In re Knight

• Decision Date: 25 March 1983
• Docket Number: No. C-C-82-521-P.,C-C-82-521-P.
• Citation: 29 BR 748
• Parties: In re Dana W. KNIGHT, Debtor, Judy Pressley KNIGHT, Plaintiff, v. Dana William KNIGHT, Defendant.
• Court: U.S. District Court — Western District of North Carolina

29 B.R. 748 (1983)

In re Dana W. KNIGHT, Debtor Judy Pressley KNIGHT, Plaintiff, v. Dana William KNIGHT, Defendant.

No. C-C-82-521-P.

United States District Court, W.D. North Carolina, Charlotte Division.

March 25, 1983.

R. Lee Myers, Charlotte, N.C., for plaintiff.

R. Keith Johnson, Charlotte, N.C., for defendant.

MEMORANDUM AND ORDER

POTTER, District Judge.

THIS MATTER coming on to be heard and being heard before the undersigned United States District Court Judge for the Western District of North Carolina on the 17th day of March, 1983, at the United States Courthouse in Charlotte, North Carolina, on the appeal of the Plaintiff from Bankruptcy Court; and,

Mr. R. Lee Myers, Attorney at Law, having appeared for the Plaintiff, and Mr. R. Keith Johnson, Attorney at Law, having appeared for the Defendant; and,

The Court having heard the oral arguments of counsel and reviewed the record and Memoranda of Law submitted, finds that the Bankruptcy Court's decision was erroneous as a matter of law and enters the following Memorandum and Order:

DISCUSSION

In this appeal from the determination of the dischargeability of the debts of the Defendant, the following findings of the Bankruptcy Court are presented for review: (1) the Defendant's debt to pay the Plaintiff's counsel fees for the separation proceedings under the state court's order was a dischargeable debt, and (2) the Defendant's debt to pay certain joint obligations to general creditors was nondischargeable, only if the monthly loan payments converted into payments made directly to the Plaintiff after satisfaction of the loan. The Plaintiff contends that the Defendant's debts for counsel fees and the joint obligations to general creditors are nondischargeable. The Defendant contends that these debts are dischargeable.

I. Factual Background

Plaintiff and Defendant were married on or about September 24, 1969; their only child was born on January 7, 1971. The Plaintiff was not employed outside the house during the marriage and had no outside income. On February 7, 1981, the Defendant abandoned the Plaintiff and the child, and on May 15, 1981, the Plaintiff filed suit in North Carolina state district court, seeking divorce from bed and board, child custody, child support, alimony pendente lite, permanent alimony, and attorneys' fees. On June 17, 1981, a settlement was negotiated, and counsel for the Plaintiff agreed to draft the consent order. The Defendant failed to execute the consent order, and on July 22, 1981, the Plaintiff moved that the state district court enter the unexecuted consent order; on September 4, 1981, it was so ordered.

The consent order was in essence a separation agreement that did not provide for an equitable distribution or settlement of property but ordered the Defendant to pay:

(1) child support of $300.00/mo. Paragraph 4

(2) permanent alimony of $50.00/mo. Paragraph 5

(3) debts incurred during the marriage to Master Charge; VISA/Citibank; Sears; Associates Finance; NCNB; Wickes; BB & T; HFC. Paragraph 5, 7

(4) additional permanent alimony following the scheduled satisfaction of the BB & T and HFC loans in the exact amount of each loan on a monthly basis. Paragraph 5

(5) counsel fees incurred by the Plaintiff in the amount of $200.00, for the consent decree and $100.00 for the prosecution of the motion to enter the Consent Order. Paragraph 8

On November 4, 1981 the Defendant was held in contempt. He was ordered incarcerated pending the payment of money, his wages were ordered garnished, and he was ordered to pay $200.00 for the Plaintiff's attorneys' fees for the contempt proceedings.

On February 12, 1982, the Defendant filed a Chapter 7 Bankruptcy petition in this district. On May 10, 1982 the Plaintiff filed a complaint to determine the dischargeability of debts pursuant to 11 U.S.C. § 523. On July 28, 1982 the Bankruptcy Court held that only the BB & T and HFC loans were in the nature of alimony, maintenance and support, so as to be nondischargeable. The Defendant's debt for the remaining joint obligations to general creditors was discharged with the debt for Plaintiff's counsel fees. The Plaintiff filed her notice of appeal on June 25, 1982, pursuant to Rule 801 of the Bankruptcy Rules of Procedure.

II. Payments on Behalf of the Dependent Spouse

The Bankruptcy Reform Act of 1978 provides that a discharge of debts under the Act does not discharge 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 property settlement agreement, except to the extent that—

(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise; 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."

