Michael A. Katz

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Case 2:10-bk-50721-TD Doc 30 Filed 05/20/11 Entered 05/20/11 17:18:11 Desc

In re:

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FILED & ENTERED

MAY 20 2011

CLERK U.S. BANKRUPTCY COURT
Central District of Caltfornia
BY penning DEPUTY CLERK

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

Case No: 2:10-bk-50721-TD

Michael A. Katz, Chapter: 7

MEMORANDUM DECISION GRANTING UNITED
STATES TRUSTEE’S MOTION TO DISMISS
CHAPTER 7 CASE.

Debtor.

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AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

This memorandum is issued in response to the United States Trustee's (U.S. Trustee) motion to

dismiss this chapter 7 bankruptcy case on the basis that granting relief would be an abuse of the
provisions of chapter 7 of the Bankruptcy Code, §§707(b)(1), (b)(2), (b)(3)(B), and (b)(3)(A)." Michael
A. Katz, the debtor (Katz), filed a response to the U.S. Trustee’s motion, along with an amended means
test Form 22A.? The following are my findings of fact, conclusions of law and my final decision based

on the pleadings and the evidence.

?

’ All section references herein are to the Bankruptcy Code, 11 U.S.C. §§101—-1532.

? A chapter 7 debtor is required to complete and file Official Form 22A (sometimes referred to herein as the “means test”
form). This form employs a formula designed to generate a snapshot of a debtor’s income and reasonably necessary living
expenses based on the Internal Revenue Service (IRS) National and Local Standards as in effect for a debtor and his or her
dependents for the area in which the debtor resides. See §707(b){2)(A)(i).

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Case 2:10-bk-50721-TD Doc 30 Filed 05/20/11 Entered 05/20/11 17:18:11 Desc
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Background. Katz filed a voluntary chapter 7 petition on September 23, 2010. Katz reports
primarily consumer debts, including nonpriority unsecured debt totaling $1,420,378.80.

Katz is a physician employed by a hospital. He receives a salary of about $27,638 per month.®
Additionally, Katz receives a substantial bonus, paid quarterly, two quarters in arrears. Although the
quarterly bonus is based on Katz’ performance and the hospital's productivity, he has received a
quarterly bonus regularly in the past, and there is no evidence to suggest the bonus will not continue in
the future. Katz offers no evidence of declining hospital profitability or any indication of declining
performance on his part. According to Katz’ Statement of Financial Affairs, his monthly income
averaged $38,165 in 2008, $36,823 in 2009, and $32,982 in 2010.* Thus, it appears Katz has been
regularly receiving a quarterly bonus of approximately $24,000 in addition to his salary over the past
three years. During the statutory so-called “means test” period applicable here, March 1 through
August 31, 2010, Katz received bonuses of about $24,171 each on March 1 and May 28, 2010. He
also received a similar bonus on September 2, 2010, two days after his means test period.

Katz and his wife are separated and parties to a pending marital dissolution proceeding. Katz’
wife is currently employed part-time at Kaiser Hospital, earning $125 per hour, a total of $13,500 per
month.’ Under a family court order, Katz pays substantial child and spousal support and enjoys limited
visitation with his three minor children, 6-year old twins and a 4-year old. Some spousal support
payments apparently may decrease shortly when Katz’ wife resumes working full time later this year,
according to the February 23, 2011 family court order.®

Katz lives in a 2-bedroom apartment and pays monthly rent of $2,985. The applicable IRS
standard for the rental expense deduction for a household of four is $1,807, as acknowledged by Katz

on his amended Form 22A. Katz claims an additional apartment rental expense adjustment of $1,178.

3 Katz receives approximately $13,818 in salary every two weeks, See Exhibit 7 to the U.S. Trustee Motion to Dismiss.

‘ Katz received income of $457,979 in 2008, $441,877 in 2009, and $296,835 for 9 months of 2010. See Statement of
Financial Affairs.

5 See Exhibit A to Levin Declaration, Judgment on Bifurcated Issues, entered in the Los Angeles Superior Court in Katz’
marital dissolution case on February 23, 2011, 14:21.

