In re Montgomery

• Decision Date: 28 April 2004
• Docket Number: Adversary No. RS03-1228 PC.,Bankruptcy No. RS02-28302 PC.
• Citation: 310 B.R. 169
• Court: U.S. District Court — Central District of California
• Parties: In re Paul Douglas MONTGOMERY, Debtor. Diane K. Ruhlen, f/k/a Diane K. Montgomery, Plaintiff, v. Paul Douglas Montgomery, Defendant.

310 B.R. 169

In re Paul Douglas MONTGOMERY, Debtor Diane K. Ruhlen, f/k/a Diane K. Montgomery, Plaintiff, v. Paul Douglas Montgomery, Defendant.

Bankruptcy No. RS02-28302 PC.

Adversary No. RS03-1228 PC.

United States District Court, C.D. California, Riverside Division.

April 28, 2004.

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Allan Calomino, Law Office of Allan Calomino, Orange, CA, for Diane K. Ruhlen.

Edward L. Fine, Law Office of Edward L. Fine, Pasadena CA, for Paul Douglas Montgomery.

MEMORANDUM DECISION

PETER H. CARROLL, Bankruptcy Judge.

Plaintiff, Diane K. Ruhlen, f/k/a Diane K. Montgomery ("Ruhlen") seeks a judgment determining that her claim against Defendant, Paul Douglas Montgomery ("Montgomery"), a chapter 7 debtor, should be excepted from discharge under 11 U.S.C. § 523(a)(15). The court conducted a trial in this adversary proceeding on April 8, 2004. Allan Calomino, Esq. appeared on behalf of Ruhlen, and Edward Fine, Esq. appeared on behalf of Montgomery. The court, having considered the pleadings, evidentiary record, and arguments of counsel, makes the following findings of fact and conclusions of law¹ pursuant to Fed.R.Civ.P. 52, as incorporated into Fed.R. Bankr.P. 7052.

I. STATEMENT OF FACTS

On June 1, 1985, Ruhlen and Montgomery were married in the State of California. On June 20, 1990, Ruhlen and Montgomery, as husband and wife, borrowed the sum of $54,000 from the Harry B. and Lee Richert Revocable Living Trust dated July 15, 1998 ("Richert Trust"). At the time, Ruhlen's parents, Harry B. Richert and Myrtle Lee Richert, a/k/a Lee Richert, were the trustees of the Richert Trust. Ruhlen and Montgomery used the funds as a down payment for the purchase of a single family residence at 12718 Vultee Avenue, Downey, California ("Vultee Property").

Four years later, Ruhlen and Montgomery executed a note and deed of trust to evidence their loan from the Richert Trust. Ruhlen and Montgomery, as husband and wife, jointly executed a Note Secured By Deed of Trust ("Richert Note") in the original principal sum of $54,000, bearing interest at the rate of 7% per annum from June 20, 1990, payable to the Richert Trust dated January 27, 1994. The Richert Note was secured by a deed of trust lien on the Vultee Property evidenced by a Short Form Deed of Trust of even date therewith recorded as Document # 94-843009 in the Official Records of Los Angeles County, California, on May 3, 1994. The Richert Note was due and payable either (a) upon the sale of the Vultee Property or (b) upon the death of the last of the trustees of the Richert Trust.

On July 28, 1997, Ruhlen and Montgomery separated as husband and wife. Montgomery ultimately filed a petition for dissolution of marriage in the Superior Court for the State of California, County of Los Angeles, Southeast District, under Case # VD032881. In conjunction therewith, Ruhlen and Montgomery entered into a Marital Settlement Agreement ("MSA") dated October 20, 1999, for the purpose of (a) dividing their marital property; (b) allocating responsibility for the remaining marital debt; (c) establishing and allocating the payment of child support; (d) determining visitation schedules for the non-custodial parent with the couple's three minor children of the marriage; and (e) establishing spousal support payments.

When the MSA was executed, the only marital property that had not been divided between the parties was the Vultee Property² and Montgomery's pension plan and deferred compensation plan as a fireman with the City of West Covina. Under the MSA, Montgomery paid Ruhlen the sum of $6,199.60 and conveyed to Ruhlen all of his right, title and interest in the Vultee Property. Ruhlen was awarded the Vultee Property as her sole and separate property. In consideration therefor, Ruhlen relinquished all of her right, title and interest in Montgomery's pension plan and deferred compensation plan which Montgomery received as his sole and separate property.³

Because the Vultee Property was still encumbered by a second deed of trust lien securing the Richert Note, Ruhlen and Montgomery specifically agreed in paragraph 12 of the MSA, as follows:

12. Debt Owed to Lee Richert: The parties agree that each will pay half of the debt owed to Lee Richert, including principal and interest."