11 U.S.C. § 523(a)(5) emphasis added.

The Bankruptcy Court below held that this section "requires that the debt be to the spouse and not on her behalf." Order ¶ 20, p. 7 (emphasis in original). Since there is no precedent within the Fourth Circuit, this Court will look to the detailed discussion of the issue recently provided by the Second Circuit:

"A joint explanatory statement, issued shortly before Congress passed the 1978 Act, states in part:

`If the debtor has assumed an obligation of the debtor\'s spouse to a third party in connection with a separation agreement . . . such debt is dischargeable to the extent that payment of the debt by the debtor is not actually in the nature of alimony, maintenance, or support of debtor\'s spouse, former spouse, or child.\'

* * * * * *

In that portion of the House Report immediately succeeding the language in question, the committee said: `This provision will, however, make nondischargeable 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 spouse, as determined under bankruptcy law considerations that are similar to considerations of whether a particular agreement to pay money to a spouse is actually alimony or a property settlement.\'"

In re Spong, 661 F.2d 6, 9-11 (2d Cir.1981) (citations omitted, emphasis added). The Court in Spong held that the debt in question was not "assigned to another entity," (11 U.S.C. § 523(a)(5)(A)), but was a third-party beneficiary contract "and should not be confused with an assignment." Id. at 10. Thus, the agreement, found by the Court to be "in payment of alimony, maintenance, or support," resulted in a nondischargeable debt, although payment was made to a third-party for the benefit of the debtor's spouse. See also, Matter of Gwinn, 20 B.R. 233 (Bkrtcy.App. 9th Cir.1982); In re Schroeder, 25 B.R. 190 (Bkrtcy.Ill.1982); In re Harrod, 16 B.R. 711 (Bkrtcy.W.D.Ky. 1982).

Until the Fourth Circuit announces its interpretation of the words "to the spouse" in Section 523(a)(5) of the Bankruptcy Reform Act, this Court will follow the Second Circuit, agreeing "that it would be exalting form over substance to fail to treat defendant's agreement to pay his wife's debts as a `debt . . . to a spouse . . . for alimony . . . maintenance . . ., or support,' and that, therefore, it is nondischargeable in bankruptcy" once the debts have been found to be "actually in the nature of alimony." In re Spong, supra, 661 F.2d at 10.

III. Counsel Fees

The Bankruptcy Court below held that counsel fees awarded pursuant to a supporting spouse's duty of maintenance under state law would be a nondischargeable debt only if specifically delineated as alimony, maintenance, or support, or if such payments converted into alimony payments to be made directly to the dependent spouse Order ¶ 18, p. 7.

Although the Bankruptcy Court rested upon the failure of the state court order to specifically designate the Plaintiff's counsel fees as "alimony", it is clear from 11 U.S.C. § 523(a)(5)(B) Section II, infra, that it is the true "nature" of the debt, the substance and not the form or "designation" that will control dischargeability. This Court finds no basis in the Act for the Bankruptcy Court's requirement that the counsel fee debt must convert into a direct alimony payment upon satisfaction of the debt to be nondischargeable under Section 523(a)(5). The Court finds no supporting case law for this proposition, and none was cited in the Order below.

It is state domestic relations law that governs "the nature of alimony, maintenance, or support," and, thus, will determine whether a provision in a consent decree is intended to discharge the duty of support under state law.

"United States courts have no jurisdiction over divorce or alimony allowances . . . `there is no federal law of domestic relations,\' DeSylva v. Ballentine, 351 U.S. 570, 580 76 S.Ct. 974, 979-980, 100 L.Ed. 1415 (1956), `the whole subject of which belongs to the laws of the States.\' Popovici v. Agler, 280 U.S. 379, 383 50 S.Ct. 154, 154-155, 74 L.Ed. 489 (1930). (quoting Ex parte Burrus, 136 U.S. 586, 593-594 10 S.Ct. 850, 852-853, 34 L.Ed. 1500 (1890)). Congress could not have intended in enacting the 1978 Bankruptcy Code that federal courts were to formulate the bankruptcy law of alimony and support in a vacuum, precluded from all reference to the reasoning of the well-established law of the States."

In re Spong, 661 F.2d 6, 9 (2d Cir.1981) applying New York law, holding a debt for counsel fees to be nondischargeable when awarded in connection with separation or divorce proceedings. See also, Matter of Painter, 21 B.R. 846 (Bkrtcy.M.D.Ga.1982).

In North Carolina, it has been held that "a finding that the wife . . . cannot be represented in the divorce action by counsel without financial help from her husband is equivalent to a finding that she does not have sufficient means whereon to subsist during the

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