* See id. at 14:24-26.

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Katz operates two vehicles and claims expense deductions on his amended Form 22A for both.
In this regard, Katz leases a Honda Pilot SUV in order to transport his three young children who all
require car seats. Because the Honda lease restricts the mileage that the car may be driven and
imposes a penalty for miles driven beyond the lease’s allowance, Katz asserts he needs his second
car, a 2001 Volkswagen Jetta that requires significant maintenance expenditures. Katz uses the Jetta
to make his lengthy commute to work and uses the newer, larger Honda SUV to accommodate his
children and their car seats.

Dismissal under §707(b). Pursuant to §707(b)(1), “... the court. .. may dismiss a case... if
it finds that the granting of relief would be an abuse of the provisions of [chapter 7]." The court may find
abuse in two ways: either because (1) the presumption of abuse arises pursuant to §707(b)(2), or (2) if
the presumption does not arise or is rebutted, (a) the debtor filed the petition in bad faith or (b) the
totality of the circumstances of the debtor's financial situation demonstrates abuse, as set forth in
§707(b}(3)(A) and (B).

Section 707(b)(2) provides that“... the court shall presume abuse exists if the debtor's current
monthly income [CMI] reduced by the amounts determined under clauses (ii), (iii), and (iv), and
multiplied by 60 is not less than the lesser of—

(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $7,025, whichever is
greater; or
(I) $11,725."7

Pursuant to §101(10A){A), the term “current monthly income” is defined, in part, for purposes of
this case, as “the average monthly income from all sources that the debtor receives .. . without regard
to whether such income is taxable income, derived during the 6-month period ending on (i) the last day
of the calendar month immediately preceding the date of the commencement of the case if the debtor

files the schedule of current income required by section 521(a)(1)(B)(ii); . . . .”

7 A further elaboration of this formula, as prepared by the court, is attached as Appendix A to this memorandum.

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A debtor may rebut the presumption of abuse under §707(b)(2}(B){i) “only . . . by demonstrating
special circumstances . . . to the extent such special circumstances that [sic] justify additional expenses
or adjustments of current monthly income for which there is no reasonable alternative.” To
demonstrate such special circumstances, the debtor must itemize each additional expense or
adjustment of income and provide “(I) documentation for such an expense or adjustment to income;
and (Il) a detailed explanation of the special circumstances that make such extra expenses or
adjustment to income necessary and reasonable.” §707(b)(2)(B)(ii), and see §707(b)(2)(B)(iii) and (iv).

lf the presumption of abuse does not arise or is rebutted, the court, under §707(b)({3), is directed
to consider “{A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances .
.. of the debtor's financial situation demonstrates abuse.” See §707(b)(3)(A) and (B).

Discussion. Based on the foregoing, Katz received three bonuses that might be relevant here,
on March 1, May 28, and September 2, 2010. Katz seeks to exclude each of them. Specifically, the
question before the court is (1) whether the definition of CMI contained in §101(10A)(A) encompasses
all income that Katz received during the applicable 6-month CMI period ending on the iast day of the
calendar month immediately preceding September 23, 2010, the date of Katz’ commencement of this
case, that is, March 1 through August 31, 2010, or (2) whether Katz’ income must have been both
received as well as earned during the applicable period, as Katz contends, to qualify as Katz’ CMI in
this case. The U.S. Trustee has urged that the bonuses that Katz received in March and May 2010
should be included in calculating CMI because he received them during Katz’ 6-month CM! period. In
response, Katz urges that the plain words of §101(10A)(A) allow him to exclude his bonus
compensation from his CMI calculation on the basis that CMI includes income from all sources that was
received and derived during the applicable period. Katz argues that the first two bonuses, although

received during the applicable period, were “derived” from his services performed prior to Katz’ 6-month

CMI period. Because Katz’ quarterly bonuses were “derived” from his services rendered two quarters

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before they were paid, Katz argues that neither the March 2010 nor the May 2010 bonus was
“received” and “derived” during the applicable CMI period.®

