In re Johnson, 07-51275.

• Decision Date: 27 February 2008
• Docket Number: No. 07-51275.,07-51275.
• Citation: 397 B.R. 289
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re Travis Benton JOHNSON and Amy Turtle Johnson, Debtors.

397 B.R. 289

In re Travis Benton JOHNSON and Amy Turtle Johnson, Debtors.

No. 07-51275.

United States Bankruptcy Court, M.D. North Carolina, Winston-Salem Division.

February 27, 2008.

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Thomas W. Anderson, Pilot Mountain, NC, for Debtor.

Kathryn L. Bringle, C. Edwin Allman, III, Winston-Salem, NC, for Trustee.

MEMORANDUM OPINION DENYING CONFIRMATION OF CHAPTER 13 PLAN

THOMAS W. WALDREP, JR., Bankruptcy Judge.

This matter came before the Court on November 20, 2007 upon the Notice and Proposed Order of Confirmation (the "Plan"), filed by Travis and Amy Johnson (the "Debtors") on October 26, 2007; the Objection to Confirmation or Reclassification of Debt (the "Objection"), filed by Christy C. Snow ("Mrs.Snow") on November 14, 2007; and the Response to Objection to Order Confirming Plan by Christy C. Snow (the "Response"), filed by the Debtors on November 19, 2007. Thomas W. Anderson appeared on behalf of the Debtors, A. Carl Penney appeared on behalf of Ms. Snow, and Vernon J. Cahoon appeared on behalf of the Chapter 13 Trustee (the "Trustee"). After consideration of the Plan, the Objection, the Response, the evidence presented at the hearing, the arguments of the parties, and the relevant law, the Court will sustain the Objection and deny confirmation of the Plan.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(L) which this Court has the jurisdiction to hear and determine.

II. FACTS

The male Debtor ("Mr.Johnson") and Mrs. Snow were married on December 7, 2001. One child, Meagan Johnson, was born to the marriage. On November 23, 2005, Mr. Johnson and Mrs. Snow entered into a Separation Agreement (the "Separation Agreement"). The Separation Agreement was drafted by Mr. Johnson's divorce attorney and was revised on at least three occasions prior to entry. Paragraph one releases Mr. Johnson "from any and all obligations for alimony and support" of Mrs. Snow. Paragraphs three and four of the Separation Agreement provide that Mr. Johnson will pay for the support and medical insurance coverage of Meagan Johnson. Paragraph five provides that Mr. Johnson and Mrs. Snow will equally share the costs of a college education for Meagan Johnson. Paragraph nineteen of the Separation Agreement provides that Mr. Johnson and Mrs. Snow will purchase life insurance policies and designate Meagan Johnson as the beneficiary.

Mr. Johnson and Mrs. Snow owned real property located at 121 Cedar Bluff Trail, Dobson, North Carolina (the "Real Property") as tenants by the entirety. Pursuant to paragraph six of the Separation Agreement, Mr. Johnson agreed to convey his undivided, one half interest in the Real Property to Mrs. Snow. Two deeds of trust encumber the Real Property. The first deed of trust is in favor of Piedmont Federal Savings and Loan Association ("Piedmont"), and it secures a debt in the original principal amount of $56,000.00. Mrs. Snow agreed to assume sole responsibility for payment of the debt secured by the Piedmont deed of trust.

The second deed of trust is in favor of Wachovia Bank and Trust Company ("Wachovia"); it secures a line of credit with an outstanding balance, as of the signing of the Separation Agreement, of $22,000.00 (the "Wachovia Debt"). The Wachovia Debt was incurred to purchase personal property items for Mr. Johnson, Mrs. Snow, Meagan Johnson, and their household.¹ During the marriage, Mr. Johnson and Mrs. Snow made payments on the interest portion of the Wachovia Debt. Because Mrs. Snow could not afford to pay both deeds of trust on the Real Property, Mr. Johnson agreed to assume sole responsibility for payment of the Wachovia Debt.² Meagan Johnson was accustomed to living in the residence, and both Mr. Johnson and Mrs. Snow wanted her to remain living there. Mr. Johnson was aware that Mrs. Snow intended to remain in the residence with Meagan Johnson after the separation and divorce. At the time that the parties entered into the Separation Agreement, there was roughly $30,000.00 of equity in the Real Property.³

On September 18, 2006, a divorce judgment was entered in state court, terminating the marriage of Mr. Johnson and Mrs. Snow and incorporating the Separation Agreement. Mr. Johnson married the female Debtor in November of 2006. Mrs. Snow remarried in the spring of 2007.

