The James vs. West case, part four: Consumer Debt and the Presumption of Abuse

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.


What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.

This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!

Click on the links to read Part One, Two and Three.


The Mixed-Motive Cox Case is Distinguishable

As discussed above, the Cox case held that even when a debtor had a “mixed motive,” a debt incurred to buy a home is still a consumer debt so long as the debtor intends to live in the home. The Court believes Cox is distinguishable from this case, however, since by definition a B&B is a type of lodging business that requires the homeowner to live there. Based on the factual finding that the Debtor had the intent to purchase the Jameses’ Property for the business purpose of running a B&B, the Court concludes that the Jameses’ debt is not a consumer debt.

Second, In the Alternative, the Debt is Not Consumer or Business but is Interstitial

In the alternative, even if the Debtor’s testimony were not credible, the Court finds that the Jameses have not met their burden of proving the debt is a consumer debt based on a plain reading of the phrase “incurred for a personal, family or household purpose.” The Court concludes as a matter of law that the debt was not “incurred” for a personal, family or household purpose, for the following reasons.

Courts that have carefully considered the phrase “incurred for a personal, family or household purpose” note that all the words in the phrase, including the word “incurred,” must be considered. These courts reason that some debts are “interstitial” – they are neither consumer nor business debts. For example, a debt arising from an intentional tort is not a consumer or a business debt; a debtor does not ordinarily commit an intentional tort for either a personal or business purpose. See In re Peterson, 524 B.R. 808 (Bankr. S.D. Ind. 2015). Likewise, tax debts are generally not considered consumer debts because they are not voluntarily “incurred.” In re Westberry, 215 F.3d 589 (6th Cir. 2000); In re Stovall, 209 B.R. 849 (Bankr. E.D. Va. 1997).

The Court finds and concludes that the Jameses’ debt is an interstitial debt. The debt was created when the state court granted the Jameses’ motion for discovery sanctions under Missouri Rule 61.01 and imposed, according to the plain language of the judgment, the severest sanction of striking the Debtor’s pleadings. The plain language definition and common sense understanding of “incurred” pursuant to a Black’s Law Dictionary definition means “to suffer or to bring on oneself,” indicating an element of volition. Incur, BLACK’S LAW DICTIONARY (8th ed. 2004); see also Peterson, 524 B.R. 808; In re White, 49 B.R. 869 (Bankr. W.D.N.C. 1985).

The Debtor in this case did not voluntarily incur a sanctions judgment; the Court believes her credible testimony that she did not know of the Jameses’ lawsuit or the pending discovery.

Her testimony is buttressed by the extraordinary admission against interest of the state court lawyer who credibly testified that he filed an answer on the Debtor’s behalf in the state court action without ever talking to or meeting her.

The only case this Court found that rejected the volition requirement is In re Walton, 69 B.R. 150 (Bankr. E.D. Mo. 1986), aff’d, 866 F.2d 981 (8th Cir. 1989). But in Walton, the Eighth Circuit on appeal did not reach the issue of whether “incurred for a household purpose” means willingly incurred, and this Court finds the underlying facts of that case distinguishable.

The Court had alerted the parties to this issue at an earlier pretrial conference, and invited the parties to provide authority to supplement their trial briefs. The Jameses did not provide any supplemental authority, but argued that the judgment is not a sanctions judgment. The Court rejects that argument based on the plain reading of the state court judgment, which clearly states it came about as a result of the Jameses’ Rule 61.01 sanctions motion.

Conclusion As to § 707(b)(1) and (2) – Presumption of Abuse and Consumer Debt

The Court thus concludes that the Jameses’ debt is not a consumer debt and that the Debtor’s debts are not primarily consumer debts based on a finding of fact that the Debtor had a profit motive when she executed the Contract with the Jameses to purchase their home and turn it into a B&B. In the alternative, the Court concludes that the Jameses’ debt is a sanctions judgment – an interstitial type of debt that is neither consumer debt nor business debt – since the Debtor did not know of and therefore could not have voluntarily incurred the sanctions judgment. Accordingly, the Debtor was not required to complete a means test form, such that the presumption of abuse does not apply.


In the Alternative, the Court Would Not Exercise Discretion to Require Dismissal or Conversion

The Court has already discussed above that even if all the elements of § 707(b)(1) are met, the Court need not exercise its discretion to dismiss or convert the case. Here, even if this Court is incorrect about the weight of the evidence, its legal interpretation of “consumer debt,” or the law as applied to the facts of this case, the Court would not exercise its discretion to dismiss or convert, because the Court cannot conclude that the Debtor’s filing of this case is an abuse of the Bankruptcy Code.

