Crosswhite, Matter of

Citation148 F.3d 879
Decision Date22 July 1998
Docket NumberNo. 97-1128,97-1128
Parties40 Collier Bankr.Cas.2d 519, Bankr. L. Rep. P 77,746 In the Matter of Maurice G. CROSSWHITE, Debtor-Appellee. Appeal of Terry Crosswhite GINTER.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Stephen P. Rothberg (submitted), Fort Wayne, IN, for Appellant.

Maurice G. Crosswhite, Columbia City, IN, Debtor-Appellee pro se.

Before RIPPLE, MANION and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

The question before us, in this bankruptcy appeal, is whether the two debts that Maurice Crosswhite agreed to assume and pay under a property settlement agreement are dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(15). The bankruptcy court held that the obligations were dischargeable and entered judgment for the debtor Crosswhite. The district court affirmed. For the reasons set forth in the following opinion, we vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

I BACKGROUND

When the marriage of Maurice and Terry Crosswhite was dissolved on August 16, 1994, Mr. Crosswhite was ordered to pay child support for their two children. Under the terms of the property settlement agreement incorporated into the divorce decree, Mr. Crosswhite kept possession of the marital residence and agreed to pay Terry (now Terry Crosswhite Ginter) $8,000 as a property equalization payment. In addition, Mr. Crosswhite agreed to assume, pay and hold Ms. Ginter harmless on two joint debts, $3,489 to Merchants Bank (to purchase Mr. Crosswhite's boat) and $1,700 to the General Federal Credit Union (to improve the real estate retained by Mr. Crosswhite).

This appeal focuses on the debts owed to the bank and the credit union. Mr. Crosswhite did not pay those marital obligations. Instead, on November 21, 1994, he filed a bankruptcy petition, as "Crosswhite d/b/a Morrie's Automotive Specialists," for relief under Chapter 7 of the United States Bankruptcy Code. When the bank brought suit, Ms. Ginter paid the debt. When the credit union threatened to sue, Ms. Ginter restructured the loan and made monthly payments to pay it. Then Ms. Ginter initiated an adversary proceeding in Mr. Crosswhite's bankruptcy by filing a complaint to determine the dischargeability of Mr. Crosswhite's property settlement agreement obligations under 11 U.S.C. § 523(a)(15).

The bankruptcy court held that debtor Crosswhite's property settlement obligations to Ms. Ginter were dischargeable under 11 U.S.C. § 523(a)(15)(B). The district court affirmed the bankruptcy court's decision. Ms. Ginter has appealed that judgment, and we have jurisdiction over this case pursuant to 28 U.S.C. § 158(d). We conduct a de novo review of the bankruptcy and district courts' legal interpretations; however, we review the findings of fact entered by the bankruptcy court only for clear error. See In re Reines, 142 F.3d 970, 972 (7th Cir.1998); In re Birkenstock, 87 F.3d 947, 951 (7th Cir.1996). In this case, no underlying facts are in dispute.

II DISCUSSION
A.

Section 523(a) of the Bankruptcy Code lists eighteen categories of debts that are excepted from a debtor's discharge, i.e., that are not dischargeable. When deciding whether a particular debt falls within a § 523 exception, courts generally construe the statute strictly against the objecting creditor and liberally in favor of the debtor in order to give the debtor a better chance at a fresh start. See Reines, 142 F.3d at 972-73. Consequently, the party claiming an exception to discharge usually bears the burden of proving by a preponderance of the evidence that the debt is not dischargeable. See Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Bero, 110 F.3d 462, 465 (7th Cir.1997). That policy of protecting and favoring the debtor is tempered, however, when the debt arises from a divorce or separation agreement. See 4 Lawrence P. King, Collier on Bankruptcy pp 523.05, 523.11 (15th ed. rev.1998) (stating that, with respect to enforcement of obligations for spousal and child support, Congress "has overridden the general bankruptcy policy in which exceptions to discharge are construed narrowly" against a creditor). Bankruptcy law has had a longstanding corresponding policy of protecting a debtor's spouse and children when the debtor's support is required. See Wetmore v. Markoe, 196 U.S. 68, 77, 25 S.Ct. 172, 49 L.Ed. 390 (1904) ("The bankruptcy law should receive such an interpretation as will effectuate its beneficent purposes and not make it an instrument to deprive dependent wife and children of the support and maintenance due them from the husband and father, which it has ever been the purpose of the law to enforce."); Shine v. Shine, 802 F.2d 583, 585-86 (1st Cir.1986) ("The exception from discharge for alimony and payments for maintenance and support has long been an accepted part of bankruptcy law."). 1 This policy is manifest in the Bankruptcy Code's § 523(a)(5); this section declares nondischargeable a marital obligation that was incurred by the debtor for alimony, maintenance or support of the debtor's spouse, former spouse or child. 2 This exception therefore expresses Congress' determination to protect former spouses in matters of alimony, maintenance, and support despite the Bankruptcy Code's general policy of providing a debtor with a fresh start. Because of this Congressional determination, a § 523(a)(5) exception from discharge is construed more liberally than other § 523 exceptions. See King, Collier on Bankruptcy p 523.05.

