United States Trustee v. Cortez , 457 F.3d 448 ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
July 20, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-10459
In Re: CARLOS VICENTE CORTEZ; SUZANNE HALLMAN CORTEZ
Debtors
UNITED STATES TRUSTEE
Appellee
v.
CARLOS VICENTE CORTEZ; SUZANNE HALLMAN CORTEZ
Appellants
Appeal from the United States District Court
for the Northern District of Texas
Before KING, STEWART and DENNIS, Circuit Judges.
KING, Circuit Judge:
This case arises from the debtors’ bankruptcy filed under
Chapter 7 on April 8, 2004, and the United States Trustee’s
motion to dismiss for substantial abuse filed under 11 U.S.C.
§ 707(b) on July 9, 2004. The issue presented on appeal is
whether a bankruptcy court should consider post-petition events
in deciding whether to dismiss a case for substantial abuse under
§ 707(b). The bankruptcy court determined that post-petition
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events should not be considered, and the district court reversed,
holding that such circumstances should be considered in
determining substantial abuse. Based on the version of § 707(b)
that applied to cases filed before the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, we AFFIRM the
district court’s judgment and REMAND the case to the district
court with instructions to remand it to the bankruptcy court for
further proceedings consistent with this opinion.
I. BACKGROUND
A. Factual and Procedural History
On April 8, 2004, Carlos Vicente Cortez and Suzanne Hallman
Cortez (collectively, “the Cortezes”) jointly filed for
bankruptcy under Chapter 7. In addition to their voluntary
petition, the Cortezes filed their schedules, showing one secured
claim in the amount of $176,000 on their homestead and unsecured
debt in the amount of $85,719, the majority of which consisted of
credit card debt. Schedule I listed the Cortezes’ net income as
$4147 per month, and Schedule J listed the Cortezes’ total
expenses as $5320 per month. At that time, Mr. Cortez was
unemployed and Mrs. Cortez was employed as a registered nurse, so
all of the income listed on Schedule I was attributable to Mrs.
Cortez.1
1
Mr. Cortez lost his job in late 2003 and was unemployed
from January 1, 2004, through April 8, 2004. Prior to Mr.
Cortez’s unemployment, the Cortezes had combined annual income of
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At the bottom of Schedule I, debtors are instructed to
“[d]escribe any increase or decrease of more than 10% in any of
the above categories anticipated to occur within the year
following the filing of this document.” In response, the
Cortezes disclosed that Mr. Cortez “believes he will be employed
this month, but he has not started working yet.”
On April 12, 2004, four days after the Cortezes filed for
Chapter 7, Mr. Cortez was offered a position with Aramark
Healthcare Management Services (“Aramark”) as the Human Resource
Director. Mr. Cortez accepted the position and began working for
Aramark on April 26, 2004. As the Human Resource Director, Mr.
Cortez earned an annual salary of $95,000, making his net income
$5896 per month, and received a $5000 signing bonus after sixty
days of employment. Mr. Cortez was also eligible to receive a
company car.
After Mr. Cortez began working for Aramark, Mrs. Cortez
reduced her hours so that her net income as of October 1, 2004,
was approximately $750 per month. With Mr. Cortez’s new job and
Mrs. Cortez’s reduced hours, the Cortezes’ net income was $6646
per month, exceeding their expenses by $1325 per month. The
Cortezes provided documents to the United States Trustee
(“Trustee”) showing that Mr. Cortez was employed by Aramark and
testified to the same at the § 341 meeting of the creditors on
$145,600 in 2003, and $147,363 in 2002.
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May 10, 2004.
On July 9, 2004, the Trustee filed a motion to dismiss under
11 U.S.C. § 707(b), asserting that the Cortezes “appear to have
the means to repay a substantial portion of their debts through a
Chapter 13 plan,” given that the Cortezes’ income now exceeded
their expenses by $1325 per month, and that it would therefore be
a substantial abuse to grant the Cortezes’ relief under Chapter
7. On July 28, 2004, the Cortezes filed their response,
contending that Mr. Cortez was unemployed at the time they filed
their Chapter 7 petition and that it was inappropriate for the
court to consider post-petition events, including Mr. Cortez’s
employment with Aramark, in deciding whether to dismiss their
case under § 707(b).