Mr. Johnson made payments on the Wachovia Debt from September of 2005 through August of 2007. On August 16 2007, the Debtors filed jointly for Chapter 13 bankruptcy relief. On October 4, 2007, Mrs. Snow filed a proof of claim totaling $22,283.47, which represents the principal balance of the Wachovia Debt as of the petition date. On October 26, 2007, the Plan was filed; it provides for a plan payment of $505.00 each month for 60 months. The Plan proposes no payments on the Wachovia Debt.

On their Schedule E, the Debtors checked the box stating that there were domestic support obligations owing. Mrs. Snow is listed as an unsecured, nonpriority creditor on Schedule F. Schedule F lists the Wachovia Debt as "domestic support obligations arising from separation agreement and divorce judgment." Wachovia Bank is also listed as an unsecured, nonpriority creditor for the "second deed of trust on property conveyed to former spouse." On Schedule H, Mrs. Snow is listed as a co-debtor on the Wachovia Debt.

On November 14, 2007, Mrs. Snow filed the Objection. Mrs. Snow argues that confirmation should be denied and that the balance owed on the Wachovia Debt is a nondischargeable domestic support obligation pursuant to Section 523(a)(5) of the Bankruptcy Code. On November 19, 2007, the Response was filed. The Debtors agree that Mr. Johnson has ongoing obligations pursuant to paragraphs three, four, and five of the Separation Agreement. Further, the Debtors agree that such obligations are priority, nondischargeable obligations pursuant to Sections 507(a)(1) and 523(a)(5) of the Bankruptcy Code. However, the Debtors assert that paragraph six of the Separation Agreement, which addresses the Real Property, provides for a property settlement, not a nondischargeable domestic support obligation ("DSO") pursuant to Section 523(a)(5). Mr. Johnson contends that he did not intend for the assumption of the Wachovia Debt to be for alimony or child support. He admitted that he wanted to provide for Meagan Johnson, and that he was willing to do anything to secure a divorce.

The issue before the Court is whether the portion of the Separation Agreement pertaining to the Wachovia Debt constitutes a nondischargeable DSO or a dischargeable property settlement.

III. DISCUSSION

A. The Statute

Section 523 of the Bankruptcy Code specifies that certain debts are nondischargeable in a bankruptcy case. The pertinent portions of Section 523, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), specify:

(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) for a domestic support obligation;

. . .

(15) to a spouse, former spouse, or child of the debtor and 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, or a determination made in accordance with State or territorial law by a government unit; . . .

BAPCPA added the term "domestic support obligation" ("DSO") to the Code. Section 101(14A) provides that a DSO is:

a debt that accrues before, on, or after the date of the order of relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is —

(A) owed to or recoverable by —

(I) a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or

(ii) a governmental unit;

(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child's parent, without regard to whether such debt is expressly so designated;

(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of —

(I) a separation agreement, divorce decree, or property settlement agreement;

(ii) an order of a court of record; or

(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative for the purpose of collecting the debt.

11 U.S.C. § 101(14A) (2005).

Sections 523(a)(5) and (15) operate to provide greater protection for alimony, maintenance, and support obligations owing to a spouse, former spouse, or child of a debtor in bankruptcy. Alan N. Resnick, 2007 Collier Pamphlet Edition Bankruptcy Code 42-43, 590 (Alan N. Resnick & Henry J. Sommer eds., Matthew Bender & Company, Inc.2007) (1981). "[A] debtor should not use the protection of a bankruptcy filing in order to avoid legitimate marital and child support obligations." Id. (quoting 140 Cong. Rec. H 10,769 (October 4, 1994)). These provisions are intended to make "non-dischargeable any debts resulting from an agreement by the debtor to hold the debtor's spouse harmless on joint debts, to the extent that the agreement is in payment of alimony, maintenance, or support of the...