For the reasons set forth below, however, | conclude that CMI is the monthly average of the 6
months income that Katz received from all sources. | disagree with Katz’ contention that the March and
May 2010 bonuses should be excluded from his CMI calculation. | agree that the plain meaning of
§101(10A){A} controls, but | differ from Katz in what the plain meaning is. Reduced here to its
essentials, §101(10A)(A) states unequivocally and unambiguously that “current monthly income” means
the “average monthly income from all sources that the debtor receives ... , derived during the 6-month
period ending on (i) the last day of the calendar month immediately preceding the date of the
commencement of the case ....” As such, | conclude from the statute that CMI consists of income
received during the applicable CMI period, regardless of when it was earned or when Katz’ services
that led to the income were performed.

The statute does not address or limit the CMI calculation in Katz’ case to the time period in
which Katz’ services that led to the income may have been performed. Instead, the statute requires the
court to include all of Katz’ income from any “source” that he “received” in the applicable 6-month CMI
period. There is nothing in the statute that limits the calculation to income received that resulted from
services performed during the applicable CMI period.

In the court's view, the statute also includes income “derived” during the applicable CMI period
even if “earned” by debtor's services performed two quarters earlier. According to the Merriam-
Webster online dictionary, “derive” is defined as “to take, receive, or obtain especially from a specified
source.” Whether income is included in CM1 should be determined by when Katz received funds, not

when the funds were earned. In light of the absence of controlling authority’ on this issue, it is the

® Katz’ argument is the same with respect to his third 2010 bonus received on September 2, 2010—that the bonus was not
both received and derived during Katz’ applicable CMI period. I agree that the third 2010 bonus Katz received on September
2, 2010, should not be included in calculating Katz’ CMI because it was received outside Katz’ applicable CMI period

® See In re Burrell, 399 B.R. 620 (C.D. Ill. 2008), (holding that ‘derived during’ appears to be surplus adding nothing
substantive to the definition of CMI); In re Robrock, 430 B.R. 197 (D. Minn. 2010), (noting that ‘derived during’ is logically
understood as ‘income that resulted from employment during the relevant six month period’); In re Bernard, 397 B.R. 605
(D. Mass. 2008), (stating that the income has to have been ‘derived’ during the six month period but the time of its actual

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court's interpretation that the term “derived” in §101(10A) provides no additional limiting criterion in
order for “income received” during the prescribed 6-month period to be included in the calculation of
CMI. The court concludes that in this case, the two quarterly bonus payments that were received by
Katz in the applicable 6-month period must be included in calculating Katz’ CMI. Including the first two
quarterly bonuses received during the applicable CMI period increases Katz’ CMI from $28,175, as
reported by Katz, to $35,694.86, thereby raising a presumption of abuse.”

Further, the U.S. Trustee urges that Katz has proven his court-ordered support payment
expenses only in the amount of $10,042.46 per month. Katz asserts in his amended Form 22A that he
must make court-ordered payments of $14,606.51 and argues in his opposition that between March
2010 and August 2010, he accrued $87,639.04 in domestic support obligation arrearages.” Despite
this, Katz has yet to provide the U.S. Trustee with any evidence documenting this figure. The only
evidence provided to the U.S. Trustee were Katz’ pay advices which showed domestic support
obligation payments of $10,042.46 per month. This is consistent with (1) the February 23, 2011 family
court order®® and (2) the amount that Katz claims he actually paid in support obligations during the
applicable 6-month CMI period. Katz urges that because he was ordered by the family court to pay a
total of $87,639.04, his expense deduction for court-ordered support obligations should be $14,606.51

per month. However, under §707(b)(2)(A)(ii), “. . . the monthly expenses of the debtor shall not include

receipt is irrelevant); In re Meade, 420 B.R. 291 (W.D. Va. 2009); In re Foster, 2006 Bankr. LEXIS 2259 (N.D. Ind.); Inre
Arnoux, 2010 Bankr. LEXIS 2735 (E.D. Wash.). See also Collier Bankruptcy Manual (defining CMI as “the average of the
last six months income received from all sources by debtor . . . with certain adjustments.”)

