#2177 entered 11-8-95
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
KENNETH HUGH WRIGHT,
CASE NO. 95-40182-7
KENNETH HUGH WRIGHT,
DESIREE D. WRIGHT,
ADV. NO. 95-7051
MEMORANDUM OF DECISION
The plaintiff-debtor brought this action seeking a determination of the dischargeability of an
obligation imposed on him in a decree of divorce. The defendant claims the obligation is
nondischargeable as maintenance under 11 U.S.C.A. §523(a)(5), or alternatively, is
nondischargeable under §523(a)(15). The plaintiff-debtor is represented by Paul D. Post. The
defendant is represented by Pantaleon Florez. The proceeding was tried to the Court on October
17, 1995, and the Court is now prepared to rule on the issues.
FINDINGS OF FACT
The debtor and the defendant were married for four years and had one child before they were divorced in 1994. Following trial, a district judge of Shawnee County, Kansas, entered a divorce decree in December of 1994. The defendant was given residential custody of the child and the debtor was ordered to pay child support of $240 per month. The debtor concedes this award is nondischargeable. The debtor was also ordered to pay the defendant $357 per month as "spousal maintenance" or "spousal support." This obligation was to continue for a period of 36 months, and would terminate earlier upon the remarriage of the defendant or the death of either party. The dischargeability of this award is the subject of this proceeding.
Certain other provisions of the divorce decree are relevant here. The parties were to pay their own attorney fees, and they both retained the property they had in their possession. Excluding the $10,000 present value of an annuity the defendant had received in a structured settlement of a civil action which will make two payments to her after the year 2001, the value of the personal property awarded to the debtor exceeded that awarded to the defendant by several thousand dollars. The defendant received mortgaged real property in which the parties appear to have had equity of $1,000 to $2,000. Thus, aside from the annuity, the asset allocation between the parties appears to have been about equal. The defendant was awarded about $16,000 in unsecured debts and the debtor about $2,000; they participated about equally in incurring these debts. Each retained a vehicle subject to a lien; the lien on the defendant's was about $7,000, and the lien on the debtor's was about $12,000.
In conjunction with the divorce proceeding, both parties considered filing for bankruptcy and were referred by their divorce lawyers to a bankruptcy attorney. That attorney interviewed the parties and concluded that the debtor could file a chapter 7 case, but that, to preserve the value of the nonexempt annuity, the defendant would have to file a chapter 13 case and attempt to work out a compromise with her creditors. The judge presiding over the divorce received a report from the bankruptcy attorney and so was aware that the debtor was seriously contemplating filing for bankruptcy, as he now has done. The defendant decided not to file for bankruptcy.
The courts of Shawnee County, Kansas, have adopted guidelines concerning support and maintenance awards in divorce cases. Although these guidelines are normally followed, deviations are allowed. In this case, the judge followed the guidelines in fixing the debtor's child support obligation. The guidelines called for the debtor to pay $125 to $150 per month in maintenance or spousal support for one year, with credit for the time he paid temporary maintenance, but the judge ordered him to pay two to three times that much for three years, with no credit for the time he paid temporary maintenance.
At the time of the divorce, the debtor's gross earnings were $1,976 per month. By the time of this hearing, they were projected to be about $2,417 per month for 1995, or $29,000 for the year, which included some $4,000 in overtime, vacation, and sick pay along with some other additions to his regular pay. After the divorce, according to the debtor, he had monthly living expenses of $1,280 ($300 rent, $150 food, $196 utilities, $50 clothing, $100 transportation, $130 insurance, $34 property tax, and $320 car payment), plus the support payments of $597 and taxes of $528, for total monthly expenses of $2,410 or $28,920 per year. He should qualify for a tax refund for 1995 of between $750 and $1600, depending on whether part of his payment to the defendant is for spousal support. The debtor claims that he was unable to pay his monthly expenses where he was living, so he recently moved in with his parents. He pays only $150 per month to live with them, reducing his rent and utility bills by $346. He also refinanced his 1990 pickup truck by extending the repayment period to four and one-half years, which reduced his payments by $43 per month.