It is undisputed that there were no community debts or obligations owing by the parties when the MSA was executed, other than the Richert Note. Indeed, Exhibit "C" to the MSA entitled "Debts and Obligations" specifically declares: "All debts and obligations have been satisfied." Nevertheless, paragraph 13 of the MSA states:

13. Division of Debts and Obligation: The parties agree that the debts and obligations listed in Exhibit "C" attached to this Agreement and incorporated herein by reference are their community debts and obligations and that each will pay and hold the other harmless from the debts set forth opposite the name of each. Any debts and obligations not listed in Exhibit "C" are the sole and separate responsibility of the party incurring the debt or obligation, and each party agrees to pay and hold the other harmless against any liability therefor.

On October 20, 1999, Lee Richert was the sole surviving trustee of the Richert Trust, and the Richert Note was the only debt owing by the parties to Lee Richert.

A Judgment dissolving the marriage between Ruhlen and Montgomery was entered in the state court divorce proceeding on November 10, 1999. The MSA between Ruhlen and Montgomery was attached and incorporated into the Judgment.⁴ After entry of the Judgment, Ruhlen continued to occupy the Vultee Property as her residence and made all mortgage and property tax payments required from the date of the Judgment.

On August 8, 2002, Ruhlen sold the Vultee Property. Lee Richert, as Trustee of the Richert Trust, made demand for payment of the principal sum of $54,000 due and owing on the Richert Note and waived her claim to accrued interest due on the note. The principal amount of the Richert Note was paid in full upon close of escrow.

After the sale of the Vultee Property, Ruhlen made demand on Montgomery to pay the sum of $27,000 representing his one-half share of the debt owing to the Richert Trust pursuant to paragraph 12 of the MSA, as incorporated into the Judgment dated November 10, 1999. Montgomery refused the demand.

On October 9, 2002, Ruhlen filed an application for an order to show cause in the divorce proceeding pending in state court, seeking to enforce the Judgment and to recover the sum of $27,000 which constituted her payment of Montgomery's portion of the debt owed to the Richert Trust. The order to show cause was set to be heard by the state court on November 13, 2002. On November 12, 2002, Montgomery filed his voluntary chapter 7 petition in this case to halt further action on the claim in state court and to discharge the debt. Ruhlen timely commenced this adversary proceeding on February 18, 2003, prior to expiration of the deadline for complaints seeking a determination concerning the dischargeability of debts set in this case pursuant to Fed.R.Bankr.P. 4007.

II. DISCUSSION

This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is appropriate in this court. 28 U.S.C. § 1409(a). The standard of proof under § 523(a)(15), as with other § 523(a) dischargeability exceptions, is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Objections to the dischargeability of a debt are to be literally and strictly construed against the objector and liberally construed in favor of the debtor in order to promote the debtor's fresh start. See Quarre v. Saylor (In re Saylor), 108 F.3d 219, 221 (9th Cir.1997). That policy of protecting and favoring the debtor is tempered, however, when the debt arises from a divorce or separation agreement. Matter of Crosswhite, 148 F.3d 879, 881 (7th Cir.1998).

Section 523(a)(15) states that a discharge in chapter 7 does not discharge an individual debtor from a debt, not of the kind described in § 523(a)(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.

11 U.S.C. § 523(a)(15).

Plaintiff has the initial burden under § 523(a)(15) to establish a prima facie case by a preponderance of the evidence, i.e., that the debt was incurred in the course of a divorce proceeding, was imposed by a court of record in that proceeding, and does not qualify as alimony, maintenance or support within the scope of § 523(a)(5). Jodoin v. Samayoa (In re Jodoin), 209 B.R. 132, 139 (9th Cir. BAP 1997). Once a prima facie case has been established, the burden of proof then shifts to the debtor to establish by a preponderance of the evidence that the debt is dischargeable because the conditions set forth in either subparagraph (A) or subparagraph (B) of § 523(a)(15) exist. Id. at 139-40.

Section 523(a)(15)'s subsections present a two-prong test. If the debtor does not have the ability to pay, the debt is discharged. Only if the debtor has the ability to pay does the court then turn to § 523(a)(15)(B) and...