‘© The U.S. Trustee compiled a chart of Katz’ payroll statements by “Pay Date” in order to calculate Katz’ monthly income,
attached as Exhibit 7 to the U.S. Trustee Motion to Dismiss and Exhibit 2 to the U.S. Trustee Reply. The court concludes
that Katz’ monthly income is $35,694.86, and not the higher amount reported by the U.S. Trustee. Like the third quarterly
bonus, the $17,041.65 August 31, 2010 salary should not be included in calculating Katz’ monthly income because the sum
was actually received in early September, after the end of the applicable means test period. As such, Katz’ total gross income
received between March 1, 2010, and August 31, 2010, is $214,169.20, which divided by 6 months equais $35,694.86 per
month. See Exhibit 7 to the U.S. Trustee Motion to Dismiss and Exhibit 2 to the U.S. Trustee Reply.

" Attached as Appendix B is a demonstration of how this court concludes that the presumption of abuse arises pursuant to
§707(b), as it pertains to Katz’ case.

” Levin Declaration, 1:27-2:9. Compare Judgment on Bifurcated Issues, infra, 15:1-18:18, especially 16:7-9.

% By family court order, Katz is required to pay $10,230 per month in support payments for the period of January 1, 2010,
through May 31, 2010. Katz is required to pay $6,418 per month in support payments for the period of June 1, 2010 to the
present. See Exhibit A to Levin Declaration, Judgment on Bifurcated Issues, entered in the Los Angeles Superior Court in
Katz’ marital dissolution case on February 23, 2011, 16:25-17:10.

4 Katz asserts he paid $60,703.32 during the 6-month CMI period, equaling $10,117.22 per month. See Levin Declaration,
1:27-2:9.

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any payments for debts.” Thus, it would seem, Katz is not entitled to default on his domestic support
obligations to his wife and then increase his monthly expenses by paying off defaults in earlier support
obligations in installments during his applicable CMI means test period. Here, Katz has not actually
paid these past due support obligations during his applicable CMI period. Rather, he simply includes
arrearages in his monthly expense obligation in order to increase his total allowable deductions from
income to squeeze in under the dollar limits of §707(b)(2)(A)(ii). However, as stated above, that
subsection of the statute specifically excludes “payments for debts.” Katz then claims this obligation
again on his amended means test form, as allowed, as a $3,834.71 deduction for debt payment on
prepetition priority claims for the child and spousal support claims for which he was liable at the time of
his bankruptcy filing. !t was improper for Katz to double count this deduction from income: Katz cannot
claim $14,606.51 in his means test calculation because of his domestic support obligations, including
arrearages, and then at the same time claim an additional $3,834.71 as a monthly allowance of these
domestic support obligation arrearages."®

The U.S. Trustee has also urged that the expenses of only one vehicle should be an allowable
deduction on Katz’ Form 22A because Katz is the only driver in his household and Katz can only
operate one vehicle at a time. Katz urges that it is absolutely necessary for him to operate two vehicles
and, thus, he should be allowed to claim expense deductions on both cars. Accordingly, Katz has
claimed a vehicle operation expense of $766 and an average monthly payment deduction of $486.65.
Although Katz notes in his opposition that his high mileage 2001 Jetta requires a $200 monthly vehicle
expense deduction for “ongoing maintenance,” Katz does not provide the court or the U.S. Trustee with
documentary proof of this additional monthly vehicle expense. The U.S. Trustee further contends that
Katz’ deduction of $486.65 on Line 23b and Line 42 of his amended Form 224 is inaccurate. According
to Katz’ Honda vehicle billing statement, Katz’ average monthly payment would seem to be only

$354.98.

1S See Lines 28 and 44 on Katz’ Amended Form 22A.

