Central District Consumer Bankruptcy Attorney's Association

In re Johnson, ---- B.R. ---, 2008 WL 5265740 (Bkrcy, S.D. Cal. Dec.
2008, Bowie. J.)
Issue: Can the debtor's large mortgage payment be the basis for a
finding of abuse even though the debtor has passed the means
test?
Holding: Usually not and not here on these facts.
The debtors own an "approximately 4,000 square foot Residence [they
built] in May of 2003. Unfortunately for Debtors, shortly after the
Residence was completed, Mr. Johnson, an airline pilot, had to accept
a $60,000 cut in pay. The Debtors list the value of the Residence at
$900,000, and the debt secured by it at nearly $1,100,000. The
monthly mortgage expense for the Residence is $6,060, and total
expenses associated with the property are scheduled at $8,286." The
debtors passed the means test. The UST moved to dismiss under 707(b)
(3) arguing that "Debtors' expenses to pay their mortgage and to
maintain their Residence are unreasonably high. If they would give
up the property they could purchase or rent at substantially lower
expense, and in so doing they would free up income for the benefit of
unsecured creditors." Judge Bowie ruled in favor of the debtors.
"[T]he presumption of 707(b)(2) does not arise in this case. When
the presumption does not arise (or is rebutted), 707(b)(3) sets
forth two alternate considerations for assessing abuse. Under 707
(b)(3) the Court is to consider whether the petition was filed in bad
faith ( 707(b)(3)(A)), or whether an abuse exists based on
the `totality of the circumstances ... of the debtor's financial
situation.' No allegations of bad faith have been presented.
Accordingly, the Court must evaluate the Trustee's motion to dismiss
based solely on the `totality of the circumstances ... of the
debtor's financial situation.' This brings us to the issue at
hand."
"In a nutshell, the issue is whether Congress, by allowing secured
claims to be included without limitation in the Means Test of (b)(2),
has limited the courts' discretion to consider them under the
totality of circumstances test of (b)(3)." "[T]his Court is
persuaded there are circumstances that warrant dismissal under 707
(b)(3) although a debtor may have `passed' the Means Test." "In the
minds of many, including this Court, there is a point at which
allowing an individual debtor relief from unsecured debt while
sinking most income into maintaining the debt service on such a
property seems egregious."
[But] "If Congress determines that there should be no cap on secured
debt obligations on a debtor's primary residence for purposes of the
Means Test, and therefore no presumption of abuse arises under 707
(b)(2), can Congress properly be understood to intend that that same
primary residence secured obligation can, by itself, be the basis for
a finding of abuse under 707(b)(3)?" "t would seem quite ironic
if Congress went through all it did to establish the assertedly more
objective Means Test in place of individual discretion, only to turn
around in 707(b)(3) and hand the same discretion right back."
Judge Bowie looked at the Price factors. Two Price factors appear to
be relevant; "whether the debtor has a likelihood of sufficient
future income to fund a Chapter 11, 12, or 13 plan which would pay a
substantial portion of the unsecured claims...." and "whether
the "proposed family budget is excessive or extravagant." But the
determination of future income in chapter 13 and 11 for an individual
comes from 707(b)(2) which permits unlimited mortgages to be
deducted. As to the extravagance, "we are back to the core issue of
whether that can be considered under the new 707(b)(3) given the
policy decisions Congress made in 707(b)(2)."
Bowie concluded, "Assuming that the size of the mortgage payment can
be considered notwithstanding 707(b)(2), the Court is comfortable
in concluding that the mortgage payment in this case is neither
sufficiently excessive nor extravagant as to warrant dismissal on a
totality of the circumstances basis under 707(b)(3)."

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