In re Westerfield

• Decision Date: 13 March 2009
• Docket Number: No. 07-15526.,07-15526.
• Citation: 403 B.R. 545
• Parties: In re William Owen WESTERFIELD, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

403 B.R. 545

In re William Owen WESTERFIELD, Debtor.

No. 07-15526.

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

March 13, 2009.

Kenneth C. Rannick, Chattanooga, TN, for Debtor.

Rex A. Wagner, Cleveland, TN, for Gloria Westerfield.

MEMORANDUM

R. THOMAS STINNETT, Bankruptcy Judge.

This memorandum deals with the chapter 13 debtor's objection to a claim filed by his ex-wife, Ms. Westerfield. The divorce decree and the marital dissolution agreement awarded the marital home to Ms. Westerfield and ordered the debtor to pay the mortgage debt. Ms. Westerfield filed a proof of claim asserting an unsecured claim for the mortgage debt. The proof of claim also asserts the claim is entitled to first priority among unsecured claims because the debtor's duty to pay the mortgage is a "domestic support obligation." 11 U.S.C. §§ 101(14A) & 507(a)(1). The debtor's objection asserts that his obligation to pay the mortgage debt is not a domestic support obligation.

In 1994 the debtor and Ms. Westerfield refinanced the debt secured by their home and executed a mortgage to American Home Mortgage. In August 1996 the debtor and Ms. Westerfield executed the marital dissolution agreement. The agreement awarded the house to Ms. Westerfield, divested the debtor of any interest in the house, and required him to execute the necessary documents conveying title to her. The agreement made the debtor responsible for paying the mortgage debt to Trans Financial in the approximate amount of $76,000, required him to indemnify and hold Ms. Westerfield harmless from liability on the mortgage debt, and provided that these obligations would be extinguished on the death or remarriage of Ms. Westerfield. The state court entered the divorce decree in September 1996 and adopted the marital dissolution agreement as part of the decree.

More than eleven years later, on December 19, 2007, the debtor filed his chapter 13 petition along with the required schedules and other documents. The schedule of real property identifies the house as jointly owned by the debtor and subject to a mortgage debt of $48,000. Schedule D identifies the mortgage holder as U.S. Bank Home Mortgage, but the mailing list includes two addresses for Wells Fargo Home Mortgage. It is undisputed that Wells Fargo was the mortgage holder when the debtor filed his chapter 13 case.

The debtor did not list Ms. Westerfield as a creditor in any of the schedules of creditors. The debtor scheduled her as a co-debtor on the mortgage debt. Under Ms. Westerfield's name and address, the schedule includes the notation "523(a)(15) CLAIM". The statistical summary of liabilities lists the mortgage debt among divorce obligations that are not entitled to priority as domestic support obligations.

The debtor's proposed chapter 13 plan treated U.S. Bank/Wells Fargo as the other party to an executory contract. It listed the house as the property dealt with by contract and provided for surrender to U.S. Bank/Wells Fargo.

The plan provided that priority claims would be paid in full unless a different treatment was set out in section 6 for a particular claim. Section 6 did not refer to Ms. Westerfield's claim. No other provision of the proposed plan mentioned Ms. Westerfield's claim.

Less than a month after the debtor filed his chapter 13 case, Wells Fargo Bank filed a motion for relief from the automatic stay imposed by the bankruptcy code. 11 U.S.C. § 362(a). The bank sought relief from the stay so that it could foreclose on the house. It demanded payment of the full balance due—$45,270.84. The motion alleged the debtor had failed to pay the full amount of the monthly mortgage payments. The court granted the motion on February 14, 2008.

On February 29, 2008 the court confirmed the debtor's chapter 13 plan. In early May 2008 Ms. Westerfield filed her proof of claim. Ms. Westerfield had refinanced the mortgage in late February or early March 2008 and paid the debt to Wells Fargo Bank. The amount of her claim is the amount that she paid, which was the amount Wells Fargo Bank demanded to avoid foreclosure—$45,270.84.

At this point, the court can deal with whether confirmation of the plan affected the priority of Ms. Westerfield's claim. An explanation of some basic legal rules will help to avoid confusion.

Bankruptcy law has long included an exception from discharge for the debtor's obligations that are actually in the nature of support for an ex-spouse or child. 11 U.S.C. § 35(a)(7) (1978); 1A James W. Moore, et al., Collier on Bankruptcy ¶ 17.19 (14th ed.1988); 11 U.S.C. § 523(a)(5) (1979); 4 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 523.11 (15th ed.2008).

A 2005 law made several amendments to the bankruptcy code for the purpose of giving more protection to creditors owed support debts. Those amendments included the definition of domestic support obligation. Pub.L. 109-8, 119 Stat. 23 §§ 102, 211-219, 329 & 442 (Apr. 20, 2005); 11 U.S.C. §§ 101(14A), 362(b)(2), 503(b)(1), 507(a)(1), 523(a)(5), 547(c)(7), 704(a)(10), 707(c)(3), 1106(a)(8), 1112(b)(4)(P), 1129(a)(14), 1202(b)(6), 1208(c)(10), 1225(a)(7), (b)(2), 1228(a), 1302(b)(6), 1307(c)(11), 1325(a)(8), (b)(2) & 1328(a). The definition of domestic support obligation is now used in the discharge exception, § 523(a)(5) of the bankruptcy code.