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Katz also claims an additional apartment rental expense deduction of $1,178 beyond the
$1,807 allowable deduction claimed by Katz under the IRS standard for a household of four people.
Katz argues that he is required to live in a high-rent district and maintain a 2-bedroom apartment
because his daughters stay with him 35-40 percent of the time,"* and his daughters attend schoo!
nearby. There is no dispute about these general statements. Despite Katz’ urging, however, there
would seem to be less expensive rental options available to Katz in the general area of West Los
Angeles that would allow him to live in a 2-bedroom apartment relatively close to where his daughters
attend school for significantly less than $2,985/month, as the IRS local standard recognizes. Further,
the U.S. Trustee has correctly pointed out that Katz has not provided either a lease agreement or any
other documentary evidence to justify his claims that rent of $2,985 per month is “necessary and
reasonable” to provide a suitable residence to accommodate his natural parental desire to provide a
home for his daughters reasonably close to their schools.

Katz also claims $1,800 in childcare expenses, but again without providing the U.S. Trustee or
the court with any evidence to corroborate either the payment or the necessity of these expenses.
Rather, the only evidence provided was Katz’ conclusory statement that childcare costs are borne
equally by both Katz and his separated wife, a general statement based on equally general language
contained in Katz’ marital dissolution agreement.” Katz also claims additional healthcare costs of $410
with neither explanation nor documentation. Katz is required to demonstrate by documentary evidence
that these expenses were not covered or reimbursed by insurance or a health savings account.
Instead, Katz summarily explains, with nothing more, that his children require monthly therapy sessions
amounting to $175-200 per month. Katz also claims $100 in education expenses without providing the

U.S. Trustee with any explanation or documentation of actual expenses incurred and does not explain

'S Katz was awarded a “20% custodial timeshare” by the family court judge. See Exhibit A to Levin Declaration, Judgment
on Bifurcated Issues, entered in the Los Angeles Superior Court In Katz’ marital dissolution case on February 23, 2011,
19:26,

"” See id, at 20:27; See also Katz Opposition, 11:27.

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why the amount claimed is necessary and reasonable and not already accounted for in the IRS
standards.

In concluding that Katz’ CMI includes the March 2010 and May 2010 bonuses received during
the applicable CMI period, the court finds that Katz’ monthly disposable income, after deducting
allowable expenses that are both necessary and reasonable, raises a presumption of abuse.

Conclusion. Katz has not satisfied the procedura! requirements of §707(b)(2)(B)(ii), which
gives a debtor the opportunity to rebut the presumption of abuse. Katz was required to provide (1)
documentation to demonstrate that these additional housing rental, car, education, childcare, and
healthcare expenses he claims were caused by his special circumstances, and (2) a detailed
explanation of the special circumstances that made the expenses necessary and reasonable.”
Although Katz filed an amended Form 22A with his opposition, Katz failed to satisfy the stringent
standard imposed by §707(b)(2)(B)(ii). The court concludes that Katz has not provided adequate
documentary evidence or sufficient detailed explanation to support his claims in response to the
objections of the U.S. Trustee. Katz has not demonstrated by a preponderance of the evidence that the
expenses objected to by the U.S. Trustee are in each instance “necessary and reasonable.” Katz has
not rebutted the presumption of abuse.”

A proper means test calculation in Katz’ case causes the presumption of abuse under
§707(b)(2) to arise. Because Katz has failed to rebut the presumption of abuse by establishing special
circumstances under §707(b)(2)(B), this case must be dismissed.

SO ORDERED.

ahrrren, @ Veer

United States Bankruptcy Judge

DATED: May 20, 2011

'8 See attached Appendix C for a comparison of Form 22A expense deductions as claimed by Katz and as recalculated by the
USS. Trustee. See also U.S. Trustee’s Alternative Form 22A and Katz’ Amended Form 22A attached as Exhibits 1 and 4 to
the U.S. Trustee Reply, respectively.

'? If the presumption of abuse does not arise or is rebutted, a finding of abuse may be predicated on the totality of the
circumstances of the debtor’s financial situation or the debtor’s bad faith pursuant to §707(b)(3). However, if the
presumption of abuse arises and is not rebutted, as is the case here, the court is required to dismiss or convert pursuant to
§707(b}(2). See §707(b)(3).

