In re Leach
| Decision Date | 24 December 1981 |
| Docket Number | Adv. No. 205-81-0259.,Bankruptcy No. 5-81-00437 |
| Citation | 15 BR 1005 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re James N. LEACH, Debtor. STATE OF CONNECTICUT, Plaintiff, v. James N. LEACH, Defendant. |
Edward F. Reynolds, Jr., Asst. Atty. Gen., State of Conn., Hartford, Conn., for plaintiff.
Francis J. Grady, Waterbury, Conn., for debtor.
ALAN H.W. SHIFF, Bankruptcy Judge.
This opinion considers the effect of the recent amendments1 in the Omnibus Budget Reconciliation Act of 1981 on a debtor's right to discharge. The State of Connecticut has filed a complaint to determine the nondischargeability of the debtor's child support obligations. In addition, the State has objected to an exemption asserted by the debtor in connection with the settlement of his personal injury claim.
The material facts necessary for a resolution of the issues in this proceeding are undisputed and are as follows:
The debtor received $63,018.83 in public assistance from the State of Connecticut, including child support payments in the amount of $44,785.34 made under the Aid To Families With Dependent Children Program (AFDC). The debtor's obligation of support was assigned to the State pursuant to section 402(a)(26) of Title IV of the Social Security Act.2 The State also obtained a priority claim and a lien on the proceeds of the debtor's personal injury cause of action pursuant to the General Statutes of Connecticut §§ 17-83e,3 17-83f.4
On November 11, 1977, the debtor's attorney received notice of the State's statutory lien. On or about April 10, 1981, the debtor received $12,500.00 in settlement of his personal injury claim and on April 20, 1981, the debtor filed a petition under chapter 7 listing the net proceeds of his personal injury claim as exempt property on Schedule B-4 of his petition. The debtor's attorney currently holds the proceeds. The debtor also listed the public assistance as a debt to the State on Schedule A-3. On August 20, 1981, the trustee received notice of the State's lien.
Although the State has raised several issues, including voidable preferences and nondischargeability of debts for obtaining money by false pretenses or actual fraud, the dispositive issues in this case follow.
Is the debt excepted from discharge under Code § 523(a)(5) or other applicable law?
If the debt is not discharged, are the settlement proceeds liable for that debt under Code § 522(c)?
The State's pro forma claim, challenging the constitutionality of this court's exercise of jurisdiction in such matters was rejected by Judge Robert L. Krechevsky in the bankruptcy court for this district at Hartford in a decision embraced by the Court of Appeals for the Second Circuit in In re Glidden, 8 B.R. 128, 7 B.C.D. 117, (Bkrtcy.) aff'd, 653 F.2d 85 (2nd Cir. 1981), petition for cert. filed, 81-565 (U.S. Sept. 18, 1981). Consequently, this issue will not be discussed further in this opinion.
It should be noted parenthetically that the discharge ordered in this case merely released the debtor from his dischargeable debts. 11 U.S.C. § 727(b). In the instant proceeding the State seeks a determination that the debt occasioned by the grant of public assistance to the debtor's children is nondischargeable pursuant to 11 U.S.C. § 523(a)(5), as amended. The debtor, on the other hand, claims that debts arising out of support obligations assigned to another entity (such as the State) are dischargeable. Thus, while both parties claim that Code § 523(a)(5)(A) applies to the issue of dischargeability of the debt to the State of Connecticut, the debtor seeks a determination on the basis of this Code section as it was on the date of his discharge, whereas, the State argues that the recent amendment of that section should control, as it is the law in effect at the time of this decision.5
The question of what law applies was settled by In re Spell, 650 F.2d 375 (2d Cir. 1981). The court in Spell at page 377 observed:
This general principle that a court must apply the law that exists as of the date it renders its decision has been consistently applied in cases arising under the Bankruptcy Act. The issue has arisen most frequently in the context of a change of law in the period between the filing of a bankruptcy petition and the court\'s ruling on the bankrupt\'s application for a discharge from bankruptcy. In these cases, this circuit has repeatedly held that "the grounds which would bar a discharge must be determined by the law in force at the time the judge passed on the question of discharge . . ." In re Carter, 32 F.2d 186, 188 (2d Cir. 1929); see also United Wallpaper Factories v. Hodges, 70 F.2d 243 (2d Cir. 1934); Royal Indemnity Co. v. Cooper, 26 F.2d 585 (4th Cir. 1928); In re Sloss, 192 F.Supp. 136 (S.D.N.Y.1961). It is noteworthy that this rule was applied even though the result for the bankrupt was harsh, as In re Carter, supra, or Royal Indemnity Co. v. Cooper, supra.
