In re Kadoch

• Decision Date: 03 April 2015
• Docket Number: Case # 14–10552
• Citation: 528 B.R. 626
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re: David Kadoch, Debtor.

528 B.R. 626

In re: David Kadoch, Debtor.

Case # 14–10552

United States Bankruptcy Court, D. Vermont.

Signed April 3, 2015

Jennifer Emens-Butler, Esq. Obuchowski & Emens-Butler Bethel, Vermont For the Debtor

James Anderson, Esq. Ryan, Smith & Carbine Rutland, Vermont For Creditor Laurie Kadoch

John Canney, III, Esq. Rutland, Vermont Chapter 7 Case Trustee Pro Se

Jess Schwidde, Esq. Glinka & Schwidde Rutland, Vermont For Creditor Esther Clenott

MEMORANDUM OF DECISION

Colleen A. Brown United States Bankruptcy Judge

Overruling Creditors' Objections to Debtor's Homestead Exemption

Two creditors in this case, Laurie Kadoch, the Debtor's former spouse, and Esther Clenott, the Debtor's former mother-in-law, have filed objections to the Debtor's claim of a homestead exemption in his current residence at 2024 Main Street, Quechee, Vermont. Specifically, the creditors argue the Debtor is not entitled to claim a homestead exemption in this property, and even if he is, the Debtor's homestead exemption does not bar Ms. Clenott's enforcement of a claim for money she loaned to the Debtor and his then spouse to renovate the Main Street property. For the reasons set forth below, the Court overrules the creditors' objections.

Jurisdiction

This Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered by Chief Judge Christina Reiss on June 22, 2012.

The Court declares that this contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (K), and that this Court has constitutional authority to enter a final judgment in this matter.

Procedural History

On November 10, 2014, David Kadoch (the “Debtor”) filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code (doc. # 1). On December 8, 2014, creditor Laurie Kadoch (hereafter “Ms. Kadoch”) filed an objection to the Debtor's claim of exemptions with supporting memorandum of law (doc. # # 22, 23). On December 11, 2014, creditor Esther Clenott (hereafter “Ms. Clenott” or collectively with Ms. Kadoch, the “Creditors”) filed an objection to the Debtor's claim of exemptions (doc. # 33) (hereafter, these two objections to the Debtor's homestead exemption are collectively referred to as “the Objections”).

The parties filed a joint notice of evidentiary hearing on December 11, 2014 (doc. # 35). Over the course of the next month, Ms. Kadoch filed a supplemental memorandum in support of her objection to exemption, the Debtor filed a response to Ms. Clenott's objection, Ms. Kadoch filed a reply to the Debtor's response to Ms. Clenott's objection, and the Debtor filed a response to Ms. Kadoch's objection to exemption (doc. # # 42, 44, 45, 47).

On January 14, 2015, the Debtor filed a notice of voluntary conversion from Chapter 13 to Chapter 7, and the next day the Court entered an order converting the case to Chapter 7 (doc. # # 48, 49).

On January 20, 2015, Ms. Kadoch filed a reply to the Debtor's response to Ms. Kadoch's objection to exemption (doc. # 53).

On January 23, 2015, the Court conducted an evidentiary hearing on the Objections, at which the Court found certain facts to be material and undisputed. Based on those facts, the Court entered an oral ruling sustaining the Creditors' Objections. However, on January 28, 2015, the Court entered an order sua sponte vacating its oral ruling based upon its discovery of case law that raised issues which might have influenced the Court's decision in the case, had they been squarely addressed by the parties. In its January 28, 2015 order, the Court directed the parties to file additional memoranda of law and appear for a continued hearing on March 6, 2015 (doc. # 57).

Pursuant to the Court's Order, each of the Creditors filed a memorandum of law in support of her objection, the Debtor filed a memorandum of law in support of his claimed homestead exemption, and each of the Creditors filed a reply to the Debtor's memorandum of law (doc. # # 65, 66, 68, 71 and 72).

After considering the parties' expanded legal arguments, the Court entered an oral ruling at the March 6, 2015 hearing, overruling the Objections and further ruling that the Debtor's homestead exemption is effective as to Ms. Clenott's debt and thus bars the enforcement of that debt against the Property. This memorandum of decision is issued to further articulate the Court's rationale and memorialize the bench ruling it made at the March 6th hearing.

Undisputed Material Facts

Based on its review of the parties' pleadings, the record in the case, and the parties' stipulation to certain facts, the Court finds the following facts to be material and undisputed:

(1) The Debtor and his former spouse purchased real property located at 2024 Main Street, Quechee, Vermont in 2002 (the “Property”).

(2) The Debtor recorded the deed to the Property shortly thereafter, in 2002.

