De Boer v. Talsma (In re Talsma)

• Decision Date: 05 August 2013
• Docket Number: 10–43790–DML–11.,10–43791–DML–11,Bankruptcy Nos. 10–43790–DML–11,10–43792–DML–11,Adversary No. 12–4059.,11–40900–DML–11
• Parties: In re Klaas TALSMA d/b/a Klaas Talsma Dairy d/b/a Frisia Farms, Frisia Farms, Inc., Frisia Hartley, LLC, and Frisia West, LLC, Debtors. Willemina Jacoba de Boer, Plaintiff, v. Klaas Talsma, Defendant.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

496 B.R. 828

In re Klaas TALSMA d/b/a Klaas Talsma Dairy d/b/a Frisia Farms, Frisia Farms, Inc., Frisia Hartley, LLC, and Frisia West, LLC, Debtors.

Willemina Jacoba de Boer, Plaintiff,

v.Klaas Talsma, Defendant.

Bankruptcy Nos. 10–43790–DML–11, 10–43791–DML–11, 10–43792–DML–11, 11–40900–DML–11, 10–43790–DML–11.

Adversary No. 12–4059.

United States Bankruptcy Court,

N.D. Texas,

Fort Worth Division.

Aug. 5, 2013.

St. Clair Newbern, III, Law Offices of St. Clair Newbern III, P.C., Fort Worth, TX, Behrooz P. Vida, The Vida Law Firm, PLLC, Bedford, TX, for Plaintiff/Defendant.

MEMORANDUM OPINION

D. MICHAEL LYNN, Bankruptcy Judge.

Before the court is the Second Amended Complaint to Determine Dischargeability of Debt Under 11 U.S.C. §§ [sic] 523(a)(15) (the “Complaint”) filed by Plaintiff Willemina Jacoba De Boer. The court held a hearing on the Complaint on March 28, 2013 (the “Hearing”). In light of the parties' joint stipulation to the facts restated below,¹ De Boer and Talsma submitted supplemental briefs arguing solely the issues of law raised in the Complaint.

The court exercises core jurisdiction over the Adversary pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). This memorandum opinion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7001(6) and 7052.

I. BACKGROUND

De Boer and Talsma divorced in 2006. The divorce was finalized through an Agreed Final Decree of Divorce (the “Divorce Decree”) signed by De Boer and Talsma and approved by the District Court of the 266th Judicial District of Erath County, Texas on October 12, 2006. The Divorce Decree obligated Talsma to pay to De Boer: ² (1) $100,000.00 by December 31, 2008 (the “2008 Obligation”) and (2) $2 million by May 1, 2015 (the “2015 Obligation”).

On June 1, 2010 (the “Petition Date”), Talsma filed a petition for relief under chapter 11 of the Bankruptcy Code (the “Code”).^3,4 As of the Petition Date, Talsma owed $15,000.00 to De Boer under the 2008 Obligation and the entire $2 million under the 2015 Obligation. Talsma filed his Schedule E and listed De Boer as having an undisputed, non-contingent, liquidated claim in the amount of $2,015,000.00. Docket no. 79. De Boer, with the assistance of her divorce attorney, filed a proof of claim (the “Claim”) indicating that the Claim was a priority claim as a domestic support obligation under section 507(a)(1). The Debtor did not object to the Claim.

In December 2010, the Debtor filed its initial Joint Plan of Reorganization and Joint Disclosure Statement. Docket no. 366. Under this initial Joint Plan, the Debtor proposed to pay De Boer $1.7 million in 120 monthly payments under the plan. Thereafter, the Debtor filed three amended plans and disclosure statements over the next six months. In the second and third amended plans, Debtor specifically identified the Claim as a “Domestic Support Obligation within the meaning of § 507(a)(1)” but which did not otherwise alter the treatment of the Claim. Docket nos. 484 & 531. De Boer signed and filed her ballot in favor of the Third Amended Plan (the “Plan”), including the treatment of her Claim, in May 2011. Ex. 26 to Stip. Facts, Adv. Docket no. 27. On the ballot, De Boer wrote that the value of her claim was “$2,000,000.” Id.

Despite receiving notice of all hearings related to the Debtor's plans and disclosure statements, De Boer never filed objections to any of the plans, disclosure statements, or her proposed treatment under the related documents. This court entered its Order Confirming Third Amended Joint Plan of Reorganization, as Modified, Filed by [the Debtor] on June 8, 2011 (the “Confirmation Order”).

The Confirmation Order states:

X. Domestic Support (11 U.S.C. § 1129(a)(14)). In the ordinary course of its business, the Debtor, Klaas Talsma, had obligations with respect to domestic support, but has provided for such in Class 19, and said class accepted the Plan....

