David Ly Chang

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UNITED STATES BANKRUPTCY COURT

Entered on Docket
October 16, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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8 UNITED STATES BANKRUPTCY COURT
9 NORTHERN DISTRICT OF CALIFORNIA
10 || In re ] Case No. 07-50484-ASW
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« 11 |] David Ly Chang ] Chapter 7
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E 12 Debtor. ]
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OC 14 MEMORANDUM DECISION
a DENYING UST’S MOTION TO DISMISS
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E 16 Before the Court is the motion of the United States Trustee
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5 17} (“UST”) to dismiss the bankruptcy case of debtor David Ly Chang
= 18 | (“Debtor”) under 11 U.S.C. § 707(b)(1)1 as an abuse of the
iS 19 | provisions of chapter 7 (the “Motion”). The UST asserts that
20 || Debtor’s monthly disposable income as calculated under § 707(b) (2)
21]/ (the “means test”) is sufficiently high for the presumption of
22] abuse to arise. Debtor contends that the UST’s calculations are
23 |} incorrect, and that his monthly disposable income, calculated
24 || properly, does not give rise to the abuse presumption. The UST has
25 || challenged several of Debtor’s claimed expenses, but the outcome of
26 | the Motion turns solely on whether Debtor is entitled to deduct,
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48 ‘Unless otherwise noted, all statutory references are to Title
11, United States Code (the Bankruptcy Code), as it existed when
Debtor filed his bankruptcy petition on February 20, 2007.

U.S. GOVERN

INFORMATION

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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for purposes of the means test, secured debt payments due on his
residence, notwithstanding the fact that Debtor has surrendered the
property post-petition.* The parties stipulate that the Court’s
decision on this single issue is dispositive for purposes of this
Motion.

Debtor is represented by Cathleen Cooper Moran, Esq. of the
Moran Law Group, Inc. The UST is represented by John S.
Wesolowski, Esq.

This Memorandum Decision constitutes the Court’s findings of
fact and conclusions of law, pursuant to Rule 7052 of the Federal

Rules of Bankruptcy Procedure.

I.

STATEMENT OF FACTS

The relevant facts are undisputed. Debtor filed a chapter 7
bankruptcy petition on February 20, 2007. On Schedule A, Debtor
listed his interest in a single family residence in Milpitas,
California (the “Residence”). On Schedule D, Debtor indicated that
the Residence was encumbered by two notes secured by deeds of trust
with a total balance of approximately $920,000. Debtor filed a
statement of intention indicating his intent to surrender the
Residence.

Debtor filed Form 22A, Chapter 7 Statement of Current Monthly

Income and Means-Test Calculation, with the petition. Debtor’s

* UST also challenges Debtor’s right to claim a vehicle

ownership expense for a car owned free and clear of liens and his
deductions for support payments to his wife and two children, none
of which are court-ordered. Due, however, to the magnitude of the
mortgage expense, resolution of these issues is not necessary at
this juncture.

MEMORAND

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UNITED STATES BANKRUPTCY COURT

For The Northem District Of California

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annualized Current Monthly Income (“CMI”) on Form 22A, line 13, is
$141,290.16. The California median family income for a three
person household is $62,112. Accordingly, Debtor is an above-
median debtor and must complete the expense portion of Form 22A to
determine whether the presumption of abuse arises under

§ 707(b) (2).

In Part V of the means test, Subpart C, entitled “Deductions
for Debt Payment”, at Line 42, Debtor listed deductions for future
payments on secured claims totaling $6,779.36, comprised of (1) a
payment to Downey Savings of $4,210 on account of the first deed of
trust; (2) a payment of $2,100 to Indymac Bank on account of the
second deed of trust; and (3) a payment of $469.36 to the County of
Santa Clara for property taxes.* It is undisputed that the
contracts concerning the debts secured by the Residence were valid
and enforceable on the petition date and that the Residence was not
surrendered pre-petition.

