In re Cole

• Decision Date: 24 March 2016
• Docket Number: Case No. 15–30979–KLP
• Citation: 548 B.R. 132
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: Gregory A. Cole, Debtor.

548 B.R. 132

In re: Gregory A. Cole, Debtor.

Case No. 15–30979–KLP

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

Signed March 24, 2016

Hunter R. Wells, Canfield, Baer & Heller LLP, Richmond, VA, for Debtor.

MEMORANDUM OPINION

Keith L. Phillips, United States Bankruptcy Judge

This matter is before the Court on 1) the objection to confirmation of the Debtor's chapter 13 Plan filed by Tricia P. Cole ("Ms.Cole"), 2) the objection to confirmation filed by Carl M. Bates, Chapter 13 Trustee (the "Trustee"), and 3) the Debtor's objection to Ms. Cole's proof of claim. An evidentiary hearing was held on November 10, 2015.

Ms. Cole contends that confirmation of the Debtor's plan should be denied because the plan fails to provide for payment in full of all domestic support obligations, was not filed in good faith, fails to satisfy the liquidation test required under § 1325(a)(4) of the Bankruptcy Code, 11 U.S.C. § 1325(a)(4),¹ and fails to include all of the Debtor's projected disposable income for the applicable period, as required under § 1325(b)(1)(B). The Trustee, for the same reasons asserted by Ms. Cole, contends that the plan does not satisfy § 1325(a)(4) and (b)(1)(B).² The Debtor maintains that the plan should be confirmed because it satisfies all of the criteria for confirmation prescribed by § 1325(a) and includes a commitment by the Debtor of all of his projected disposable income as required under § 1325(b)(1)(B).

The Debtor has objected to the proof of claim filed by Ms. Cole in this case. Ms. Cole claims that $50,000 in attorney's fees awarded to her in connection with state court divorce proceedings constitutes a priority domestic support obligation, as defined by § 101(14A) of the Bankruptcy Code, that should be paid in full through the Debtor's chapter 13 plan pursuant to § 1322(a)(2). The Debtor contends that the attorney's fees do not constitute a domestic support obligation and therefore should be allowed only as a general unsecured claim.

Jurisdiction

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(a) and (b)(1) and 1334 and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L) and (O ). This Opinion and Order constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr.P. 7052.³

Facts

Gregory A. Cole ("Dr. Cole" or the "Debtor") and Ms. Cole were married on September 8, 2001 and separated on April 21, 2011. Ms. Cole filed a complaint for divorce on July 30, 2010, seeking a divorce a vincula matrimonii on the grounds of adultery or, in the alternative, on the grounds of cruelty and constructive desertion or, in the alternative, on the grounds of a one-year period of separation. Dr. Cole filed an answer and counterclaim in which he asserted his privilege under the Fifth Amendment regarding his alleged adultery and sought a divorce a vincula matrimonii on the grounds of a one-year period of separation. The matter was tried in the Circuit Court for the County of Chesterfield, Virginia, (the "Circuit Court") on the issues of grounds for divorce, equitable distribution, spousal support, child support, custody, visitation, and attorney's fees and costs. In a letter opinion dated September 26, 2014 (the "Letter Opinion"), the Circuit Court ruled on the issues of grounds for divorce, equitable distribution, spousal support, child support, and attorney's fees and costs. A final decree of divorce, incorporating the Letter Opinion, was entered by the Circuit Court on December 19, 2014.⁴

The Circuit Court awarded Ms. Cole a final divorce on the grounds of adultery, provided for the division of property, and ordered Dr. Cole to pay Ms. Cole the sum of $4000 per month in spousal support and $754 per month in child support, as well as the sum of $38,000 in spousal support arrearages. The Circuit Court also ordered Dr. Cole to pay the sum of $70,000 directly to Ms. Cole for attorney's fees and costs. In the Letter Opinion, the court cited a number of factors supporting the fee award:

First, the grounds for divorce is adultery by Dr. Cole, compounded by his dishonesty about it. If Mrs. Cole did not cause or contribute to the collapse of the marriage, why should she pay for necessary legal services to clean it up? Second, the financial resources of the parties are quite unequal. Dr. Cole earns roughly four times what Mrs. Cole earns. Third, the overall results obtained in this litigation generally demonstrate that Mrs. Cole is the prevailing party. Next, my review of the parties' respective memoranda regarding attorney fees creates the distinct impression that Mrs. Cole was more willing to negotiate and settle than was Dr. Cole. The apparent debacle of the settlement conference is one notable example. In the end, it was necessary to resolve this case only by a "full blown" trial. Taking all these factors into account, I will award Mrs. Cole $70,000 in attorney fees, to be paid by Dr. Cole within 90 days of the date of entry of the Final Decree, or as otherwise mutually agreed by the parties.

