Vaughn v. Vaughn (In re Vaughn)

• Decision Date: 27 November 2018
• Docket Number: 2d Civil No. B286871
• Court: California Court of Appeals Court of Appeals
• Parties: IN RE MARRIAGE OF Philip and Charlene Yu Steele VAUGHN. Philip Vaughn, Appellant, v. Charlene Yu Steele Vaughn, Respondent.

29 Cal.App.5th 451

240 Cal.Rptr.3d 227

IN RE MARRIAGE OF Philip and Charlene Yu Steele VAUGHN.Philip Vaughn, Appellant,

v.Charlene Yu Steele Vaughn, Respondent.

2d Civil No. B286871

Court of Appeal, Second District, Division 6, California.

Filed November 27, 2018

Law Office of Charles M. Oxton, Charles M. Oxton ; Ferguson Case Orr Paterson, Wendy C. Lascher and John A. Hribar, Ventura, for Appellant

Jarrette & Walmsley, Robert R. Walmsley and Marlea F. Jarrette, for Respondent.

TANGEMAN, J.

Philip Vaughn appeals from the trial court’s postjudgment order concluding that his outstanding debt on a loan from a family partnership—in which his ex-wife, Charlene Yu Steele Vaughn, is a limited partner—was nondischargeable in bankruptcy.

( Code Civ. Proc., § 904.1, subd. (a)(2).) Philip¹ contends the court incorrectly determined that his debt was exempt from discharge pursuant to section 523(a)(15) of title 11 of the United States Code.² We hold that when the nature of a debt is such that its discharge will directly and adversely impact the finances of the debtor’s spouse or former spouse, it is nondischargeable in bankruptcy, even if it is not directly payable to the spouse. We therefore affirm.

FACTUAL AND PROCEDURAL HISTORY

In May 1995, Charlene’s parents created CJPM Family Partnership, Ltd. Charlene’s parents are the general partners of CJPM. They have "full, exclusive, and complete authority and discretion in the management and control of the business of the [p]artnership." Charlene, her parents, and her three siblings are limited partners of CJPM. No limited partner is liable for the "debts, liabilities, contracts, or any other obligations of the [p]artnership."

Each partner has a capital account in the partnership. Charlene’s account contains 20 percent of the partnership’s total capital. The amount of money distributed to a partner, the partner’s share of partnership losses, and the amount of the partner’s liabilities that are assumed by the partnership all decrease a partner’s capital account.

Philip and Charlene married in June 1995. Ten years later, CJPM made three loans to Philip totaling $150,000. The promissory notes name Philip as the borrower and CJPM as the note holder. The loans were credited against Charlene’s partnership interest. Her capital account was reduced by $150,000.

In 2009, Philip executed a new promissory note for $150,000, restating the total amount he had borrowed from CJPM. The note provided for 8 percent annual interest. Interest began to accrue from the date of the notes that were executed in 2005.

Philip did not repay his debt to CJPM. He and Charlene divorced in 2011. Section 9.3 of their stipulated dissolution judgment awarded Charlene "[a]ll rights, title[,] and interest to any community interest that may exist in [CJPM]." Section 10.1 assigned to Philip, as his separate obligation, his debt to CJPM. It also required Philip to "indemnify and hold [Charlene] harmless from" that debt.

Section 11.0 of the judgment is a separate warranty clause:

[E]ach party has released the other from any and all liabilities, debts[,] or obligations that have been or will be incurred[,] and each party shall indemnify and hold the other harmless therefrom. If any claim, action[,] or proceeding hereafter shall be brought seeking to hold the other party liable on account of any such debt, liability[,] or obligation, the party who incurred such debt, liability[,] or obligation will[,] at his or her sole expense, defend the other party against any such claim or demand or threat thereof ....

Later that year, Philip filed for Chapter 7 bankruptcy. All of his debts, including his loan from CJPM, were discharged.

In 2015, Charlene moved to reopen bankruptcy proceedings to obtain a ruling that Philip’s debt to CJPM was nondischargeable. The bankruptcy court declined to reopen the case. It did not decide whether the debt was dischargeable.

Charlene moved to recover Philip’s CJPM debt in the trial court. Charlene testified that the money loaned to Philip came from her share of CJPM. She said Philip acknowledged that he knew the loan came from her share. She also said she is responsible for the loan to Philip, as implied by the CJPM partnership agreement. Her father confirmed this. Charlene’s capital account in the partnership was reduced by the amount of the unpaid loan.

The trial court determined that Philip’s CJPM debt was nondischargeable. It concluded that the debt did not have to be directly payable to Charlene to fall under the exemption set forth in section 523(a)(15). The court calculated that Philip owes Charlene $345,963, representing $150,000 principal plus accrued interest.