Subsection (15) of § 523(a) was added to the Bankruptcy Code in the Bankruptcy Reform Act of 1994 to expand the § 523(a)(5) exception to discharge for marital debts. 3 It states that an individual is not discharged from any debt

(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless--

(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or

(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.

11 U.S.C. § 523(a)(15). This section is intended to cover divorce-related debts such as those in property settlement agreements that "should not justifiably be discharged." King, Collier on Bankruptcy p 523.21. The legislative history of this section reflects the same policy interest in protecting ex-spouses and children that is found in § 523(a)(5) by treating property settlement debts as nondischargeable. 4

Many courts (including the bankruptcy and district courts reviewing Ms. Ginter's adversary proceeding in Mr. Crosswhite's bankruptcy) have criticized this provision for its lack of clarity. However, we believe that a careful parsing of the provision eliminates some of the confusion. Section 523 provides the general scheme for establishing exceptions from discharge, and two subsections provide specific protection to the debtor's children, spouse and former spouse. Subsection (5) establishes as nondischargeable the debtor's obligations of alimony, maintenance and support; subsection (15) sets forth as nondischargeable any marital debt other than alimony, maintenance or support that is incurred in connection with a divorce or separation. Subsection (15) then offers two exceptions to that rule of nondischargeability under sub-subsections, or subparts, (A) and (B). Therefore, a subsection (15) property settlement debt is not dischargeable unless, under (A), the debtor does not have the ability to pay the debt from disposable income, or, under (B), the benefit to the debtor in discharging the debt outweighs the detrimental consequences to the debtor's former spouse or child. See 11 U.S.C. § 523(a)(15); see also Hill v. Smith, 260 U.S. 592, 594-95, 43 S.Ct. 219, 67 L.Ed. 419 (1923) (stating that bankruptcy discharge is subject to exception which must be proven by the "one who would bring himself within the exception," and that when there is an "exception to the exception," the debtor must offer evidence to show his right to that benefit).

B.

In the case before us, the bankruptcy court first considered Mr. Crosswhite's ability to pay the property settlement obligations pursuant to § 523(a)(15)(A). It held that the debtor Crosswhite, despite his current inability to pay his debts to Ms. Ginter, had the capability to pay the marital debts because he is a skilled and experienced mechanic who is reasonably able to earn more than he now does. The bankruptcy court placed on the debtor the burden of proving that he did not have the ability to pay his marital debts and concluded that Mr. Crosswhite failed to make that showing. As a result, the court concluded that the debtor did not qualify for the discharge exception provided under § 523(a)(15)(A). (That finding was not disputed in the district court and is not an issue before us.) The bankruptcy court then turned to Mr. Crosswhite's alternative possibility for excepting the property settlement debts under subpart (B). The bankruptcy court noted that Congress gave no guidance on how to balance the debtor's benefit against the creditor's detriment in its analysis of § 523(a)(15)(B). It chose to follow a "totality of the circumstances" approach which required both parties to proffer evidence: The debtor must present evidence demonstrating the benefits he would receive from a discharge of the debt, and the creditor...

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