New Mexico Dep't of Workforce Solutions v. Martinez (In re Martinez)

• Decision Date: 25 July 2012
• Docket Number: No. 7-11-15027 JA,Adversary No. 12-1186 J,7-11-15027 JA
• Parties: In re: BENJAMIN MARTINEZ, JR. and MARGARET L. MARTINEZ, Debtors. NEW MEXICO DEPARTMENT OF WORKFORCE SOLUTIONS, Plaintiff, v. MARGARET L. MARTINEZ, Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: BENJAMIN MARTINEZ, JR. and MARGARET L. MARTINEZ, Debtors.NEW MEXICO DEPARTMENT OF WORKFORCE SOLUTIONS, Plaintiff,

v.MARGARET L. MARTINEZ, Defendant.

No. 7-11-15027 JA

Adversary No. 12-1186 J

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

Date entered on docket: July 25, 2012

MEMORANDUM OPINION

Plaintiff New Mexico Department of Workforce Solutions ("NMDWFS") filed this adversary proceeding seeking a determination of non-dischargeability of debt under 11 U.S.C. § 523 following Defendant Margaret L. Martinez's rescission of a Reaffirmation Agreement between the NMDWFS and Ms. Martinez reaffirming a debt in the amount of $8,993.00. The reaffirmed debt represents unemployment benefits that NMDWFS asserts Ms. Martinez fraudulently obtained. Ms. Martinez filed a motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., asserting that NMDWFS's complaint to determine non-dischargeability of debt is untimely, and that the reaffirmation agreement between NMDWFS and Ms. Martinez is unenforceable. See Defendant's Motion to Dismiss Plaintiff's Complaint to Determine Dischargeability of Debt Pursuant to Fed. R. Civ.P. 12(b)(6) ("Motion to Dismiss") - Docket No. 5. NMDWFS opposes the Motion to Dismiss, asserting that the doctrine of equitable tolling applies.

The Court heard oral argument on the Motion to Dismiss on July 18, 2012 and took the matter under advisement. After considering the arguments of counsel, and being otherwise sufficiently informed, the Court finds that the Motion to Dismiss should be granted. Even if the Court were to accept for purposes of argument that the doctrine of equitable tolling extended the period for NMDWFS to file its non-dischargeability complaint, NMDWFS did not file its complaint within the reasonable tolled period of time.

In considering a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7012, Fed.R.Bankr.P., the Court must accept as true all well-pleaded facts alleged in the complaint and construe those facts in the light most favorable to the party opposing dismissal. Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006). New Mexico Department of Workforce Solutions' Complaint to Determine Dischargeability of Debt ("Complaint") includes the following allegations relevant to the Court's determination of the Motion to Dismiss:

1. Ms. Martinez received unemployment benefit payments totaling $8,993.00 to which she was not entitled. See Complaint, ¶ 6.

2. Ms. Martinez filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code on November 19, 2011. See Complaint ¶ 2.

3. The Court had set a deadline of February 17, 2012 for the filing of a complaint to determine the dischargeability of debt in Ms. Martinez's bankruptcy case. See Complaint, ¶ 8.

4. NMDWFS sent a letter to Ms. Martinez's counsel on January 13, 2012 regarding the entry of a reaffirmation agreement under which Ms. Martinez would agree to repay the outstanding balance of the unemployment insurance benefits to which she was notentitled. The letter stated that if Ms. Martinez did not enter into the reaffirmation agreement, NMDWFS would file a complaint to seeking to have the debt determined non-dischargeable. See Complaint, ¶ 9.

5. Ms. Martinez and NMDWFS entered into a reaffirmation agreement with NMDWFS on February 15, 2012 as proposed in the January 13, 2012 letter. See Complaint ¶ 10. Ms. Martinez and her counsel executed the Reaffirmation Agreement on February 10, 2012. NMDWFS executed and filed the Reaffirmation Agreement on February 15, 2012.¹

6. Ms. Martinez filed a Notice of Rescission of Reaffirmation Agreement giving notice to the NMDWFS and to the Court of her rescission of the reaffirmation agreement on April 4, 2012. See Complaint ¶ 11.

NMDWFS filed its Complaint in this adversary proceeding on April 27, 2012. See Docket No. 1. NMDWFS's Complaint includes an allegation that the NMDWFS acted in a prompt and timely manner in addressing the Defendant's notice of rescission of the reaffirmation agreement. See Complaint, ¶ 12. However, whether NMDWFS acted in a prompt and timely manner for purposes of applying equitable tolling presents a mixed question of fact and law; a legal conclusion is made based on the underlying facts and circumstances. See In re Bender, 385 B.R. 800, *2 (9th Cir. BAP Nov. 21, 2007)(Table)(stating that "[e]quitable tolling presents a mixed question of law and fact.")² The Court discounts "legal conclusions clothed in factual garb" for purposes of ruling on a motion to dismiss. Tronox Inc. v. Anadarko Petroleum Corp.(In re Tronox Inc.), 429 B.R. 73, 90 (Bankr.S.D.N.Y. 2010)(citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). See also, Ashcroft v. Iqbal, 556 U.S. at 678 (in evaluating a motion to dismiss "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.").

