In re Hales, Case No. 18-40351-BDL

• Decision Date: 06 March 2019
• Docket Number: Case No. 18-40351-BDL
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: In re: CATHY LYNN HALES, Debtors.

In re: CATHY LYNN HALES, Debtors.

Case No. 18-40351-BDL

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA

March 6, 2019

Below is a Memorandum Decision of the Court.

MEMORANDUM DECISION ON CLAIM NO. 10 AND CREDITOR'S MOTION FOR RELIEF FROM STAY

On October 25, 2018, Debtor Cathy Hales filed an objection to Claim No. 10 in her bankruptcy case. See ECF No. 43 (the "Claim Objection"). Claim No. 10 is based on a debt held by the Estate of John B. Hales ("Creditor") against Debtor's husband, Kevin Hales ("Mr. Hales") arising from a judgment entered against Mr. Hales in Multnomah County Circuit Court in Oregon (the "Judgment"). Debtor asserts that Claim No. 10 should be disallowed in its entirety because the Judgment is only valid against Mr. Hales individually and therefore is not enforceable against the marital estate or community property.

Also on October 25, 2018, Creditor filed a motion for relief from the automatic stay to enforce the Judgment against Mr. Hales. See ECF No. 44 (the "Motion"). If granted relief from the automatic stay, Creditor would seek to satisfy its Judgment by garnishing Mr. Hales's wages. See id. at 3-4.

Creditor opposed Debtor's Claim Objection, and Debtor objected to Creditor's Motion. See ECF No. 49; ECF No. 50. Arguments for the Claim Objection and the Motion were heard by this Court on December 13, 2018. At the conclusion of that hearing, the Court identified certain legal issues of interest to the Court and invited the parties to file supplemental briefing.

Consideration of the Claim Objection and the Motion requires a determination of whether Claim No. 10 is solely a claim against non-debtor Mr. Hales individually or a claim against the community property Mr. Hales shares with the Debtor as well. Because determination of the Claim Objection and Motion require the evaluation of a common legal issue, the Court issues one memorandum opinion as to both but will enter separate final orders on the Claim Objection and the Motion.

I. Factual Background

A. History of the Chapter 13 Case.

Debtor and Mr. Hales filed a joint chapter 13 bankruptcy petition on February 1, 2018. In their original schedules, Debtor and Mr. Hales listed Creditor as having a $246,000 unsecured claim arising from the Judgment. See ECF No. 1 at 29. The original schedules state that only Mr. Hales incurred the debt, but also check a box to indicate that the claim is for a community debt. See id.

On March 13, 2018, Creditor filed a motion to dismiss the case on the basis that Debtor and Mr. Hales were not eligible for a chapter 13 bankruptcy case because the noncontigent, liquidated, unsecured debts on the date of filing surpassed the $394,725 limit imposed by Section 109(e) of the Bankruptcy Code. See ECF No. 12. The Chapter 13 Trustee objected to confirmation of the Debtor's and Mr. Hales's chapter 13 plan on the same basis and joined Creditor's motion to dismiss. See ECF No. 13 at 2; ECF No. 14. In response, Debtor and Mr. Hales filed a motion to dismiss Mr. Hales from the chapter 13 bankruptcy case. See ECF No. 17. That motion states

The debtor Cathy Hales desires to continue in bankruptcy and believes her individual debt and community debt to be well within the jurisdictional limits of Chapter 13.

Cathy Hales intends to file an amended Schedule F to clarify which debt is her individual debt and community debt. Already she has identified at least one debt that is marked community debt in error. That debt is to the Estate of John B Hales for $246,000. That debt arises from a judgment against Kevin Hales and does not include Cathy Hales or the community estate. Furthermore, the judgment arose from alleged tort activity by Kevin Hales including breach of fiduciary duty with punitive damages. This amendment alone would put Cathy Hales' unsecured debt within the Chapter 13 limits. However, Cathy Hales and her bankruptcy counsel may find other amendments that need to be made after further investigation.

Id. at 1-2. The motion was unopposed, and an order was entered on April 27, 2018 dismissing Mr. Hales. See ECF No. 19; ECF No. 22.

After Mr. Hales was dismissed from the case, Debtor filed a motion to amend her chapter 13 plan along with a proposed amended plan. See ECF No. 28; ECF No. 29. The motion to amend was unopposed and an order approving the amended plan was entered on July 6, 2018. See ECF No. 34; ECF No. 36. The amended plan was confirmed on July 12, 2018. See ECF No. 37.