Ex. 1 at 18. Prior to his bankruptcy filing, Dr. Cole paid Mrs. Cole $20,000 of the attorney's fees award, leaving a balance due of $50,000. He also paid $25,000 toward the spousal support arrearages, leaving an unpaid balance of $13,000.

On February 27, 2015, Dr. Cole filed a voluntary petition under chapter 13 of the Bankruptcy Code, and on March 4, 2015, he filed his chapter 13 plan (the "Plan") (Ex. 4). The Plan is funded by sixty equal monthly payments of $1100 to the Trustee for a total funding of $66,000. The Plan provides for payment of administrative expenses, including a trustee's commission of 10% and $4600 in attorney's fees, and for payment of $13,000 to Ms. Cole for a priority domestic support obligation pursuant to 11 U.S.C. § 507(a)(1). The remaining funds are available for unsecured creditors.⁵ Section 4(A) of the Plan provides that the "[e]stimated distribution [to unsecured creditors] is approximately 15%.... If this case were liquidated under Chapter 7, the debtor(s) estimate that unsecured creditors would receive a dividend of approximately 6%."

On March 19, 2015, Ms. Cole timely filed her proof of claim (the "Claim") in the total amount of $132,969, comprised of $13,000 in spousal support arrearages, $50,000 in court ordered legal fees, and $69,969 owed in connection with equitable distribution, asserting that the full amount of the Claim is a domestic support obligation entitled to priority pursuant to § 507(a)(1) of the Bankruptcy Code. On April 9, 2015, the Debtor filed an objection to the Claim, asserting that while the total dollar amount of the Claim is correct, only $13,000 of the Claim should be allowed as a domestic support obligation entitled to priority and that the remainder of the Claim should be allowed as a general unsecured claim.

Three other creditors have filed claims in the case, the largest of which was filed by the Debtor's parents, who filed an unsecured claim in the amount of $69,388.25. The other two claims are a secured claim filed by First Commonwealth FCU in the amount of $1340.55⁶ and an unsecured claim in the amount of $156.50 filed by eCAST Settlement Corporation. The deadline for any other creditor to file a claim has expired.⁷

At the time of the parties' separation and divorce, on the date the Debtor filed his petition in bankruptcy, and on the date of the hearing on Ms. Cole's objection to confirmation of the Plan, Dr. Cole owned a 25% interest in a dental practice known as Schroeder, Stenger, & Cole, DDS, P.C.⁸ (the "Practice" or the "Corporation"), which he acquired in 2008 for a purchase price of $325,000. In the divorce proceedings, in ruling on the issue of equitable distribution, the Circuit Court was required to determine the value of Dr. Cole's interest in the Practice. There, the parties agreed to a valuation date of September 30, 2013, and each party offered the opinion of a business valuation expert. Ms. Cole's expert, Robert Raymond, valued Dr. Cole's interest at $212,000. Dr. Cole's expert, Dean Heinberg, valued Dr. Cole's interest at $15,782. The Circuit Court noted that for purposes of equitable distribution, the "relevant standard of value is the ‘intrinsic value’ of the business interest, to these parties"⁹ (Ex. 1 at 4) and, after commenting on various reasons why it found the valuation proffered by Ms. Cole to be more persuasive, adopted Mr. Raymond's value of $212,000 for Dr. Cole's 25% interest in the Practice. The Circuit Court criticized Mr. Heinberg's valuation, in part, because he assigned "no value whatsoever to ongoing patient relationships (denoted as ‘patient charts')," which the Circuit Court described as "the going concern value." (Ex. 1 at 4).

At the hearing before this Court on November 10, the Debtor offered the testimony of Dean Heinberg, the same valuation expert who testified on his behalf in the divorce proceedings. Mr. Heinberg testified that the "liquidation value of Dr. Cole's practice as a personal-services company" is "zero" because the liabilities of the entity exceed the value of its assets. (Tr. at 31, ll. 4–12). He placed no value on patient records. (Tr. at 30, ll. 5–23).

The Debtor also offered the testimony of an experienced chapter 7 trustee, Bruce Matson. Mr. Matson testified that he had reviewed various documents, including an operating agreement, the shareholders' agreement, a balance sheet, and other financial information relating to the Practice. He stated that if he were appointed to administer Dr. Cole's bankruptcy estate as a chapter 7 trustee, he would abandon the interest in the Practice because he does not believe there is "anyone who would pay anything in the open market, for that twenty-five percent interest." (Tr. at 41, ll. 12–24). He further...