B. Bankruptcy Court’s Decision
On November 5, 2004, the bankruptcy court denied the
Trustee’s motion to dismiss, concluding “that post-petition
events should not be considered in deciding whether to dismiss a
case under section 707(b) unless the events were clearly in
prospect at the time of filing for bankruptcy.” Relying on In re
Pier, 310 B.R. 347, 355 (Bankr. N.D. Ohio 2004), the bankruptcy
court interpreted the phrase “granting of relief” in § 707(b) to
mean an “order for relief,” which occurs at the commencement of
the case, under 11 U.S.C. § 301. The bankruptcy court reasoned
that its analysis must therefore “focus on whether the order for
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relief granted on the Petition Date by operation of section 301
was proper, not whether substantial abuse would occur if the
court were to grant that same relief for the first time today.”
The bankruptcy court concluded that it was barred from
considering facts that arose after the commencement of the case
in deciding substantial abuse under § 707(b). In other words,
the bankruptcy court determined that it could consider the
circumstances only as they existed on the petition date,
“including anticipating post-petition events known to be in
prospect at the time of filing.”
The bankruptcy court explained that using the date of filing
for deciding whether substantial abuse exists was consistent not
only with the language of §§ 301 and 707(b), but also with the
Bankruptcy Code’s general policy of using the filing date to
determine a party’s rights in a bankruptcy case. The bankruptcy
court pointed out that the automatic stay under § 362, the
debtor’s entitlement to exemptions under § 522, and the
determination of secured claims under § 506, among other Code
provisions, all use the petition date as the point of reference.
Applying its interpretation of § 707(b) to the Cortezes’
case, the bankruptcy court found that Mr. Cortez’s post-petition
employment could not be considered because it was not an event
clearly in prospect at the petition date.2 Given that it could
2
The bankruptcy court provided an example of an event
“clearly in prospect” at the petition date. According to the
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not consider Mr. Cortez’s post-petition improvements in earnings,
the bankruptcy court concluded that the debtors did not have the
ability to fund a Chapter 13 plan and therefore denied the
Trustee’s motion to dismiss.
C. District Court’s Decision
On March 9, 2005, the district court reversed the bankruptcy
court’s order, holding that the language of § 707(b) makes clear
“[t]hat post-petition events are to be taken into account in
ruling on a motion under § 707(b).” The district court explained
that § 707(b) specifically instructs courts not to consider
whether a debtor has made, or continues to make, charitable
contributions. The district court reasoned that the fact that no
other limitations are placed on the court in ruling on such
motions provides sufficient support for its conclusion that the
text of § 707(b) takes post-petition events into account, except
to the extent that the debtor continues to make charitable
contributions.
The district court also distinguished In re Pier, 310 B.R.
347, the primary case the bankruptcy court relied on in its
bankruptcy court, if Mr. Cortez had reached an oral agreement to
begin employment at Aramark or had received a formal letter from
Aramark prior to the petition date, it would be proper to
consider his employment with Aramark in deciding whether the
Cortezes have the ability to repay their creditors. Given that
Mr. Cortez did not receive an offer of employment with Aramark
until after the Cortezes filed for Chapter 7, the bankruptcy
court concluded that Mr. Cortez’s employment was not clearly in
prospect on the petition date.
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interpretation of § 707(b), as standing “for the proposition that
a later change in circumstances will not necessarily save a
bankruptcy whose original filing was a substantial abuse of the
provisions of Chapter 7.” The district court explained that
[s]uch is not the case here, where the issue is whether
debtors have the ability to make significant payments to
their creditors from future income. Moreover, there was
no need for the bankruptcy court to rely on Pier in
making a case for assessing a § 707(b) motion as of the
time of filing of a petition. All of the pertinent
authorities implicitly, if not explicitly, recognize that
a debtor’s current and future expected income is to be
taken into account in determining whether the debtor is
in need of Chapter 7 relief.
(citing Behlke v. Eisen (In re Behlke), 358 F.3d 429, 434-35 (6th
Cir. 2004), Stuart v. Koch (In re Koch), 109 F.3d 1285, 1288 (8th
Cir. 1997), and In re Laman, 221 B.R. 379, 381 (Bankr. N.D. Tex.
1998)).
D. Subsequent Proceedings
On March 4, 2005, while the case was on appeal to the
district court, Mr. Cortez lost his job at Aramark. The Cortezes
contend that the district court was unable to consider Mr.
