In re Hesson

• Decision Date: 24 January 1996
• Docket Number: Bankruptcy No. 94-1-6699-PM. Adv. No. 95-1-A114-PM.
• Citation: 190 BR 229
• Parties: In re Kathy Elizabeth HESSON a/k/a Kathy Hesson Collins, Debtor. Michael COLLINS, Plaintiff, v. Kathy Elizabeth HESSON, Defendant.
• Court: U.S. Bankruptcy Court — District of Maryland

190 B.R. 229 (1995)

In re Kathy Elizabeth HESSON a/k/a Kathy Hesson Collins, Debtor Michael COLLINS, Plaintiff, v. Kathy Elizabeth HESSON, Defendant.

Bankruptcy No. 94-1-6699-PM. Adv. No. 95-1-A114-PM.

United States Bankruptcy Court, D. Maryland.

December 21, 1995.

As Corrected January 24, 1996.

COPYRIGHT MATERIAL OMITTED

George E. Snyder, Hagerstown, MD, for Debtor.

Michael G. Wolff, Trustee, Rockville, MD.

MEMORANDUM OF DECISION

PAUL MANNES, Chief Judge.

Before the court is a complaint to determine dischargeability of a debt. Michael Collins ("Plaintiff") seeks a determination that the debt owed him by his ex-wife, Kathy Elizabeth Hesson ("Defendant" and "Debtor"), is nondischargeable pursuant to § 523(a)(15) of the Bankruptcy Code. A trial on the merits was held on October 3, 1995. This case involved an exception to discharge created by the Bankruptcy Reform Act of 1994, and is one of first impression for this court.

This court has jurisdiction pursuant to 28 U.S.C. § 1334 (district courts have original and exclusive jurisdiction in all cases under Title 11), 28 U.S.C. § 157(a), and Maryland District Court Local Rule 402 (all cases under Title 11 and proceedings arising under Title are deemed referred to the bankruptcy judges of this district). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The court submits the following findings of fact and conclusions of law.

ISSUES PRESENTED

1. Is this a timely filed action?

2. What are the elements of a cause of action under § 523(a)(15)?

3. What is the applicable date for measuring debtor\'s ability to pay the subject debt and weighing the benefit to debtor from discharge against the detrimental consequences to the creditor?

4. Who has the burden of proof under § 523(a)(15)?

5. May there be a partial discharge of § 523(a)(15) obligations?

FINDINGS OF FACT

Plaintiff and Defendant married in 1989 and separated in 1991. Defendant Kathy Elizabeth Hesson signed an Agreement of Voluntary Separation and Property Settlement ("the Agreement") on October 25, 1991. Fifteen months later, on January 21, 1993, Plaintiff Michael Collins signed it. Meanwhile, sometime in 1992, Debtor filed an action for divorce in the Circuit Court for Frederick County, Maryland. On August 16, 1994, the Agreement and an oral addendum were read into the Circuit Court record, ratified and approved by the Circuit Court, and incorporated but not merged into the Judgment of Absolute Divorce dated September 7, 1994, and filed September 14, 1994. The result of the oral addendum was to liquidate Debtor's obligations to Plaintiff under the Agreement and enter judgment thereon in the amount of $20,000.00 with interest at 10% per annum accruing from August 16, 1994. Execution was stayed until November 16, 1994. Defendant had the option to satisfy the judgment in full by the payment of $18,500.00 before November 15, 1994.

Defendant saw bankruptcy counsel and completed the petition, Schedules A-J, and Statement of Financial Affairs on December 14, 1994. This bankruptcy case under Chapter 7 was filed December 16, 1994. Debtor's discharge was entered April 10, 1995. Plaintiff seeks to except the Circuit Court judgment from discharge.

