CASE NO. 01-15083-AJM-7, Adversary Proceeding No. 02-003United States Bankruptcy Court, S.D. Indiana
April 25, 2002
James J. Ammeen, Jr., for the Plaintiff
Brian Bertram, for Defendant United States Trustee
FINDINGS OF FACT AND CONCLUSIONS OF LAW
ANTHONY METZ, Bankruptcy Judge
Tanya Bertram (the “Plaintiff”) filed her Complaint to Determine Dischargeability of Debt under 11 U.S.C. § 523 against Brian Bertram (the “Defendant”) on January 4, 2002. Trial on that complaint was held on April 3, 2002 wherein the Plaintiff appeared in person and by counsel, James J. Ammeen, Jr.; the Defendant appeared in person and pro se. The Court heard the evidence presented and took ruling of the matter under advisement. The Court now issues these findings and conclusions in accordance with Rule 7052 fo the Federal Rules of Bankruptcy Procedure.
Findings of Fact
1. The Plaintiff and the Defendant were married on September 11, 1992 and there were two sons born of the marriage. Although the marriage was dissolved by decree on May 14, 1999, the allocation of assets and liabilities was still pending as of
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that date. The parties reached an agreement with respect to the allocation of assets and liabilities on or about May 8, 2001 and drafted and circulated an order (the “Order”) that incorporated the terms of the agreement. That Order was not approved by the state court until September 20, 2001.
2. Under that Order, the Defendant was awarded the marital residence, and the Plaintiff was to quitclaim her interest in the residence to the Defendant. Specifically, paragraph 1 of the Order provided as follows:
The parties mutually agree that the husband shall have as his sole and separate property the residence located at 8630 So. 575 West, Knightstown, Indiana, 46148, and the wife shall sign a Quitclaim Deed immediately. The husband shall pay and hold the wife harmless from the payment of the first and second mortgages, both to Ameriana Savings Bank.
3. In exchange for quitclaiming her interest in the marital residence, and to balance the allocations of assets between the Plaintiff and the Defendant, the Plaintiff was awarded the sum of $7500 (the “Award”). Paragraph 5 of the Order provided as follows:
The husband shall pay to the wife within ninety (90) days, $7,500.00 as a property settlement judgment. Said sum shall bear no interest for a period of ninety (90) days after which it shall bear interest at the rate of 8%. The husband shall make a good faith attempt to refinance both the first and the second mortgages within ninety (90) days. The judgment shall be nondischargeable should the Petitioner later file bankruptcy.
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4. The Defendant testified that, after the terms of the agreement were incorporated into the Order, but before the Order was approved, he intended to refinance both mortgages on the property that was awarded to him and to pay the Plaintiff the Award pursuant to paragraph 5 of the Order.
5. A quitclaim deed was apparently drafted, but never executed by the Plaintiff, or if it was, it was never delivered to the Defendant. The Defendant testified that the paperwork to refinance could not even be started until the Plaintiffs interest was quitclaimed to him and he was the sole owner of the property, and consequently, the Defendant was unable to refinance the property and obtain the $7500.00 to satisfy the Plaintiff’s Award.
6. In addition, a loan with a variable interest rate had been obtained on the first and second mortgages but the interest rate had to be locked in within one year. The Defendant testified that the Plaintiff failed to execute an agreement which would have locked the mortgage interest rate in at 7%, and, as a result, the mortgage payments collectively increased by $300.00 per month.
7. The Defendant and his current wife, Kelly, filed their voluntary petition for relief under chapter 7 of the Bankruptcy Code on October 2, 2001. The Plaintiff commenced this adversary proceeding by filing her Complaint to Determine Dischargeability of Debt under 11 U.S.C. § 523
on January 4, 2002.
Conclusions of Law
1. The Plaintiff contends that the Award is nondischargeable because paragraph 5 of the Order recites that the Award shall be nondischargeable and
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collaterally estops the Defendant from arguing otherwise. The Plaintiff further maintains that, even if the Order is not given collateral estoppel effect, the Award is nevertheless nondischargeable under §523(a)(15) of the Bankruptcy Code.
Collateral Estoppel
2. Collateral estoppel principles apply to state court decisions in Section 523(a) nondischargeability actions provided that the following four requirements are met: (a) the issue sought to be precluded must be the same as that involved in a prior action; (b) the issue must have been actually litigated; (c) the determination of the issue must have been essential to the final judgment; and (d) the party against whom estoppel is invoked must be fully represented in the prior action. Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir. 1987). See, also, Lehnman’s of Anderson v. Hittle, 163 B.R. 814, 816 (S.D. Ind. 1994)
3. Paragraph 5 of the Order clearly indicates that the $7,500.00 payment is for property settlement rather than alimony, support or maintenance. The paragraph also states that the debt “shall be nondischargeable should the Petitioner (Defendant) later file bankruptcy.”