B. History of Claim No. 10, the Claim Objection, and the Motion.

On April 11, 2018, during the pendency of Debtor's motion to dismiss Mr. Hales, Creditor filed Proof of Claim No. 10 based on the Judgment. The Judgment consists of compensatory and punitive damages arising out of claims for conversion, unjust enrichment, and breach of fiduciary duty by Mr. Hales in relation to the management of his father's estate in Oregon. See Proof of Claim No. 10-1. Creditor asserts that the amount of Claim No. 10 is $254,700. Although not in the record, the Court will exercise its prerogative to take judicial notice of the fact that the Haleses have been married at all times relevant to Claim No. 10.¹

In the Motion, Creditor requests relief from the automatic stay to collect on the Judgment through a garnishment of Mr. Hales's wages. See ECF No. 44. Creditor acknowledges that those wages are community property, but argues collection against such community property is allowed because the tortious conduct resulted in a benefit to the community. In the alternative, Creditor asserts it should be allowed to collect against Mr. Hales's one-half interest in the community's personal property because Mr. Hales does not have sufficient separate assets to satisfy the Judgment. Creditor cites to Washington state case law to support its arguments in favor of collecting against community property to satisfy the Judgment.

In her objection to the Motion, Debtor points out that Creditor has not specified the legal grounds for seeking relief from stay under Section 362 of the Bankruptcy Code. See ECF No. 50.² Debtor presumes Creditor seeks relief under Section 362(d)(2), which provides for relief from the automatic stay with respect to an act against property of the estate if (a) the debtor does not have equity in the property, and (b) the property is not necessary for an effective reorganization. See 11 U.S.C. § 362(d)(2). Debtor argues that Mr. Hales's wages "are nothing but equity" and that "as plainly seen in the [D]ebtor's sworn schedules and confirmed plan, the wages are an integral and necessary part of the funding of the plan of reorganization." ECF No. 50 at 1. According to Debtor, "[w]ithout the wages the plan cannot be adequately funded." Id.

In the Claim Objection, Debtor "maintains that the claim is against Mr. Hales only and that it should not be an allowed claim in her individual case." ECF No. 43 at 1. Debtor supports her assertion with the following facts: (1) Claim No. 10 arises from the Judgmentagainst Mr. Hales; (2) neither Debtor nor the marital estate are named in the Judgment; and (3) the Judgment is for alleged fraud or similar tortious conduct that was committed by Mr. Hales alone. See id. at 1-2. Debtor requests that Claim No. 10 be disallowed in its entirety because the claim is only valid against Mr. Hales individually, not against the marital estate or community property.

Creditor states in its response that it "agrees with Debtor's Objection insofar as it also concedes that Creditor should be granted relief from stay." ECF No. 49 at 1. However,

[i]f Creditor's claim is disallowed, and Creditor is still not able to collect on Kevin Hales outside the bankruptcy, Creditor would have no other recourse to collect on the debt. In that scenario, Kevin Hales would, remarkably, have greater protection from his largest creditor than he would if he were in an active bankruptcy.

Id. at 1-2.

On December 13, 2018, the Court held a telephonic hearing on the Claim Objection and the Motion. Counsel for Debtor, Creditor, and the Chapter 13 Trustee were present. At the hearing, the Court posed questions to the parties related to whether Oregon or Washington law should be applied for the determination of whether Creditor can recover against community property to satisfy the Judgment. The Court also posed questions as to whether Mr. Hales holds any separate property against which the Judgment could be collected.

Near the end of the hearing, the Court invited the parties to submit optional supplemental briefing. Creditor filed a supplemental brief on January 17, 2019. See ECF No. 54. Debtor did not file a supplemental brief.

In the supplemental brief, Creditor argues as follows: (1) because the Judgment was obtained under Oregon law, the assets available for satisfaction of the Judgment should also be determined under Oregon law; (2) under Oregon law, Mr. Hales's wages are subject to collection and community property laws do not apply to the collection analysis; and (3) Mr.Hales's wages, with respect to the Judgment, should be treated as a separate asset, and therefore the commitment of those wages to funding Debtor's chapter 13 plan should not restrict Creditor's collection of those wages to satisfy the Judgment. See id. at 1-2. Creditor relies on Pacific Gamble Robinson Co. v. Lapp, 95 Wn.2d 341, 622 P.2d 850 (1980) to support these arguments. In the alternative, Creditor repeats its prior argument that under Washington law, because Mr. Hales does not have sufficient separate assets to satisfy the Judgment, Claim No. 10 should be enforceable against one-half of the community assets. See id. at 3-4. Creditor points out that Debtor's sworn schedules, in particular the lack of filing of an amended Schedule B after Mr. Hales's dismissal, is sufficient evidence to show Mr. Hales does not own separate assets. See id.

II. Analysis

Whether the Haleses' community property is liable for Claim No. 10 depends on whether Washington or Oregon law applies. Applying...