(3) From the date of purchase, it was the Debtor's intent to make the Property his homestead.

(4) The Property needed significant renovations.

(5) Between October 2004 and July 2005, Ms. Clenott loaned the Debtor and Ms. Kadoch $200,000, through a series of advances, to renovate the Property.

(6) Through July 2005, the Debtor resided at Salt Box Road and that property was his homestead.

(7) The Debtor did not abandon his homestead interest in the Salt Box Road property during the period of renovations.

(8) In late 2005 or early 2006, the Debtor began residing at the Property.

(9) In 2006, the Debtor filed the requisite state tax declaration that the Property was his homestead.

(10) On June 21, 2010, the family court entered a divorce decree, based upon a stipulation between the Debtor and Ms. Kadoch, which directed the Debtor to sell the Property and directed the Debtor and Ms. Kadoch to each pay one-half of Ms. Clenott's debt (the “Divorce Decree”).

(11) On October 18, 2010, with the consent of the Debtor, the state court granted judgment in the amount of $208,090.83, in favor of Ms. Clenott against the Debtor (the “Clenott Judgment”).

(12) On July 10, 2014, the family court entered an order (a) finding the Debtor in contempt of the Divorce Decree, based upon his failure to sell the Property, and (b) appointing a receiver to sell the property (the “Contempt Order”).

(13) As of the date of the Debtor's bankruptcy filing on October 10, 2014, the Debtor had neither sold the Property nor paid the debt owed to Ms. Clenott.

(14) As of the date of the bankruptcy filing, the Property was subject to a first mortgage in the approximate amount of $311,000.

Issues Presented

This contested matter raises numerous intertwined legal issues: First,_did the Debtor's filing of the instant bankruptcy case relieve him of the Divorce Decree obligation to pay Ms. Clenott from his share of the net sale proceeds of the Property? Second, does the Divorce Decree prevent the Debtor from claiming a homestead exemption, or from invoking the homestead exemption as a bar to the enforcement of Ms. Clenott's debt? Third, did the family court's Contempt Order change the parties' rights in the Property? Fourth, does the fact that the Debtor consented to entry of the judgment in favor of Ms. Clenott affect his right to avoid that judgment under federal bankruptcy law? Fifth, does the Debtor have equity in the Property to which his claimed homestead exemption can attach? Sixth, did the Debtor acquire his ownership interest in the Property subject to a pre-existing debt owed to Ms. Clenott? Seventh, what rights does each of the parties currently have in the Property? Eighth, if the Property is sold (as required by the Divorce Decree), how must the sale proceeds be distributed in light of the bankruptcy filing?

Discussion

1. Did the Debtor's filing of the instant bankruptcy case relieve him of the Divorce Decree obligation to pay Ms. Clenott from his share of the net sale proceeds of the Property?¹

The Divorce Decree included four provisions particularly pertinent to this disputed matter: (1) it awarded the Property to the parties equally as tenants in common;² (2) it declared certain debts, including Ms. Clenott's debt, to be joint debts of the Debtor and Ms. Kadoch; (3) it directed the Debtor sell the Property; and (4) it directed that proceeds from the sale of the Property be used to pay certain enumerated joint debts, including Ms. Clenott's debt. None of the parties challenge any portion of the first three of these salient provisions. Rather, the dispute centers on whether the Debtor's filing of the instant bankruptcy case relieved him of the obligation of paying Ms. Clenott from his share of the net sale proceeds of the Property, as directed by the Divorce Decree. Whether the Debtor may claim a homestead exemption in the Property is at the crux of this issue—and many of the issues—raised in this case. If the Debtor may not claim a homestead exemption in the Property, then Ms. Clenott would be able to enforce her debt against the Debtor's net sale proceeds,³ and any remaining net proceeds from the sale of his interest in the Property would be paid over to the bankruptcy case trustee for distribution to creditors. If, on the other hand, the Debtor may claim a homestead exemption, the Debtor's exemption would protect his portion of the net sale proceeds from the claims of creditors, up to the amount of his allowed exemption.

The Creditors characterize the Debtor's claim of a homestead exemption in bankruptcy as an attempt to appeal or relitigate the family court's directive that he pay certain creditors from his share of the net proceeds from the sale of the Property. They argue this is prohibited by the

Rooker –Feldman

doctrine,⁴ and the Debtor should be required to distribute his net proceeds from sale of the Property pursuant to the distribution mandated by the Divorce Decree, notwithstanding his bankruptcy filing. The Debtor counters that his relationship with—and duty to—his creditors, including Ms. Clenott, is governed by federal law, post-bankruptcy. Essentially, the Debtor asserts that...