4. The issue here is whether the Award is nondischargeable under Bankruptcy Code § 523(a)(15), and an inquiry into the parties’ financial conditions as required by this section in order to balance the relative hardships of the parties is made at the time of the nondischargeability trial, not when the decree giving rise to the debt is entered. See, paragraph 9, infra. It is quite possible that the Defendant was fully capable of paying the Award to the Plaintiff when the parties negotiated the settlement agreement but was no longer capable of paying said debt as of the date of § 523(a)(15)
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trial.
5. Had the Award been for alimony, maintenance or child support, then the debt would not be dischargeable under 523(a)(5) regardless of whether Paragraph 5 contained the above referenced language. However, the Award was unquestionably a property settlement payment and such debts can be discharged under certain circumstances provided that the Defendant can make the required showing under § 523(a)(15). Couple this with the philosophy of the Bankruptcy Code, (albeit somewhat tempered in cases involving debts arising from divorce or separation agreements), which is to give a debtor a “fresh start”, the Court finds that the “nondischargeable” language in paragraph 5 of the Order does not bind the Bankruptcy Court and does not collaterally estop the Defendant from arguing that the Award is dischargeable. Giving such a provision in the Order binding effect would be against public policy and would subvert the clear intentions of the Bankruptcy Code.
Dischargeability of Award Under § 523(a)(15)
6. Generally, the party seeking a determination of nondischargeability in a § 523 action bears the burden of proving by a preponderance of the evidence that the debt is nondischargeable. See, Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Courts have historically construed § 523 exceptions to discharge strictly against the creditor/plaintiff and in favor of the debtor in order to give the debtor a fresh start. The “fresh start” policy however is tempered somewhat but nevertheless still applicable when the debt sought to be determined to be nondischargeable arises from a divorce or separation agreement. Matter of Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998).
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7. Debts that arise from a divorce or separation agreement are nondischargeable if they are in the nature of support, alimony or maintenance (§ 523(a)(5)). If they are in the nature of a property settlement, or are debts that result from the division of marital assets, they are dischargeable under Section 523(a)(5), but are nonetheless nondischargeable under Section 523(a)(15) unless it can be proven that one of two conditions under subparts (A) and (B) of that section exists. The Crosswhite court recognized that § 523(a)(15), like § 523(a)(8), is structured in the “exception within an exception” format, and therefore, the burden of proving dischargeability falls on the debtor. Crosswhite, 148 F.3d at 886, fn 9.
8. Therefore, the only burden of proof to be carried by a creditor seeking a determination of nondischargeability under Section 523(a)(15) is the initial burden of proving that the debt owed to the former spouse is not in the nature of alimony, support or maintenance (because, if it were, it would be nondischargeable under Section 523(a)(5)) and that it was incurred by the debtor in the course of the divorce or in connection with the divorce decree or similar agreement. Once the creditor carries its burden as described above, the burden shifts to the debtor to establish dischargeability of the debt by proving one of the two prongs under Section 523(a)(15), namely: (1) the debtor does not have the ability to pay the debt; or, if the debtor is shown to have the ability to pay the debt, then (2) the benefit of the discharge to the debtor is greater than the detriment of the discharge to the non-debtor spouse Crosswhite, 148 F.3d at 884-885. See also, Strayer v. Strayer, NO. 95-7172-RLB-7, Adv. Pro. 95-535 at p7-8 (Bankr. S.D. Ind., April 10, 1996); Smith v. Brock, No. 96-2647-RLB-7, Adv. Pro. 96-301
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at p. 5-6 (Bankr. S.D. Ind., Mar. 13, 1997).
9. The language of the first “ability to pay” prong under Section 523(a)(15)(A) has been recognized as essentially the “disposable income test” associated with confirmation of a chapter 13 plan under § 1325(b)(2) but analyzes the debtor’s financial condition at the time of the Section 523(a)(15) trial and compares the debtor’s income with the expenses reasonably necessary for the debtor’s support. 3 Norton Bankr. L. Prac.2d § 47:38 (2002); Strayer, p. 10. In addition, one court has held that the “ability to pay” test for Section 523(a)(15)(A) purposes, means that the debtor has sufficient disposable income to pay all or a material part of a debt within a reasonable amount of time. If the debtor has the ability to pay only a portion of the debt, the Court may discharge in part and/or equitably modify the obligation in question, (italics added). In re Smither, 194 B.R. 102, 110 (Bankr. W.D. Ky. 1996).
