Opinion
Bankruptcy Case No. 00-72201; Adversary No. 00-7136
January 19, 2001
OPINION
The issue before the Court is whether the Debtor's failure to remit certain lottery payments to her ex-husband as required by a Marital Settlement Agreement and Supplemental Judgment for Dissolution of Marriage renders a debt nondischargeable pursuant to 11 U.S.C. § 523(a)(4) and (15).
On June 28, 1982, the Debtor, Karen Cohen, won $1,000,000 in the Illinois State Lottery. The prize was payable at the rate of $50,000 per year for 20 years.
On September 29, 1983, the Debtor's marriage to the Plaintiff, Steven Shanle, was dissolved. A Marital Settlement Agreement dated May 1, 1994, provided for the following treatment of the Debtor's lottery winnings:
B. As for his rights in and to said annual Lottery payments, Wife shall pay to Husband the sum of $9,000.00 per year, from each annual Lottery payment, commencing with the Lottery payment to be received in June, 1984. Said $9,000.00 payment from Wife to Husband shall be free of any and all Federal and Illinois Income Taxes with Wife being solely responsible for any and all income taxes levied against or assessed against the total of said Lottery payments received. Wife shall include the total gross amount of each annual Lottery payment in her taxable income in each and every year that the payments are received, and the $9,000.00 payment herein required from Wife to Husband shall be a net amount to him after any and all income taxes have been paid by Wife.
C. The annual payment herein required from Wife to Husband shall be paid to Husband by Wife within five business days of the day she receives the annual Lottery Payment.
The Marital Settlement Agreement was adopted by the Circuit Court as part of its Supplemental Judgment for Dissolution of Marriage on May 1, 1984.
As of January, 1997, the Debtor had received 15 of her 20 annual payments, and the Plaintiff had received his appropriate share of the payments. On January 15, 1997, the Debtor borrowed $60,000 from Zeus Corporation. Paragraph 4(e) of the Loan Agreement provides as follows:
Borrower is not subject to any unpaid judgment, levy or claim, except for a Supplemental Judgment of Dissolution of Marriage filed May 1, 1984 in the Eleventh Judicial Circuit of Illinois, Lincoln, Logan County, Illinois, Case No. 83-D-19, awarding Steven M. Shanle a payment of $9,000 from each of the Annual Installments.
The Debtor executed a Promissory Note on January 15, 1997, wherein she promised to make annual payments of $25,000 to Zeus Corporation on June 28 of 1997-2000. The Promissory Note was secured by the Debtor's right to receive her annual lottery payments pursuant to a Security Agreement dated January 15, 1997.
The Security Agreement describes the collateral as "Five lottery payments due on or about June 28 commencing in the year 1997 and continuing each year thereafter to and including the year 2001 . . ."
The Security Agreement recognizes that the Debtor's right to the annual lottery payments is limited by the Plaintiff's interest in $9,000 from each of the annual installments pursuant to the Supplemental Judgment of Dissolution of Marriage. The Debtor executed the necessary documents to allow the Illinois State Lottery to send her payments directly to Zeus. She also gave Zeus the authority to sign her signature to the checks.
The Plaintiff did not receive his share of the lottery payments in 1998 and 1999. In addition, the Debtor fell behind in her share of the college expenses for one of their children.
Therefore, the Plaintiff garnished $25,000 of the lottery proceeds to make up for these payments. The Plaintiff was current until this year. He is now owed his last two payments. However, Zeus' successor, Midland States Life Insurance Company, has garnished the balance of the lottery payments.
The Debtor filed a petition pursuant to Chapter 7 of the Bankruptcy Code on July 13, 2000. The Debtor scheduled two debts owing to the Plaintiff: one for college expense/support and one for the lottery payments. The Debtor commenced an adversary proceeding to determine the dischargeability of these debts. The Debtor filed an answer admitting the nondischargeability of the college expenses of $1,725.80 under § 523(a)(5), but contesting the dischargeability of the $18,000 debt from the settlement of the lottery proceeds. 11 U.S.C. § 523 provides in pertinent part as follows:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —
. . . .
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
. . . .
(15) 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, a determination made in accordance with State or territorial law by a governmental unit unless —
(A) the debtor does not have the ability of 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(.)
The party seeking to establish an exception to the discharge bears the burden of proof. In re Harasymiw, 895 F.2d 1170, 1172 (7th Cir. 1990). The burden of proof required to establish an exception to discharge is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). To further the policy of providing a debtor with a fresh start in bankruptcy, "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of a debtor." In re Scarlata, 979 F.2d 521, 524 (7th Cir. 1992).
To prevail under § 523(a)(15)(A), the debt in question must be other than the type set forth in § 523(a)(5), that was awarded by a court in the course of a divorce proceeding or separation. In re Paneras, 195 B.R. 395, 403 (Bankr.N.D.Ill. 1996) citing In re Silvers, 187 B.R. 648, 649 (Bankr.W.D.Mo. 1995). Once this is established, the burden of proving that the debt falls within either of the two exceptions to nondischargeability rests with the debtor. In re Crosswhite, 148 F.3d 879, 884-85 (7th Cir. 1998).
Hence, once the creditor's initial proof that the claim falls under § 523(a)(15) of the Bankruptcy Code is made, the debt is excepted from discharge and the debtor is responsible for the debt unless the debtor can prove either of the two exceptions, subpart (A), the "ability to pay" test, or (B), the "detriment" test. Id., 148 F.3d at 885.