The court concluded that the law on the date of the determination of dischargeability must be applied even if it differs from the law on the date the debtor received his discharge. Accordingly, if the parties were correct that Code § 523(a)(5)(A) governs the issue of dischargeability in this case, it would follow that the recent amendment to that subsection would render the debt to the State nondischargeable.
The parties, however, have overlooked the plain language of Code § 523(a)(5) to the effect that the debt for support must be "in connection with a separation agreement, divorce decree or property settlement agreement". This requirement was stressed in 3 Collier on Bankruptcy Par. 523.152 page 523-109 (15th ed. 1979):
Section 523(a)(5) also excepts from the operation of a discharge debts for "maintenance for, or support of both spouse or child." This provision applies only "in connection with a separation agreement." This qualifying clause did not appear in section 17a(7) of the Bankruptcy Act, and represents a significant change. Section 17a(7) was construed to apply to the common law liability involuntarily imposed upon the parent for support of a child. The provisions of section 523(a)(5) are clear that liability for maintenance and support are dischargeable unless the liability arises in connection with a separation agreement, divorce decree, or property settlement agreement.
No claim was made in this proceeding that the child support debt had such an origin. I therefore conclude that the debt to the State of Connecticut is not excepted from discharge by Code § 523(a)(5)(A) as amended, but that conclusion is not dispositive of the question of dischargeability.
The controlling law is found in section 456 of the Social Security Act, 42 U.S.C. § 656, which was amended in the same enactment that amended 11 U.S.C. § 523(a)(5)(A). The amended 42 U.S.C. § 656 now includes the following subsection: "(b) A debt which is a child support obligation assigned to the State under 402(a)(26) of the Social Security Act, 42 U.S.C. 602(a)(26) is not released by a discharge in bankruptcy under title 11, United States Code."6 As was the case with the amendment to 11 U.S.C. § 523(a)(5)(A), the amendment to 42 U.S.C. § 656 became effective August 13, 1981,7 and the holding of In re Spell, as noted above, dictates that the amendment to 42 U.S.C. § 656 be applied in the instant case. I accordingly conclude that the debt in this proceeding which consists of a child support obligation assigned to the State is not discharged.8
Having decided that Leach's debt to the State of Connecticut is not discharged, attention is now directed to the State's objection to the debtor's assertion that the settlement proceeds of his personal injury claim are exempt.
The filing of a petition in bankruptcy creates an estate, consisting of essentially all of the debtor's property. Even property which is needed for a fresh start is initially included in the estate but subject to the debtor's exemption rights under Code § 522. Code subsections 522(d)(11)(D) and (E)9 permit the debtor to exempt payments on account of bodily injury and lost earnings. Code § 522(d)(5) permits a debtor to exempt any property up to the value of $400.00 plus any unused amount allowable under the so-called homestead exemption.
The question then is not whether the debtor is entitled to claim settlement proceeds as exempt property, but rather whether such property is liable for his prepetition debt to the State of Connecticut. The resolution of this issue is found in an analysis of Code § 522(c).10
Exposure of exempt property to prepetition debts under Code § 522(c)(1) depends upon a finding that the debt arose in connection with a "separation agreement, divorce decree or property settlement agreement" as specified in Code § 523(a)(5). Since, as stated above, no such debt has been asserted in this proceeding, Code § 522(c)(1) does not apply.
Under Code § 522(c)(2), exempt property remains liable to prepetition debts to the extent that the property is subject to a lien not avoided under various sections of the Bankruptcy Code. The debtor has conceded that the State has a valid statutory lien on the settlement proceeds of his personal injury claim. He contends, however, that the lien was not perfected or enforceable against a bona fide purchaser on the date his petition was filed and therefore is voidable pursuant to Code §§ 545(2)11 and 522(h).12 I agree.
For a determination of whether a state statutory lien is perfected or enforceable against a bona fide purchaser, bankruptcy courts look to the law of the state which created the lien. 4 Collier on Bankruptcy Par. 545.042, page 545-18 (15th ed. 1979).
Section 17-83f of the Connecticut General Statutes is silent regarding the rights of a bona fide purchaser. The statute merely provides that the...
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