In In re Jundt, 623 B.R. 764 (Bankr. D. Minn. Jan 15, 2021) (Sanberg, J.), upon motion by the United States Trustee and a creditor’s joinder and response in support thereof, the court dismissed the debtors’ chapter 7 case under 11 U.S.C. § 707(b) for abuse after determining that the debtors’ disposable monthly income met 11 U.S.C. § 707(b)(2)(A)(i)’s presumption of abuse, there were no special circumstances to rebut such abuse, and the debtors’ debts were primarily consumer debts.
The parties stipulated that there was a presumption of abuse and that there were no special circumstances to rebut such abuse. But the debtors disputed that their debts were primarily consumer debts. The dispute centered on secured debts incurred to acquire two separate residential properties; the first property was financed by mortgages, and the second property was financed under a contract for deed. The main issue was whether those debts were consumer debts under 11 U.S.C. § 101(8), which is “debt incurred by an individual primarily for a personal, family, or household purpose.” To decide the issue, the court relied on In re Cox, 315 B.R. 850 (B.A.P. 8th Cir. 2004), which determined that, if the debtor’s purpose in incurring debt secured by real property is to purchase a home or make improvements to it, then the debt is consumer debt under 11 U.S.C. § 101(8).
As to the mortgaged property, the court determined that debt was consumer debt because the parties stipulated that the debtors intended to finance the first property as their homestead when they incurred that debt. The debtors, however, argued that, by the petition date, the debtors had moved out of that property and were renting it out as investment property. The debtors urged the court to examine their motive in retaining the property instead of examining their intent in incurring the debt to purchase the property. The court declined to adopt that theory, citing the lack of legal authority supporting that theory and cases rejecting that theory.
As to the contract for deed property, the debtors argued that it was a business debt because they purchased it as investment property with the intent to sell it for a profit. The court rejected that argument, noting that the debtors listed that property on their petition as their residence and scheduled it as their homestead. The court applied the equitable doctrine of judicial admission to determine that the debtors are bound by statements made in such schedules. The court also determined that, under Cox, the evidence showed that the debtors incurred the debt with the intent of using the property as their residence. The debtors urged the court to reject Cox and apply the profit motive test, under In re Booth, 858 F.2d 1051 (5th Cir. 1988), which ruled that determining whether a debt is business debt considers “whether it was incurred with an eye toward profit.” The court declined, stating that neither the Eighth Circuit nor any court within the Eighth Circuit adopted that profit motive test.
In the alternative, the debtors argued that the contract for deed was an executory contract. The debtors further argued that, if the contract for deed were an executory contract, then the related debt amount should be reduced to the amount remaining on the contract as of the petition date, and then the amount of consumer debt would not exceed business debt. The court rejected this argument, and reasoned, “In the Eighth Circuit, state law governs the question of whether a contract for deed is an executory contract, and, under Minnesota law, a contract for deed is not an executory contract for purposes of bankruptcy law.” (citations omitted).
Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law