Cortez’s job loss because the district court issued its order and
final judgment on March 9, 2005, without oral argument and before
the Cortezes could file a reply brief advising the district court
of their post-petition change in financial circumstances. As of
May 2, 2006, Mr. Cortez was still unemployed.
On April 7, 2005, the Cortezes filed this appeal, arguing
that (1) the district court erred in concluding that § 707(b)
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takes into account post-petition events, and (2) the district
court erred in limiting the bankruptcy court’s ability to
consider additional post-petition changes on remand, such as Mr.
Cortez’s job loss and current unemployment.
II. DISCUSSION
A. Jurisdiction
Before addressing the merits of this dispute, we first must
consider whether we have jurisdiction to hear this appeal.
Although neither party raised the issue before this court, “‘we
are obligated to examine the basis for our jurisdiction, sua
sponte, if necessary.’” Chunn v. Chunn (In re Chunn), 106 F.3d
1239, 1241 (5th Cir. 1997) (quoting Williams v. Chater, 87 F.3d
702, 704 (5th Cir. 1996)).
We have jurisdiction to hear “appeals from all final
decisions, judgments, orders, and decrees” in bankruptcy matters
entered under § 158(a) and (b). 28 U.S.C. § 158(d)(1); see also
Andrews & Kurth L.L.P. v. Family Snacks, Inc. (In re Pro-Snax
Distribs., Inc.), 157 F.3d 414, 420 (5th Cir. 1998) (observing
that this court is “limited to reviewing only final orders” under
§ 158(d)). “[W]hen a district court sitting as a court of
appeals in bankruptcy remands a case to the bankruptcy court for
significant further proceedings, the remand order is not ‘final’
and therefore not appealable under § 158(d).” Conroe Office
Bldg. Ltd. v. Nichols (In re Nichols), 21 F.3d 690, 692 (5th Cir.
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1994).
In determining what constitutes “significant further
proceedings,” we distinguish between those remands requiring the
bankruptcy court to perform “judicial functions” and those
requiring mere “ministerial functions.” See Beal Bank, S.S.B. v.
Caddo Parish-Villas S., Ltd. (In re Caddo Parish-Villas S.,
Ltd.), 174 F.3d 624, 627-28 (5th Cir. 1999). Remands that
require the bankruptcy court to perform judicial functions, such
as additional fact-finding, are not final orders and, therefore,
are not appealable to this court. See Aegis Specialty Mktg.,
Inc. v. Ferlita (In re Aegis Specialty Mktg., Inc.), 68 F.3d 919,
921 (5th Cir. 1995). “However, if the remand involves only
ministerial proceedings, such as the entry of an order by the
bankruptcy court in accordance with the district court’s
decision, then the order should be considered final.” In re
Caddo, 174 F.3d at 628 (internal quotation marks and citation
omitted).
In this case, the district court reversed the bankruptcy
court’s order denying the Trustee’s motion to dismiss under
§ 707(b), and remanded the case to the bankruptcy court “to allow
[the Cortezes] to take action to convert to a Chapter 13
proceeding within ten days from the date of this order;
otherwise, the bankruptcy court is instructed to dismiss the
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proceeding.”3 We are satisfied that this remand order leaves
only ministerial tasks for the bankruptcy court and therefore
constitutes a final order under § 158(d). See In re Pro-Snax,
157 F.3d at 420-21 (concluding that jurisdiction exists under
§ 158(d) where “[t]he district court’s remand order neither
necessitates further fact-finding nor the use of substantial
discretion on the part of the bankruptcy court”); see also In re
Caddo, 174 F.3d at 628 (stating that a remand order is final if
all that remains to do on remand is “purely mechanical” or “mere
entry of an order in accordance with the district court’s
decision”). Because we conclude that we have jurisdiction
pursuant to § 158(d), we turn to the merits of this appeal.
B. Construction of 11 U.S.C. § 707(b)
This case, one of first impression in this circuit, requires
us to determine whether dismissal for “substantial abuse” in
§ 707(b) includes a consideration of post-petition events, a
question of law that we review de novo. See Sec. State Bank v.
IRS (In re Van Gerpen), 267 F.3d 453, 455-56 (5th Cir. 2001).
Section 707(b), in relevant part, provides that
the court, on its own motion or on a motion by the United
States trustee, . . . 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
3
At oral argument, counsel for the Trustee explained that
this was not the relief requested by the Trustee. Instead, the
Trustee requested that the district court reverse the bankruptcy
court’s legal determination and remand the case to the bankruptcy
court for a determination on the § 707(b) motion to dismiss.
