In re Osborne

• Decision Date: 30 April 2001
• Docket Number: Bankruptcy No. 00-33265. Adversary No. 00-3132.
• Citation: 262 BR 435
• Parties: In re Bobby Joe OSBORNE, Debtor. Judy Fay Crawford, Plaintiff, v. Bobby Joe Osborne, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

262 B.R. 435 (2001)

In re Bobby Joe OSBORNE, Debtor Judy Fay Crawford, Plaintiff, v. Bobby Joe Osborne, Defendant.

Bankruptcy No. 00-33265. Adversary No. 00-3132.

United States Bankruptcy Court, E.D. Tennessee.

April 30, 2001.

COPYRIGHT MATERIAL OMITTED

Gail F. Wortley, Knoxville, TN, for Plaintiff.

Turner & Vittone, Jimmie D. Turner, Oliver Springs, TN, for Defendant.

MEMORANDUM

RICHARD STAIR, Jr., Bankruptcy Judge.

Before the court is the Plaintiff's Complaint to Determine Dischargeability of Debt (Complaint) filed on November 16, 2000. By her Complaint, the Plaintiff seeks a determination that three marital debts (the Marital Debts) assumed by the Defendant (Debtor) in the parties' Marital Dissolution Agreement are non-dischargeable pursuant to 11 U.S.C.A. §§ 523(a)(5) or (15) (West 1993 & Supp.2000). This matter was tried before the court on April 9 and 23, 2001.

This is a core proceeding. 28 U.S.C.A. § 157(b)(2)(I) (West 1993).

I

Formerly husband and wife, the parties were divorced on October 27, 1998, pursuant to a Final Decree of Divorce entered in the Fourth Circuit Court for Knox County, Tennessee. The divorce decree incorporates by reference the parties' Marital Dissolution Agreement (MDA) dated October 26, 1998, which provides in material part:

4. Non-dischargeability. With respect to each party\'s responsibility for payment of certain debts and liabilities, and their obligation to hold the other harmless for the payment thereof, the parties understand and agree that their obligation is a non-dischargeable debt under the Bankruptcy Code, this obligation being part of the final financial support settlement for both parties.

. . . .

20. Alimony Waived. In consideration of Husband waiving all claims to the wife\'s sic PIA account, the assumption of certain marital debts by Husband, the stipulation for each party to retain their own retirement account and other good and valuable consideration, both party\'s sic agree that they waive any and all claims for alimony that they might have in this divorce action between them.

21. Debts. Each party agrees to assume, pay and hold the other party harmless from any of the debts that were incurred in their own individual names during the marriage. Husband agrees to assume all liability and responsibility for all outstanding indebtedness associated with the following joint accounts:

(a) American General Finance Account # XXXXXXXXXXXXXXXX;

(b) Discover Card Account # XXXXXXXXXXXXXXXX; and

(c) Household Credit Service Account # XXXXXXXXXXXXXXXX.

Each party represents unto the other party that each party has no knowledge of any other outstanding joint or marital debt except that which might be associated with the parties\' marital residence, which is provided for hereinafter. However, the parties agree that in the event a debt shall become known, that each party agrees that the party who incurred the debt shall be solely responsible for said debt and shall hold the other party harmless therefrom.

Each party agrees that any charges either party might have made or any liability that would result from either party\'s own individual credit cards, charge accounts, signature loans, lines of credit or other type of indebtedness shall become that individual party\'s sole and exclusive responsibility, and that party shall hold the other party harmless therefrom.

On August 17, 2000, the Debtor filed a Voluntary Petition under Chapter 7. He listed the Plaintiff as a co-debtor on the debt to Household Credit Service,¹ but did not schedule the Plaintiff as a co-debtor on the Discover Card account.² The American General Finance debt is not accounted for in the Debtor's schedules, and the testimony at trial indicated that the account had been paid in full.

II

The Plaintiff objects to the dischargeability of the American General Finance, Discover Card, and Household Credit Service accounts pursuant to § 523(a)(5) of the Bankruptcy Code. That section provides that a discharge under Chapter 7 does not discharge an individual debtor from any debt:

To a spouse or former spouse . . . of the debtor, for alimony to, maintenance for, or support of such spouse . . . in connection with a separation agreement, divorce decree or other order of a court of record . . . but not to the extent that —

. . . .