The UST filed the Motion on May 25, 2007, and Debtor opposed.
A hearing was held on the Motion on July 12, 2007. At the hearing,
the parties agreed that if the deduction for the debts secured by
the Residence is proper, the Motion must be denied, and if not, the

Motion must be granted.

Il.
ANALYSIS

Section 707(b) (2) contains the means test, the purpose of which

7At Line 43, in the section for other payments on secured
claims, Debtor listed cure amounts for the secured debts listed in
Line 42 totaling $662.43. The Court need not determine the
propriety of these deductions to resolve the Motion.

MEMORANDUM DECISION

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UNITED STATES BANKRUPTCY COURT

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is to measure the presumed ability of a debtor to repay his debts
in the 60 months following the filing of the petition. Under the
means test, if a debtor’s CMI, after deducting allowable expenses,
would permit him to pay, over a 60-month period, either (1) 25% of
his non-priority unsecured claims or $6,000, whichever is greater;
or (2) $10,000, then abuse of the provisions of chapter 7 is
presumed. 11 U.S.C. § 707(b) (2) (A) (i). If abuse is presumed under
the means test, dismissal is required unless the debtor rebuts the
presumption or agrees to convert the case to one under chapter 13.
See 11 U.S.C. §§ 707(b) (2) (A) & (B); In re Kelvie, 372 B.R. 56, 60
(Bankr. D. Idaho 2007).

Pursuant to § 707(b) (2) (A) (iii), a debtor is permitted to
deduct, for purposes of the means test, monthly payments for
secured debts. The specific language of the statute 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.
11 U.S.C. § 707(b) (2) (A) (iii).
Courts are divided on the question of whether this section
authorizes a debtor to deduct monthly payments on secured debt
where the debtor intends to surrender the property securing such

debt. The majority of decisions hold that it does. Kelvie, 372

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UNITED STATES BANKRUPTCY COURT

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B.R. at 62; In re Hayes, --- B.R. ---, 2007 WL 2815983 (Bankr. D.

Mass. Sept. 26, 2007); In re Wilkins, 370 B.R. 815 (Bankr. C.D.

Cal. 2007); In re Kogler, 368 B.R. 785 (Bankr. W.D. Wis. 2007); in

re Longo, 364 B.R. 161 (Bankr. D. Conn. 2007); In re Mundy, 363
B.R. 407 (Bankr. M.D. Pa. 2007); In re Randle, 358 B.R. 360 (Bankr.
N.D. Ill. 2006), aff'd, 2007 WL 2668727 (N.D. Ill. July 20, 2007);
In re Walker, 2006 WL 1314125 (Bankr. N.D. Ga. May 1, 2006).
Courts in the majority have employed a variety of rationales in
support of this holding. Some courts have concluded that a plain
meaning approach to § 707(b) (2) (A) (iii) (I) supports the conclusion
that secured debts may be included notwithstanding the debtor’s
stated intention to surrender the collateral. Mundy, 363 B.R. at
411-414; In re Hartwick, 359 B.R. 16, 19-20 (Bankr. D.N.H. 2007).
Others in the majority find that the language of

§ 707 (b) (2) (A) (iii) (I) regarding “amounts scheduled as
contractually due” should be interpreted to mean amounts owed
pursuant to an underlying contract, regardless of the debtor’s
Stated intention with regard to surrender. See Longo, 364 B.R. at
165-166; Mundy 363 B.R. 411-413; Randle, 358 B.R. at 364-65; In re
Sorrell, 359 B.R. 167, 184-85 (Bankr. S.D. Ohio 2007). Still
others have found that the means test calculations are intended to
represent a “snapshot” as of the petition date, which furthers the
Congressional intent of prompt screening of chapter 7 cases for
abuse, limits judicial discretion, and “conforms to the general

tenet in bankruptcy that circumstances are to be gauged from the

petition date.” In re Haar, 360 B.R. 759, 766 (Bankr. N.D. Ohio
2007). Permitting the deduction also limits the court’s discretion

by allowing the means test to operate as a “switching device” that

MEMORANDUM DECISION

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steers certain cases into § 707(b)(2)(B) (where debtors bear the
burden of proving “special circumstances” to avoid dismissal) or

§ 707(b) (3) (where the party seeking dismissal bears the burden of
showing “abuse” on the basis of a bad faith filing or under the
totality of the circumstances test). Longo, 364 B.R. at 164.’