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relief would be a substantial abuse of the provisions of
this chapter. . . . In making a determination whether to
dismiss a case under this section, the court may not take
into consideration whether a debtor has made, or
continues to make, charitable contributions . . . .
11 U.S.C. § 707(b).4 Whether subsequent improvements in the
debtor’s earnings warrant dismissal is not directly answered by
the text itself.5 Still, as with any statutory analysis, we
begin with the words of the statute, keeping in mind that “the
meaning of statutory language, plain or not, depends on context.”
Brown v. Gardner, 513 U.S. 115, 118 (1994) (quoting King v. St.
Vincent’s Hosp., 502 U.S. 215, 221 (1991) (citing Shell Oil Co.
v. Iowa Dep’t of Revenue, 488 U.S. 19, 26 (1988))).
The statute conditions dismissal on a finding “that the
granting of relief would be a substantial abuse of the provisions
of this chapter.” 11 U.S.C. § 707(b). Although “granting of
relief” is undefined, its context reveals that it is referring to
a Chapter 7 discharge, and not the relief associated with the
4
On April 20, 2005, Congress enacted the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (“2005 Act”), Pub.
L. No. 109-8, 119 Stat. 23 (2005), which amended § 707(b), inter
alia, to set forth a financial means test for determining whether
a Chapter 7 case is presumed to be an abuse and also set forth
certain other criteria to be considered when such a presumption
does not arise. See Pub. L. No. 109-8, § 102. Because these
amendments apply only to cases commenced on or after October 17,
2005, they are not relevant to this appeal.
5
The parties do not contest that the Cortezes are
individuals and that their debts are primarily consumer debts,
two of the threshold requirements under § 707(b), leaving us to
decide only whether a court can consider post-petition events in
determining substantial abuse under the statute.
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commencement of the case under § 301. First, the phrase
“provisions of this chapter” refers to Chapter 7, the chapter in
which § 707(b) is located. Section 727, the relief under Chapter
7, discharges the debtor from all debts that arose before the
filing of the petition. See id. § 727(b). That “granting of
relief” means a discharge under § 727 and not an order for relief
under § 301 is also evident from the use of the words “would be”
following “granting of relief,” indicating that the relief is to
take place sometime in the future. This interpretation is
consistent with the bankruptcy procedural rules, which delay
granting a § 727 discharge when a motion to dismiss under
§ 707(b) is pending. See FED. R. BANKR. P. 4004(c)(1)(D).
Finally, the courts of appeals considering § 707(b) have
implicitly, if not explicitly, recognized that “granting of
relief” means a Chapter 7 discharge. See First USA v. Lamanna
(In re Lamanna), 153 F.3d 1, 3 (1st Cir. 1998) (“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.”) (emphasis added);
U.S. Trustee v. Harris (In re Harris), 960 F.2d 74, 75 (8th Cir.
1992) (stating that § 707(b) “permits the bankruptcy court to
dismiss a Chapter Seven proceeding if it finds that granting a
discharge ‘would be a substantial abuse of the provisions of this
chapter’”) (emphasis added); see also 6 COLLIER ON BANKRUPTCY
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¶ 707.04[5][a] (15th ed. rev. 2006) (“In determining whether a
substantial abuse exists, there is a presumption in favor of
granting the relief sought by the debtor, i.e., a discharge.”).
Therefore, we think that the “granting of relief” in § 707(b) is
referring to the relief associated with Chapter 7, the discharge
of all debts under § 727, and not the relief associated with the
commencement of the case under § 301.6
Section 707(b) does not condition dismissal on the filing of
bankruptcy being a “substantial abuse” but rather on the granting
of relief, which suggests that in determining whether to dismiss
under § 707(b), a court may act on the basis of any development
occurring before the discharge is granted. Other language in
§ 707(b) supports this view and indicates that a substantial
abuse determination is forward looking. The last sentence in
§ 707(b) states that “[i]n making a determination whether to
dismiss a case under this section, the court may not take into
consideration whether a debtor has made, or continues to make,
charitable contributions . . . .” 11 U.S.C. § 707(b) (emphasis
6
The bankruptcy court relied on In re Pier, 310 B.R. 347,
a bankruptcy court decision from the Northern District of Ohio,
in concluding that the “granting of relief” referred to an “order
for relief.” Such a reliance was understandable in light of the
fact that the court in In re Pier appears to be the only court to
have considered this issue. However, because we are not bound by
In re Pier and because we conclude that the meaning of “granting
of relief” depends in large part on its placement in the statute,
see Brown, 513 U.S. at 118, we conclude that the “granting of
relief” under § 707(b) means a Chapter 7 discharge under § 727.