DISCUSSION

A Chapter 7 bankruptcy generally discharges all of an individual’s debts, but there are exceptions. ( In re Hicks (Bankr. D.Mass. 2005) 331 B.R. 18, 22 ; see § 727(a), (b).) Debts excepted from discharge are limited to those "plainly expressed" in federal bankruptcy statutes. ( Bullock v. BankChampaign, N.A. (2013) 569 U.S. 267, 275-276, 133 S.Ct. 1754, 185 L.Ed.2d 922.) They include debts for "domestic support obligation[s]" ( § 523(a)(5) ) and those "to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that [are] 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" ( § 523(a)(15) ). State courts have concurrent jurisdiction to decide whether a debt is dischargeable under these provisions. ( In re Doll (Bankr. N.D.Ohio 2018) 585 B.R. 446, 461, fn. 7 ; see 28 U.S.C. § 1334(b).)

Whether Philip’s debt to CJPM is nondischargeable presents a mixed question of law and fact. ( Miller v. United States (9th Cir. 2004) 363 F.3d 999, 1003-1004.) The interpretation of section 523(a)(15) is a question of law for our independent review. ( Western States Petroleum Assn. v. Board of Equalization (2013) 57 Cal.4th 401, 415, 159 Cal.Rptr.3d 702, 304 P.3d 188.) Our goal is to give effect to Congress’s intent. ( Harris v. City of Santa Monica (2013) 56 Cal.4th 203, 215, 152 Cal.Rptr.3d 392, 294 P.3d 49.) We first examine the words of the statute, giving them their plain, commonsense meaning. ( Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724, 122 Cal.Rptr.3d 331, 248 P.3d 1185.) We follow the statute’s plain meaning unless doing so would lead to absurd results Congress did not intend. ( Ibid. )

If section 523(a)(15) ’s meaning is unclear, we examine its legislative history to determine Congress’s intent. ( Pacific Palisades Bowl Mobile Estates, LLC v. City of Los Angeles (2012) 55 Cal.4th 783, 803, 149 Cal.Rptr.3d 383, 288 P.3d 717.) We strive to harmonize provisions relating to the same subject matter ( Lakin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 659, 25 Cal.Rptr.2d 109, 863 P.2d 179 ), bearing in mind that "[w]here a statute is framed in language of an earlier enactment on the same or an analogous subject, and that enactment has been judicially construed, [Congress] is presumed to have adopted that" interpretation in the more recently enacted statute ( People v. Harrison (1989) 48 Cal.3d 321, 329, 256 Cal.Rptr. 401, 768 P.2d 1078 ( Harrison ) ). We also "consider the impact of an interpretation on public policy, for ‘[w]here uncertainty exists consideration should be given to the consequences that will flow from a particular interpretation.’ [Citation.]" ( Mejia v. Reed (2003) 31 Cal.4th 657, 663, 3 Cal.Rptr.3d 390, 74 P.3d 166.)

We review the trial court’s resolution of disputed facts and inferences for substantial evidence. ( HLC Properties, Ltd. v. Superior Court (2005) 35 Cal.4th 54, 60, 24 Cal.Rptr.3d 199, 105 P.3d 560.)

Philip’s debt to CJPM is a debt to a former spouse

Philip first contends section 523(a)(15) ’s meaning is "clear and unambiguous," and requires that his debt be payable directly to Charlene to be nondischargeable. ( In re Reinhardt (Bankr. M.D.Fla. 2012) 478 B.R. 455, 457 ( Reinhardt ); see also In re Gunness (9th Cir. BAP 2014) 505 B.R. 1, 7-8 ( Gunness ) [ section 523(a)(15) should be interpreted narrowly to afford debtors a "fresh start"].) But most courts have determined that section 523(a)(15) ’s language is ambiguous, and should be interpreted "broadly and liberally ... to encourage payment of familial obligations rather than to give a debtor a fresh financial start." ( In re Reynolds (Bankr. M.D.Fla. 2016) 546 B.R. 232, 237 ; see also id. at p. 236, fn. 19 [compiling cases].) We agree with the latter line of cases.

Section 523(a)(15) ’s legislative history supports a broad interpretation. For over a century, Congress has sought to protect a debtor’s spouse and children in bankruptcy proceedings. ( Beale v. Kurtz (Bankr. S.D.Ind. 2008) 381 B.R. 727, 731 ; see Wetmore v. Markoe (1904) 196 U.S. 68, 77, 25 S.Ct. 172, 49 L.Ed. 390 [bankruptcy law should not be "an instrument to deprive [a] dependent [spouse] and children of the support and maintenance due [to] them"].) It enacted section 523(a)(15) in 1994 because it recognized "that the economic protection of dependent spouses and children under state law [could] no longer [be] accomplished solely through the traditional mechanism of support and alimony payments." ( In re Golio (Bankr. E.D.N.Y. 2008) 393 B.R. 56, 61.) The enactment of this section evidenced Congress’s "intent that ‘a debtor should not use the protection of a bankruptcy filing in order to avoid legitimate marital and child support obligations.’ [Citation.]" ( In re Proyect (Bankr. N.D.Ga. 2013) 503 B.R. 765, 773.)

As enacted, section 523(a)(15) worked in conjunction with section 523(a)(5). ( In re Cordia (Bankr. N.D.Ohio 2001) 280 B.R. 138, 146.) Former section 523(a)(5) exempted from discharge any debt "to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement [or] divorce decree." Former section 523(a)(15) exempted from...