In re Harbaugh

• Citation: 257 BR 485
• Decision Date: 23 January 2001
• Docket Number: No. 00-73129.,00-73129.
• Parties: In re Tracy L. HARBAUGH. Tracy L. Harbaugh, Debtor-Appellee, v. Samuel D. Sweet, Chapter 7 Trustee, Appellant.
• Court: U.S. District Court — Western District of Michigan

257 B.R. 485 (2001)

In re Tracy L. HARBAUGH.

Tracy L. Harbaugh, Debtor-Appellee, v. Samuel D. Sweet, Chapter 7 Trustee, Appellant.

No. 00-73129.

United States District Court, E.D. Michigan, Southern Division.

January 23, 2001.

Thomas J. Budzynski, Clinton Twp., MI, for appellant-trustee.

Robert P. Denton, Saginaw, MI, for appellee-debtor.

ORDER

COOK, District Judge.

On June 30, 2000, the United States Bankruptcy Court for the Eastern District of Michigan ("Bankruptcy Court"), filed an Order in which it rejected the objection of the Appellant, Trustee Samuel D. Sweet, to a claim of exemption that had been filed by the Appellee, Debtor Tracy L. Harbaugh. For the reasons that are set forth below, the Court will affirm the Order of the Bankruptcy Court.

I

On August 24, 1998, the Genessee County Circuit Court of Michigan entered a consent judgment that dissolved Harbaugh's marriage of five years. Pursuant to the terms of the consent judgment, she retained the physical custody of her twin children, Rachel and Zachary, who were born on September 7, 1996. Although Harbaugh's former husband retained joint legal custody of the children, the twins have been dependent upon her for support. (R.Ex. 2 at 2-3.)

According to one section in the consent judgment ("Property Settlement"), Harbaugh obtained a 1988 Oldsmobile automobile and the personal property (excluding certain major appliances) within the marital home in exchange for the termination of her rights to the marital home, a restaurant, and two family businesses.

Another part of the consent judgment ("Alimony or Spousal Support") required Harbaugh's former husband to pay her a total of $48,500.00 in alimony. A sum of $2,000.00 became due within a period of fourteen days from the entry of the consent judgment, with the balance to be paid in weekly installments of $117.00. According to the terms of this consent judgment, these payments are to continue for a total of 399 weeks (or approximately seven and one-half years from the date of the judgment). It was their intention that these payments would be deducted from the income of Harbaugh's husband and included in her income for purposes of federal and state taxation. No further conditions were placed upon the alimony right by the state court.

Approximately one year after the divorce (August 26, 1999), Harbaugh filed for bankruptcy under Chapter Seven of the United States Bankruptcy Code. At that time, Harbaugh's husband owed approximately $42,000.00 to her under the terms of the consent judgment. In Harbaugh's petition, she claimed that her right to receive alimony was exempt from the bankruptcy estate pursuant to 11 U.S.C. § 522(d)(10)(D). On October 27, 1999, the Trustee objected and sought a hearing on the issue.

During the evidentiary hearing on December 8, 1999, Harbaugh testified that, at the time of the divorce, she wanted half of the value of the family's property interests. However, fearing that she would receive nothing, Harbaugh accepted an offer of $48,500.00, which would be payable to her as alimony. (Tr. at 33:14-:24.) On September 10, 2000, she executed a deed to her former husband, and, in so doing, relinquished all of her interest in the marital house (Tr. 57:03-:16.) Harbaugh also admitted that the alimony grant was not modifiable for any reason, even if she received some sizable windfall from another source. (Tr. at 35:08-36:12.) Nonetheless, it is her contention that she has needed the money in order to support herself and her children.

At the conclusion of the hearing, the Bankruptcy Court (1) concluded that the alimony amount was reasonably necessary for Harbaugh's support and (2) reserved for further briefing the issue of whether her husband's alimony payments are exempt under 11 U.S.C. § 522. In a subsequent written Order, the Bankruptcy Court rejected the Trustee's objection. An appeal by the Trustee followed.¹

II

This case presents two related issues. First, how should the Court interpret "alimony" under 11 U.S.C. § 522(d)(10)(D) when a party seeks to exempt a particular award from the bankruptcy estate? Second, is Harbaugh's award of $42,000.00 properly characterized as alimony or is it a property settlement which is not exempt from the bankruptcy estate? According to the Trustee, the consent judgment provides for the unconditional payment of a sum certain, which is an obligation that is not in the nature of spousal support. Instead, he argues that it is a vested property right, which is not exempt from the bankruptcy estate under federal law.