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added). In other words, § 707(b) expressly instructs the court
not to consider whether the debtor had made or currently makes
charitable contributions. We agree with the district court that
the absence of limiting language like this in the earlier part of
subsection (b) indicates that Congress did not intend to place
any other limitations on the court in ruling on such motions.
However, we would take the district court’s statutory analysis
one step further and point out that the phrase “or continues to
make” suggests that the court is entitled to focus on subsequent
developments in the debtor’s financial condition, except to what
charities the debtor is presently contributing.
Although some of the statutory language in § 707(b)
indicates that a court can consider post-petition events
occurring prior to the discharge, we must still give effect to
the words “substantial abuse” in § 707(b). Neither the statute
nor any other provision in the Bankruptcy Code defines
“substantial abuse” or indicates how it should be determined.
While none of our sister circuits has considered whether a court
should take into account post-petition events in making a
substantial abuse determination, many of them have addressed how
substantial abuse should be determined under § 707(b). See
Stewart v. U.S. Trustee (In re Stewart), 175 F.3d 796, 809 (10th
Cir. 1999); Kornfield v. Schwartz (In re Kornfield), 164 F.3d
778, 784 (2d Cir. 1999); In re Lamanna, 153 F.3d at 2; Green v.
Staples (In re Green), 934 F.2d 568, 572-73 (4th Cir. 1991); In
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re Krohn, 886 F.2d 123, 126 (6th Cir. 1989); In re Walton, 866
F.2d 981, 983-84 (8th Cir. 1989); Zolg v. Kelly (In re Kelly),
841 F.2d 908, 914-15 (9th Cir. 1988). These courts agree that a
debtor’s ability to repay his debts out of future income is a
primary factor to be considered in determining whether to dismiss
for substantial abuse.7 A consideration of the debtor’s future
earnings also follows the analysis favored by most bankruptcy
commentators. See, e.g., 6 COLLIER ON BANKRUPTCY ¶ 707.04[4] (15th
ed. rev. 2006) (“The primary factor that may indicate a
7
In fact, some circuits have held that the debtor’s
ability to pay alone can establish substantial abuse. See In re
Walton, 866 F.2d at 983-84 (holding that the ability to fund a
Chapter 13 plan can be a sufficient reason to dismiss a Chapter 7
case under § 707(b)); In re Kelly, 841 F.2d at 915 (“[A] finding
that a debtor is able to pay his debts, standing alone, supports
a conclusion of substantial abuse.”).
Other circuits apply a totality of the circumstances
approach, recognizing that the debtor’s ability to repay his
debts is a primary factor, see In re Stewart, 175 F.3d at 809, In
re Kornfield, 164 F.3d at 784, and In re Green, 934 F.2d at 572-
73, while others apply the same standard, but conclude that the
debtor’s ability to repay debts out of future earnings may be
enough by itself. See In re Lamanna, 153 F.3d at 2 (“[W]e do not
require a court to look beyond the debtor’s ability to repay if
that factor warrants the result.”); In re Krohn, 886 F.2d at 126
(same).
Lower courts in the Fifth Circuit, including the
bankruptcy court and the district court in this case, have
adopted the totality of the circumstances approach, with emphasis
on the debtor’s ability to repay debts under a Chapter 13 plan,
as set forth in In re Lamanna and In re Krohn. See, e.g., In re
Hill, 328 B.R. 490, 494-96 (Bankr. S.D. Tex. 2005); In re Rubio,
249 B.R. 689, 695-96 (Bankr. N.D. Tex. 2000); In re Faulhaber,
243 B.R. 281, 284 (Bankr. E.D. Tex. 1999); In re Lampkin, 221
B.R. 390, 392 (Bankr. W.D. Tex. 1998). The Cortezes do not
dispute that this standard applies or ask us to adopt a different
test for determining substantial abuse. Accordingly, for
purposes of this appeal, we will assume, without deciding, that
this is the correct standard.
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substantial abuse is the ability of the debtor to repay the debts
out of future disposable income.”) (citing S. REP. NO. 98-65, at
54 (1983)).