At the time of the divorce, the defendant's gross earnings were $1,333 per month or about
$16,000 per year. By the time of this hearing, they had increased to $1,583 per month, or about
$19,000 per year. Her income per month after taxes is $1,200 plus $240 in child support and the
$357 in alleged spousal support, for a total of $1,797. Until April of 1995, the defendant resided
in the home awarded to her in the divorce, and had living expenses of about $1,200 per month
excluding utilities. The defendant was awarded most of the marital debts, and says she was
unable to pay both her living expenses and the monthly amount necessary to retire those debts. In
April of 1995, she moved in with another individual, and now pays no rent or utilities. This has
reduced her living expenses to $803 per month. The remaining marital debts total about $12,500.
Although she has not been, or perhaps just began, doing so, the defendant proposes to pay $845
per month on the debts. The defendant rents out her former residence, and receives enough
income to pay for the mortgage, taxes, and insurance. She receives some immediate tax benefit
by depreciating the home and is gaining some equity in it as the rentals apply to reduce the
DISCUSSION AND CONCLUSIONS
In determining whether the debtor's obligation is nondischargeable support, the Court must begin by reviewing the language of §523(a)(5). In pertinent part, the statute excepts from discharge an individual's debt which is:
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 . . . divorce decree . . . 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.
In In re Sampson, 997 F.2d 717 (10th Cir. 1993), the Tenth Circuit said:
Congress, by directing federal courts to determine whether an obligation is "actually in the nature of alimony, maintenance, or support," sought to ensure that §523(a)(5)'s underlying policy is not undermined either by the treatment of the obligation under state law or by the label which the parties attach to the obligation. Thus, a debtor's lack of duty under state law to support his or her former spouse does not control whether an obligation to the former spouse is dischargeable in bankruptcy. Yeates, 807 F.2d at 877-78. See also Matter of Biggs, 907 F.2d 503, 505 (5th Cir. 1990). Similarly, §523(a)(5) requires federal courts to look beyond the label the parties attach to an obligation. See Sylvester v. Sylvester, 865 F.2d at 1166 (parenthethical omitted); Goin, 808 F.2d at 1392 (parenthetical omitted). Inquiry by federal courts into the actual nature of the obligation promotes nationwide uniformity of treatment between similarly situated debtors, Matter of Seibert, 914 F.2d 102, 106 (7th Cir. 1990), and furthers §523(a)(5)'s underlying policy favoring enforcement of familial support obligations over a debtor's "fresh start." [Citation omitted.]
Because the label attached to an obligation does not control, an unambiguous agreement cannot end the inquiry. As we stated in Goin, "a bankruptcy court must look beyond the language of the decree to the intent of the parties and the substance of the obligation" to determine whether the obligation is actually in the nature of alimony, maintenance or support. 808 F.2d 1392.
997 F.2d at 722. Thus, this Court is required to determine whether the "spousal maintenance" obligation is actually in the nature of alimony or maintenance.
The divorce decree was clearly tailored to try to protect the defendant's annuity and avoid the impact of the debtor's likely bankruptcy filing. Since she did not want to jeopardize her annuity by filing for bankruptcy herself but wanted to insure that the debtor would be required to pay one-half the marital debts, the defendant proposed requiring him to pay enough extra maintenance to cover that half, and the court adopted her proposal. Despite the applicable guidelines, the debtor was ordered to pay maintenance that was about two-and-a-half times the suggested monthly amount for three times as long as suggested. The extent by which the award exceeded the norm was calculated to require the debtor to pay one-half of the marital debts. The only basis offered by the parties or apparent to the Court for the award was the debts which the parties had incurred during the marriage. The debtor has already paid about twice the total amount of spousal support suggested by the Shawnee County guidelines. In addition, both parties were ordered to pay for their own attorneys, something that does not generally occur where one spouse is found to be in need of support from the other. Although the obligation has some of the earmarks of spousal support since it would terminate upon the death of either party or the defendant's remarriage, the Court concludes that despite being labelled "spousal support," the excess award was actually property settlement and is not excepted from discharge by §523(a)(5).
The Court must now consider whether the debtor's obligation is dischargeable under §523(a)(15), a provision added by the Bankruptcy Reform Act of 1994. In pertinent part, it 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 in connection with a . . . divorce decree . . . 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 . . . ; 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.
The Court will first address the debtor's ability to pay the obligation.
