Lamanna v. First

Opinion

USCA1 Opinion

                  United States Court of Appeals

                      For the First Circuit

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No. 98-9003



                     IN RE: RICHARD LAMANNA,



                             Debtor.



                       ____________________


FIRST USA, ET AL.,



                            Appellees,



                                v.



                         RICHARD LAMANNA,



                            Appellant.

                                 

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           APPEAL FROM A JUDGMENT OF THE UNITED STATES



         BANKRUPTCY APPELLATE PANEL OF THE FIRST CIRCUIT



                       ____________________



                              Before



                     Boudin, Circuit Judge,

                                

Wellford, Senior Circuit Judge,



and Lynch, Circuit Judge.

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    Peter G. Berman, with whom Raskin & Berman was on brief,

for appellant.

    Eric Kempton Bradford, Office of the United States

Trustee, with whom Paul W. Bridenhagen, Executive Office for United

States Trustees, was on brief, for amicus curiae J. Christopher

Marshall, United States Trustee.


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                        August 25, 1998

                      ____________________

                                

    LYNCH, Circuit Judge.  The question presented is the

meaning of "substantial abuse" under  707(b) of the Bankruptcy

Code and the criteria by which it is measured.  This is a question

of first instance in this circuit.  A Chapter 7 bankruptcy petition

of an individual debtor whose debts are primarily consumer debts

may be dismissed if the court finds that granting relief would be

a "substantial abuse" of the Chapter.  See 11 U.S.C.  707(b). 

    Richard Lamanna sought relief from approximately $15,000

of primarily consumer debt by filing for bankruptcy under Chapter

7.  The bankruptcy court sua sponte dismissed Lamanna's petition as

a "substantial abuse" of Chapter 7 based on the finding that

Lamanna had sufficient disposable income to pay off his debts under

a Chapter 13 payment schedule.  The Bankruptcy Appellate Panel

(BAP) affirmed for the same reason.

    On appeal, Lamanna argues that the BAP misconstrued 

707(b) as meaning that "substantial abuse" automatically exists

where a debtor's income exceeds his expenses even minimally. 

Lamanna says that his expenses are artificially low because he has

avoided normal expenses by living with his parents, and that it

cannot constitute "substantial abuse" of the bankruptcy system for

a debtor to live with parents who subsidize his needs.  Lamanna

also says that "substantial abuse" under  707(b) refers only to

acts of bad faith, and that there is no evidence of bad faith.

    As amicus curiae, the United States Trustee argues that

the court did not apply a per se future income test.  He emphasizes

that Lamanna's schedules show that he can repay 100% of his debts

out of future disposable income and that, despite ample

opportunity, Lamanna presented no evidence of countervailing

factors which militated against dismissal.  The Trustee invites

this court to adopt the "totality of circumstances" test, employed

by both the bankruptcy court and BAP, as the law of this circuit.

    We adopt the "totality of the circumstances" test as the

measure of "substantial abuse" under  707(b) of the Bankruptcy

Code.  In doing so, we join the Fourth, Sixth, Eighth and Ninth

Circuits in holding that a consumer debtor's ability to repay his

debts out of future disposable is not per se "substantial abuse"

mandating dismissal.  At the same time, we do not require a court

to look beyond the debtor's ability to repay if that factor

warrants the result.  We explicitly reject the notion that

"substantial abuse" refers only to bad faith acts, although a court

may consider a debtor's bad faith acts in making its decision. 

Applying this test, we find that the BAP correctly decided that

allowing Lamanna's petition would constitute a "substantial abuse"

of Chapter 7, and affirm.

                               I.

    Richard Lamanna, a Rhode Island resident, filed for

bankruptcy under Chapter 7 on February 18, 1997.  Lamanna's

schedules (Schedules F, I & J), filed with his voluntary petition,

show that he has total unsecured debt of $15,911.96 which is

primarily consumer debt, his monthly income is $1,350.96, and his

monthly expenses are $580.  Lamanna's income therefore exceeds his

expenses by $770.96 per month, the amount of his disposable

income.  

     On February 24, 1997, the bankruptcy court sua sponte

ordered Lamanna to show cause why his petition should not be

dismissed as a "substantial abuse" of Chapter 7 under 11 U.S.C. 

707(b).  In the show cause order, the court noted that Lamanna's

schedules showed that he was capable of paying 100% of his debts

over three years under a Chapter 13 payment plan.  