In determining a debtor’s ability to repay his debts out of
future earnings, we consider whether the debtor has sufficient
disposable income to fund a Chapter 13 plan. See In re Koch, 109
F.3d at 1288 (“[A]bility to pay for § 707(b) purposes is measured
by evaluating Debtors’ financial condition in a hypothetical
Chapter 13 proceeding.”). In other words, we must look to
Chapter 13 to see what the creditors would receive had the
debtors filed a Chapter 13 plan. See In re Walton, 866 F.2d at
985 (holding that the debtor’s ability to pay, out of future
income, 68% of unsecured debt within three years supported the
determination of substantial abuse). Such an abuse determination
is necessarily forward looking because it asks whether creditors
would receive more from the debtors’ future earnings in a Chapter
13 than they would receive in a Chapter 7.
“Chapter 13 affords ‘an individual with regular income’ the
option of preserving [his] ‘pre-petition assets through a three-
to five-year plan funded primarily’ with that individual’s
regular income.” Taylor v. United States (In re Taylor), 212
F.3d 395, 397 (8th Cir. 2000) (quoting 11 U.S.C. § 109(e), and In
re Koch, 109 F.3d at 1288). “[P]ost-petition earnings of the
debtor constitute the principal means of funding the plan.” 8
COLLIER ON BANKRUPTCY ¶ 1306.02[3] (15th ed. rev. 2006); see also 11
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U.S.C. § 1306(a)(2). While it might seem, as one bankruptcy
scholar put it,8 that “[s]ubstantial clairvoyance” is necessary
to determine a Chapter 7 debtor’s post-petition earnings and
ability to fund a Chapter 13 plan, the task is made easier by
§ 521(1), which was added at the same time Congress amended the
Bankruptcy Code to include § 707(b). See Fonder v. United
States, 974 F.2d 996, 999 (8th Cir. 1992) (“When Congress enacted
§ 707(b) in 1984, it also added the requirement that debtors file
an Income/Expense Schedule ‘[t]o facilitate addressing the
question of abuse in Chapter 7 cases.’”) (quoting 3 NORTON
BANKRUPTCY LAW & PRACTICE § 69.01 n.12 (1991)); see also 6 COLLIER ON
BANKRUPTCY ¶ 707.04[2] (15th ed. rev. 2006) (stating that
“[s]ection 707(b) must be considered in conjunction with section
521”). Section 521(1) requires a debtor to file “a schedule of
current income [i.e., Schedule I] and current expenditures [i.e.,
Schedule J].” In addition to requiring debtors to disclose their
current income, Schedule I instructs debtors to “[d]escribe any
increase or decrease of more than 10% in any of the above
categories anticipated to occur within the year following the
filing of this document.” The same schedules are filed to
commence both Chapter 7 and Chapter 13 proceedings. See Fonder,
974 F.2d at 999. If sufficient income to fund a Chapter 13 plan
8
See Jeffrey W. Morris, Substantive Consumer Bankruptcy
Reform in the Bankruptcy Amendments Act of 1984, 27 WM. & MARY L.
REV. 91, 99-100 (1985).
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is anticipated, a complete discharge of the debtor’s obligations
would constitute a substantial abuse of Chapter 7.
When, as here, the debtors’ future earnings are not known at
the time of filing, we should look to the requirements imposed on
debtors under Chapter 13. In a Chapter 13 proceeding, debtors
are obligated to amend their schedules to include subsequent
income, even if that income is not known or realized at the time
of filing. Section 521(3) requires the debtor to cooperate with
the trustee, and § 1302(b) imposes duties on the trustee,
including the duty to investigate the debtor’s financial affairs
under § 704(4). Based upon the trustee’s investigation of the
debtor’s financial affairs, the trustee makes a decision to
support or oppose confirmation of the Chapter 13 plan. If the
trustee objects to the plan confirmation, the court may not
approve the plan unless it “provides that all of the debtor’s
projected disposable income to be received [during the plan] will
be applied to make payments under the plan.” 11 U.S.C.
§ 1325(b)(1)(B) (emphasis added).9 Even if the plan, as
initially proposed, is confirmed, § 1329 allows the trustee to
seek a subsequent modification of the plan based on an increase
in the debtor’s income, so that more money is paid to the
creditors. See id. § 1329(a)(1); see also Arnold v. Weast (In re
9
Section 1325(b)(2)(A) defines disposable income for
purposes of Chapter 13 as income received by the debtor that is
not reasonably necessary for support of the debtor or the
debtor’s dependents.
