Case Name: In re William R. HARRIS and Anita L. Harris, Debtors. William R. Harris and Anita L. Harris, Appellants, v. United States Trustee and Thomas H. Casey, Chapter 7 Trustee, Appellees
Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
Jurisdiction: United States
Decision Date: 2002-05-14
Citations: 279 B.R. 254
Docket Number: BAP No. CC-01-1423-BKMo; Bankruptcy No. SA 01-12973-JB
Parties: In re William R. HARRIS and Anita L. Harris, Debtors. William R. Harris and Anita L. Harris, Appellants, v. United States Trustee and Thomas H. Casey, Chapter 7 Trustee, Appellees.
Judges: Before BRANDT, KLEIN, and MONTALI, Bankruptcy Judges.
Reporter: West's Bankruptcy Reporter
Volume: 279
Pages: 254–266

Head Matter:
In re William R. HARRIS and Anita L. Harris, Debtors. William R. Harris and Anita L. Harris, Appellants, v. United States Trustee and Thomas H. Casey, Chapter 7 Trustee, Appellees.
BAP No. CC-01-1423-BKMo.
Bankruptcy No. SA 01-12973-JB.
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Argued and Submitted Feb. 21, 2002.
Filed May 14, 2002.
Allan Dean Epstein, Epstein & Ascher, P.C., Orange, CA, for William and Anita Harris.
Michael Hauser, Office of the United states Trustee, Santa Ana, CA, for U.S. Trustee.
Before BRANDT, KLEIN, and MONTALI, Bankruptcy Judges.

Opinion:
OPINION
BRANDT, Bankruptcy Judge.
Debtors William R. Harris and Anita L. Harris appeal the bankruptcy court's order dismissing their chapter 7 case for substantial abuse under § 707(b). We REVERSE, as no evidence supports the bankruptcy court's finding of substantial abuse.
I.FACTS
The Harrises filed for chapter 7 relief on 10 April 2001, seeking discharge of $122,558 of unsecured nonpriority debt, consisting primarily of credit card debt. Mr. Harris is an attorney, and Mrs. Harris a legal secretary. Their combined net monthly income at filing was $7,422. In 1999 and 2000 the couple's income was $134,000 and $146,000 respectively.
According to Schedule J, the Harrises' total monthly expenses are $7,583. These expenses include $2,890 for housing, $800 for food, lease payments for a 1998 Honda Accord and a 1997 BMW of $654 and $535 each, and additional transportation expenses of $625, not including auto insurance.
On 29 June 2001 the United States Trustee ("UST") moved to dismiss the Harrises' case for substantial abuse under § 707(b), alleging that debtors could fund a 36-month chapter 13 plan paying 87% to unsecured creditors by reducing their expenses to the levels set forth in the Internal Revenue Service's Financial Collection Standards (the "IRS standards") (the standards to be used as the "means test" in § 102 of the proposed Bankruptcy Abuse Prevention and Consumer Protection Act of 2001, HR 333, 107th Cong. (2001), the bankruptcy legislation currently pending before Congress).
Debtors opposed, arguing that their expenses were reasonable and necessary for their maintenance and support. In support of their opposition, William R. Harris declared:
1. Debtors began experiencing financial difficulties in the early 1990s when Mrs. Harris quit her job to care for her ill mother. She returned to work after her mother's death in 1995, but in 1996 Mr. Harris lost his job and, despite several job changes over the next few years, was unable to find employment at his previous salary level.
2. The Harrises refinanced their home in July 1998 and used the money to pay down their debts. They sold the home in March 2001, netting approximately $40,000. Because they could not qualify for conventional financing to purchase another home, they entered into a lease option.
3. Mr. Harris' job requires him to drive to court appearances scattered widely across Southern California (for example, in one week, Palm Springs, San Diego, and Van Nuys on successive days, then San Diego and Glendale in the same day, and finally Santa Ana on Friday). The couple leased their current vehicles three or four years ago; at the time they believed they could afford the lease payments. After filing their petition, the couple inquired about leasing less expensive vehicles but were told they could not qualify for financing without a one-third down payment.
4. Because Mr. Harris spends so much time on the road, he frequently eats out.
In addition, the Harrises submitted the declaration of their counsel, along with documentation indicating the average price of a home in Orange County, California, to be approximately $350,000.