A. The Reaffirmation Agreement is Enforceable, Absent Rescission

Pursuant to 11 U.S.C. § 524(c), a debtor may enter into an agreement with a creditor to reaffirm a debt that would otherwise be dischargeable. See 11 U.S.C. § 524(c). The effect of reaffirming a debt is to except the debt from discharge. See Jamo v. Katahdin Federal Credit Union (In re Jamo), 283 F.3d 392, 398 (1st Cir. 2002)(explaining that "reaffirmation represents the only vehicle [other than a successful non-dischargeability suit] through which an otherwise dischargeable debt can survive the successful completion of Chapter 7 proceedings . . . . once a debt is reaffirmed, the creditor can proceed to enforce its rights as if bankruptcy had not intervened."); In re Reed, 403 B.R. 102, 104 (Bankr.N.D.Okla. 2009)(stating that "[d]ebt that would otherwise be trapped within the snare of the bankruptcy discharge, if reaffirmed, remains the debtor's personal liability and burden."). For debtors who are represented by counsel, the requirements for entering into an enforceable reaffirmation agreement are:

(1) such agreement was made before the granting of the discharge under section 717, 1141, 1228 or 1328 of this title;

(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;

(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection which states that

(A) such agreement represents a fully informed and voluntary agreement by the debtor;

(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and

(C) the attorney fully advised the debtor of the legal effect and consequences of—(i) an agreement of the kind specified in this subsection; and

(ii) any default under such an agreement;

(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim[.]

11 U.S.C. § 524(c).

Court approval is not a condition to enforceability of the agreement. In re Perez, 2010 WL 2737187, *4 (Bankr.D.N.M. July 12, 2010). In Perez, this Court found that the requirements of 11 U.S.C. § 524(c)(3) are not satisfied if counsel fails to make all three certifications. Id.

Ms. Martinez asserts that the reaffirmation agreement was unenforceable under this Court's Perez decision because her counsel crossed out one of the certifications on the agreement. This Court disagrees. Counsel crossed out the certification on the Reaffirmation Agreement stating that "this agreement does not impose an undue hardship on the debtor or any dependent of the debtor." See Reaffirmation Agreement, p.6 - Case No. 7-11-15027 - Docket No. 11. However, counsel for Ms. Martinez also checked the box on the Reaffirmation Agreement stating that "[a] presumption of undue hardship has been established with respect to this agreement. In my opinion, however, the debtor is able to make the required payment." Id. By checking the box on Part C stating that a presumption of undue hardship has been established, but in the opinion of counsel, the debtor is nevertheless able to make the payments, counsel has effectively made the undue hardship certification. See Perez, 2010 WL 2737187 at *4 n.6. Thus, the Reaffirmation Agreement between NMDWFS and Ms. Martinez was enforceable at the time the parties entered into the agreement.

An enforceable reaffirmation agreement can function as an acceptable alternative to filing a complaint objecting to dischargeability of debt because it can accomplish the same result: adebt that is reaffirmed is excepted from discharge.³ However, by entering into a reaffirmation agreement with Ms. Martinez instead of either 1) timely filing an adversary proceeding seeking a determination of non-dischargeability; or 2) obtaining entry of an order extending the time to file a complaint⁴ ; NMDWFS took a risk that Ms. Martinez could rescind the agreement. A debtor who enters into a reaffirmation agreement can rescind (cancel) the agreement "at any time before the bankruptcy court enters a discharge order, or before the expiration of the 60-day period that begins on the date [the debtor's] reaffirmation agreement is filed with the court, whichever occurs later." 11 U.S.C. § 524(k)3)(J)(i). The Complaint recites that Ms. Martinez rescinded the Reaffirmation Agreement on April 4, 2012, which is within sixty days of the date the Reaffirmation Agreement was filed with the Court. See Case No. 7-11-15027 JA - Docket No. 11. By rescinding the Reaffirmation Agreement, Ms. Martinez rendered the agreement unenforceable.

B. Even if the Court Were to Apply the Doctrine of Equitable Tolling to the Facts Alleged in the Complaint, NMDWFS's Complaint is Untimely as a Matter of Law

A complaint objecting to the dischargeability of a...