditors, the hardship imposed under Chapter 13, the
number of unsecured creditors, the amount of unsecured debt,
the nature of the unsecured debt, the motivation for filing
under Chapter 7, whether the debtor exhibited good faith in the
prosecution of the case, and whether the debtor fully and
accurately disclosed his monthly income and expenses. The court
allowed the debtors a final opportunity to amend their schedule
of current income and current expenditures to accurately
reflect their financial status, finding discrepancies and
inconsistencies rendered the evidence before the court
unreliable for a determination of the § 707(b) issue.

In the case of In re Bell, 56 B.R. 637 (Bankr.E.D.Mich. 1986),
the debtor showed an income in excess of $3,000 per month with
$127,000 in general unsecured debt and $5,500 in taxes owed. The
court noted that fraud and other means of abuse not involving a
debtor's ability to pay was dealt with elsewhere in the
Bankruptcy Code, specifically in §§ 523, 727, and 707(a). The
court also noted that in determining whether to dismiss a case
for substantial abuse, the court should consider the effect of
dismissal on the debtors versus the effect of the discharge on
the creditors. In Bell, the court characterized the debtor's
statement of expenses as extravagant. For example, the debtor
listed $608 per month in transportation expenses which included
the lease of a luxury car, and food expenses for one person of
$480 per month which included frequent meals at restaurants. In
dismissing the case, the court concluded:

[I]t is unfair and inequitable for the debtor
to request that this Court discharge
his debts while he accumulates substantial
disposable income over the next several
years while living a relatively high
life style.

In the case of In re Struggs, 71 B.R. 96 (Bankr.E.D.Mich.
1987), the court's analysis appeared to focus only on the
debtor's ability to pay. The debtor's monthly income was $4,900
with expenses of approximately $3,800 and an excess of
approximately $1,100 per month. The court noted debtor had
incurred a $16,000 secured debt for a Cadillac automobile and a
$16,000 secured debt for a motor home. Although not specifically
stated, it was clear the court considered the totality of the
circumstances, including the nature of the debtor's secured
debts in addition to the debtor's ability to pay his unsecured
debt from excess monthly income in determining that the case
should be dismissed pursuant to § 707(b).

In the case of In re Gaskins, 85 B.R. 846 (Bankr.C.D.Cal.
1988), the debtors' income was over $70,000 per year. The
debtors' excess annual income was over $6,000 per year. The
debtors' unsecured debt was approximately $30,000, most of which
was credit card debt. The debtors had recently received an
income tax refund of $8,300 which they had used to buy their
third new car. The court noted that the use of the tax refund to
buy a new car indicated an unwillingness on the part of the
debtors to pay their debts. The court also noted that
West Page 246
a three-year Chapter 13 plan would pay 54% of the unsecured debt.
The case was dismissed under § 707(b).

In the case of In re Krohn, 87 B.R. 926 (N.D.Oh. 1988), the
district court affirmed the bankruptcy court's dismissal of the
case under § 707(b). The court stated the bankruptcy court had
properly based its decision to dismiss on the evaluation of the
debtor's ability to pay, the debtor's bad faith in filing his
petition as exhibited by "eve of bankruptcy purchases", and that
the debtor had suffered no unforeseen calamity and was merely
using Chapter 7 provisions to gain relief from past excesses.

In the case of In re Strong, 84 B.R. 541 (Bankr.N.D.Ind. 1988),
the court found the presumption contained in § 707(b) in favor
of granting relief to the debtor can be overcome by the
debtor's substantial disposable income. In the Strong case, the
debtor had surplus monthly income of over $1,000 and unsecured
debt of approximately $11,000. The court noted it was
appropriate to consider the factors set forth in Kress, and its
progeny (discussed supra).

In a recent case, In re Wegner, 91 B.R. 854 (Bankr.D.Minn.
1988), the court concluded that "the fact that the debtors have
substantial net disposable income is, in and of itself,
insufficient to establish substantial abuse." The court in
Wegner also refrained from adopting a list of factors to
consider in determining substantial abuse. The court held a
finding of substantial abuse must be supported by some evidence
of the debtor's "misconduct, impropriety, or lack of good
faith." An ability to pay the debt from net disposable income is
merely evidence of such misconduct, impropriety or lack of good
faith.