(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.A. § 523(a)(5) (West 1993 & Supp.2000). The non-debtor spouse bears the burden of establishing non-dischargeability. See Long v. Calhoun (In re Calhoun), 715 F.2d 1103, 1111 n. 15 (6th Cir. 1983).

Alternatively, the Plaintiff asserts that the Marital Debts are non-dischargeable under § 523(a)(15), which excludes from discharge a debt:

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 . . . 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.A. § 523(a)(15) (West Supp.2000). The non-debtor spouse bears the burden of proving that the debt is not of the kind described in § 523(a)(5) and that the debt was 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." See Armstrong v. Armstrong (In re Armstrong), 205 B.R. 386, 391 (Bankr. W.D.Tenn.1996); In re Smither, 194 B.R. 102, 107 (Bankr.W.D.Ky.1996). The burden then shifts to the debtor to prove one of the affirmative defenses set forth in § 523(a)(15)(A) or (B). See Armstrong, 205 B.R. at 391; Smither, 194 B.R. at 107; see also Patterson v. Patterson (In re Patterson), 132 F.3d 33, 1997 WL 745501, at *2 (6th Cir.1997).

III

As an initial matter, the court must first discuss the nature of the obligations assumed by the Debtor in light of the hold harmless provisions contained in the MDA. In McCracken v. LaRue (In re LaRue), 204 B.R. 531 (Bankr.E.D.Tenn.1997), this court held that §§ 523(a)(5) and (a)(15) were inapplicable to joint debts assumed in a manner similar to those in the present case because of the absence of a hold harmless agreement. See LaRue, 204 B.R. at 534-36.

The parties in LaRue were formerly husband and wife and were divorced pursuant to a Final Decree which imposed certain obligations on the defendant debtor. At issue in LaRue was the provision of the Final Decree directing that the defendant "shall pay the outstanding balances on the Lowe's charge card, Citi-Bank, in the approximate sum of $5,100.00, and the Tennessee Teacher's Credit Union account, in the approximate sum of $3,200.00." Id. at 532. The Final Decree contained no hold harmless language "requiring the Debtor to indemnify or reimburse the Plaintiff for any portion of the parties' joint obligations she is required to pay." Id.

Citing a portion of § 523(a)(5)'s legislative history, the court held that there was no debt "in connection with" the Final Decree, as required by § 523(a)(5), because obligations to third parties are within the statute's reach only if there is an "entitlement to indemnification or reimbursement in favor of the Plaintiff if the Debtor fails to make the payments required." Id. at 534-35. The debts at issue were thus "obligations to third party creditors, not his former spouse," and not subject to § 523(a)(5). Id. at 535. Similarly, and again citing legislative history, the court held that the debts fell outside the scope of § 523(a)(15) as well:

In sum, this court holds that, in the absence of a hold harmless agreement, § 523(a)(15) is inapplicable to joint debts that were incurred by the Debtor prior to the divorce proceeding. Moreover, § 523(a)(15) is also inapplicable to debts owing to third parties, despite the fact that they were incurred in the divorce proceeding, since the statute, supported by its legislative history, makes it clear that this exception to dischargeability applies only to debts that are owed to a spouse or former spouse. Because all of the obligations at issue in the present proceeding are obligations owed by the Debtor to third party creditors as opposed to his former spouse, § 523(a)(15) is inapplicable to an action to render these debts nondischargeable.

LaRue, 204 B.R. at 536; accord Belcher v. Owens (In re Owens), 191 B.R. 669 (Bankr.E.D.Ky.1996).

In the present case, the Debtor argues that the Marital Debts are dischargeable under LaRue. In paragraph 21 of the MDA, the Debtor agrees to "assume all liability and responsibility" for the three disputed joint Marital Debts, but there is no mention of indemnification of the Plaintiff. In contrast, immediately preceding and following the Marital Debt provision, each party expressly agrees to hold the other harmless for debts incurred in their individual names during the marriage. Paragraph 4 of the MDA, addressing non-dischargeability in bankruptcy, is less than clear, stating that:

With respect to each party\'s responsibility for payment of certain debts and liabilities, and their obligation to hold the other harmless for the payment thereof, the parties understand and agree that their obligation is a non-dischargeable debt under the Bankruptcy Code, this obligation being part of the final financial support settlement for both parties.³

This provision could be read as (A) an indemnification provision applying to all...