5. Pursuant to 11 USC § 1141, except as provided in the Third Amended Joint Plan or in this [Confirmation Order], the Debtors are discharged of all preconfirmation debts, to the extent set forth in Sec. 1141(d).

Docket no. 576. No party in interest appealed the Confirmation Order and this court has not entered a discharge order in favor of Talsma. Since beginning payments in July 2011, Talsma has paid De Boer under the terms of the Plan and is current with his obligations under the Plan.

II. DISCUSSION

The issue before the court is whether an individual debtor in a chapter 11 bankruptcy may discharge a domestic support obligation debt, which is excepted from discharge under the Code, when a creditor participates in the bankruptcy proceedings by filing a proof of claim, does not raise an objection to its treatment under a proposed plan and subsequently votes in favor of the plan, which the court then confirms simultaneously with a discharge.

De Boer asserts that the Claim is not dischargeable, that the Plan did not act as a settlement of the Claim, and that her vote for the Plan is irrelevant to dischargeability. Talsma argues that the Plan reduced his liability on the Claim to $1.7 million and that the doctrines of claim preclusion and judicial estoppel prevent De Boer from arguing that the Plan did not reduce the Claim. For the reasons put forth below, Talsma's Plan is binding only as to the treatment of the allowed amount of the Claim because domestic support obligations are not dischargeable in a bankruptcy court.

A. Dischargeability

Section 1141 provides: “A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title.” Section 523 excepts from discharge various types of debts, including debts for a domestic support obligation or other debts to a former spouse arising from a divorce decree. However, section 1141 also provides in subsection (d)(1): “Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation ...” The court is thus faced with a conundrum: does Code section 1141 prevent the court from discharging a debt that is excepted from discharge within the section if such claim was purportedly reduced in the confirmed Plan?

The exception to discharge for domestic support obligations in an individual case exists to provide broad protection to debtors' dependents. See generally 4 Collier on Bankruptcy ¶ 523.11 (16th ed.). This narrowly tailored protection overrides the more general policy of construing exceptions narrowly to protect the debtor's fresh start. Id. Under chapter 11, whether the nature of the domestic support obligation is nominally “support” or is of another kind but still arising out of a marital relationship, is irrelevant to dischargeability—both types of debts are excepted.⁵ Congress has recognized that states employ more diverse methods to create domestic support obligations than simply alimony and support payments. In re Crosswhite, 148 F.3d 879, 887 (7th Cir.1998). “Property settlement arrangements are considered important components of the protection afforded individuals who, during the marriage, depended on the debtor for their economic wellbeing.” Id.

As to the practical implications of the exception to discharge, the court is sensitive to the legislative wisdom of both the protection afforded to obligations arising from divorce settlements and to the flexibility and finality that a confirmation order offers to a debtor. Allowing a former spouse to negotiate the reduction of a domestic support obligation may often further the goal of providing a fresh start to the debtor spouse without drastically impacting the creditor spouse. Conversely, such a permissive approach would increase pressure on creditor spouses to agree to reduce their claims, even when such a reduction might seriously impair the obligee-spouse's livelihood. Fortunately, congress has provided guidance with respect to the extent to which chapter 11 debtors may modify their domestic support obligations: a plan may only defer payment or satisfy the claim in full at the plan's effective date. 11 U.S.C. §§ 1129(a)(9)(B). The Code contemplates no other treatment options for domestic support obligations in the plans of chapter 11 debtors.

Both parties argue that United Student Aid Funds v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) supports their position. Espinosa was a chapter 13 debtor with educational loan debt which he proposed to repay in part (principal only, not interest) through his plan. Id. at 1373–74.⁶ Chapter 13 of the Code contains a provision to discharge “all debts provided for by the plan.” 11 U.S.C. § 1328(a). Notwithstanding section 523(a)(8), which excepts student loan debts from discharge absent a finding of undue hardship, the bankruptcy court confirmed Espinosa's plan. Espinosa, 130 S.Ct. at 1374. On appeal, the Supreme Court unanimously affirmed the bankruptcy court's confirmation order despite the reduction in student loan debts. Id. The Court held that the bankruptcy court made a legal error when it confirmed a plan that reduced a debt excepted from discharge; nevertheless, the bankruptcy court's confirmation order remained enforceable and the debt was discharged because the student loan creditor had notice of the error and failed to object or timely appeal. Id. Further, the Court held that the bankruptcy court had at least arguable jurisdiction to discharge student loan debts, even without a hearing to determine the required “undue hardship,” ⁷ because the exception to discharge for student loans is not unconditional. Id. The Supreme Court explicitly reserved judgment on the question of whether a plan provision would be void if it discharged debts that are not dischargeable under any circumstances,⁸ leaving the matter for lower courts to decide. See id. at 1379, n. 10.

Following Espinosa,...