At the hearing on the UST's motion, the bankruptcy court rejected the use of the IRS standards as a basis for determining whether the debtors' expenses were reasonable. The bankruptcy court made no factual findings on the record, but concluded there was substantial abuse:
They've chosen their lifestyle and they've chosen to expend their money for their automobiles instead of paying their creditors....
. I don't think I have any proof that [Mr. Harris] does, in fact, incur all of these except the fact that he has them in his schedules and if these are the expenses, then they're not reasonable for a debtor who is trying to discharge $90,000 of unsecured debt or more....
. the debtor has not proven that these expenses are reasonable for — especially in light of the fact that after all of these car leases were entered into, that's when all the credit card debt arose. And apparently it arose even after Mrs. Harris was reemployed. And there was no explanation as to why all that massive credit card debt was incurred at all. No explanation at all....
Transcript, 8 August 2001, pages 2-4.
The bankruptcy court entered an order dismissing the case on 15 August 2001. This appeal ensued.
II.JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 and § 157(b)(1), (b)(2)(A), and (b)(2)(0), and we do under 28 U.S.C. § 158(c).
III.ISSUE
Whether the bankruptcy court abused its discretion in ordering the dismissal of the Harrises' chapter 7 case for substantial abuse under § 707(b).
IV.STANDARD OF REVIEW
We review the bankruptcy court's decision to dismiss a chapter 7 case for substantial abuse under § 707(b) for abuse of discretion. Gomes v. United States Trustee (In re Gomes), 220 B.R. 84, 86 (9th Cir. BAP 1998). A bankruptcy court necessarily abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).
V.DISCUSSION
A. Applicable Law
Pursuant to § 707(b),
[a]fter notice and a hearing, the court, on its own motion or on a motion by the United States trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor....
The UST as moving party must establish (1) that the debtor owes primarily consumer debts; and (2) that granting of chapter 7 relief represents a substantial abuse of that chapter. Gomes, 220 B.R. at 86. Here, the parties do not dispute that the Harrises' debts are primarily consumer debt; the issue is substantial abuse.
The primary factor to be considered in determining whether granting relief would be a substantial abuse is the debtor's ability to fund a chapter 13 plan; in the Ninth Circuit, this factor alone will justify a § 707(b) dismissal. Zolg v. Kelly (In re Kelly), 841 F.2d 908, 914 (9th Cir. 1988). In considering this factor, the court may scrutinize the debtor's scheduled expenses and reject or reduce those items that do not appear to be reasonably necessary for the debtor's maintenance or support. See Kelly, 841 F.2d at 915 n. 9; In re Lenartz, 263 B.R. 331, 336 (Bankr.D.Idaho 2001).
Even if a debtor does not have the ability to repay his debts, § 707(b) dismissal may be warranted if bad faith is shown. Kelly, 841 F.2d at 915. In determining whether bad faith exists, bankruptcy courts look to the totality of the circumstances. See, e.g., In re Motahamia, 215 B.R. 63 (Bankr.C.D.Cal.1997).
B. Presumption/Burden of Proof
As noted, § 707(b) contains a presumption "in favor of granting the relief requested by the debtor." FRE 301 provides:
a presumption imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption....
The presumption may be overcome by a showing that the debtor has the ability to repay debts, or the presence of other factors indicating dishonesty or lack of need. Motahamia, 215 B.R. at 73; see also In re Mastromarino, 197 B.R. 171, 177 (Bankr.D.Me.1996) (noting that, if the United States Trustee introduces evidence of ability to pay, demonstrating the schedules do not accurately portray the debtor's circumstances, the presumption vanishes).
In addition, a leading treatise states:
[T]he statutory presumption is obviously meant to be something more than simply a rule about the burden of proof, since that burden would already have been on the party seeking to dismiss the case.... [I]t appears that the presumption is an indication that in deciding the issue, the court should give the benefit of any doubt to the debtor and dismiss a case only when a substantial abuse is clearly present.
6 Lawrence P. King, Collier on Bankruptcy, § 707.04[5][a], at 707-26 (15th ed. rev. 2001).
We reject the suggestion that the presumption was intended to require a heightened level of proof of "clear" abuse. The background of the statute is too ambiguous to warrant such a construction without Congress having been explicit that "clear abuse" was to be the standard. The presumption language in § 707(b) cannot be construed in isolation from its antecedent sentence limiting standing to raise the "substantial abuse" question to the court "on its own motion or on a motion by the United States trustee" and forbidding others ("not at the request or suggestion of any party in interest") from doing so. Id.