     At the show-cause hearing, Lamanna argued that his

expenses were artificially low because he was living with his

parents.  Without that subsidy, he said, he could not limit his

expenses to $580 per month and would thus have no disposable income

with which to pay his debts.  Yet Lamanna acknowledged that his

scheduled expenses and income were accurate and that he did not

anticipate a change in living circumstances, i.e., moving out of

his parents' house, that would precipitate a rise in living

expenses.

     The bankruptcy court, applying the "totality of the

circumstances" test, found "substantial abuse" and dismissed the

case.  The BAP affirmed on the same grounds.  Lamanna appeals.

                              II.

     The question of whether allowing Lamanna's bankruptcy

petition would constitute "substantial abuse" of Chapter 7 under 

707(b) contains two components: first, the proper test by which

"substantial abuse" is measured; second, whether, applying that

test, the BAP correctly decided the issue.  The facts are

undisputed, and we review de novo the B.A.P.'s conclusions of law. 

See In re Healthco Int'l, Inc., 132 F.3d 104, 107 (1st Cir. 1997).

A.  The "totality of the circumstances" test

     Although "substantial abuse" is not self-defining, the

history and policies underlying  707(b) give content to its

meaning and purpose.  That history is well set out in previous

opinions.  See In re Green, 934 F.2d 568, 570 (4th Cir. 1991); In

re Krohn, 886 F.2d 123, 125-26 (6th Cir. 1989); In re Walton, 866

F.2d 981, 983 (8th Cir. 1989); In re Kelly, 841 F.2d  908, 914 (9th

Cir. 1988).  We summarize the pertinent points.

     Section 707(b) was added to the Bankruptcy Code as part

of the Bankruptcy Amendments and Federal Judgeship Act of 1984. 

See Pub. L. 98-353, 98 Stat. 333, 355 (1984) (codified in various

sections of 11 U.S.C. and 28 U.S.C.) (the "1984 Act").  It

authorizes a bankruptcy court, either sua sponte or on the motion

of the United States Trustee, to dismiss the Chapter 7 petition of

an individual debtor who owes primarily consumer debts where

allowing the petition would be a "substantial abuse" of Chapter 7. 

Congress chose neither to define "substantial abuse" in the 1984

Act nor to leave specific guidance in legislative history. 

Congress thus left a flexible standard enabling courts to address

each petition on its own merit.  

     The primary impetus for the enactment of  707(b) was the

credit industry's unhappiness with the fact that consumer debtors

who were able to repay their debts had increasingly been filing for

bankruptcy relief since the enactment of the 1978 Bankruptcy Act. 

"Prior to 1984, debtors enjoyed a virtually unfettered right to a

'fresh start' under Chapter 7, in exchange for liquidating their

nonexempt assets for the benefit of their creditors." Green, 934

F.2d at 570.  Section 707(b) was enacted to impose a restraint on

consumer debtors' access to Chapter 7 discharge by interposing

bankruptcy courts as gatekeepers who could examine the worthiness

of debtor petitions and dismiss those petitions deemed abusive. 

See id.  As the Walton court summarized,  707(b) was "aimed

primarily at stemming the use of Chapter 7 by unneedy debtors." 

Walton, 866 F.2d at 983.  See also Wayne R. Wells, Janell M. Kurtz

& Robert J. Calhoun, The Implementation of Bankruptcy Code Section

707(b): The Law and the Reality, 39 Clev. St. L. Rev. 15, 28 (1991)

("In enacting section 707(b), one concern was consumer debtors with

the ability to repay their debts were unfairly taking advantage of

bankruptcy to obtain a discharge of indebtedness.").  "Substantial

abuse" thus attempts to moderate the tension between "uphold[ing]

creditors' interests in obtaining repayment where such repayment

would not be a burden," Kelly, 841 F.2d at 914, and maintaining the

ability of worthy debtors to gain access to Chapter 7's substantial

protections.  Section 707(b)'s ambiguity is inherent in its

function as a guide to equitable discretion.  

