JOHNSON, Circuit Judge:
Appellants Donald J. Booth and Carolyn Booth appeal the dismissal of their Chapter 7 bankruptcy petition pursuant to 11 U.S.C. § 707(b).
Donald and Carolyn Booth, both physicians, reside in Ocean Springs, Mississippi. In addition to his medical practice, Dr. Donald Booth engaged in numerous other ventures. He owned a small office building and mini-warehouse operation, purchased the Marsh Point Marina, and was a partner in Blue Water Development Corporation, a condominium project. Although the condominium project was completed, it turned out to be a financial failure. Both appellants had executed a personal guaranty for their proportionate share of the obligation, which exceeded $133,000.
On March 7, 1986, the Booths filed their Joint Petition for Relief pursuant to Chapter 7 of the Bankruptcy Code. The bankruptcy court, sua sponte, issued its Order to show cause why appellants' Chapter 7 proceeding should not be dismissed as constituting a "substantial abuse" pursuant to section 707(b). Following an evidentiary hearing, the bankruptcy court found that the debts were primarily consumer debts, that granting relief under Chapter 7 would constitute a substantial abuse of the provisions of that chapter, and that the Booths' schedule of income and expenditures was either not accurate or excessive and extravagant. The court then issued its Order dismissing the proceeding.
The Booths appealed to the district court, which affirmed the actions of the bankruptcy court. The district court's affirmation necessarily turned on two grounds. First, the court determined that the Booth proceeding did in fact constitute a substantial abuse of Chapter 7 of the Bankruptcy Code. In making that determination, the court adopted four factors to be examined in reaching a finding of "substantial abuse:"
After applying the above factors, the district court determined that the filing was indeed a "substantial abuse."
The district court was more troubled by the bankruptcy court's characterization of the Booth's debts as "primarily consumer debts." However, the court, determining that "signature loans are unquestionably consumer loans regardless of the use to which the debtor applies the funds," ultimately upheld the Order of the bankruptcy court.
II. CLASSIFICATION OF ASSETS
A dismissal based on substantial abuse pursuant to section 707(b) must necessarily rest on a finding that the indebtedness consists primarily of consumer debts. The existence of consumer, rather than business-related, debts is a prerequisite to the application of this section. Therefore, it is necessary to classify the debts in question.
As the district court correctly noted, there is a split of authority concerning the classification of debts secured by realty.
Furthermore, the term "consumer debt" is defined in section 101(7) to include "debt incurred by an individual primarily for a personal, family, or household purpose." 11 U.S.C. § 101(7). The legislative history of this section indicates that the definition is adapted from the definition used in various consumer protection laws.
Applying the profit motive test, we find that the district court misclassified some of appellants' debts. In regard to the three loans secured by the Booths' residence, the district court correctly looked to the use to which the money was put. Accordingly, the $11,000 loan and the $133,000 loan were properly classified as nonconsumer related debt. The district court erred, however, in its classification of the entire $152,507.99 as consumer debt. Only $75,000 was used to pay off the mortgage on the residence; the remainder, $77,507.99, was applied to the marina venture. Only the initial $75,000 may be properly characterized as consumer debt.
Similarly, the district court erred in its determination that a signature loan, no matter what use to which it is put, is always consumer debt. The Code makes no distinction between secured and unsecured debt, and we can discern no reason why the use of funds flowing from an unsecured loan may not be examined when determining the proper classification of the debt. This scrutiny is consistent with the application of the profit motive test as an overall standard for classifying debt under section 707(b). Therefore, the $46,000 and $34,000 loans used in the marina and warehouse ventures were improperly classified by the district court as consumer debt.
The ultimate break-down of the Booths' debts is as follows:
III. APPLICATION OF SECTION 707(b)
By its own language, section 707(b) only applies in a Chapter 7 proceeding in which the debts are "primarily" consumer debts. Even if the filing of the petition is in fact a substantial abuse of the bankruptcy procedure, a case may not be dismissed under this provision unless this prerequisite is satisfied. Accord, Bell, at 578. The controlling inquiry, therefore, is whether or not the Booths' indebtedness is primarily consumer in nature in light of the fact that the amount of their consumer debt, though less than their business debt, is owed to more creditors. We hold that it is not.
It has been noted, we believe correctly, that "primarily" suggests an overall ratio of consumer to nonconsumer debts of over fifty percent. Furthermore, the consumer debts should be evaluated not only by amount, but by their relative number. In re Restea, 76 B.R. 728, 735 (Bkrtcy.D.S.D.1987). The ratio of consumer to nonconsumer debt in the instant case, even allowing for $50,000 in additional taxes, is not great enough under these facts to justify dismissal under section 707(b).
The debts involved in this case, while including some consumer debts, cannot be said to be primarily composed of debts of that character. Consequently, the bankruptcy court's dismissal power under section 707(b) may not be utilized. Even if this Court were to determine that the Booths' utilization of a Chapter 7 procedure is a substantial abuse of that chapter, that in itself is not grounds for dismissal. For that reason, this Court does not now address
District Court, Memorandum Opinion at 7-8.
Schedule A-1: Priority Claims Creditor DebtIRS 1985 taxes (subsequently determined to be $42,000) State of Mississippi 1985 taxes (subsequently estimated at $5,000) Jackson Co. MS 1984-85 ad valorem taxes — $1,600 Ocean Springs, MS 1984-85 ad valorem taxes — $1,600 IRS 1986 taxes (unknown) State of Mississippi 1986 taxes (unknown) II. Schedule A-2: Secured Claims Creditor Security & Value DebtMetropolitan Nat'l Bank Realty/$260,000 (first mtg.) $ 152,507.99 Magnolia Ventures, Inc. Realty/$260,000 (second mtg.) $ 11,000.00 Southern Federal S & L Assn. Realty/$260,000 (third mtg.) $ 133,480.00 Southern Federal S & L Assn. Realty/$120,000 $ 96,000.00 Peoples Bank Auto/$1,200 $ 1,500.00 Peoples Bank Auto/$15,500 $ 16,000.00 Hancock Bank Auto/$8,500 $ 9,800.00 III. Schedule A-3: Unsecured Claims Creditor Nature of Debt DebtL.A. Cyr Personal loan $ 60,000.00 S.B.A. Renewed loan $ 2,700.00 Singing River Hospital Medical expenses, daughter $ 1,105.35 Tri-State Contract, Inc. Repair tile in residence $ 697.83 First Mississippi Nat'l Bank Signature loan, renewed $ 27,500.00 Peoples Bank Signature loan, renewed $ 46,000.00 Peoples Bank Signature loan, renewed $ 34,000.00