The history of the 1984 amendments that created § 707(b) reveals that it was a defeat for the forces now urging a heightened burden of proof. In re Weir, 173 B.R. 682, 685-89 (Bankr.E.D.Cal.1994). Likewise, the presumption language was not wanted by the proponents of § 707(b). Everything said in Weir about how § 521(2) "smacks of compromise and calculated ambiguity" applies equally to § 707(b). Id. at 689. Congress did not say that there was a heightened standard of proof, nor do we.
In the context in which the court and the U.S. trustee are given the special responsibility to note and raise the § 707(b) issue, it makes sense to remind the trier of fact that, first, even though the court may be in the anomalous position of also being the movant, a case is presumed not to be an abuse of chapter 7 unless and until the question is both raised and decided adversely to the debtor and, second, that "substantial abuse" should only be found by a preponderance of the evidence.
C. No Findings
We are hampered by a lack of findings, which are required in contested matters involving disputed issues of fact. See Rule 9014; Rule 7052; Can. Commercial Bank v. Hotel Hollywood (In re Hotel Hollywood), 95 B.R. 130, 132-34 (9th Cir. BAP 1988). At oral argument, counsel indicated that the bankruptcy court had issued a tentative ruling, but disagreed as to whether that ruling comprised the court's findings of fact. In any event, we do not consider the tentative ruling, as it is not in the record before us. See Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 169 (9th Cir. BAP 1999) (noting that, where the tentative is necessary to understanding the final ruling, it must be included in the excerpts of record).
From the hearing transcript, it is not clear whether the bankruptcy court found an ability to repay, bad faith, or both. The court cited debtors' transportation expenses and appeared to question others. The court was also troubled by the fact that debtors had not explained why they had leased two expensive vehicles when they were supposedly experiencing financial difficulties, or why they had incurred "massive" credit card debt. There is no explicit finding that the debtors' housing' or food expenses are unreasonable, but the judge seemed to accept the UST's argument that they could rent an apartment in Orange County for about half what they were paying on the lease option. Transcript, page 7.
Moreover, the bankruptcy court made no finding of how much debtors could repay were they to convert their case to chapter 13. Although no specific percentage is required, Gomes, 220 B.R. at 88, a finding that the debtors could repay at least some meaningful amount is necessary before dismissing for substantial abuse based on ability to repay.
D. Ability to Repay/Reasonableness of Expenses
The Harrises contend there was no evidence to support the bankruptcy court's conclusion that their expenses were unreasonable. We agree.
The UST's only evidence was the IRS standards and the schedules, but the bankruptcy court rejected the IRS standards as a measure of reasonableness. This was not error; neither the statute nor case law presently mandates use of those standards in the § 707(b) analysis. More over, the evidentiary value of the IRS standards is questionable: the UST provided no foundation explaining how the standards were calculated, based on what data, or how current that data might be. The UST analyst's supporting declaration was merely a hearsay reiteration of information obtained from the IRS website.
Debtors' schedules, the veracity of which was unquestioned, show the level but not the reasonableness (or not) of their expenses. The only evidence regarding reasonableness was the Harris declaration. The bankruptcy court based its conclusion solely on the schedules and its subjective judgment of the Harrises' lifestyle, presumably based on familiarity with the cost of living in Orange County, California. This approach is typical, see, e.g., In re Gyurci, 95 B.R. 639, 643 (Bankr.D.Minn. 1989), and may be appropriate where the court raises the substantial abuse issue sua sponte, see Kelly, 841 F.2d at 917 (noting that the presumption does not place on the judge the burden of producing evidence). Nevertheless, the fact that an expense appears excessive on its face does not excuse the requirement that a court's findings be based on evidence. Treating the judge's familiarity with local conditions as evidence renders any findings essentially unreviewable on the facts. While dismissal for substantial abuse is discretionary, the determination of abuse must be based on factual findings supported by admissible evidence, and not by what amounts to inappropriate judicial notice of the court's own value judgments. There was no such evidence here.