A

Throughout these proceedings in bankruptcy, the burden is on the Trustee to prove that Harbaugh's exemption is objectionable. Legal issues receive a de novo examination. See In re Calhoun, 715 F.2d 1103, 1110-11 (6th Cir.1983). By contrast, the factual findings of the Bankruptcy Court are reviewed for clear error. See In re Perlin, 30 F.3d 39, 40 (6th Cir.1994). "A factual finding is clearly erroneous when, though there is evidence to support that finding, `the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" United States v. Ables, 167 F.3d 1021, 1035 (6th Cir.1999) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). At the same time, if the "account of the evidence by the trial court is plausible in light of the record viewed in its entirety," the determination will not be reversed even if the reviewing tribunal would have reached a different finding if it had been sitting as the trier of fact. Id. (citing Anderson v. Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504 (1985)).

B

When a person files for bankruptcy, his or her assets are pooled in an estate from which creditors draw. Section 522 of Title 11 of the United States Code provides that certain property is exempt from the estate and thus it is generally unreachable. See 11 U.S.C. § 522(b)-(d). By the terms of subsection (d)(10), a debtor can exempt enumerated income benefits, including the debtor's "right to receive ... alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." 11 U.S.C. § 522(d)(10)(D). Harbaugh has invoked this subsection in an attempt to prevent certain payments, which she and a Michigan court have characterized as alimony, from becoming part of her bankruptcy estate.

The Court is called upon to determine the definition of "alimony" under section 522. Although the definition of alimony ordinarily falls within the realm of state family law, the issue also concerns the federal bankruptcy statutes. Thus, it is unclear which body of law should be relied upon when searching for an appropriate definition of "alimony" that would be applicable to this litigation. But cf. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a state serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving `a windfall merely by reason of the happenstance of bankruptcy.'").

In one line of cases, some courts have concluded that the definition of alimony under section 522 is a matter of federal law. See In re Ellertson, 252 B.R. 831, 833 (Bankr.S.D.Fla.2000); In re Sheffield, 212 B.R. 1019 (Bankr.M.D.Fla.1997); In the Matter of Joseph, 157 B.R. 514, 518 (Bankr.D.Conn.1993); In re Benjamin, 136 B.R. 574, 576 (Bankr.S.D.Fla.1992). The Bankruptcy Code discusses alimony with reference to exemptions and discharges under sections 522(d)(10)(D) and 523(a)(5)(B),² respectively. It is well settled that federal law controls the meaning of this word as it relates to discharges under section 523. See, e.g., In re Calhoun, 715 F.2d 1103 (6th Cir.1983). In Benjamin, the court did not find any logical reason to distinguish, as a matter of statutory interpretation, alimony that is subject to exemption from alimony which is subject to discharge. Rather, the Benjamin court concluded that, in the absence of any statutory text to the contrary and for the sake of legislative uniformity, alimony should have only one meaning under the Bankruptcy Code, and federal law should dictate such definition.

However, this approach has been recently criticized. In In re Bentley, 245 B.R. 684 (Bankr.D.Kan.2000), the court observed that, although the text of section 523(a)(5)(B) expressly permits the federal courts to consider the substance of a liability that is designated as alimony, Section 522 does not contain any similar language. The Bentley court opined that, although the Benjamin method "perhaps ... represents good policy, ... Congress has not adopted it." Id. at 687. Accordingly, the Benjamin analysis was rejected as "judicial legislation." Id.

In the case below, the Bankruptcy Court, in recognizing this split of authority, concluded that the Benjamin approach is the more tenable of the two. It noted that the text of section 522 "empowers each state to `opt-out' of the federally structured exemptions or to replace the scheme with its own specific compendium of exemptions." In re Dixon, 885 F.2d 327, 329 (6th Cir.1989). Thus, if a state seeks to define its own alimony provisions, it can do so. Otherwise, a uniform, federal definition ostensibly will prevail. The Bankruptcy Court also quoted In re Pine, 717 F.2d 281, 282-83 (6th Cir.1983), abrogated on other grounds by Owen v. Owen, 500 U.S. 305, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), for the proposition that in Section 522, "the House of Representatives ... sought to create nationwide uniformity by establishing one list of exemptions contained in...