A review of the schedules admitted into evidence reveals that the Debtor has:

  • Only one secured creditor secured by a 2010 Hyundai Elantra with scarcely any equity
  • No owned real estate but a house rented on a month-to-month basis
  • Minimal personal assets, all claimed as exempt, including two small retirement plans insufficient for a woman in her 60s
  • 25 scheduled unsecured creditors holding approximately $18,000 of scheduled debt in addition to the Jameses’ debt, many of the debts being in collection or judgment status (During the hearing, the Debtor testified that some of the debts and some of the creditors may be duplicates or paid off since the filing. However, she also testified that she compiled the debts based on her credit report, a very common and practical way to approach scheduling debts. The Court is not clear that some of the debts were duplicates, since there are different collectors and different account numbers listed, but even if there are somewhat fewer than 25 creditors holding somewhat less than $18,000, it does not change the Court’s analysis about whether the filing is an abuse.)
  • Reasonable and not excessive living expenses given her stable job and relatively high income
  • $592/month of disposable income as of the date of the filing, but only if the Debtor continues to work at her current job with its current medical benefits, continues not to prepare adequately for her retirement, does not need another car, and does not have to move

Also, the statement of financial affairs and credit counseling certificate reveal that the Debtor did not file bankruptcy until she had been garnished for more than a year, and only then paid her bankruptcy lawyer and completed the credit counseling course in February 2016, the month she filed.

Given the Debtor’s age and financial situation, the Court cannot find that the Debtor’s bankruptcy filing is an “abuse.” If the Debtor had not filed bankruptcy, the Jameses would have continued to garnish $1,120 per month from her wages (approximately $13,440/year) while their judgment continued to accrue interest at 9% per annum – more than $90,000 per year on the $1.1 million judgment that was in effect the day she filed. Although the judgment has now been reduced to $145,000, 9% interest on $145,000 equates to approximately $13,050/year. This means that the amount being garnished would just about keep pace with the accruing judgment interest, such that the debt would never significantly decrease in her lifetime. And that is not accounting for what might happen if the Debtor’s other creditors holding debts in collection or judgment began garnishment proceedings.

The Court believes these facts make the Debtor’s case distinguishable from other presumption-of-abuse or bad faith cases, which focus on the percentage of a certain creditor’s debt vis-à-vis all debt. Here, the Debtor had sufficient other debt and other reasons besides the Jameses’ debt to consult with experienced bankruptcy counsel and file bankruptcy. Thus, the Court concludes as a matter of law, that, even if the Debtor’s debts are primarily consumer debts, such that the presumption of abuse arises, the Court would not exercise its discretion to consider this case an “abuse” and order dismissal or conversion. The Court therefore denies the Jameses’ Motion to dismiss or convert under § 707(b)(1) and (b)(2), for all the reasons stated.

Final Grounds for Relief in Count I: § 707(b)(3)

Before reaching Count II of the Jameses’ Motion, the Court must still consider their request for dismissal for abuse under § 707(b)(3), on the grounds that the case was filed in bad faith and that the totality of the circumstances show bad faith. Under § 707(b)(3), unlike §707(b)(2), the Court has a fair amount of flexibility. In re Boatright, 414 B.R. 526, 530 (Bankr. W.D. Mo. 2009). Section 707(b)(3) was enacted as part of the BAPCPA amendments to the Code in 2005, so pre-BAPCPA cases are not as helpful, especially because the standard is now “abuse” – not “substantial abuse.” Under the bad faith analysis of § 707(b)(3)(A),

[I]n determining whether the filing was made in bad faith, the Court should focus primarily upon the Debtors’ conduct, including whether the Debtors have complied with the applicable provisions of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, whether they have engaged in any concealment or misrepresentation in connection with the case or otherwise manipulated the Bankruptcy Code.

Booker, 399 B.R. at 672.

Although courts debate the relevant considerations under the “totality of the circumstances” test, post-BAPCPA, courts in the Western District of Missouri have consistently held that the most important (and perhaps only) consideration under § 707(b)(3) is the ability to pay creditors. See Booker, 399 B.R. at 667 (“[W]hen assessing whether the case should be dismissed as an abuse based upon the totality of the Debtors’ financial circumstances, the Court should consider primarily, if not exclusively, the Debtors’ ability to pay”); Boatright, 414 B.R. at 530 (noting that the ability to pay a “significant portion of unsecured debt” is the predominate consideration); see also In re Freis, No. 06-30393, 2007 WL 1577752, at *2 (Bankr. W.D. Mo. May 18, 2007).

In this case, the Jameses’ primary argument in their Amended Motion in support of dismissal under § 707(b)(3) was the Debtor’s inclusion of their pending garnishment in her original Schedule I. Other evidence was allowed to develop without objection, however, about certain errors in the Debtor’s schedules, including an erroneous date listed for when a debt was incurred, an increase in her living expenses in her Amended Schedule J, possible duplicative creditors, and her failure to schedule the items she had purchased for the B&B. The Court does not find that these de minimis errors are evidence of bad faith.