A minority of courts hold that if a debtor indicates his
intention to surrender the property, he may not deduct the secured
debt expense from current monthly income. Courts so holding assign
a bankruptcy-specific meaning to the term “scheduled” in
§ 707 (b) (2) (A) (111), and conclude that, where a debtor indicates
in his schedules and statements an intention to surrender the
property, the secured debt payments may not be deducted. In re

Ray, 362 B.R. 680 (Bankr. D.S.C. 2007); In re Harris, 353 B.R. 304

(Bankr. E.D. Okla. 2006); In re Love, 350 B.R. 611 (Bankr. M.D.

Ala. 2006); In re Skaggs, 349 B.R. 594 (Bankr. E.D. Mo. 2006).5

“The Court is cognizant that Debtor’s income is more than the
average chapter 13 debtor and that the payments on the two deeds of
trust securing Debtor’s residence are higher than most chapter 13
debtors have to pay. The Court is aware of the legal adage that
“bad facts make bad law.” However, the particular way the numbers
work out in this unusual situation should not control what the
general rule should be. In this regard, the Court is of the
opinion that the issue addressed by the UST’s Motion must be
resolved as a matter of law.

>In a third approach, one court concluded that a debtor’s
stated intention to surrender does not eliminate the right to
deduct the secured debt payments on the means test, but the actual
surrender of the collateral does. In re Singletary, 354 B.R. 455
(Bankr. S.D. Tex. 2006). The Singletary court was constrained by
precedent holding that, under pre-BAPCPA § 707(b), post-petition
events should be considered in evaluating a dismissal for
substantial abuse. In re Cortez, 457 F.3d 448 (5th Cir. 2006).
This Court is not so constrained, and in any event concludes that
such an approach, taking post-petition events into account,
contravenes the purpose of the means test as an objective analysis,
to be performed at the time the petition is filed.

MEMORANDUM DECISION

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UNITED STATES BANKRUPTCY COURT
For The Northern District Of California

1 This Court is persuaded that the majority view is the better

2 | reasoned approach -- for all of the reasons discussed above, as

3 | articulated by the courts in the majority. Accordingly, the Court
4 || adopts the holding advocated by Debtor, and finds that it is

5 || appropriate for Debtor to deduct payments on debt secured by the

6 || Residence for purposes of the means test, notwithstanding Debtor’s
7 ||) stated intention to surrender the property. Allowing the deduction
8 |} of Debtor’s monthly mortgage payments in this case yields a CMI

9} calculation below the threshold for presumed abuse set forth in

10} § 707(b) (2) (A) (I). The presumption of abuse does not arise in this
ll || case. The UST’s Motion is therefore denied.

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13 IV.

14 CONCLUSION

15 For the reasons set forth in this Memorandum Decision, the

16 ||) UST’s Motion is denied. Counsel for the Debtor is to submit an

17 | order so providing, after review by the UST as to form.

18 Dated: 0 | ne | O74

19 a

7 Cher Jf 1) cerwbud
21 ARTHUR S. WEISSBRODT

39 UNITED STATES BANKRUPTCY JUDGE

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Cas

Court Service List

John S. Weslowski, Esq.
Office of the U.S. Trustee
U.S. Federal Bldg.

280 S ist St. #268

San Jose, CA 95113-3004

Cathleen Cooper Moran, Esq.

Moran Law Group, Inc.

1674 N Shoreline Blvd. #140

Mountain View, CA 94043-1375

Carol Wu
25A Crescent Dr. #413
Pleasant Hill, CA 94523

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