Because of the poor real estate market existing at the time of the drafting of the Agreement, the parties agreed to defer the sale of their home. Under the Agreement, Plaintiff could live in the house until sold, provided that so long as he occupied the house, he paid the ongoing carrying charges, including mortgage payments, taxes and insurance, and provided necessary repairs. The house was subject to sale upon the demand of either. The parties agreed to divide all house-related obligations arising after Plaintiff moved out.

Plaintiff remained in the house until he could no longer afford the payments, moving out on August 8, 1993. He testified that his savings were depleted, his phone was cut off, and he could not afford to continue his school classes. He cancelled his insurance and retirement plan. He sold practically everything he owned in order to meet his obligations under the Agreement. On the other hand, Defendant never made any of the payments that were required of her.

After being on the market for 8-9 months, the home was sold in June 1994. Purchased for $189,000, the home sold for $145,000. The sale proceeds were insufficient to satisfy the existing mortgages. Plaintiff made good the deficiency.

Defendant waited one month after the stay of execution expired and filed this bankruptcy case under Chapter 7. In her statement of intention filed under 11 U.S.C. § 521(2)(A) she elected to reaffirm debts secured by her home and automobile, as well as one credit union debt. The target of the bankruptcy filing was the judgment in favor of Mr. Collins — there being only three other creditors holding claims aggregating less than $1,900.00 subject to discharge.

After the separation, Defendant bought a house and an automobile. In 1994 she earned $33,470.76 per annum and contributed $184.92 monthly to a 401(K) retirement program and continues to make that contribution. Shortly after drafting her schedules, she received a $2,000.00 bonus from her employer. Since being relieved from his obligations under the voluntary separation and property settlement agreement, Plaintiff has prospered. He has remarried and now earns $53,000.00 a year.

Plaintiff does not contend that his claim is for alimony or maintenance. It is undisputed that the judgment arises under a separation agreement or divorce decree and that § 523(a)(15) applies.

PRELIMINARY DISCUSSION

Public Law 103-394, § 304(e) of the Bankruptcy Reform Act of 1994, applicable to all bankruptcy cases filed after October 22, 1994, created a new exception to a debtor's discharge. That exception codified at 11 U.S.C. § 523(a)(15) provides:

§ 523. Exceptions to discharge.

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor 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.

This section enhances the rights of family law creditors that heretofore were limited to § 523(a)(5) of the Bankruptcy Code enacted in the Bankruptcy Reform Act of 1978:

§ 523. Exceptions to discharge.

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

* * * * * *

(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement, but not to the extent that —

(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 402(a)(26) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or

(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.

Under the Bankruptcy Code, the law of dischargeability of marital obligations had been governed exclusively by 11 U.S.C. § 523(a)(5). This section required bankruptcy courts to divide family law monetary obligations into two parts — non-dischargeable payments of alimony, maintenance or support and dischargeable property settlement obligations. In world-class understatement, Collier says: "It is not always clear what will be deemed alimony for the purposes of Section 523(a)(5)." L. King, et al., 3 Collier on Bankruptcy, ¶ 523.15, 523-123 (15th ed. 1995). Another treatise describes the issues raised in § 525(a)(5):

By far the most difficult substantive problem, one that is at the heart of almost all the disputed cases, is drawing the line between alimony, maintenance and support, on the one hand, and liabilities arising out of a property settlement on the other. If a husband and wife have accumulated some wealth and then divorce, the divorce agreement will include not only payments in the nature of alimony and support, but also a division of their property. With rare exceptions, the line between settlement and support payments will be faint, irregular and blurred. Partly this arises from the recipient\'s indifference to the nature of the payment. Money is money in the hands of the recipient, and (apart from possible tax consequences) the recipient has no interest in deciding whether this payment is alimony or whether it is a payment in settlement of some other property claim.

Of course, the taxability of such payments may cause parties to label them, but beyond that both husband and wife are likely to be much more interested in amount than in characterization. In any event, both are principally interested in the net economic consequence of the divorce settlement. For this reason the cases we discuss below are usually ex post facto attempts to characterize particular payments as one or the

...