10. If it is found that the debtor has the “ability to pay” under the first prong of Section 523(a)(15)(A), (or rather, if the Court finds that the debtor has not carried his or her burden in proving that he or she does not have the ability to pay), then the Court turns to the second prong under Section 523(a)(15)(B) which balances the hardships and the advantages of the parties if the debt is discharged. Under this prong, the Court engages in a “totality of the circumstances” inquiry which considers the financial circumstances of both parties and the economic impact a discharge of the debt in question would have on each of the parties. Although “each party has the responsibility to supply the information within its exclusive control”, it is the debtor that ultimately has the burden of proving that the benefit of discharging the debt owed by the debtor outweighs the detriment to be borne by the nondebtor spouse if the debt is discharged.
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Crosswhite, 148 F.3d at 886.
11. There appears to be no dispute that the Plaintiff has met her initial burden of proof in that the Award here is a debt that is not of in the nature of alimony, support or maintenance as described by § 523(a)(5).
12. The burden then shifts to the Defendant to show dischargeability under either § 523(a)(15)(A) or (B). With respect to that burden of proof under the first prong, § 523(a)(15)(A), Schedule I and J (Ex. 6) demonstrate that the Defendant and his current spouse have a combined monthly income of $4,348.14 and combined joint expenses of $4,950.91. A review of the debtor’s Schedule J fails to disclose any expenditures which are wholly unreasonable and even if any of the expenditures shown could be reduced, they could not be reduced to a level that would allow the Defendant to satisfy the debt. (Schedule J indicates expenses exceed income by over $600.00). The Defendant testified that he and his spouse are only meeting their expenses with the assistance of their parents and friends. This would seem to be born out by the cash flow chart (Ex. 5) introduced into evidence by the Defendant which demonstrates that their expenses are exceeding their income. The Defendant testified that he had to sell a Corvette automobile to his father for $65000 in order to pay some of his debts, and that his current mother in law was paying the payments for the van which his current wife uses in her daycare business.
13. The Defendant also testified that two mortgages exist with respect to his residence that he shares with his current wife and that very little equity exists that would permit a loan that would provide money for payment of the Award. (Given the defendant’ financial picture, it is difficult for the Court to conclude that any financial
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institution would loan money to the Defendant.) The Defendant in fact testified that a bank he had approached to obtain a loan would not even accept his loan application. The bank indicated that he should come back perhaps in a year or two after the bankruptcy matters had been resolved.
14. The Court concludes that the Defendant met his burden in proving that he does not have the ability to pay under the first prong of § 523(a)(15). However, even if the Defendant had the ability to pay, the Defendant would still prevail on the second prong of § 523(a)(15) — namely, the balancing of the hardships under § 523(a)(15)(B), for the reasons stated below.
15. Although the ultimate burden of proving dischargeability falls on the Defendant, there nevertheless must be some evidence with respect to the Plaintiff’s financial condition in order to balance the respective hardships to be borne by the parties if the Award is or is not discharged.
16. The Plaintiff did testify that she received $692.00 every other week which computes to $1,487.80 if that figure is divided by 2 and the result is multiplied by 4.3. In addition, Defendant pays Plaintiff child support in the amount of $834.00 per month which gives her monthly income of $2,321.80. The only expenses to which the Plaintiff testified was insurance which cost $366.00 for six months or $61.00 per month, parking at $105.00 per month, groceries at $500.00 per month and toiletries which cost somewhere between $20.00 to $30.00 per week or around $107.50 per month. The Plaintiff also testified that her highest monthly bill was the $250.00 payment on her truck. These monthly expenditures for the Plaintiff collectively add up to $1,023.50 while her income, including child support, is $2,321.80 which leaves the Plaintiff with a
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surplus each month of $1,298.30. While the Plaintiff may have other expenses, evidence of other expenses was not offered, and therefore, the income and expense figures set forth above constitute the only evidence the Court has in order to consider the respective hardships and the impact of the discharge of the Award on both parties.
17. The Plaintiff is employed by the law firm of Baker and Daniels and testified that she did not currently have a 401(k) retirement plan, but she had prepared the paperwork to establish a 401(k) plan. In addition, when specifically asked if she felt like she would suffer more harm by not being paid the Award than the harm to be suffered by the Defendant if he was required to pay the Award, the Plaintiff stated that she really didn’t know.
18. The Court concludes, that, In light of the evidence and the testimony that has been presented in this case, it is clear that even if the Defendant had not met his burden under § 523(a)(15)(A), and had the ability to pay the Award, the benefit to him in discharging the Award would outweigh the detriment to the Plaintiff in not being paid the Award. Accordingly, the Court concludes that the Award is dischargeable under § 523(a)(15).
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