The definition is used in other statutes that Congress intended to protect claims for support. In particular, an unsecured claim for a domestic support obligation is entitled to first priority in the payment of unsecured claims. 11 U.S.C. §§ 507(a)(1) & 1322(a)(2). When a domestic support obligation requires the debtor to make installment payments on a debt, such as a home mortgage, the statutes cause some confusion as to whether the priority claim is limited to installment payments that were due pre-petition—before the debtor filed his chapter 13 petition. The question is whether the payments coming due post-petition (during the chapter 13 case) are entitled to first priority. 11 U.S.C. §§ 507(a)(1), 101(14A) & 101(5). The court raises the point because the debtor made all the mortgage payments that were due pre-petition. Despite this fact, the parties recognized the need for a decision on the nature of the debtor's duty to pay the mortgage debt. An answer is needed because other statutes require a chapter 13 debtor to make post-petition payments on a domestic support obligation, as explained in the next paragraph.

The court cannot confirm the debtor's proposed chapter 13 plan if the debtor has failed to make all payments due post-petition on a domestic support obligation. 11 U.S.C. § 1325(a)(8) (if an order or statute requires the debtor to pay the domestic support obligation). The debtor's failure to pay a domestic support obligation that first becomes payable during the chapter 13 case is a ground for dismissal of the case or conversion to a chapter 7 liquidation. 11 U.S.C. § 1307(c)(11). If the debtor completes the confirmed plan, the debtor can obtain a discharge only by certifying full payment of the amounts previously due on a domestic support obligation. 11 U.S.C. § 1328(a) (if an order or statute requires the debtor to pay the domestic support obligation and certification as to pre-petition amounts only to the extent provided for by the plan). Finally, a domestic support obligation is excepted from discharge in a chapter 13 case even if the debtor completes the confirmed plan. 11 U.S.C. § 1328(a)(2) & (c). The statutes are clearly aimed at preventing discharge of any amounts owed on a domestic support obligation. See generally 5 & 6 Keith M. Lundin, Chapter 13 Bankruptcy ¶ 440.1, ¶ 441.1 & ¶ 519.1. In light of these statutes, the courts may seldom be bothered with the question of whether amounts or obligations that come due post-petition in a chapter 13 case are entitled to first priority.

Section 523(a)(15) is another exception from discharge for debts arising from a divorce. The exception is broad but applies only to obligations that are not domestic support obligations. 11 U.S.C. § 523(a)(15). Debts that come within § 523(a)(15) do not give the ex-spouse creditor a priority claim. 11 U.S.C. § 507(a)(1) & § 101(14A); In re Boller, 393 B.R. 569 (Bankr.E.D.Tenn.2008). Debts that come within this exception will also be discharged if the debtor completes a chapter 13 plan. 11 U.S.C. §§ 727(a), 1141(d)(2), 1228(a) & 1328(a).

The debtor's schedules did not list Ms. Westerfield as holder of a priority claim for a domestic support obligation. They included a notation that Ms. Westerfield's claim came under § 523(a)(15) of the bankruptcy code. 11 U.S.C. § 523(a)(15). The statistical summary also identified Ms. Westerfield's claim as not based on a domestic support obligation. The point was to identify Ms. Westerfield's claim as not based on a domestic support obligation.

Under the marital dissolution agreement, the debtor had a separate obligation to Ms. Westerfield to pay the mortgage debt on the house, and she had a personal claim against him for payment of the mortgage debt. McCracken v. LaRue (In re LaRue), 204 B.R. 531 (Bankr.E.D.Tenn. 1997); Crawford v. Osborne (In re Osborne), 262 B.R. 435 (Bankr.E.D.Tenn. 2001) (indemnity clause not required). Ms. Westerfield had a pre-petition claim for the debtor's obligation to pay the mortgage debt. See, e.g., Schultz v. Schultz (In re Schultz), 204 B.R. 275 (D.Mass.1996); Altchek v. Altchek (In re Altchek), 124 B.R. 944 (Bankr.S.D.N.Y.1991); Beardslee v. Beardslee (In re Beardslee), 209 B.R. 1004 (Bankr.D.Kan.1997).

Ms. Westerfield was required to file a proof of claim to receive payment under the plan as holder of an unsecured pre-petition claim. See 11 U.S.C. §§ 501, 502, 507(a)(1); In re Elstien, 238 B.R. 747 (Bankr.N.D.Ill.1999). A timely filed proof of claim establishes the status of the claim until a party in interest files an objection to the claim. 11 U.S.C. § 502(a); Fed. R. Bankr.P. 3001(f). This rule...