E. Bad Faith
The bankruptcy court appeared to base its finding of substantial abuse in part on the Harrises' failure to explain why they leased expensive vehicles when they were supposedly in financial difficulty, and their failure to explain their massive credit card debt — factors suggesting bad faith. Bad faith is also a factual question. See Oaks of Woodlake Phase III, Ltd. v. Hall, Bayoutree Assoc., Ltd. (In re Hall, Bayoutree Assocs., Ltd.), 939 F.2d 802, 804-05 (9th Cir.1991).
The UST did not argue or present evidence of bad faith: the burden never shifted to the Harrises to explain the leases or the credit card debt, and any finding of bad faith was clear error.
F. Possible Plan
We may, in the absence of detailed findings, review a trial court's order if a complete understanding of the issues may be obtained from the record as a whole, or if there is no genuine dispute about the facts as to which findings were omitted. Vance v. Am. Haw. Cruises, Inc., 789 F.2d 790, 792 (9th Cir.1986); Gardenhire v. IRS (In re Gardenhire), 220 B.R. 376, 380 (9th Cir. BAP 1998), rev'd on other grounds, 209 F.3d 1145 (9th Cir. 2000).
In so doing, we may search the record for evidence supporting the order because we may affirm for any reason supported by the record. Dittman v. California, 191 F.3d 1020, 1027 n. 3 (9th Cir.1999); Polo Bldg. Group, Inc. v. Rakita (In re Shbov), 253 B.R. 540, 547 (9th Cir. BAP 2000). We have done so here.
While the facts of the case suggest that a proper evidentiary showing might have supported a finding of substantial abuse, we believe it would be error to remand where the UST failed to carry its burden. Trial was not a dress rehearsal: the debtors' opposition was well known at the time of trial, and they should be permitted to get on with the chapter 7 case they commenced.
We disagree with the suggestion in the dissent that there is $40,000 (more or less) hidden in the schedules and available to fund a chapter 13 plan. There is far less.
The Harrises have double-counted their $335 per month budgeted to pay their past due taxes. Adding that amount to the $35 per month they concede, the record shows $370 available per month, or $13,320 over the life of a 36-month plan. That $13,320 would be reduced to $5,320 by payment of the $8,000 priority tax debts the Harrises show in their schedule F. While we do not know the chapter 13 trustee's commission, it may be as much as 10% (see 28 U.S.C. § 586(e)(l)(B)(i)), thus reducing by another $1,332 (to just under $4,000) the amount available to pay unsecured creditors.
The dissent finds additional money at the expiration of the two car leases. First, it would have Mr. Harris start to drive a twelve-year-old pick-up truck with 125,000 miles on it, worth $1,200, once he returns his BMW to the leasing company. We have no evidence as to the condition of that vehicle or the suitability of it for Mr. Harris to carry out his professional obligations, and we decline to speculate that suddenly $535 more will be available each month. Second, we have no way of knowing how much it will cost the Harrises to replace Mrs. Harris' Honda when it comes off lease in September. This is also pure speculation. Thus, this additional $654 per month (minus an unknown figure) is equally conjectural. We decline to decide that the possibility of confirming a plan that could pay unsecured creditors approximately three and one-half cents on the dollar ($4,000 divided by $122,558), or perhaps a bit more, amounts to a substantial abuse. Accordingly, we will reverse.
VI. CONCLUSION
The UST did not present evidence as to the reasonableness of the Harrises' expenses sufficient to support a finding of ability to repay, nor any evidence of bad faith: the presumption in favor of granting relief to the debtors stands. Dismissing the Harrises' bankruptcy case for substantial abuse was an abuse of discretion; we REVERSE.
. Absent contrary indication, all section and chapter references are to the Bankruptcy Code, 11 U.S.C. § 101-1330, and all "Rule" references are to the Federal Rules of Bankruptcy Procedure. "FRE" references are to the Federal Rules of Evidence.
. The declaration did not explicitly state what debtors did with the proceeds from the sale of their home. At oral argument, counsel indicated debtors used the proceeds (which were exempt under Cal.Civ.Proc.Code § 704.730 and 704.960) as a down payment on the lease option.
. The full quotation is:
In view of this legislative history, it should come as no surprise that section 521(2) is written in mud. To some, it is disgraceful draftsmanship. To others, it is inspired ter-giversation. Whatever, the provision smacks of compromise and calculated ambiguity. Weir, 173 B.R. at 689.
. "A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." FRE 201(b).