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Arnold), 869 F.2d 240, 241 (4th Cir. 1989) (“[I]t is well-settled
that a substantial change in the debtor’s financial condition
after confirmation may warrant a change in the level of
payments.”). Put another way, permitting a debtor to retain
post-petition improvements in earnings, without committing the
increase in income that is not reasonably necessary for support
of the debtor or the debtor’s dependents, would be grounds for
rejection or later modification of a Chapter 13 plan. As a
practical matter, then, the debtors would be obligated to amend
their schedules to disclose any post-petition income under
Chapter 13. Therefore, it would seem to us, drawing on Chapter
13 and the schedules themselves, as we are required to do in a
substantial abuse determination under § 707(b), that post-
petition improvements in earnings can be taken into account and
should be taken into account up until the point at which the
discharge is entered.10
The Cortezes insist that if we include post-petition income
as a consideration for substantial abuse under § 707(b), this
court will infringe upon § 541(a)(6), which states that post-
10
In so holding, we are mindful of the Cortezes’ argument
that the date of filing is the critical date for determining
rights (e.g., the automatic stay, entitlement to exemptions) in a
Chapter 7 proceeding. While this may be true, we do not find
this argument persuasive because it fails to take into account
other sections of the Code that require analysis of post-petition
circumstances. See, e.g., 11 U.S.C. § 727(a) (requiring the
court to deny a Chapter 7 discharge based on certain post-
petition circumstances, such as destroying books and records,
making a false oath, or failing to explain the loss of assets).
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petition earnings are not property of the estate in a Chapter 7
proceeding. Cf. 11 U.S.C. § 1306(a)(2). The Cortezes argue that
their case is akin to Burgess v. Sikes (In re Burgess), 438 F.3d
493 (5th Cir. 2006), in which this court, sitting en banc, held
that a post-petition disaster-relief payment was not property of
the estate within the meaning of § 541(a)(6).
This case is easily distinguished from the one we faced in
In re Burgess. While we do not dispute the Cortezes’ contention
that debtors are entitled to exclude their post-petition earnings
from the estate in a Chapter 7 proceeding, the ability to exclude
post-petition income for purposes of a Chapter 7 estate is an
independent issue from whether debtors have the ability to repay
their debts. The latter issue is the pertinent inquiry for
determining substantial abuse under § 707(b), and we conclude,
like those circuits considering whether exempt property should be
included for purposes of a substantial abuse determination, that
post-petition improvements in earnings can be considered in
ruling on a motion to dismiss. See In re Taylor, 212 F.3d at 397
(stating “that the relevant inquiry is not whether the payments
are exempt from creditors in a Chapter 7 proceeding but whether
the challenged payments would constitute income in a hypothetical
proceeding under Chapter 13 of the United States Bankruptcy
Code”); In re Kornfield, 164 F.3d at 784 (“A totality of the
circumstances inquiry is equitable in nature and existence of an
asset, even if exempt from creditors, is relevant to a debtor’s
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ability to pay his or her debts [under § 707(b)].”).
Accordingly, although post-petition earnings are not property of
the estate under § 541(a)(6), the court can and should take them
into account for purposes of determining substantial abuse under
§ 707(b).11
Given that post-petition events should be considered up
until the date of discharge,12 we remand this case to the
district court with instructions to return it to the bankruptcy
court. See In re Koch, 109 F.3d at 1290 (“The final decision on
a § 707(b) motion to dismiss should be made initially by the
bankruptcy court.”). On remand, the bankruptcy court should
consider any post-petition events affecting the Cortezes’
financial situation, including any post-petition improvements in
income or, if still applicable, Mr. Cortez’s unemployment.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court reversing the judgment of the bankruptcy court,
and REMAND to the district court, with instructions to remand to
the bankruptcy court for further proceedings consistent with this
11
In so holding, we do not opine on the effects of the
amendments to § 707(b) under the 2005 Act.
12
We are mindful that, pursuant to FED. R. BANKR. P.
1017(e), the trustee is required to file a motion to dismiss
under § 707(b) within sixty days of the § 341 meeting of the
creditors, unless, prior to the expiration of that period, the
trustee requests and the court finds good cause to extend that
deadline.
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opinion. Costs shall be borne by appellants.
AFFIRMED and REMANDED.
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