In Wegner, the debtors had amassed over $100,000 in credit card
debt. The debtors had a net monthly disposable income of over
$1,500. Debtors were ineligible for relief under Chapter 13 or
Chapter 11. The court found that, until the stock market crash
in October, 1987, the debtors had an honest belief, however
naive and unreasonable it may have been, that they would be able
to pay their credit card debt. The court also noted little
evidence that the debtors used the cash advances from the credit
cards to purchase luxury items and that more than one family
crisis had contributed to the debtors' financial burden while
diverting their attention from their financial affairs.
Additionally, the court analyzed the allegations concerning
debtors' ability to pay their debts. Because the debtors were
ineligible for relief under Chapter 13 or Chapter 11, interest
would continue to accrue on their debts. The monthly interest
alone on their credit card debt constituted more than their net
monthly disposable income. The court concluded that financial
irresponsibility alone is insufficient cause to deny relief
under Chapter 7.

In the instant case, Debtor is attempting to use the provisions
of Chapter 7 of the Bankruptcy Code to obtain a discharge of a
single debt of $1,450, of which the creditor has received
through garnishment $896.46. Debtor shows an excess monthly
income of $130. Debtor's schedules also show an anticipated
income tax refund of $500. While it does not appear Debtor's
statement of his monthly expenses is excessive, it likewise does
not appear to be understated. Debtor has offered no evidence of
any recent calamity which would affect his ability to pay.
Although Debtor has stated the deficiency judgment was taken by
default and that he has a good defense to the judgment, e.g.,
that the sale was not conducted in a manner reasonably
calculated to obtain the highest value for the car, Debtor has
offered no facts in support of this contention. Thus, it does
not appear that Debtor is inflicted with "crushing debt burdens
and severe financial problems" or even with debts he cannot pay.
It is apparent Debtor filed his Chapter 7 petition for the sole
purpose of discharging a single debt which he does not wish to
pay. Accordingly, it is hereby

ORDERED that, pursuant to 11 U.S.C. § 707(b), the above-styled
case is DISMISSED.

IT IS SO ORDERED.

[fn1] In that letter brief, Bank South alleged it did not receive
notice of the hearing and, thus, was not present at the
hearing.

[fn2] Debtor's schedules indicate his intention to file a
complaint to recover the amounts Bank South collected pursuant
to that garnishment. On February 19, 1988, Debtor filed a motion
to avoid judicial lien pursuant to 11 U.S.C. § 522(f). That
motion was denied without prejudice by this court on October 10,
1988, pending disposition of the instant motion to dismiss.

[fn3] The provision in § 707(b) allowing a motion pursuant to
that section to be filed by the United States Trustee was added
with the amendments to the Bankruptcy Code in 1986 which
instituted the United States Trustee program nationwide.

[fn4] See, 130 Cong.Rec.H. 1808 et seq. (daily ed. March 21,
1984). See also the discussion of the legislative history of
§ 707(b) in the case of In re Grant, 51 B.R. 385 (Bankr.N.D.Ohio
1985).

[fn5] The 1984 Amendments also added § 1325(b) which mandates
that the debtor utilize all his disposable income to make
payments under the plan unless unsecured creditors can be paid
in full through a smaller distribution. In addition, the 1984
amendments provided through § 1329(a) that the plan may be
modified at the request of an unsecured creditor, presumably
modified upward if debtor's economic situation improves.

[fn6] See also, Andrea M. Proia, The Interpretation and
Application of Section 707(b) of the Bankruptcy Code, 93
Comm.L.J. 367 (1988).

[fn7] Even in the Kelly case, although the court concluded
ability to pay could be the sole factor for determining
substantial abuse, the facts of the Kelly case show that the
debtors, in addition to having the ability to pay, were also
abusing the provisions of Chapter 7 by attempting to manipulate
the chapter's provisions to discharge a single, unsecured
judgment debt. The judgment debt which the Kelly debtors sought
to discharge consisted primarily of attorney fees which had been
awarded against them for abusive litigation.

[fn8] Of interest is an example given by the Edwards court of
circumstances, similar to those in the instant case, which that
court found would constitute substantial abuse. The example was
a Chapter 7 debtor with a single debt of several thousand
dollars for a student loan. The debtor's stated income and
expenses revealed no reason why the debt could not be paid in
full in less than a year. That case was dismissed pursuant to
§ 707(b). Edwards, 50 B.R. at 941.