     With "substantial abuse" lacking specific meaning, it has

fallen to the courts to determine how "substantial abuse" ought to

be measured.  Although tests employed by various courts of appeals

do not employ precisely the same language, they share common

elements.  First and foremost, it is agreed that a consumer

debtor's ability to repay his debts out of future disposable income

is strong evidence of "substantial abuse".  See Green, 934 F.2d at

572; Krohn, 886 F.2d at 126; Walton, 866 F.2d at 985; Kelly, 841

F.2d at 914-15; see also 6 Lawrence P. King, Collier on Bankruptcy 707.04[4], at 720 (15th ed. rev. 1998) ("The primary factor that

may indicate a substantial abuse is the ability of the debtor to

repay the debts out of future disposable income."). Kelly and

Walton focus primarily upon ability to repay, while Green and Krohnemphasize the need to consider the "totality of the circumstances." 

Krohn offers this test:

     In determining whether to apply  707(b) to an

     individual debtor, . . . a court should

     ascertain from the totality of the

     circumstances whether he is merely seeking an

     advantage over his creditors, or is "honest,"

     in the sense that his relationship with his

     creditors has been marked by essentially

     honorable and undeceptive dealings, and

     whether he is "needy" in the sense that his

     financial predicament warrants the discharge of

     his debts in exchange for liquidation of his

     assets.  Substantial abuse can be predicated

     upon either lack of honesty or want of need.

     . . .

          Among the factors to be considered in

     deciding whether a debtor is needy is his

     ability to repay his debts out of future

     earnings.  That factor alone may be sufficient

     to warrant dismissal.  For example, a court

     would not be justified in concluding that a

     debtor is needy and worthy of discharge, where

     his disposable income permits liquidation of

     his consumer debts with relative ease.  Other

     factors relevant to need include whether the

     debtor enjoys a stable source of future

     income, whether he is eligible for adjustments

     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.



Krohn, 886 F.2d at 126-27 (citations omitted).  As described by

Krohn, the "totality of the circumstances" test demands a

comprehensive review of the debtor's current and potential

financial situation.

     We adopt the "totality of the circumstances" test largely

as it is described in Krohn.  In so doing, we reject any per se

rules mandating dismissal for "substantial abuse" whenever the

debtor is able to repay his debt out of future disposable income,

or forbidding dismissal on that basis alone.  Such strict

interpretations cannot be squared with the open-textured nature of

 707(b) and are inconsistent with  707(b)'s purpose of guiding,

not constraining, bankruptcy courts in the exercise of their

equitable discretion.  We hold that a bankruptcy court may, but is

not required to, find "substantial abuse" if the debtor has an

ability to repay, in light of all of the circumstances.

     In sum, in assessing the totality of a debtor's

circumstances, courts should regard the debtor's ability to repay

out of future disposable income as the primary, but not necessarily

conclusive, factor of "substantial abuse."  The factors recited in

Krohn should be regarded as a nonexclusive list of relevant

considerations.

B.  Application of the Standard

     Applying the "totality of the circumstances" test to

Lamanna's case results in affirmance of the dismissal of his

Chapter 7 petition for "substantial abuse."  Lamanna's schedules

showed that he has sufficient disposable income to repay his debts

under a Chapter 13 repayment plan in three to five years.  There is

no evidence that Lamanna's living situation was unstable or likely

to change in the near future.  There is no evidence of other

factors that cast doubt on the stability of Lamanna's future income

and expenses.  Although Lamanna's expenses are particularly low

because he lives with his parents, this state of affairs, as the

BAP noted, "is not artificial; it is actual."  The court properly

based its decision on the current and foreseeable facts.  If

Lamanna's circumstances dramatically change, he is free to seek

relief anew.

     Lamanna's argument that the court penalized him for

living with his parents (and thus having exceptionally low monthly

expenses) boils down to the notion that  707 requires the

bankruptcy court to impute a minimum cost of living to a debtor and 

then measure the debtor's actual income against the higher of the

imputed minimum and the debtor's actual expenses.  Section 707 does

not contain such an implicit requirement, and this court will not

write such a requirement into the statute.

     Finally, we reject Lamanna's argument that the court

imposed a "mechanically applied future income test" in determining

that allowing Lamanna's petition would constitute "substantial

abuse" of Chapter 7.  The BAP's decision was not mechanical; it was

simply uncomplicated.

                              III.

     We adopt the "totality of the circumstances" test as the

measure of "substantial abuse" under  707(b) in this circuit. 

Applying this test, we hold that the court correctly decided to

dismiss Lamanna's Chapter 7 petition.  The decision is affirmed. 

Costs are awarded to the United States Trustee.