As discussed above, the Debtor included the Jameses’ garnishment on her original Schedule I. Obviously, the Debtor should not have deducted the Jameses’ pending garnishment, since the garnishment would stop automatically as of the date of filing based on the automatic stay of § 362(a). The Court believes, however, the Debtor’s credible testimony that she thought she was supposed to reflect her current budget, which suffered from a garnishment, when she filed the bankruptcy; frankly, in the Court’s experience, a debtor’s lawyer typically reviews the budget and corrects such errors, consulting with the debtor and adjusting the budget accordingly.

In any event, the Jameses’ original Motion to Dismiss was filed some five months after the Debtor filed bankruptcy, and raised for the first time, as far as the Court is aware, that the garnishment should not have been reflected as a deduction on the Debtor’s Schedule I. The Debtor, less than two weeks after the Motion to Dismiss was filed, amended her Schedules I and J to remove the garnishment deduction. The promptness of the amendment, coupled with the Debtor’s credible testimony about the reason she scheduled the deduction to begin with, refutes the argument that the original error of including the garnishment in the budget is evidence of bad faith. Moreover, the Jameses have not argued that they were harmed or prejudiced by the error; any party reviewing the original Schedule I could have seen that the garnishment was a mistake and calculated the mathematical effect on the disposable income accordingly. The Court can presume the Jameses knew they could not continue to garnish the Debtor since there is no evidence that the garnishment continued postpetition.

As far as the unscheduled items, the Court believes the Debtor’s credible testimony that the value of those items was likely less than $25 and that because they were packed away in boxes she did not think about them in preparing her Schedule A/B of assets. Although the Court never condones any failure to schedule assets, here, the Court rejects the Jameses’ argument that the Debtor’s failure to schedule the approximately $25 worth of figurines and decorative items intended to be used for the B&B is evidence of her bad faith, for several reasons.

First, the Court has already noted that the primary consideration for dismissal for abuse under § 707(b)(3) is ability to pay, not concealment of assets. The Jameses did not file a § 727 complaint for denial of discharge for concealment of assets or false oath. Instead, they filed a Motion to Dismiss, and did not allege these errors as part of their Motion. Thus, as a practical matter, the nature and value of these assets and how they should have been scheduled, if at all, was not an issue before the Court.

Second, it is questionable whether the items even had to be separately scheduled. They appropriately could have been considered household goods, and the Debtor still had available an unused household goods and furnishings exemption. (Debtor scheduled $500 of household goods and furnishings, in addition to clothing and electronics.) Missouri law allows a $3,000 exemption for these items. § 513.430.1(1) RSMo.9 Moreover, the Schedule A/B requires separate scheduling of “Collectibles of Value” — it is doubtful that $25 of miscellaneous angel and other figurines and decorative items could even be considered “collectibles” under that definition.

The same analysis is true about whether the items should have been scheduled as “any business-related property.” The Court questions whether the items were “business property” as of the petition date. At that point, it was clear to the Debtor that the B&B had fallen through.

The Court otherwise detected no other evidence of bad faith in the Debtor’s testimony or in her bankruptcy filing. In sum, these “errors” are de minimis; there is no evidence of any prejudice to the Jameses or the Chapter 7 Trustee. The Jameses had the opportunity to take the Debtor’s Rule 2004 exam and conduct other discovery and they point to no other issues of bad faith, concealment, or misrepresentation. And, most importantly, these “errors” have no bearing on the primary factor of ability to pay, which will be discussed below in conjunction with the Court’s analysis of Counts II and III of the Motion.

The Court therefore concludes that the Jameses have failed to meet their burden to prove that the Debtor’s debts are “primarily consumer” debts or that the Debtor filed the case in bad faith or that the totality of circumstances shows bad faith. The Court denies Count I of the Jameses’ Amended Motion to Dismiss.


About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois ( has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Dieterich, Vandalia, McLeansboro and throughout Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!





6 thoughts on “The James vs. West case, part four: Consumer Debt and the Presumption of Abuse

  1. Pingback: A Primer on a Motion to Convert to Chapter 11 or 13; the James vs. West case, part five | Curry Law Office

  2. Pingback: A Review of Fraudulent Intent: the factual scenario from James vs. West | Curry Law Office

  3. Pingback: What is Fraud? And how does it affect bankruptcy? The James vs. West case | Curry Law Office

  4. Pingback: A primer on the elements of fraud | Curry Law Office

  5. Pingback: The James vs. West case, part nine: More analysis on the Elements of Fraud | Curry Law Office

  6. Pingback: A primer on Willfull and Malicious: the final review of the James vs. West case | Curry Law Office

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