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Appendix A

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Step 1:
Calculate Current Monthly
Income (CMI), as defined

by §101(10A)(A)

Step 2:
Calculate Tota! Allowable
Deductions from Form
2eA

Step 3:

Subtract Total Deductions
from Tota! CMI to
calculate Monthly

Disposable Income (MDI)

Step 4:
If MDI multiplied by 60 is
greater than $11,725
abuse presumed

if MDI multiplied by 60 is
less than $7,025
abuse not presumed

if MDI multiptied by 60 is
greater than $7,025 but
jess than $11,725, then:

(1) abuse not presumed if
MDI is less than 2596 of
total nonpriority unsecured
debt

(2) abuse is presumed if
MDI is greater than 25%
of total nonpriarity
unsecured debt

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Appendix B

Step 1:
Current Monthly Income
(CMI) = $35,694.86

Step 2:

Total Allowable Necessary
and Reasonable Deductions
from Form 22A =
$35,365.94

Step 3:
CMI [$35,694.86] -
Deductions [$35,365.94] =
MDI [$328.92]

Step 4:
If MDI multiplied by 60 is
greater than $11,725
abuse presumed

MDI [$328.92] x 60 =
$19,735.20

$19,735.20 is greater
than $11,725

Page 11 of 14

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Appendix C

Comparison of
Expense Deductions
from Form 22A
UST Katz
Food, Clothing $1,371 $1,371
Health Care $240 $240
Non-Morigage $647 $647
Rent
Adjustment $0 $1,178
Vehicle
Operation $283 $766
Vehicle
Ownership $141.02 $9.35
Taxes $15,475.08 $11,444.09
Life $0 515
Insurance
Court-Ordered
Payments $10,042.46 $14,606.51
Childcare $0 $1,800
Health Care $290 $410
Disability $5 sa75
Insurance 14.58
Education for
Dependents $0 $100
Charitable
Contribution $10 $10
Secured Debt $354.98 $486.65
Cure Amount $2.98 $0
Prepetition
Priority Claims $3,834.71 $3,834.71
Chapter 13
Administrative $352.13 $0
Total
Deductions $35,365.94 $39,200.31
from CMI

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NOTE TO USERS OF THIS FORM:
1) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3) Category |. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category Il. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity (or attorney)
who filed an opposition to the requested relief. DO NOT list an address if person/entity is listed in category I.

NOTICE OF ENTERED ORDER AND SERVICE LIST

Notice is given by the court that a judgment or order entitled (specify) Fill in Name of Order/Judgment was
entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in the
manner indicated below:

BY TH VIA NOTICE OF TRONIC FILING ("NEF") - Pursuant to controlling General
Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following person(s) by the
court via NEF and hyperlink to the judgment or order. As of 5/20/14, the following person(s) are currently on the
Electronic Mait Notice List for this bankruptcy case or adversary proceeding to receive NEF transmission at the
email address(es) indicated below.

Brad D Krasnoff (TR)
medaniel@lbbslaw.com, bkrasnoff@ecf.epiqsystems.com

Thomas J Polis on behalf of Debtor Michael Katz
tom@polis-law.com

United States Trustee (LA)
ustpregion16.la.ecf@usdoj.gov

Hatty K Yip on behalf of U.S. Trustee United States Trustee (LA)
hatty.yip@usdoj.gov

CL) Service information continued on attached page

ll. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order was
sent by United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:

Debtor

Michael A. Katz

2728 Manning Ave

Los Angeles, CA 90064

Debtor's Attorney
Thomas J Polis

Polis & Associates, APLC
19800 MacArthur Blvd
Ste 1000

Irvine, CA 92612-2433

Trustee

Brad D Krasnoff (TR)

221 N. Figueroa Street, Suite 1200
Los Angeles, CA 90012

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U.S. Trustee

United States Trustee (LA)
725 $ Figueroa St., 26th Floor
Los Angeles, CA 90017

Hatty K Yip
Office of the UST/DOJ
725 § Figueroa St 26th Fl
Los Angeles, CA 90017
[1 Service information continued on attached page

lll. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order
which bears an “Entered” stamp, the party lodging the judgment or order will serve a complete copy bearing an
“Entered” stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of service of the
entered order on the following person(s) and/or entity(ies) at the address(es), facsimile transmission number(s),
and/or email address(es) indicated below:

1 Service information continued on attached page

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