At the time of the divorce, the debtor's after-tax income was not sufficient to pay his living expenses and child support as well as the required payments to the defendant. He cut his expenses by moving in with his parents (at a greatly reduced cost for rent and utilities) and refinancing his vehicle. This enabled him to pay the $357 per month along with his other expenses, but left him unable to pay any other bills he might incur. At this time, based upon the debtor's present earnings, which include about $4,000 in excess of his base pay, he could continue to pay the $357 so long as he can continue to live with his parents at a generously low rent. In fact, if he quit living with his parents and could live on rent, utility, and other expenses equal to those he reported he had before he returned to their home, he could pay it and be at the break-even point. The Court notes, though, that the debtor's expenses are probably understated since they do not include any entertainment expense or any expenses relating to the care and feeding of his child during the frequent visitations allowed by the divorce decree. Nevertheless, given his present circumstances, the Court must conclude the debtor currently has the ability to pay the obligation to the defendant. The Court must therefore consider whether discharging the obligation would provide a benefit to the debtor that outweighs the detrimental consequences the defendant would suffer.
At the time of their divorce, everyone involved appears to have recognized that the couple would not be able to maintain separate households and pay the bills they had accumulated during their marriage. The state court crafted the divorce decree in an effort to save a substantial asset for the defendant. No one should have been surprised when the parties were unable to pay their current expenses and the marital debts while protecting the annuity. Later, both parties reduced their current living expenses. The debtor moved in with his parents, thus reducing his rent and utility expenses by $346. The defendant moved in with a man who pays the mortgage and utility bills on her new residence, which he owns, and rented out her former residence, thus reducing her expenses by about $400 per month plus whatever she had paid for utilities while living in the residence she had received in the divorce.
But for the fact that she proposes to pay $845 per month on the marital debts, the defendant's budget would show a surplus. Her proposal would pay off those debts in about 18 months. At the end of that time, her income would exceed her expenses by at least $600 per month even without the debtor's $357 payment, which he would still owe for 6 more months. In addition, the defendant would retain the parties' former residence and her annuity. By contrast, the debtor would have to continue living with his parents to be able to make the monthly payments, and when his payment obligation ended, he would probably have been unable to accumulate any savings.
If the defendant paid $465 per month on the marital debts rather than $845, she would pay them off in about three years, assuming they bear interest at an average rate of 20%.(1) Using just her salary and the debtor's child support payments, she could afford to do this even if her living expenses increased by up to $170 per month. After three years, she would still be free of the marital debts and retain her annuity and the parties' former residence. Under Kansas law, if they sued and obtained a judgment, the marital creditors could not garnish more than about $300 per month from the defendant's salary, see K.S.A. 60-2310(b), and could obtain more immediately only by attempting to attach and liquidate her annuity, probably for less than its present value. The former residence has too little equity to provide any value to the creditors, and it has little current value for the defendant. The marital creditors would probably prefer her voluntary full payment of their debts over about three years, especially at their high interest rates, to incurring the added costs of litigation and forced collection.
Under these circumstances, the Court must conclude that discharging this obligation will provide
a benefit to the debtor that outweighs the detriment to the defendant.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.
Dated at Topeka, Kansas, this ____ day of November, 1995.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: )
KENNETH HUGH WRIGHT, ) CASE NO. 95-40182-7
KENNETH HUGH WRIGHT, )
v. ) ADV. NO. 95-7051
DESIREE D. WRIGHT, )
JUDGMENT ON DECISION
The plaintiff-debtor brought this action seeking a determination of the dischargeability of an obligation imposed on him in a decree of divorce. The defendant claimed the obligation was nondischargeable as maintenance under 11 U.S.C.A. §523(a)(5), or alternatively, was nondischargeable under §523(a)(15). The plaintiff-debtor was represented by Paul D. Post. The defendant was represented by Pantaleon Florez. The proceeding was tried to the Court on October 17, 1995, and the Court has issued its Memorandum of Decision resolving the issues presented.
For the reasons stated therein, judgment is hereby entered declaring that the debtor's obligation to pay the defendant $357 per month is dischargeable.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of November, 1995.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
1.1The marital debts are largely owed on credit and department store charge cards, so they likely bear interest at a rate close to 20%. The defendant could probably significantly reduce the interest to be paid on the debts by taking out a bank loan secured by her annuity and using the proceeds to pay off the original debts. This would make it even easier for her to pay off the debts.