If the debtor can show the inability to pay the debt, the examination stops and the debtor prevails. The debt will remain dischargeable if paying the debt would reduce the debtor's income below that necessary for the support of the debtor and the debtor's dependents. In re Jenkins, 202 B.R. 102, 104 (Bankr.C.D.Ill. 1996); In re Hill, 184 B.R. 750, 754 (Bankr.N.D.Ill. 1995).
Because this language mirrors the disposable income test found in 11 U.S.C. § 1325(b)(2), most courts utilize an analysis similar to that used in determining disposable income in Chapter 13 cases. Id. at 755; In re Smither, 194 B.R. 102, 108 (Bankr.W.D.Ky. 1996); In re Carroll, 187 B.R. 197, 200 (Bankr.S.D.Ohio 1995); In re Phillips, 187 B.R. 363, 369 (Bankr.M.D.Fla. 1995).
The Debtor does not have the ability to pay the debt to the Plaintiff. Her mother recently passed away, and she is caring for her 75 year-old father who is on an oxygen tank. She makes $100 per week tending bar. She does not own a car or furniture. Her chosen occupation is to be a dealer in a casino, but she has not worked full-time in a casino since 1996. Under these circumstances, the Debtor does not have the ability to pay the debt to the Plaintiff.
Moreover, discharging the debt would not result in a benefit to the Debtor that outweighs the detrimental consequences to the Plaintiff. The financial repercussions of discharging the debt to the Plaintiff will be modest. The Plaintiff makes $40,000 per year as a mailman. Having worked as a mailman for 27 years, his employment appears to be secure. The Plaintiff's wife makes $25,000 per year working at St. John's Hospital. Thus, the Plaintiff and his wife have a combined annual income of $65,000 per year. While discharging the debt may deprive the Plaintiff of a few luxuries, he has more than enough to take care of the necessities of life. Therefore, the debt is dischargeable under § 523(a)(15).
Fraud and defalcation require proof of a fiduciary relationship within the context of § 523(a)(4). Courts have narrowly construed the term fiduciary within the context of § 523(a)(4); the fiduciary relationship must be an express or technical trust which existed prior to the act creating the debt.
In re Marchiando, 13 F.3d 1111 (7th Cir. 1994). An "express trust" traditionally includes (1) an explicit declaration of a trust; (2) a defined trust res; and (3) an intent to create a trust relationship. In re Grisham, 245 B.R. 65 (Bankr.N.D.Tex. 2000).
In this case, there is neither an explicit declaration of a trust nor evidence of an intent to create a trust relationship. Because no fiduciary relationship exists between the Debtor and the Plaintiff, no fraud or defalcation can arise from the nonexisting fiduciary relationship as mandated under the discharge exception for fiduciary fraud or defalcation.
Embezzlement is defined as "the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come". In re Britt, 200 B.R. 409, 411 (Bankr.M.D.Fla. 1996), quoting Moore v. United States, 160 U.S. 268, 16 S.Ct. 294 (1895). Embezzlement is distinguished from larceny by the fact that larceny requires that the initial appropriation of property of another be wrongful. In re Clayton, 198 B.R. 878, 884 (Bankr.E.D.Pa. 1996). Neither larceny nor embezzlement requires proof of a fiduciary relationship. In re Britt, supra, 200 B.R. at 411.
In order to prevail on a claim of embezzlement, the plaintiff must show "that (1) the debtor appropriated funds for his or her own benefit; and (2) the debtor did so with fraudulent intent or deceit". In re Weber, 892 F.2d 534, 538 (7th Cir. 1989).
Fraudulent intent or deceit may be inferred from the totality of the circumstances. In re Mangel, 72 B.R. 516, 522 (Bankr. S.D. Fla. 1987).
The Debtor's annual lottery payment was $50,000. After taxes were withheld at the 31% rate, the Debtor's annual check was for $34,500. Deducting the $9,000 owed to the Plaintiff, the Debtor was entitled to $25,500 each year. This is the exact amount which the Debtor obligated herself to pay annually to Zeus pursuant to the Promissory Note. Moreover, both the Loan Agreement and the Security Agreement specifically refer to the Plaintiff's interest in $9,000 out of each payment. Thus, the Plaintiff did not try to conceal her obligations to the Plaintiff, and the Promissory Note only obligated her to pay her share of the annual lottery payment to Zeus. The Court believes the Debtor when she says that she thought Zeus was going to pay the Plaintiff his $9,000 each year.
This was a reasonable conclusion based on the Court's review of the documents. It is unclear why Zeus did not pay the Plaintiff his $9,000 each year, and the Plaintiff may have a valid cause of action against Zeus. However, it is clear that the failure to pay the Plaintiff his share of the lottery proceeds was not the result of the Debtor's fraudulent intent or deceit. Therefore, the debt is discharged.
For the foregoing reasons, the Debtor's obligation to pay the Defendant $1,725.80 for college expenses is nondischargeable under § 523(a)(5), and the Debtor's debt of $18,000 to the Plaintiff for his share of the lottery proceeds is dischargeable under § 523(a)(4) and (15).
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Debtor's debt of $1,725.80 to the Plaintiff for college expenses be and is hereby determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(5).
IT IS FURTHER ORDERED that the Debtor's debt to the Plaintiff of $18,000 for the two missed lottery payments be and is hereby determined to be dischargeable.